The Cypriot authorities must address the high level of non-performing loans, maintain fiscal sustainability and strengthen institutions to support fiscal consolidation efforts and long-run growth, the IMF said on Wednesday.
In a Staff Report on the fourth review of Cyprus` adjustment program, the IMF said that “while still deep, the recession continued to moderate in the first quarter. Unemployment remains high, and mild deflation persists”.
According to the Fund, “conditions in the banking sector are normalizing, although non-performing loans remain very high, constraining the ability of banks to provide credit to the economy”.
“The outlook remains challenging, although with a somewhat milder output contraction expected this year, followed by a more gradual recovery” it noted.
The IMF said that “overall, the economy remains weighed down by large private sector deleveraging needs”.
According to the IMF the Cyprus program “remains on track”.
“Fiscal targets for the first quarter were met with considerable margins, domestic payment restrictions were fully lifted, and the coop sector was consolidated” the Fund noted, adding that “the authorities intensified efforts to overcome delays in the implementation of structural measures”.
The IMF stressed that there are three key policy challenges: (i) addressing the high level of non-performing loans; (ii) maintaining fiscal sustainability; and (iii) strengthening institutions to support fiscal consolidation efforts and long-run growth.
“Risks to the program remain significant, in particular those related to still strong macro-financial linkages” it stressed.
On Monday the IMF`s board approved the immediate disbursement of 84 million euros.
Recently, the Eurogroup endorsed in principle the disbursement of the next tranche of financial assistance to Cyprus, following Troika`s (IMF, EC and ECB) fourth review mission on the island.
Troika is set to return to Cyprus July 15.
Cyprus received a 10-billion-euro bailout from lenders in March 2013 and is following a three-year economic adjustment programme.
