The EBRD has already invested €220 million in the country
Cyprus was a founding member of the EBRD in 1991 and has traditionally been a strong supporter of the Bank. So when the island suffered a deep economic shock following the 2008 global financial crisis, the international community decided in May 2014 to expand the EBRD’s mandate to invest on the island to support the country's economic adjustment programme.
The EBRD moved swiftly. Barely two months after the shareholders’ decision to give the green light to investments in Cyprus, it acquired an equity stake in Bank of Cyprus as part of a €1 billion capital raise.
The stabilisation and restructuring of the island’s largest lender was crucial not only for the financial sector, but also for overall economic activity. The intervention was the first ray of light after a prolonged period of decline.
And it was a success. Not only did the Bank of Cyprus return to profit in 2016, it also fully repaid the €850 million Emergency Liquidity Assistance it had received from EU institutions in previous years.
The bank also achieved a significant reduction of its non-performing loans and listed its shares on the London stock market in January 2017.
The lender’s success corresponds with the recovery of the Cypriot economy. Growth returned in 2015 with the economy expanding by 1.7 per cent and accelerating to almost 3 per cent in 2016.
According to EBRD forecasts, the positive trend will continue this year with 2.2 per cent growth.
Confirming the old adage that “nothing succeeds like success” the good news attracted investors, boosted consumer confidence and led to a decrease in unemployment. The island also enjoyed a remarkably strong tourism season in 2016, the country’s main economic sector and foreign-currency earner.
While it would be premature to say that Cyprus has embarked on a virtuous cycle, things are definitely looking up.
The EBRD is contributing to this positive development with investments, engagement in policy reform and the provision of training and advisory services.
To date, it has invested €220 million in Cyprus, focussing on the private sector and complementing public and publicly guaranteed financing provided by the EU and other international financial institutions.
Following the successful engagement in the Bank of Cyprus, the EBRD also acquired an equity state in Hellenic Bank in September 2015, the second largest private bank in Cyprus, to strengthen its capacity to provide businesses with credit.
Small and medium-sized enterprises (SMEs) in particular continue to find it challenging to get access to finance. However, SME financing is vital for the sustainable growth of the economy as these enterprises form the backbone of the Cypriot economy.
Building on the island’s tradition as a trading post, the EBRD also rolled out its Trade Facilitation Programme in Cyprus. The support offered under the programme to promote foreign trade was met with strong appetite by local exporters and importers and to date three leading banks on the island have signed up to it.
Indeed, the demand for trade finance support in Cyprus was so great that the country quickly reached the third most active trade finance programme position among all of the countries where the EBRD works in 2016.
In addition, EBRD financing also supported physical trading infrastructure with a loan to Interorient Shipmanagement to expand its fleet, and to participate in the private concession of Limassol port, the main port on the island.
Improved performance of Limassol port under private management will enable easier access to international markets by Cyprus exporters, helping local companies to recover from the financial crisis.
Addressing another core challenge Cyprus is facing, the EBRD is actively promoting investments in green energy, where the island has great potential. Solar irradiation in Cyprus is one of the highest in Europe.
At the same time the island is highly dependent on imported sources of energy, principally highly polluting oil and oil products, the energy system is isolated with no interconnections with neighbouring countries and renewables account for less than 10 per cent of energy supply.
All this means that there is a large need not just for investments in renewable power generation but also energy efficiency and energy security. However, investments remain constrained by lack of financing.
In this situation the EBRD has taken the lead and to date alone financed the construction of five photovoltaic power plants which, once completed, will lead to a 20 per cent increase in total solar power generation.
Libor Krkoska is the Head of the EBRD’s Resident Office in Cyprus