International lenders anticipate a shallower recession in Cyprus this year as private consumption continued to drive the economy, Cypriot authorities said on Saturday, holding out the possibility of an earlier than envisaged return to international markets.
Lenders concluded their fourth mission to the island and said an economic adjustment program was on track, Cypriot Finance Minister Haris Georgiades said.
“It was noted that progress was achieved in all sectors of the economy,” Georgiades said.
Lenders, known as the troika, had lowered their expectations on the depth of recession to 4.2 percent, from a February projection of 4.8 percent, Georgiades and EU officials said.
Future recovery was likely to be more subdued, given the high levels of unemployment, a liquidity crunch from high nonperforming loans in the banking sector and indebtedness, which could dampen consumption, the troika said in a joint statement.
Cyprus’s economy contracted by 5.4 percent last year, more than 2 percentage points better than initial expectations. A return to growth of about 0.4 percent was anticipated next year, the IMF and the EU said.
“Consumption is holding up better than we expected,” a senior European Commission source said, adding it was also due to the carry-over effect from last year.
The source said the possibility of Cyprus returning to international markets earlier than its game plan next year could not be discounted, given its performance so far.
Cyprus teetered on the verge of financial collapse in March last year after its banking system imploded from risky lending, exacerbating a cash squeeze on a state, which has been shut out of financial markets for three years.
The island, one of the eurozone’s smallest, required a 10 billion euro (US$13.7 billion) bailout and is following a three-year economic adjustment program.
The positive review means that Cyprus will receive a new tranche of aid of about 686 million euros, mostly provided by the EU, by the end of next month.
The amount will be used to finance the deficit and refinance maturing debt.
The new memorandum of understanding, a game plan of economic adjustment modified with every troika assessment, is to call for reforms to Cyprus’ public healthcare system.
Under the present time frame, Cyprus anticipates a full return to financial markets by the end of next year, even though Nicosia tested the waters for Cypriot debt with a private placement of bonds last month.
Georgiades avoided giving a direct answer when asked if the end-of-next-year timeframe could be moved earlier, saying it would be discussed with parliament.
“I wouldn’t rule out that there will be a possibility of Cyprus returning to markets earlier ... [as] it is fully funded,” the source said.