NICOSIA – Despite just getting good grades from international lenders for pressing reforms in return for a 10 billion euro ($13.34 billion) last year, bad bank loans and reliance on Russia could derail the country’s recovery, the International Monetary Fund has warned.
The IMF, along with the European Union and European Central Bank make up the Troika of the EU-IMF-ECB that put up the rescue monies but they demanded tough conditions in return, including austerity measures as well as confiscation of 47.5 percent of bank accounts over 100,000 euros ($133,400).
But Cypriot President Nicos Anastasiades has stuck to the Troika recipe despite anger that he reneged on a promise not to go after bank accounts and even as austerity has sent unemployment soaring.
While that has hurt Cypriots, it has helped the government get back on keel after the country’s banks were brought to the edge of ruin by bad loans to Greek businesses and when the Greek government hit private investors with 74 percent losses.
The IMF alarm bell came only days after Troika envoys checked Cyprus’ books and gave a thumbs-up to progress in their fifth review.
The IMF, one of the lenders that stepped in with a 10-billion-euro bailout for the Mediterranean island nation last year also said it expected Cyprus would require additional fiscal efforts to achieve a sustainable primary surplus target of 4 percent by 2018, the news agency Reuters reported.
It said a “growth-friendly consolidation” should focus on fully unwinding spending increases introduced before Cyprus plunged into crisis in 2013, while protecting capital expenditures but that there was a likelihood that there would be more cuts to the public payroll.
Salaries in the public sector have already been scaled back under the bailout agreement, and a freeze on pay raises is in place until 2016.
“While significant progress has been achieved, overcoming the legacy of the crisis will be challenging,” the IMF said in a staff report, part of a regular annual consultation by the Fund.
“Risks remain significant, related to the uncertainty about the magnitude and pace of private sector deleveraging and the ability of banks to address NPLs (non-performing loans), as well as to geopolitical tensions of Ukraine-Russia,” the IMF said.
Cyprus had been accused before the crisis of being a money-laundering haven for rich Russians and mobsters and despite the confiscations and capital controls that only now are being lifted, many foreigners still hold big deposits in the island’s banks.