The European Commission is evaluating the fiscal and other impact of a possible settlement to the Cyprus problem, the Commission Vice President Valdis Dombrovskis has said, welcoming the conclusion of the island`s three-year economic adjustment programme.
In an interview with CNA, Dombrovskis recommended that Cyprus should remain vigilant in a bid to tackle macroeconomic imbalances that remain.
Dombrovskis` remarks came as the leaders of Cyprus, President Anastasiades and Mustafa Akkinci, the leader of the Turkish Cypriot community, continue to be engaged in UN-backed talks aiming to reunify the island, divided since the 1974 Turkish invasion.
“We are evaluating the impact of a possible reunification within 2016, we are seeing that there is a positive momentum and on behalf of the Commission we maintain the issue high in our political agenda,” Dombrovskis told CNA.
He recalled that the Commission has transferred the competencies associated with the reunification of Cyprus under the direct supervision of President Jean Claude Juncker and himself.
“We are in close contact with both communities, providing technical support and discussing different issues and actions that need to be taken,” he said, adding that in case of a settlement the EU acquis will be implemented throughout Cyprus the soonest possible.
Asked on what could happen in fiscal terms in case of a settlement, Dombrovskis said that the EU held a seminar with both communities and discussed various versions of fiscal federalism “and we are ready to assist Cyprus to choose which method the two communities consider as appropriate but also to prepare the necessary structures.”
The Commission Vice President also commended Cyprus for concluding its economic adjustment programme.
“Cyprus has worked very hard to stabilise its economy, to return to sustainable growth and sustainable public finances and to implement an ambitious reform agenda,” he said.
Dombrovskis went on to say that Cyprus showed results that were better than expected and it outperformed fiscal targets, noting that the island will not only have a sizeable primary surplus but also, according to Commission forecasts, will have a general budget surplus, while its public debt is on a downward trajectory and will decline below 100% of GDP in 2016 and continue to decline in the coming years.
The Commission VP also recalled that a significant number of reforms have been concluded, but pointed out that Cyprus should remain on track with regard to fiscal discipline and structural reforms where there is many significant issues to be finalised in the future in fields such as the stabilisation of the financial sector, the competitiveness of the economy and the national health scheme.
Dombrovskis also pointed out that Cyprus will be part of the regular surveillance mechanism such as the European semester and the macroeconomic imbalances procedure.
As Cyprus has exited from the programme, he added, we are preparing country-specific report with a detailed analysis of the situation and recommendations for the future.
“It is important that Cyprus had impressive performance in the last years but there are significant persisting imbalances that need to be tackled,” Dombrovskis said.
On the privatisation of Cyprus telecoms provider (Cyta) Dombrovskis pointed out that “parliamentary support was weak.”
Cyprus failed to meet one prior action of the last tranche as the Parliament did not approve a bill providing for the creation of a state owned private telecommunication company, which would absorb the public telecoms operation, as part of a privatisation scheme.
“The prior action had more to do with Cyta`s administrative structure and we believe that this would strengthen the competition of the Cyprus telecoms sector to the benefit of the consumers,” he pointed out.
Cyprus received a total of €7.3 billion from the €10 billion earmarked in the financial envelop (€9 billion from the ESM and €1 billion from the IMF).
“Of course Cyprus had smaller financing needs as it had better fiscal performance. Cyprus already has significant fiscal buffers, the financing needs in the next years are small therefore the government did not need to use the whole financial envelope,” he explained.
Asked whether the decision of the ECB to exclude Cyprus from the public bond purchasing programme is a source of concern, Dombrovskis said Cyprus has returned to the markets, it tapped internal borrowing and its financing needs in the next years are small.
“In that sense we are sure that Cyprus can cover its financing needs on its own,” he said, pointing out that Cyprus has already tested the markets several times while, it not only has a sizeable primary surplus but also a small general budget surplus.
“Public debt will decline below 100% of GDP this year and that means if Cyprus maintains the current course there is no concern regarding market access,” he stressed.
Replying to a question on what Cyprus should do to maintain investor confidence, Dombrovskis said after the successful programme completion, Cyprus achieved fiscal stabilisation relatively quickly and returned to growth and shows a declining unemployment.
“It is extremely important for Cyprus to remain on track in terms of fiscal responsibility and structural reforms. A large number of reforms have been made but important imbalances remain and these need to be tackled,” he concluded.