July 30 Bailed-out Cyprus is likely to return to
growth next year, the International Monetary Fund said on
Wednesday, but cautioned the outlook was tempered by tensions
over Ukraine and banks' rising bad loans.
The IMF, one of the lenders that stepped in with a 10
billion euro bailout for the Mediterranean island nation last
year, also said it expected Cyprus would require additional
fiscal effort to achieve a sustainable primary surplus target of
4 percent by 2018.
It said a 'growth friendly consolidation' should focus on
fully unwinding spending increases introduced before Cyprus
plunged into crisis in 2013, while protecting capital
expenditures. It also said there was further scope to cut the
Pay in the public sector has already been scaled back under
the bailout agreement, and a freeze on pay rises is in place
"While significant progress has been achieved, overcoming
the legacy of the crisis will be challenging," the IMF said in a
staff report, part of a regular annual consultation by the fund.
"Risks remain significant, related to the uncertainty about
the magnitude and pace of private sector deleveraging and the
ability of banks to address NPLs (non-performing loans), as well
as to geopolitical tensions of Ukraine-Russia," the IMF said.
Cyprus has close business links with both countries,
particularly Russia, and was known within the European Union to
be reluctant to adopt stringent sanctions on the country because
of the impact it could have on its still-fragile economy.
The island has already garnered positive assessments from
its lenders in a fifth post-bailout review concluded on July 25,
but lenders are demanding that Cyprus approve an improved
framework on foreclosures to assist banks in paying down
non-performing loans. A rising hole in balance sheets is
constraining banks' ability to provide credit, in turn stymieing
Parliamentary approval of a new repossessions framework is
considered a 'prior action' before any new disbursement of aid
is offered to Cyprus this September.
International lenders expect the Cypriot economy will
contract by about 4.2 percent this year, register a modest
recovery in 2015, and see a gradual increase in growth of close
to 2 percent over the medium term.
The IMF report is separate from assessments by lenders on
(Reporting By Michele Kambas; Editing by Susan Fenton)