The European Commission (EC) has just issued its report following their first quarterly review of South Cyprus’ economic programme. Teams from the EC, International Monetary Fund (IMF) and European Central Bank (ECB) visited Nicosia 17-31 July to review progress against the programme’s objectives of restoring the stability of the financial sector and public finance and the adoption of reforms to improve long-term growth.
The report is expected to be reviewed for approval by the Eurogroup and the IMF Executive Board in September. If approved by these bodies then this would trigger release of further funding of around 86m Euros from the IMF and 1.5b Euros from the European Stability Mechanism (the eurozone rescue fund).
The report covered a number of financial areas. It noted the successful implementation of the difficult steps needed to recapitalise the Bank of Cyprus and development of a roadmap to gradually remove the capital controls and restrictions, while also putting in place stronger regulation and anti-money-laundering controls within the banking sector. Other financial institutions are due to be restructured and recapitalised by the end of the year, without using depositors funds.
It also acknowledged the prudent budget controls put in place within the public sector, which have resulted in all fiscal targets being met. These include integration of internal revenue and VAT departments, greater focus on tax evasion to increase revenues, and steps being taken to reform the welfare system such as eliminating duplicate welfare benefits and putting in place a Guaranteed Minimum Income scheme.
In conclusion, the review found that while the short-term economic outlook for South Cyprus remains difficult, with unemployment continuing to rise, the overall economic programme is on track and is expected to pave the way for a modest recovery by 2015. Furthermore, they expect to have a surplus of 4% of GDP by 2018 which will begin to reduce public debt.
