Interview with Isfandyar Zaman Khan, lead specialist for finance and innovation at the World Bank

The amount of non-performing loans in Cyprus has been reduced, how could the issue of NPLs reach a sustainable amount of 4%-5% or be dealt with completely?

There needs to be a pro-active, cooperative approach to deal with the NPL problem, it involves working on a number of fronts:

o Use comprehensive approach to address all aspects of the NPL problem

o The role of the government should be to establish a conducive environment for private debt resolution, avoiding subsidising NPL resolution

o Extensive true operational restructuring of viable borrowers need to be done aimed at root causes

o NPL resolution should be accompanied by heightened data transparency and cross-country comparability, so that progress can be tracked and analysis improved

We also recommend working on 4 pillars:

Pillar 1: Regulatory and supervisory frameworks should promote timely recognition and proper

Pillar 2: Ensure operational readiness at the level of banks to respond early on to rising loan delinquencies

Pillar 3: Strengthen the enabling environment, i.e. the body of laws, regulations, institutions and practices

Pillar 4: Diversify the range of disposal options,

How could a solution to the Cyprus problem affect the economy of the country?  Has the World Bank conducted any exercises on various scenarios?

The benefits of reunification outweigh its costs. Reunification will open a window of opportunity for greater economic growth in Cyprus. It is expected to boost trade, increase intra-island commerce, spur investment, and create more jobs.

We have to recognise that the status quo of an already small economy that is divided into two smaller economies amplifies the challenges - and potentially reinforces the increased per capita income gap between the GCC and the higher income economies of the EU. If reunification is well managed, the benefits of a larger economy, greater public and private investment, and increased domestic and international trade could create many jobs across the island. Enhanced domestic connectivity for energy, transport, and water could generate about €1.1 billion-worth of investment opportunities within the next 2-3 years. There would be income convergence within the island and a catchup with the advanced economies of the EU. 

Continuation of the status quo is costing Cyprus. Reunification, on the other hand, would generate significant benefits for the economy -  as long as it is accompanied by sound policy and institutional decisions, effective implementation, and careful management of the property issue.

With respect to trade: increased trade, primarily with the rest of the EU and Turkey, would allow Cypriot firms to reap economies of scale and become larger and more competitive in the world economy. This will provide opportunities to domestic investors, and the resulting growth would generate more jobs for the entire island. The experience of economies that have joined the EU shows that those that have benefited most from the integration of their economies are those which have embraced integration.

Under the status quo, sales across the Green Line are significantly below potential, due to unique features of the tax systems and different product standards. Harmonized tax systems and product standards following reunification, however, would support increased intra-island commerce. Our simulations indicate that intra-island commerce could more than triple. An enhanced business climate, a stronger financial sector, and a stable macroeconomic-fiscal framework would help the Cypriots grab these opportunities.