IMF: Greek Cyprus on track; risks increase for Kosova

Greek Cyprus is making a comeback from near bankruptcy although its banks are still struggling with bad loans, the recent 25 increase of pensions and public servants' wages will put significant pressure on Kosovo's budget International Monetary Fund says

IMF: Greek Cyprus on track; risks increase for Kosova

World Bulletin/News Desk

Greek Cyprus is making a comeback from near bankruptcy although its banks are still struggling with bad loans and political support may be waning for tough measures, an IMF report said on Tuesday.

The IMF, which together with the European Union bailed the Mediterranean island out a year ago, also flagged risks to Greek Cyprus from its close business ties with both Moscow and Kiev.

"The Ukraine crisis may lead to capital flight from non-resident depositors of foreign banks in Cyprus, which may affect the business service sector," the International Monetary Fund said in an appraisal accompanying its third tranche of aid under the three-year bailout programme.

Some 40,000 Russians live in Greek Cyprus out of a total population of 800,000.

Greek Cypriot officials acknowledge risks if East-West tensions rise but say deposits have stabilised after a rout on its banking system last year. Greek Cyprus had to seize money from big savers, many of them Russian, as a condition of its 10 billion euros ($14 billion) bailout. Capital controls are still in force.

EU/IMF aid is directed mainly towards supporting the island's fiscal needs.

Tuesday's report was the first since the collapse of a centre-right governing coalition in early February. Diminished political support for the programme, going forward, was a risk, the IMF said.

It noted non performing loans for the core domestic sector reached 50 percent of total loans - 22 billion euros, or 135 percent of gross domestic product (GDP). Parliament is debating the politically-sensitive question of how assets can be repossessed.

Greek Cyprus defied lenders' projections with a shallower recession than anticipated in 2013. The economy shrank around 6 percent compared with initial forecasts of about 9 percent.

The IMF maintained its forecast of a further 4.8 percent fall in output in 2014, but said the island might instead be able to sustain a pick-up in economic activity which started in the second half of 2013.

Prospects for exploiting offshore gas reserves, and the reunification of the ethnically-split island could raise the economy's long term growth potential, the IMF said.

Last month Cyprus's parliament approved plans for privatisations, averting a showdown with international lenders who insist on state sell-offs.

Concern over Kosovo wages increase

The recent 25 increase of pensions and public servants' wages will put significant pressure on Kosovo's budget and hurt the former Serbian province's private sector, an International Monetary Fund official also told Reuters on Tuesday.

In 2011, the IMF canceled a precautionary programme with Kosovo when Prime Minister Hashim Thaci hiked public sector wages by up to 50 percent to keep a promise he made during the previous election campaign.

Last month, Thaci's cabinet raised salaries for 240,000 teachers, police officers, doctors, state administration, pensioners and welfare beneficiaries.

The move came a few months ahead of a next parliamentary election, expected between June and September. The opposition has accused Thaci of using public money to improve his ratings.

"The recent wage and pension increases raises concerns," the IMF resident representative in Kosovo, Jose Sulemane, said.

"Together, they will put significant pressure on the budget and hurt competitiveness in the private sector. A more moderate increase in wages and less generous benefits would have been more appropriate."

IMF and Kosovo had agreed on a 14 percent wage increase, only for the public administration, which employs some 80,000 people. There was no mention of other increases.

The broader new hike will require an additional 100 million euros ($137.82 million) for the remaining nine months of 2014 and around 130 million euros for the whole of next year.

The government did not say where the money would come from.

Kosovo is hoping to clinch a new precautionary programme with the world lender. An IMF delegation visited the country last week but a government official said the IMF would not start talks on a new loan before the elections are held.

The IMF cut its 2014 forecast for Kosovo's growth to 3-3.5 percent from 3.9 percent, which is still above most other countries in the Balkans.

The growth is largely based on positive developments in western Europe, mainly Germany and Switzerland, where up to 800,000 Kosovars work and send remittances home.

Six years after gaining independence from Serbia, the land-locked country remains one of the poorest in Europe. Government data show more than 35 percent of the population is unemployed.

 

Last Mod: 13 Nisan 2014, 12:14
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