Ms. Christine Lagarde, Managing Director of the International Monetary Fund (IMF), issued the following statement today on Cyprus:
“A staff team of the International Monetary Fund has reached staff level agreement with the Cypriot authorities on an economic programme that will be supported by the IMF jointly with the European Union and the European Central Bank. A combined financing package of €10 billion (about US$13 billion) is designed to help Cyprus cover its financing needs, including to service debt obligations, while it implements the policies needed to restore the health of the economy and regain access to capital market financing.
“The IMF’s contribution would be through a three-year SDR891 million (about €1 billion; or US$1.34 billion) loan, representing about 563 percent of Cyprus’ quota, under the Extended Fund Facility (EFF). I expect that the arrangement would go to the Executive Board for approval in early May”.
“The Cypriot authorities have put forward an ambitious, multi-year reform program to address the economic challenges they face. The overarching goals are to stabilize the financial system, achieve fiscal sustainability, and support the recovery of economic activity to preserve the welfare of the population.
“The programme builds on resolute policy steps taken recently. First, problems in the two largest banks are being addressed upfront with an approach that avoids putting additional burden on taxpayers and contributes to putting public debt on a sustainable path. Importantly, insured depositors (representing over 95 percent of the total number of account-holders in the two affected banks) have been fully protected. Second, substantial fiscal consolidation measures for 2013-15 have been introduced with this year’s budget, implying limited need for additional fiscal measures in the short term. Third, the government implemented a significant reform of the public wage indexation mechanism as well as important steps to improve the pension system’s long-term viability.
“The programme ahead rests on two pillars. The first pillar aims to restore the health of the financial system and minimize the contingent liabilities from the banks to the state. Recent actions have already resulted in a substantial reduction in the size of the banking system in relation to the economy as well as in restructuring and recapitalization of one of the banks. Going forward, efforts will focus on completing the financial sector recapitalization process, gradually restoring normal financial flows, and facilitating the restructuring of banks’ impaired loans. To prevent the build-up of risks in the future, the program seeks to reform banking supervision and regulation and to enhance transparency.
“The second pillar entails an ambitious and well-paced fiscal adjustment that balances short-run cyclical concerns and long-run sustainability objectives, while protecting vulnerable groups. In addition to the fiscal consolidation already underway—estimated at about 5 percent of GDP— an additional 2 percent of GDP in measures will be implemented during the program period, including by raising the corporate income tax rate from 10 to 12 ½ percent and the tax rate on interest income from 15 to 30 percent. An additional 4½ percent of GDP in measures will be needed over the medium term to achieve a 4 percent of GDP primary surplus by 2018, which is required to put debt on a firmly downward path. There will be protection for the most vulnerable groups. The social welfare system will be reviewed to streamline administration costs, minimize the overlap of existing programs, and improve their targeting to ensure that public resources reach those in need.
“To complement the fiscal consolidation efforts, the program will undertake substantial structural reforms aimed to improve the effectiveness of the public sector. The state’s capacity to collect revenues will be strengthened with the implementation of a comprehensive reform agenda to modernize and harmonize procedures, improve internal coordination, and exploit economies of scale. Public financial management reforms will include the implementation of a medium-term budget framework and the adoption of a law on fiscal responsibility. In addition, to enhance the efficiency of the economy and reduce public debt, viable state-owned enterprises will be privatized. Finally, based on an assessment of needs, the program will supplement the recent reform of the pension system with additional measures to ensure its long-run sustainability.
“This is a challenging programme that will require great efforts from the Cypriot population. We believe that it provides a durable and fully financed solution to the underlying problems facing Cyprus and provides a sustainable path toward a recovery. The fiscal and financial policies of the program seek to distribute the burden of the adjustment fairly among the various segments of the population and to protect the most vulnerable groups. The IMF, together with its European partners, will continue to support the efforts of the Cypriot people.”