In May 2013, the Fund approved a €1 billion loan over three years to help Cyprus in its efforts to stabilize its banking sector and set public finances on a sustainable path. The loan is subject to regular review checkpoints. On June 19, 2015 the IMF Executive Board signed off on three such reviews, giving a green light to release €278.4 million.
In an interview with IMF Survey, Mark Lewis, the IMF Mission Chief for Cyprus, reflects on the progress made and the road ahead.
IMF Survey : After some delays, the IMF has completed three reviews of the Cyprus program at the same time. What happened?
Lewis: Performance under the program has been good over the past year. Public finances have exceeded expectations, structural reforms have proceeded, and the authorities’ ownership of the program has remained high. However there were difficulties in reforming legislation to address non-performing loans. The Cypriot parliament froze approved changes to foreclosure rules, arguing that insolvency rules needed to be updated in parallel. This took longer than anticipated but Parliament ultimately provided broad-based support to the whole reform. This was a fundamental step forward for Cyprus and allowed the reviews to proceed.
IMF Survey : Why are the insolvency and foreclosure frameworks so important?
Lewis: The insolvency and foreclosure frameworks are critical to ensure the country returns to a sustainable path for jobs, stability and prosperity. A lot has been said about the impact of non-performing loans on banks’ balance sheets and capital, but not enough on the broader implications for the economy. Almost 60 percent of loans on domestic banks’ books are non-performing, which is preventing them from providing new credit. Modern and effective foreclosure and insolvency frameworks are good news for both banks and borrowers. They allow new credit to be extended to families and corporations, and on better terms, which supports growth and jobs.
IMF Survey : At the time of the crisis, many observers said Cyprus should look for another economic model. Has it found it?
Lewis: Prior to the crisis, growth had been driven by an outsized banking system, construction and real estate activity. These sectors have understandably and necessarily fallen back. Cyprus’s...