IMF says Cyprus will need more spending cuts

Economy • Financially troubled island nation has to do more to satisfy rescue program.

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Nicosia, Cyprus • The International Monetary Fund said Wednesday that Cyprus will need to make additional spending cuts to meet a key target of its financial rescue program.

IMF official Delia Velculescu said that more permanent cuts to government spending, including the public sector wage bill, are needed for authorities to achieve a primary surplus of four percent of gross domestic product by 2018. A primary surplus does not count the cost of servicing existing debt.

That surplus is seen as key to rolling back Cyprus' public debt which is now around 120 percent of gross domestic product. According to the program terms, public debt must fall to around 100 percent of GDP by 2020.

With Cyprus on the verge of bankruptcy, a joint IMF-European Union rescue package agreed in March 2013 forced uninsured deposits in the country's two largest banks to be seized in order to recapitalize the bigger Bank of Cyprus. The smaller lender, Laiki, was shut down and parts of it absorbed by Bank of Cyprus.

Cypriot authorities have implemented a package of spending cuts backed up by revenues that amounted to around 7 percent of GDP. However, the IMF said in a statement that more savings could be made by eliminating automatic pay rises for government workers before a wage freeze expires in 2016, better linking pay with performance and reforming the education sector and pensions.

Velculescu said the country must revise its foreclosure legislation to tackle the high number of bad loans — over half of all loans — that are holding back economic growth.

She said the IMF expects the Cabinet-approved legislation to pass since it's a condition of the rescue program. But some political parties have openly opposed it over fears that people will lose their homes. Velculescu said in case the parliament votes down the legislation before a September 1st deadline, international creditors would have to return to the country to discuss with authorities how to proceed.

The next batch of rescue money — $470 million from the EU and $115.5 million from the IMF — is set to be released in late September.