IMF and EU warn of the downside risks to the economy of Cyprus as unemployment spikes
EU and IMF warn of ‘downside risks’ to Cyprus economy as unemployment spikes
Unemployment in Cyprus has increased at a faster pace than predicted by the European Union and International Monetary Fund and both lenders have warned of “considerable downside risks” to the island’s economic prospects
Bruno Waterfield By Bruno Waterfield, in Brussels5:46PM BST 18 Sep 2013 CommentsComments
EU and IMF reports into progress in Cyprus since its €10bn bailout in March found that the economy had shrunk 5.2 per cent, with unemployment rocketing by almost six per cent to 17.3pc over the last year.
The spike in unemployment is up from an original EU-IMF forecast of 15.5pc, with joblessness now predicted to hit 19.6pc in 2014, an upwards revision to the original forecast of 16.9pc.
“A further worsening of labour market conditions may lead to a more prolonged loss of business and consumer confidence,” the European Commission said in its report.
Tight capital controls, which are expected to last until January 2014, will push the tiny Mediterranean island’s economy into further slump, with a predicted contraction of nine per cent this year and additional fall in outputof 4pc in 2014.
Imports fell by 20 per cent since the introduction of capital controls and the IMF predicted a “very difficult” economic period ahead, warning “risks to the programme remain substantial and tilted to the downside given the uncertain impact of the crisis, the still-recovering banking system and on-going challenges to policy implementation”.
Despite capital controls, confidence in the Cypriot banking system has continued to fall with net outflows since March reaching €8 billion, representing 12 per cent of all deposits combined by a credit crunch of 9pc since last June.
The commission’s review forecast that bank credit would to continue to shrink, but should not be seen as a credit crunch due to “necessary adjustment of the previous excessive credit expansions”.
As well as soaring unemployment and economic strangulation, public debt in Cyprus is forecast to rise from a projected 114 per cent of GDP this year to 126 per cent of output in 2015.
Despites the grim unemployment figures, the commission insisted that Cyprus was “on track”.
“When I say itis positive news, I mean it’s not worse than expected,” said an EU official. “This is no walk in the park.
Eurozone finance ministers approved the disbursement of €1.5 billion from to Cyprus last week, while the IMF cleared its contribution of €84.7 million on Monday.