Pitfalls and Potential of Financial Liberilasation Patterns in Neighboring Areas

Three potential pitfalls may beset Cyprus’s financial liberalisation programme. To avoid them, gaps in financial structures must first be identified and addressed; financial stability could be jeopardized in the absence of a broad variety of financial markets and financial institutions. Second, the imposition of reserve requirements on foreign as well as domestic deposits together with some discouragement of consumer credit may be the best practical solution should capital account liberalisation produce excessive capital inflows. Third, pathological borrowers with perverse credit demands must be removed form the pool of potential borrowers and banks put on a sound footing to ensure that interest-rate liberalisation produces beneficial allocative and inflation-reducing effects.