Just as economic tensions are rising again around Greece and economies across eastern Europe are being pummelled by Russia’s slump driven by sanctions and a collapsing oil price, a small glimmer of economic hope is emerging on the Mediterranean island of Cyprus.
The European Bank for Reconstruction and Development (EBRD) has been winding back its forecasts for many of the countries where it invests and sees a mild contraction on average across its regions of operations.
But Cyprus, where the EBRD began investing in the middle of last year, is defying the broader trend. Only a few months back we had been predicting that its crippling recession would continue into this year with at best a stagnating economy for the whole of 2015.
Now we see a rebound: - a modest 0.7 per cent rise - but a rebound all the same.
Cyprus is a small and flexible economy and its agile response to its economic problems has led to this better-than-expected performance.
Its high-quality offerings in the professional services sector have continued to attract strong demand from foreign customers. Actors in the all-important tourism and leisure industry have taken a hit on prices but have increased their competiveness with good results. Consumer spending at home has also surprised on the upside.
Key to the successful turnaround has been a determination on the part of the Cypriot authorities to drive through necessary reforms.
Cyprus has set an example for others in demonstrating the benefits of pushing ahead with reforms, despite - - or even because of – the immediate pressure of acute economic challenges.
A great deal has been achieved especially in efforts to recapitalise and restructure the banking sector. But the job is by no means complete. There are major challenges ahead to reduce the debilitating level of non-performing loans that are close to 50 per cent of total loans.
The EBRD is also prepared to support the work by banks who are already beefing up their loan recovery departments. We look forward to seeing NPLs dropping back to the average level for the eurozone.
Another important focus for Cyprus is moving ahead with the restructuring, privatisation and modernisation of the utilities and infrastructure sectors where the country has previously lagged behind. At the same time supporting SMEs as they seek to gain greater access to finance against a backdrop of a banking industry whose ability to lend has been constrained will be a priority.
It is still too early to sound the all clear for Cyprus, while potential problems remain in the eurozone and the impact of Russian weakness still hovers over much of the region.
However, Cyprus’s resolve in dealing with its own problems will ensure that it is far better placed to deal with future external shocks and serves as a positive role model for others still seeking their route back to recovery.
Libor Krkoska is Head of the European Bank for Reconstruction and Development Office in Cyprus