NICOSIA: Confidence in Cyprus’s once-bloated banking sector is still running low despite a massive reorganisation imposed under a ¤10bn international bailout in March, the IMF said yesterday.
Despite unprecedented capital controls slapped on the banks in March, the International Monetary Fund said net outflows had reached ¤8bn ($10.6bn), or 12.6 percent of deposits and nearly half of GDP, by August 21.
That has put pressure on banks’ balance sheets, already hurt by 30 percent of their loans being classified as non-performing, and led to a sharp contraction in credit supply.
Corporate credit declined by nine percent year on year in June, while mortgage lending, already suffering from the effects of recession, was down three percent and consumer loans by seven percent.
The IMF report, issued after a first review of the bailout agreed with Cyprus by the Fund, European Commission and European Central Bank, said authorities were on track to fulfil a sweeping package of restructuring measures imposed in exchange for saving the island from bankruptcy.
“Nevertheless, risks to the programme remain substantial, given the uncertain impact of the crisis, the still-recovering banking system and ongoing challenges to policy implementation.”
In May, the IMF forecast that GDP would contract by 8.7 percent this year and by 3.9 percent in 2014, before posting modest growth of 1.1 percent in 2015.
In its report, despite noting that second-quarter growth had been somewhat better than projected, it maintained its forecast in light of continuing uncertainties.