Cyprus continues to experience “excessive economic imbalances” after it made limited progress in implementing structural reforms which could have helped address them, the European Commission said.
While the island has made some progress in reducing non-performing loans,which comprise roughly half the loan portfolio of Cypriot banks, and promoting investment, progress was limited in increasing the capacity of public employment services, reforming national healthcare, implementing fiscal structural reforms and reducing public debt, the European Commission said on Wednesday in its country report on Cyprus.
Even after expanding 2.8 per cent last year, the economy’s growth potential “remains weak, constrained by limited implementation of structural reforms to support investment,” while the implementation of growth enhancing initiatives is slow, the Commission said. The high non-performing loan ratio, combined with subdued investment and stagnant productivity, continues to burden growth. At the end of 2016, the unemployment rate remained at 13.3 per cent and the risks of poverty and social exclusion high.
“After three years of ambitious reforms during the economic adjustment programme, 2016 saw a loss of reform momentum and the stalling of some measures, reflecting a more complex political context,” the Commission said.
Last year, during which Cyprus completed its economic adjustment programme agreed with international creditors in 2013, was marked by the government’s failure to push forward its plan to privatise state telecom Cyta aiming at reducing public debt of 107.4 per cent of the economy in 2016. The government under President Nicos Anastasiades who is facing re-election next year, failed to have a bundle of draft bills aiming at reforming human resource management in the public sector and contain the increase of public payroll passed by the parliament.
The government which is facing increased difficulties in forging alliances to pass legislation in the parliament following the May parliamentary elections, has also made little progress in implementing the healthcare reform.
While public debt is expected to drop in coming years, “its sustainability remains subject to sizeable risks,” the European Commission said.
“A number of recent fiscal measures, as well as delays in the implementation of key structural reforms, are expected to lead to a deterioration of the structural balance and risk, reducing the scope for growth-enhancing public investments,” the Commission said in reference to the parliament’s decision to abolish the property tax in 2017 and to approve a government proposal to modernise the army with the hiring of professional soldiers.
Even as debt write-offs and debt-to-asset swaps helped reduce private debt last year, “the debt of non-financial corporations and households remains among the highest in the EU at around 280 per cent of gross domestic product, excluding special-purpose entities,” the Commission said. “Repayment of debt has been modest, notably due to weak contract enforcement and the limited use of the insolvency and foreclosure frameworks”.
At the same time, the trend towards debt-to-assets swaps may have increased the number of high-risk assets in the possession of banks and increased their exposure to the housing market, even as the latter shows signs of tentative stabilisation, the Commission said.
In addition, the tools available to banks to reduce unviable debt and motivate debtors to engage in restructuring negotiations remain ineffective as a result of “weak administrative capacity, the cost of procedures and inefficiencies in the court system” with “re-default” rates remaining high, the Commission said. Banks have also been unable to reduce their bad loan portfolio as a result of “the lack of a secondary market for loans” and in the absence of a loan securitisation framework.
While the parliament passed a law allowing the sale of loans to third parties more than a year ago, the approval of the loan securitisation law remains pending. “In addition, the governance and administrative capacity of insurance and pension funds supervision remain weak,” the Commission report said.
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