NICOSIA, April 1 Cyprus is making a comeback
from near bankruptcy although its banks are still struggling
with bad loans and political support may be waning for tough
measures, an IMF report said on Tuesday.
The IMF, which together with the European Union bailed the
Mediterranean island out a year ago, also flagged risks to
Cyprus from its close business ties with both Moscow and Kiev.
"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 International Monetary
Fund said in an appraisal accompanying its third tranche of aid
under the three-year bailout programme.
Some 40,000 Russians live in Cyprus out of a total
population of 800,000.
Cypriot officials acknowledge risks if East-West tensions
rise but say deposits have stabilised after a rout on its
banking system last year. Cyprus had to seize money from big
savers, many of them Russian, as a condition of its 10 billion
euros ($14 billion) bailout. Capital controls are still in
EU/IMF aid is directed mainly towards supporting the
island's fiscal needs.
Tuesday's report was the first since the collapse of a
centre-right governing coalition in early February. Diminished
political support for the programme, going forward, was a risk,
the IMF said.
It noted non performing loans for the core domestic sector
reached 50 percent of total loans - 22 billion euros, or 135
percent of gross domestic product (GDP). Parliament is debating
the politically-sensitive question of how assets can be
Cyprus defied lenders' projections with a shallower
recession than anticipated in 2013. The economy shrank around 6
percent compared with initial forecasts of about 9 percent.
The IMF maintained its forecast of a further 4.8 percent
fall in output in 2014, but said the island might instead be
able to sustain a pick-up in economic activity which started in
the second half of 2013.
Prospects for exploiting offshore gas reserves, and the
reunification of the ethnically-split island could raise the
economy's long term growth potential, the IMF said.
Last month Cyprus's parliament approved plans for
privatisations, averting a showdown with international lenders
who insist on state sell-offs.
($1 = 0.7256 Euros)
(Reporting by Michele Kambas; Editing by Ruth Pitchford)