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Categorized | Economy

Cyprus reforms on track but risks remain


Posted on July 31, 2013

The Cypriot and European Union flags are seen flying outside the office of the bank employees' union ETYK in the Cypriot capital, Nicosia, on April 4, 2013, as bank employees demonstrated over fears that pensions may be at risk under Cyprus's bailout. ETYK called the two-hour work stoppage over concerns that pension funds at failed Laiki and at Bank of Cyprus are not being protected under the island's 10-billion-euro bailout deal with the IMF, European Commission and European Central Bank.©AFP

Cyprus’s economic reform programme is on track, but substantial risks remain, according to EU and International Monetary Fund monitors.

The island’s prospects are regarded as remaining uncertain as authorities struggle to contain a deepening recession and rebuild confidence in the battered banking system.

    “While the authorities have started to implement the programme with determination, risks remain substantial. . . The short-term outlook remains difficult and subject to considerable uncertainty,” the troika of the European Commission, European Central Bank and IMF said in a statement on Wednesday after their first assessment mission since a €10bn international bailout in March.

    The troika’s positive report on reform effectively clears Cyprus to receive a €1.5bn tranche of aid in September from the EU and another €86m from the IMF.

    Yet the Cypriot economy is projected to shrink by about 13 per cent in 2013 and 2014, with the eurozone’s first capital movement controls, imposed in March as a bailout condition, constraining private sector activity. Controls have been gradually eased, but are likely to continue for another 24 months, according to local bankers.

    Cyprus has met fiscal targets set by international lenders, while Bank of Cyprus, the country’s largest bank, has been recapitalised with funds raised through a 47.5 per cent “haircut” of uninsured deposits.

    Co-operative credit institutions, which used to account for about a third of lending, will be restructured and recapitalised by the end of this year without imposing a haircut on depositors, the statement said.

    Underscoring a rapid weakening of the labour market, the jobless rate jumped to 17.3 per cent in April from 11.7 per cent a year earlier – the largest annual increase in the eurozone, according to official figures released on Wednesday.

    Despite the island’s economic problems, Greek and Turkish Cypriots are preparing to resume peace talks under UN auspices in October after a 14-month hiatus. Both sides have appointed negotiators to lead a fresh attempt to reunify the two communities in a loose federation. Cyprus has been divided since Turkish troops occupied its northern third in 1974 in response to an Athens-inspired coup aimed at union with Greece.