Cyprus: Fourth Review Under the Extended Arrangement Under the Extended Fund Facility and Request for Modification of Performance Criteria-Staff Report; Press Release; and Statement by the Executive Director for Cyprus

EXECUTIVE SUMMARYExtended Arrangement: On May 15, 2013, the Executive Board approved a three-yearExtended Arrangement under the Extended Fund Facility in the amount ofSDR 891 million (563 percent of quota; about €1 billion). Four purchases of amountsequivalent to SDR 74.25 million (about €84 million) each have been made so far, andanother purchase of the same amount is proposed to be released upon completion ofthe fourth review. The European Stability Mechanism has released €4.75 billion (of€9 billion committed), and an additional €600 million is expected to be disbursed inearly July.Recent Economic Developments: While still deep, the recession continued to moderatein the first quarter. Unemployment remains high, and mild deflation persists. Conditionsin the banking sector are normalizing, although non-performing loans remain very high,constraining the ability of banks to provide credit to the economy. The outlook remainschallenging, although with a somewhat milder output contraction expected this year,followed by a more gradual recovery. Overall, the economy remains weighed down bylarge private sector deleveraging needs.Policy Implementation: The program remains on track. Fiscal targets for the firstquarter were met with considerable margins, domestic payment restrictions were fullylifted, and the coop sector was consolidated. The authorities intensified efforts toovercome delays in the implementation of structural measures. Looking forward, thereare three key policy challenges: (i) addressing the high level of non-performing loans;(ii) maintaining fiscal sustainability; and (iii) strengthening institutions to support fiscalconsolidation efforts and long-run growth. Risks to the program remain significant, inparticular those related to still strong macro-financial linkages.