Cyprus running out of time to resume stalled reform process, fiscal watchdog says

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By Stelios Orphanides

The European Union will likely put pressure on Cyprus soon to resume its reforms process, virtually suspended after the island’s exit from the bailout adjustment programme, the head of the fiscal watchdog said in an interview.

Demetris Georgiades pic“All those who believe that the exit from the program will give the green light to return to practices of the past, will soon realise that this is not the case,” said Demetris Georgiades, head of the Fiscal Council, a body tasked with monitoring fiscal developments and planning to avoid derailment.

Following the completion of the cash-for-reforms programme in March, officials from the European Commission, the European Central Bank, and the International Monetary Fund, widely known as the Troika, will continue to monitor the island’s economy and issue recommendations, but they have little power to force Cyprus to implement related policies.

On the other hand, the process of the European Semester, in which country-specific recommendations are issued to member states following in-depth reviews of each member state’s economy, provides more tools to enforce compliance.

“The European institutions have a lot more powers to prevent and address any macroeconomic and fiscal risks identified and can impose penalties, and even restrict access to European funds, if a member state refuses or is reluctant to address these issues,” Georgiades said. “I cannot comment on behalf of the programme partners, but my guess is that given that the fiscal targets are being met, from now on, all measures and reforms considered appropriate for Cyprus that are not implemented voluntarily, are to be pushed through the European Semester procedures and not through the programme reviews.”

As part of the European Semester process, Cyprus’s fiscal policy and macroeconomic imbalances will come under scrutiny, Georgiades said, adding that following the recent fiscal improvement — which prompted suspension of Cyprus’s excessive deficit procedure in May — it is likely that the focus will be on reforms to address macroeconomic imbalances.

In a staff working document, dated April 7, 2016, the European Commission identified five areas in which Cyprus shows imbalances that need to be addressed.

They include Cyprus’s high stock of non-performing loans, which account for roughly half of the overall bank loan portfolio, together with a low level of provisioning and the inability of Cypriot banks to generate profit.

Cyprus’s spiralling private debt, seen at 340 per cent of gross domestic product, and high government debt — rose to 108.9 per cent of economic output last year with a negative international investment position of 140 per cent of the economy — are also considered threats to the country’s long term economic growth prospects and already translate into high unemployment rates.

Eurozone summit Merkel Tsipras Hollande JunckerIn June, the European Council issued five recommendations to address the imbalances, which include reform of the public administration, overhauling of the pay rise system in the public sector, governance modernisation of state-owned organisations, and local administration reform. In addition, Cyprus was asked to do more to reduce non-performing loans and improve the evaluation of collateral, to further improve its insolvency and foreclosure framework — after half-heartedly doing so as part of the adjustment programme — speed up issuance of title deeds and transfer of property rights, strengthen the capacity of the judiciary, and overhaul civil procedure law.

Cyprus has also been asked to do more to reduce, unemployment, especially long-term, to reform its healthcare sector by introducing a national scheme, and to “remove impediments to investment, in particular by implementing the action plan for growth, pursuing the privatisation plan, and strengthening the national regulatory authorities (and) take measures to increase access to finance for small and medium-sized enterprises”.

Time for the government, which already submitted a number of draft bills to the parliament eleven months ago, is running out. In addition to the deadlines it faces to address imbalances before December or next year, it must also deal with maturing debt worth around €5.5bn, or roughly one-third of gross domestic product, by 2020, as the country’s sovereign credit rating remains up to three notches below investment grade. This means higher borrowing costs.

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