IMF approves €1-bn loan for Cyprus

The International Monetary Fund (IMF) has approved a €1-billion (SDR 891 million) loan package to debt-laden eurozone nation Cyprus as part of the much larger bailout agreed by the European Union and the IMF earlier in March.

The three-year loan has been arranged under the IMF's extended fund facility for Cyprus' economic adjustment progarmme and about €86 million will be disbursed immediately, the IMF said in a statement.

Earlier this week, EU officials approved the first €2-billion tranche of the €10-billion rescue package to Cyprus from the troika of international creditors, the European Central Bank (ECB), The European Commission and the IMF.

The funding is intended to stabilise the country's financial system, achieve fiscal sustainability, and support the recovery of economic activity to preserve the welfare of the population, the statement said.

The IMF managing director and chair of the executive board Christine Lagarde said, ''The Cypriot economy has suffered a confidence crisis, linked to weaknesses in the oversized banking sector and large external and internal imbalances.''

''The authorities took bold steps to address the crisis, including the upfront resolution and restructuring of the two largest and insolvent banks at no fiscal cost, while protecting insured depositors. They also implemented ambitious fiscal consolidation measures,'' she further stated.

Nevertheless, challenges ahead are significant, including restoring credibility in the banking sector and reducing fiscal deficits and debt to sustainable levels.

The three-year programme will help Cyprus to achieve financial stability and debt service to restore growth.

Priority areas include restructuring of the banking sector and achieving sustainable public finances and the IMF considers that additional fiscal consolidation measures in outer years will be needed to bring down the country's debt which was around 86 per cent of GDP in 2012.

As part of the bailout deal, the Cypriot government had agreed to impose a tax of up to 60 per cent on deposits of over €100,000 in two of its biggest banks, Bank of Cyprus and Laiki Bank.

''There is no room for implementation slippages. Full and timely implementation of the program is critical to maintain credibility and achieve the program's objectives,'' Lagarde stated.

The country's economy shrank 2.5 per cent in 2012 on the back of falling private demand and declining investment. According to the IMF projections, the GDP is expected to contract by 9 per cent in the current year and 4 per cent in 2014.

It is expected that a gradual recovery will begin in 2015, driven by normalisation of private consumption and a rebound of investment. However, growth is expected to remain modest, stabilising at around 2 per cent by 2020.

Cyprus, which fell into recession in 2009 following the global financial crisis, registered a weak economic recovery during 2010-11. The country fell victim to the Greek debt crisis in 2011 as its banks had deep exposure to Greece and also held huge overseas deposits, particularly from Russian corporations.

In late 2011, Cyprus fell into a deeper recession, and in last June, requested for an international bailout.