The Executive Board of the International Monetary Fund (IMF) today completed the second review of Cyprus’s performance under an economic program supported by a three-year, SDR 891 million (about €1 billion, or US$1.4 billion) Extended Fund Facility (EFF) arrangement. The completion of this review enables the disbursement of SDR 74.2 million (about €83.5 million, or US$114 million), which would bring total disbursements under the arrangement to SDR 222.7 million (about €250.4 million, or US$341.9 million). The Executive Board also approved the authorities’ request for modification of performance criteria on end-December 2013 fiscal targets.

The EFF arrangement, approved on May 15, 2013 (see Press Release No. 13/175), is part of a combined financing package with the European Stability Mechanism (ESM) amounting to €10 billion. It is intended to stabilize the country’s financial system, achieve fiscal sustainability, and support the recovery of economic activity to preserve the welfare of the population.

Following the Executive Board discussion, Ms. Christine Lagarde, Managing Director and Chair, said:

“The Cypriot authorities have established a record of strong policy implementation, meeting fiscal targets with comfortable margins, making strides in restructuring and recapitalizing the financial system, and advancing structural fiscal reforms. While macroeconomic outcomes have been somewhat better than expected, the economic situation and outlook remain difficult and subject to significant risks. Full and timely implementation of the adjustment program, as well as broad public support, is therefore crucial to restore confidence and growth.

“Considerable progress has been made in stabilizing the financial sector. Cyprus’s largest bank put in place a restructuring plan, the second largest bank was fully recapitalized with private—including foreign—funds, and initial steps were taken to consolidate the cooperative credit sector. Building on these efforts, banks will need to implement their restructuring plans, and the recapitalization and consolidation of cooperative credit institutions should be completed rapidly. These will help pave the way for a further gradual relaxation of payment restrictions in line with the authorities’ roadmap, while safeguarding financial stability.

“The resumption of credit flows and output growth will depend on progress in addressing banks’ problem loans. This requires an effective framework for private sector debt restructuring with appropriate incentives. At the same time, efforts should continue to strengthen bank supervision and regulation and the implementation of the anti-money laundering framework.

“The 2014 budget is appropriately conservative, given the uncertain outlook. Continued prudence in budget execution is necessary, complemented by structural reforms to ensure adequate protection of vulnerable groups, improve revenue administration, and strengthen public financial management. The authorities also need to accelerate efforts to jump-start the privatization process,” Ms. Lagarde said.