Cypriot economy to contract by 8.7% in 2013, according to IMF’s WEO

The Cypriot economy will contract by 8.7% in 2013, the IMF World Economic Output notes, reflecting the rapid deterioration of the macroeconomic environment on the island following the Eurogroup decisions that featured an unprecedented haircut of deposits.

According to the WEO October projections, the Cypriot economy will decline by 8.7% in 2013 and by 3.9% in 2014, maintaining the same projections of the Troika adjustment programme. The WEO projects that the Cypriot GDP will shrink by 10.7% in the fourth quarter of 2013.

Inflation is expected to be limited to 1.0% in 2013 and to marginally increase to 1.2% in 2014. The current account deficit is projected to reach 2.0% in 2013 and to decline further to 0.6% in 2014.

Unemployment is projected at 17% for 2013 and to rise further at 19.5% in 2014.

Excluded from the international capital markets since May 2011, Cyprus appealed in June 2012 for a financial assistance as its two largest banks sought state support after posting mammoth losses due to the haircut of the Greek sovereign debt.

The Cypriot authorities and the Troika (EC, ECB and the IMF) agreed last March on a €10 billion bailout. The programme featured a conversion of uninsured deposits to capital in a bid to recaptalise the island`s largest lender, Bank of Cyprus, whereas Cyprus Popular Bank, the island`s second largest bank is to be wound down.

“A specific concern was that the events in Cyprus could amplify financial fragmentation. Although further fragmentation did not happen, progress in reintegrating financial markets has been very limited,” the IMF notes