Cyprus rescue plan will require great efforts, IMF says
- 3 April 2013
- From the section Business
Cyprus has agreed to a set of measures that will release a 10bn-euro (£8.5bn; $12.8bn) international bailout.
The International Monetary Fund (IMF), which is contributing 1bn euros, says they are "challenging" and will require "great efforts" from its population.
They will mean a doubling of taxes on interest income to 30% and a rise in corporation tax from 10% to 12.5%.
The plan, designed to stabilise the banking system and government finances, was agreed in principle last week.
Cyprus's new finance minister Harris Georgiades, speaking on his first day in the post, said he was determined to honour the country's commitments: "The responsibility is great, and the expectations of our citizens greater. Our promise is that we will make every effort for what is best for the nation. Under your guidance I am sure we will succeed."
His appointment followed the resignation of Michalis Sarris on Tuesday.
The plans for the two largest banks, Bank of Cyprus and Laiki, are especially controversial in Cyprus, as they will involve heavy losses for depositors with large balances in their accounts.
The IMF, which is providing 10% of the bailout money, said 95% of account holders would be protected.
The majority of accounts have less than 100,000 euros in them, which will not be affected.
However, depositors with more than 100,000 euros will lose some of their savings. Although the exact amount has still not been decided, reports have said they could lose up to 60%.
Cyprus agreed last week to shut down Laiki and transfer deposits of under 100,000 euros to Bank of Cyprus.
Restrictions on the amount of money that can be withdrawn daily are still in place.
At present, there is a daily cash withdrawal limit of 300 euros and a cap of 1,000 euros on the amount that can be taken out of the country.
Mr Georgiades said the restrictions would be lifted ``gradually'.'
The IMF's managing director, Christine Lagarde, said the country would need to pull together: "This is a challenging programme that will require great efforts from the Cypriot population."
She added that its aim was to spread the pain, and "seek to distribute the burden of the adjustment fairly among the various segments of the population and to protect the most vulnerable groups".
Cyprus is in recession, with unemployment at around 15% and gross domestic product (GDP) down by 3.5% this year.
The country is already planning to introduce austerity measures equivalent to 5% of GDP between 2013-15 through tax rises and spending cuts, but Ms Lagarde said further measures were needed.
She said the corporation tax increase and raising of the tax on interest rates to 30% would help bring in another 2% of GDP.
In order to tackle its debt, additional cuts worth 4.5% of GDP would also be needed over the medium term to reach the target of a budget surplus of 4% of GDP by 2018, the IMF said.
The country's President, Nicos Anastasiades, warned there would be "difficult days ahead" that demanded a collective effort.
The IMF said the reform programme would also lead to changes in banking supervision and transparency.
Cyprus's banking system has been seen by some as a haven for firms, particularly Russian businesses, who wish to avoid close scrutiny of their affairs.
The IMF said that the international rescue effort, which also involves the European Union (EU) and the European Central Bank (ECB), would be "well paced".
BBC economics correspondent Andrew Walker says that appears to be a response to criticism that austerity policies in some countries have led to excessive economic damage.
The IMF's contribution will need to be ratified by its board in the coming weeks.
A spokesman for the European Commission, Olivier Bailly, said the bailout would also need parliamentary approval from several of Cyprus's eurozone partners.