23 Feb 2017

EC Warns: Cyprus Hasn’t Learnt Its Lesson Yet

Cyprus has made limited progress in effectively applying structural reforms and continues to experience “excessive economic imbalances,” the latest country report from the European Commission shows. The country has failed to increase the capacity of employment services for the public, modernise healthcare, apply crucial fiscal reforms and reduce public debt.

The report came shortly after the announcement that Cyprus’ public debt has increased its value by €357.1m in the last year and by December 2016 it was €19bn. The date came from The Public Debt Management Office (PDMO) report. The largest government creditor is the European Stability Mechanism (ESM) which played a crucial role in the country’s bailout 4 years ago, the second biggest creditor is The Russian Federation to which the Cyprus government owes €2.5bn. The public debt also includes €1.2bn owed to the Central Bank of Cyprus and €370.4m to the Cooperative Central Bank.

According to PDMO the increase of the public debt in 2016 is due to the €1bn bond issued for a period of 7 years last July. By this day, the government has used up to €558m to smooth the payment of maturities which are due to start next year with the first payment of the Russian loan. In the next five years, the maturity debt is expected to account for 34% of the total debt.

The European commission report was somehow positive of the movement of the public debt, predicting that it will drop in the coming years but cautioned about risks: “Government debt is expected to have peaked, but the current relaxation of fiscal policy is foreseen to slow down the needed adjustment” and “its sustainability remains subject to sizeable risks,” the European Commission said.

In addition, the auditors were concerned about the struggles of the local banks to motivate debtors and apply new negotiation tactics due to a “weak administrative capacity, the cost of procedures and inefficiencies in the court system”. To top the issue “the governance and administrative capacity of insurance and pension funds supervision remain weak” concludes the report. The EC fears that since 2016 the government’s will for reforms has weakened and that will slow down the process of reforming crucial areas like public administrations, the justice system, electricity and privatisation.