ECONOMY

Rehn and Lagarde hail agreement for Cyprus bailout

European Economic and Monetary Affairs Commissioner Olli Rehn and International Monetary Fund managing director Christine Lagarde have issued a joint statement hailing the memorandum agreed between Cyprus and the troika.

A day after Nicosia said it had settled on the terms of its 10-billion-euro bailout, Rehn and Lagarde said on Wednesday that the program “puts forward comprehensive structural reforms to set the conditions for growth and job creation.”

Cyprus expects to receive its first bailout tranche in May. Nicosia will be charged an interest rate of 2.5 percent for its loans but will receive a 10-year grace period on repayments.

In return, Cyprus has agreed to a range of fiscal measures and reforms that include the corporate tax rate rising from 10 to 12.5 percent, 4,500 civil servants leaving the public sector by 2018 and 170,000 Cypriots paying a temporary insurance fee of 1.5 percent on monthly salaries for access to healthcare.

The IMF will provide 1 billion of the 10 billion euros Cyprus will receive as part of the bailout.

The memorandum foresees Cyprus running a primary deficit until 2016 and a primary surplus of 4 percent of GDP from 2017 onward.

“The program ahead rests on two pillars,” said Lagarde in a separate statement. “The first pillar aims to restore the health of the financial system and minimize the contingent liabilities from the banks to the state. Recent actions have already resulted in a substantial reduction in the size of the banking system in relation to the economy as well as in restructuring and recapitalization of one of the banks”

“The second pillar entails an ambitious and well-paced fiscal adjustment that balances short-run cyclical concerns and long-run sustainability objectives, while protecting vulnerable groups,” added the IMF head. “In addition to the fiscal consolidation already underway—estimated at about 5 percent of GDP— an additional 2 percent of GDP in measures will be implemented during the program period, including by raising the corporate income tax rate from 10 to 12.5 percent and the tax rate on interest income from 15 to 30 percent.”

Here is Rehn and Lagarde’s statement in full:

The Cypriot authorities have put forward a multi-annual reform programme to address the economic challenges facing the country. Its goals are to stabilize the financial system and achieve fiscal sustainability in order to lay the foundations for a recovery of economic activity and the growth potential that will preserve the longer-term prosperity of the population.

The programme builds on important steps already taken by Cyprus to address the problems in the two largest banks and includes a set of measures aimed at ensuring a stable, sustainable and transparent financial sector.

While the Cypriot government has already adopted important fiscal consolidation measures, the programme entails a well-paced fiscal adjustment that balances short-run cyclical concerns and long-run sustainability objectives, while protecting vulnerable groups. The social welfare system will be reviewed with the view to ensuring sustainability and social fairness.

The programme puts forward comprehensive structural reforms to set the conditions for growth and job creation.

Significant challenges lie ahead for Cyprus. The European Commission and the International Monetary Fund stand by Cyprus and the Cypriot people in helping to restore financial stability, fiscal sustainability and growth to the country and its people.