Exactly a year ago from today, the events of March 2013 left Cyprus faced with a shattered banking system, its citizens in despair and a future that looked grim, laden with uncertainty. Twelve months later, with the help of Cyprus’s international partners, outlines of recovery may be faint, but are now visible. The authorities, through firm and ambitious reforms, have been abiding strictly to the terms of the EU-IMF memoranda, which are viewed as the necessary steps to correct the island’s weaknesses, setting the stage for sustainable growth. In implementing these reforms, the society has held together, with social cohesion proving to be an invaluable asset in the country’s endeavours.
The third review shows that Cyprus continues to perform strongly under the programme, which remains on track and well financed, with all performance criteria observed with considerable margins. All structural benchmarks, but one, were observed by the time of this review, with the remaining one on track to be completed by end-April 2014. The Cypriot authorities remain committed to their goal of restoring the economy to a sustainable footing through the painful, but necessary, structural reforms taken to date and going forward.
On March 4, 2014 the politically sensitive, large-scale privatisation programme was approved by parliament. While the latter was faced with significant headwinds, the parliament tackled the issue with soberness and despite a breakup of the governing coalition a few days earlier. Staff rightly points out that this development may weaken the government’s ability to advance its reform agenda, as policy makers may seek to find more common ground and build consensus. Nevertheless, this example along with other extremely difficult decisions of the past, evidence the authorities’ abilities to implement program policies even under difficult political circumstances.
Clearly, the fundamentals, when seen on their own, are not flattering for the state of the economy. Cyprus is in the midst of a deep recession, unemployment is high and the banking sector is still unable to support the economy. However, they conceal the considerable successes of the last year. The reforms to date have been bold and numerous, the economy did not shrink as much as was originally feared and the banking system has been fully recapitalised and is now in the process of an ambitious restructuring. In turn, society’s expectations have been steadily improving. The Economic Sentiment Indicator has been on the rise every month since April 2013 and is now at the highest level since mid-2011. The improved market perceptions of Cyprus’s financial position have also been reflected in sovereign bond yields which have declined to the lowest level since May 2011, while rating agencies have started reversing a long trend of successive downgrades. These developments are promising, even as the report is rightly mindful of the outlook’s fragility.