NICOSIA — Cyprus’ economy is adjusting following the 2013 recession, which was “not as severe as anticipated”, the International Monetary Fund said in its report.
But it warned that the outlook remains challenging, with rising unemployment, falling credit, and increasing non-performing loans.
And that the current crisis in Ukraine may also add to the country’s woes. “Signs of stabilisation are emerging in the banking sector,” said the report which maintained its forecast of a 4.8% contraction in the island’s economy this year.
But 0.9% growth is expected in 2015, helped by rising exports.
In addition, exploiting offshore gas reserves, and the reunification of the island could raise the economy’s long-term growth potential.
Cyprus agreed to a €10 billion bailout with the European Union and the IMF last year.
“The Ukraine crisis may lead to capital flight from non-resident depositors of foreign banks in Cyprus, which may affect the business service sector,” the IMF said.
Cyprus was nearly bankrupted after Greece’s financial crisis in 2010.
Local banks were hit hard by a Greece debt haircut but Nicosia did not have the funds to support them.
Slow economic growth and the stance of international lenders, who stopped offering loans, added to the pressure on the country’s finances.
The IMF noted that in the labour market, lower wages are helping to cushion the fall in employment.
“Economy-wide compensation per employee fell by 6.1% year-on-year in 2013, largely driven by cuts in the public sector – by an estimated 9.4%,” it said.
At the same time, in the private sector, the decline was estimated at 5.3%.
The statistics may underestimate the wage adjustment – given the implementation of some of the public sector wage reductions as withholding taxes, it said.
Data does not include more recently agreed private sector wage cuts, including in the cooperative credit sector.
“With the labour force relatively stable, the unemployment rate reached 17.2% in December, better than expected,” it said. Nonetheless, youth unemployment stood at 40.2% – among the highest in the eurozone. This report is the first since the collapse of the coalition government in February.
And the IMF warned: “Political support for the rescue plan, or lack thereof, is a risk”.
The IMF’s third review of the island’s bailout programme ended on February 11.
“Despite the difficult environment in which the authorities operate in, the political commitment remains strong while every effort is being made to maintain strong social cohesion,” concluded the IMF review.
“Steadfast implementation has produced tangible results with indications that the healing process is already underway,” it added.
Inspectors agreed that: “Numbers are ahead of profile, market perceptions have improved, banks have been fully capitalised under prudent assumptions and the authorities are investing in the future by addressing structural challenges.”
“In terms of financing, 2014 needs are more than covered as the government has been building on its deposits while, at the same time, the significant programme buffer remains intact which is conservatively embedded in the debt forecasts.”