## 1cypea2022002 - introduction of a carbon tax, will be challenging. ## Source details **Canonical URL:** [1cypea2022002 - introduction of a carbon tax, will be challenging.](https://www.imf.org/-/media/files/publications/cr/2022/english/1cypea2022002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1cypea2022002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1cypea2022002.pdf.json) --- ### Context and structural features - Pre-Covid recovery supported by tourism and growth in higher value-added sectors: information and communication technologies (ICT), maritime shipping, non-bank financial services, and education. - Cyprus Investment Program (CIP) contributed to residential real estate investment and was terminated following corruption allegations. - Economy highly exposed to recent shocks: Covid-19 and the war in Ukraine. - Exports to Russia account for about 10 percent of GDP, the highest level in the euro area. - High indebtedness and NPLs remain legacies of the 2012–13 financial crisis despite progress in deleveraging and NPL offloading to credit acquiring companies (CACs) and the public Asset Management Company (KEDIPES). - Low savings rates contributed to a buildup of external debt; special purpose entities (SPEs) amplify external debt figures but external debt is high and NIIP negative even after excluding SPEs. - Governance weaknesses and structural bottlenecks persist: inefficiencies in the legal system that hinder NPL workouts, gaps in infrastructure and ICT adoption, and skills mismatches. ### Recent developments and recovery from COVID - Public health and mobility: - Around 70 percent of the population has been fully vaccinated and around 40 percent has received a booster. - Authorities eased Covid restrictions in March (shortening quarantines and eliminating testing requirements on arrival for vaccinated tourists). - Fiscal and support measures: - COVID-related fiscal support measures were equivalent to around 3 percent of GDP in 2021; most expired in December 2021 except interest subsidy schemes and a new loan guarantee scheme. - Most financial support (including debt payment moratoria) has expired. - Output and labor market: - GDP grew by an estimated 5½ percent in 2021, returning output to pre-crisis level. - Unemployment rate declined to 6.3 percent by 2021Q4 (around pre-pandemic level). - Labor force participation rate and employment reached all-time highs; output gap still negative at -½ percent. - Recovery has lagged in tourism-related sectors—value added, employment and hours worked in services dependent on international tourism remain below pre-pandemic levels. - Inflation and expectations: - Headline and core inflation edged up sharply to 5.8 and 2.8 percent (yoy) in February, driven largely by energy prices and pass-through to utilities and transportation. - Private sector balance sheets and banks: - Households increased assets (mainly deposits) and NFCs reduced debt liabilities. - Banks: liquidity remained high and capital ratios broadly stable; the Tier1 capital ratio stands at 19.0 percent overall. - Stage 2 loans accounted for 15 percent of total loans as of December 2021 (EU average is 9 percent); these loans are concentrated in tourism-related sectors. - NPL ratio reduced to around 10 percent in December 2021 (from 17.7 percent a year earlier) after large NPL sales; CACs and KEDIPES already held 74 percent of total NPLs in the economy before these transactions. - Margin pressures and high costs continue to weigh on banks’ profitability. - Public finances and external position: - Headline fiscal deficit dropped from 5.7 percent in 2020 to 2.1 percent of GDP in 2021. - Public debt declined from 115 percent in 2020 to 104 percent in 2021. - Current account deficit declined to -7.3 percent of GDP in 2021 (from -10.1 percent in 2020) but remained higher than the 2019 level of -5.7 percent of GDP. - Large cash buffer from the 2020 Eurobond issuance covered 2021 financing needs; sizeable deposits expected to cover financing needs for the first 9–12 months of 2022. - Deficit largely financed by Foreign Direct Investment; termination of the CIP from end-Nov 2020 has not had a material impact. - Fund’s EBA-lite Current Account model suggests external position weaker than implied by fundamentals and desirable policy settings. ### Near-term outlook and impact of the war in Ukraine - Baseline assumptions: - Theater of conflict remains limited to Ukraine. - Sanctions on Russia do not tighten beyond those announced by end March and remain in place over the forecast horizon. - Expected near-term impacts for Cyprus: - Tourism arrivals and demand for professional services will be affected given Cyprus’s exposures to Russia. - GDP is projected to grow by around 2 percent this year, supported by partial recovery in exports (with non-Russian tourist arrivals close to their 2019 level), private consumption, and investment (boosted by new spending under the RRP). - Current account projected to worsen due to a deterioration in the terms-of-trade and a recovery in imports. - Inflation expected to rise this year and then start declining but will remain elevated next year given the prolonged pass-through. - Tourism and services fallout: - Tourists from Russia accounted for around 20 percent of total arrivals before the pandemic; arrivals from Ukraine were around 2½ percent of the total. - Staff estimate corresponding revenues amounted to around 2½ percent of GDP in 2019. - War and sanctions likely reduce Russian arrivals to nearly zero, though partial substitution from other source countries is possible. - Direct Russia linkages: - Cyprus-reported outward position with Russia: $161 billion in 2020 (over 850 percent of GDP). - Cyprus-reported inward position from Russia: $119 billion (625 percent of GDP). - Russia-related activities account for about 10 percent of revenues in professional services; these activities with scientific and tech generate 11 percent of Cyprus’s value added. - Russian citizens were the largest investors through the CIP between 2013 and 2020, concentrated in luxury real estate. - Financial-sector and refugee notes: - Russian depositors accounted for about 4 percent of total deposits at end-2021. - RCB Bank: VTB held 46 percent stake until February 24th; bank announced plan to phase out banking operations in Cyprus; ECB restricted RCB Bank’s business and approved sale of its domestic loan portfolio (up to around €560 million) to Hellenic Bank. - By end-March, Cyprus received around 10,000 Ukrainians and provided them a 12-month right to residence, food, education, health care, and employment; fiscal impact from supporting refugees expected to be small. ### Outlook, medium term and risks - Medium-term recovery drivers: - RRP investments and structural reforms expected to increase potential GDP growth by about ½ percentage point (to about 3 percent) by the end of the projection period. - Assumes progress on NPL reduction to strengthen credit’s role in financing private investment. - Current account expected to improve gradually, reflecting only a moderate increase in savings and higher investments. - Risks (tilted to the downside): - Escalation and prolonged duration of the war and sanctions. - De-anchoring of inflation expectations in advanced economies leading to unexpected and abrupt monetary tightening, flow reversals, rollover difficulties and higher risk premia. - Uncontrolled and more severe Covid outbreaks could further disrupt recovery of services and external demand. - These shocks could lower growth, increase defaults, and strain banks’ balance sheets; given high public debt, lower growth and realization of contingent liabilities from the financial sector could undermine fiscal sustainability (favorable debt profile mitigates financing risks). - Upside risk: - Higher-than-expected impact of the RRP—particularly productivity-enhancing reforms—would boost long-run growth potential. ### Policies for sustainable recovery and growth (summary) - Overarching challenge: calibrate policy as pandemic impact wanes but war-related shocks take a toll; avoid policy errors (too restrictive or too accommodative). - Priority: more forceful implementation of NPL reduction strategy, which hinges on judicial efficiency reforms. - Broader reforms: strengthen governance, address skills gaps and mismatches, and close infrastructure and digital gaps. ### Fiscal policy guidance and 2022 recalibration - Fiscal stance: - Staff project a deficit of 1¼ percent of GDP this year based on the current budget (stronger than the deficit of 2 percent of GDP in 2021). - Authorities’ Stability Program 2022–25 targets a fiscal balance of 1¾ percent of GDP in 2025; staff projects a slower adjustment but a small fiscal surplus in 2024. - 2022 recalibration recommendations: - Allow automatic stabilizers to operate; Cyprus has a Guaranteed Minimum Income (GMI) scheme. - Cushion higher energy prices via targeted transfers to vulnerable households rather than lowering taxes or capping prices; authorities reduced VAT rates on electricity and excise duties on gasoline and diesel until June. Total cost of these measures is manageable (below 0.2 percent of GDP). - If shock larger or longer, additional support should be targeted, temporary, and not hinder labor reallocation: - Staff simulations: in an adverse scenario of zero growth in 2022, a 1½ percent of GDP higher deficit in 2022 would not jeopardize debt sustainability. - Extend unemployment benefits but tie to activation requirements; scale up active labor market policies. - Temporary support to viable companies may be warranted to prevent scarring; ensure transparency and accountability drawing on Covid experience. - Fiscal consolidation measures and buffers: - Reinstating the immovable property tax would increase revenue by about ½ percent of GDP and could offset spending pressure or finance public investment. - Contingent liabilities from the banking sector estimated at around 8 percent of GDP (arising from legacy NPLs, potential new NPLs, and planned expansion of KEDIPES). - RRP / Next Generation EU: - Total budget of Cyprus’s RRP amounts to €1.2 billion (5.2 percent of 2021 GDP). - 41 percent of allocation to support climate objectives and 23 percent to support the digital transition. - Cyprus received the first tranche of NGEU grants of €157 million (0.7 percent of GDP) as pre-financing. - Staff baseline assumes use of funds for new projects paced gradually but concentrated over 2022–24; absorption could be challenging. ### Banking sector, NPLs, and resolution tools - Banking sector resilience: - Liquidity high and capital ratios broadly stable; Tier1 capital ratio stands at 19.0 percent. - Stage 2 loans 15 percent of total loans (Dec 2021); concentrated in tourism-related sectors. - NPL ratio reduced to around 10 percent in Dec 2021 (from 17.7 percent a year earlier) after large NPL sales. - Foreclosure framework and CACs: - Recent foreclosure activity (including e-auctions) remains limited and stalled for primary residences. - Staff recommend addressing uncertainties from 2019 amendments. - CACs are critical; progress made but gaps remain (including online access to land registry). Oversight and transparency of CACs need strengthening. - KEDIPES expansion and Mortgage-to-Rent (MtR) proposal: - Authorities plan to transfer primary residences and business premises with market value below €350,000 used as collateral for NPLs (after a debt-to-asset swap) to KEDIPES. - House price statistics indicate over half of primary residences could be eligible. - Staff estimate the upper bound of the fiscal cost of expansion at about 3½ percent of 2022 GDP. - Recommended design: strictly means-tested, timebound, robust transfer pricing, strong governance, transparency and accountability. - Restructuring, insolvency, judicial reforms: - Amend legislative framework to implement EU Restructuring Directive on Preventive Insolvency Procedures; improve examinership process; set up new Department of Insolvency and digitalize cases; develop hybrid/out-of-court restructuring. - Macroprudential policy: - Work to draft policy enabling CBC to set a positive neutral countercyclical capital buffer (CCyB). - Avoid broad tightening of financial conditions: credit gap negative and no signs of overheating in real estate market. - Supervisors should monitor risks from planned sales of repossessed collateral. ### Structural reforms, digitalization, and green transition - RRP aims to tackle governance, skills, digital and infrastructure gaps; impact is backloaded. - Suggested accelerations: - Strengthen governance: recruit and train judges, reduce case backlog, whistle-blower protection legislation, new independent anti-corruption agency, public service reform. - Address skills gaps and digital infrastructure: improve teaching quality, enhance digital skills, strengthen vocational education, public investments in digital infrastructure and steps to improve the e-communications market. - National climate target: 2030 greenhouse gas reduction target of 32 percent (relative to 2005) for sectors not covered by the EU ETS. - Total public funding needs for energy dependency reduction and energy efficiency initiatives estimated at 25 percent of GDP; financing planned via national budgets and EU funding (including RRP). - Green tax reform: - Introduce a carbon tax on fuels used in non-ETS sectors in 2023. - Staff simulations: carbon tax starting at €25 per metric ton in 2023 and gradually increasing to €100 by 2030 would: - reduce total emissions by 7½ percent relative to the baseline, - reduce emissions of the non-ETS sectors by 12 percent, - generate a revenue of about ¾ percent of GDP to help address growth and distributional impacts. - Implementation challenges: financing and capacity constraints, and current high energy prices. Additional measures (including feebates at the sectoral level) may be required. ### Annex VI — Climate policies: detailed quantitative findings - NECP envisages investment of €3.3 billion on RES and €2.3 billion on energy efficiency from 2021 to 2030. - Emissions and targets: - Cyprus cut total GHGs by about 5 percent since 2005. - Aims to reduce emissions by 32 percent in non-ETS sectors by 2030 (relative to 2005); emission neutrality targeted by 2050. - Liquid fuel accounts for more than 95 percent of emissions from total fuel. - Carbon tax design and impacts (CPAT estimates): - Carbon tax starting at €25 per metric tonne in 2023, rising to €100 by 2030. - Projected emissions impacts by 2030 (relative to baseline): - Total emissions reduced by 7.5 percent. - Emissions in Non-ETS sectors reduced by 12 percent. - Carbon tax of €100 estimated to generate additional fiscal revenue of 0.85 percent of GDP by 2030. - Carbon tax of €100 would reduce the GDP growth rate by 0.5 percentage point by 2030. - Revenue recycling assumption: 70 percent of revenue used for public investment, 15 percent for social protection, 15 percent for current spending. - With revenue recycling to investments, most negative GDP impact would be offset and net impact become positive from 2030. - Distributional effects: - Carbon tax €100 estimated to reduce household consumption by 1 percent. - It is estimated that 15 percent of revenue gains could compensate consumption loss of the bottom 30th percentile of households. - Complementary measures and co-benefits: - Achieving RES targets could reduce fuel import needs and improve the current account by around 1 percent of GDP each year. - Public investment on climate projects, if fully implemented, could increase GDP level by over 10 percent by 2030. - Feebates recommended where carbon pricing alone is insufficient. - Policy implications: - Use revenue gains to minimize adverse impacts on growth and household welfare—prioritizing public investment and targeted social protection. - Complement carbon pricing with NECP investments and energy-efficiency measures. ### Stress tests, scenarios and fiscal resilience - Stress-test scenarios and key quantitative assumptions: - One standard deviation growth shock: 5.1 percentage points decrease in growth during 2023–24; interest rates rise 65 bps in 2023 and 133 bps in 2024; inflation falls by 0.25 percentage points per percentage point reduction in GDP growth. Result: public debt would be raised by 20 percentage points relative to baseline to 108 percent of GDP by 2024, before declining to 93 percent of GDP by 2027. - Primary balance shock: decrease in primary surplus by 1.5 percent of GDP during 2023–24; accompanied by 37 bps rise in interest rates; increase in real interest rate by 648 bps during 2023–27. Result: public debt would marginally rise to 76 percent and 78 percent of GDP by 2027, respectively. - Combined macro-fiscal shocks: public debt would peak at 111 percent of GDP in 2024 before declining to 102 percent of GDP by 2027; gross financing needs would peak at 18 of GDP in 2024 before falling back. - Lower fiscal balance + realization of contingent liabilities: interest rates higher by 177 bps in 2023 and 37 bps thereafter; public debt would rise to 101 percent of GDP in 2023 and decline to 86 percent in 2027; gross financing needs would spike to 14 percent of GDP in 2023. - Adverse macro-fiscal-banking scenario (including KEDIPES expansion): KEDIPES expansion cost included at 3.4 percent of 2023 GDP; further banking contingent liabilities at 4.3 percent of GDP in 2023. Result: public debt would rise to 106 percent of GDP in 2023 and decline only slowly to 104 percent of GDP in 2027; gross financing needs would spike to 16 percent of GDP in 2023 before declining to 12 percent of GDP. - External debt dynamics: - External debt-to-GDP ratio declined in 2021 to 825 percent of GDP. - Projected gross external debt: 762 percent of GDP in 2022 and 599 percent of GDP by 2027. - Government external debt 92 percent of GDP in 2021; projected to decline to around 74 percent of GDP over the medium-term. - Gross external financing needs projected to remain elevated (over 150 percent of GDP) through the projection period, reflecting a sizable stock of short-term debt of the private sector. ### Key macroeconomic projections (selected series 2019–27) - Real GDP growth (percent): - 2019: 5.3 - 2020: -5.0 - 2021: 5.5 - 2022: 2.0 - 2023: 3.5 - 2024: 3.0 - 2025: 2.7 - 2026: 2.8 - 2027: 2.9 - Unemployment rate (percent, period average): - 2019: 7.1 - 2020: 7.6 - 2021: 7.5 - 2022: 7.9 - 2023: 7.5 - 2024: 7.0 - 2025: 6.5 - 2026: 6.0 - 2027: 5.5 - General government balance (percent of GDP): - 2019: 1.3 - 2020: -5.7 - 2021: -2.1 - 2022: -1.3 - 2023: -0.1 - 2024: 0.6 - 2025: 1.2 - 2026: 1.5 - 2027: 1.6 - General government debt (percent of GDP): - 2019: 91.1 - 2020: 115.0 - 2021: 103.9 - 2022: 97.7 - 2023: 94.1 - 2024: 87.8 - 2025: 84.5 - 2026: 78.2 - 2027: 73.6 - Current account balance (percent of GDP): - 2019: -5.7 - 2020: -10.1 - 2021: -7.3 - 2022: -8.2 - 2023: -6.8 - 2024: -5.7 - 2025: -5.5 - 2026: -5.2 - 2027: -5.0 - Nominal GDP (billions of euros): - 2019: 23.0 - 2020: 21.6 - 2021: 23.4 - 2022: 24.7 - 2023: 26.4 - 2024: 28.0 - 2025: 29.5 - 2026: 31.2 - 2027: 32.9 - Gross external debt (billions / percent of GDP series shown above): - 2019: 843.3 - 2020: 880.9 - 2021: 825.2 - 2022: 762.4 - 2023: 719.7 - 2024: 684.3 - 2025: 656.1 - 2026: 626.7 - 2027: 599.0 - Net IIP (percent of GDP): - 2019: -116.1 - 2020: -136.2 - 2021: -123.3 - 2022: -124.3 - 2023: -122.8 - 2024: -121.1 - 2025: -120.2 - 2026: -118.8 - 2027: -117.3 ### Staff appraisal — principal conclusions and prioritized recommendations - Cyprus handled the pandemic successfully but faces fallout from the war in Ukraine; recovery projected to stall in 2022 and regain momentum in 2023, with medium-term growth supported by investments and RRP reforms. - Fiscal policy: continue providing support while gradually rebuilding buffers; strict fiscal discipline needed to achieve medium-term adjustment. - Keep public sector wages under control, address NHS irregularities, and continue plans to ensure financial self-sufficiency of public hospitals. - Reinstating the immovable property tax would help offset spending pressures or alternatively scale up public investment. - Closely monitor contingent liabilities from the banking system due to legacy and potential new NPLs. - Financial system: enhance monitoring and address asset quality given the worsened outlook; resolve legacy NPLs with more forceful implementation of existing tools and judicial reforms. - KEDIPES/MtR: planned MtR scheme should be strictly means-tested, timebound, include robust transfer-pricing and strong governance with transparency and accountability. - Structural reforms: timely and effective implementation of RRP structural reforms (including judicial reforms and measures to boost potential growth in education and infrastructure/digital gaps) should be accelerated. - Climate policies: continue green agenda implementation; consider additional sectoral measures (feebates) to enhance emissions reduction; use carbon tax revenues to finance investment and targeted social protection. *Source: IMF staff.* ### introduction of a carbon tax, will be challenging. ### 1cypea2022002 - introduction of a carbon tax, will be challenging. ### Context - Pre-Covid recovery supported by tourism and growth in higher value-added sectors: information and communication technologies (ICT), maritime shipping, non-bank financial services, and education. - Cyprus Investment Program (CIP) contributed to residential real estate investment and was terminated following corruption allegations. - The economy is highly exposed to recent shocks: Covid-19 and the war in Ukraine. - Exports to Russia account for about 10 percent of GDP, the highest level in the euro area. - High indebtedness and NPLs remain legacies of the 2012–13 financial crisis despite progress in deleveraging and NPL offloading to credit acquiring companies (CACs) and the public Asset Management Company (KEDIPES). - Low savings rates have contributed to a buildup of external debt; special purpose entities (SPEs) amplify external debt figures but external debt is high and NIIP negative even after excluding SPEs. - Governance weaknesses and structural bottlenecks persist, notably inefficiencies in the legal system that hinder NPL workouts, gaps in infrastructure and ICT adoption, and skills mismatches. ### Recent developments: recovery from COVID - Public health and mobility: - High vaccination rate: around 70 percent of the population has been fully vaccinated and around 40 percent has received a booster. - Authorities eased Covid restrictions in March (shortening quarantines and eliminating testing requirements on arrival for vaccinated tourists). - Fiscal and support measures: - COVID-related fiscal support measures were equivalent to around 3 percent of GDP in 2021; most expired in December 2021 except interest subsidy schemes and a new loan guarantee scheme. - Most financial support (including debt payment moratoria) has expired. - Output and labor market: - GDP grew by an estimated 5½ percent in 2021, returning output to pre-crisis level. - Public consumption remained a large contributor; exports rebounded with partial recovery of international tourism. - Unemployment rate declined to 6.3 percent by 2021Q4 (around pre-pandemic level). - Labor force participation rate and employment reached all-time highs; labor market slack remains with the output gap still negative at -½ percent. - Recovery has lagged in tourism-related sectors—value added, employment and hours worked in services dependent on international tourism are still below pre-pandemic levels. - Inflation and expectations: - Headline and core inflation edged up sharply to 5.8 and 2.8 percent (yoy) in February, driven largely by energy prices and pass-through to utilities and transportation. - Wages started recovering (not fully in tourism-related services; continued increases in public services). - Private sector balance sheets and banks: - Households increased assets (mainly deposits) and NFCs reduced debt liabilities. - Banks: liquidity remained high and capital ratios broadly stable; the Tier1 capital ratio stands at 19.0 percent overall. - Stage 2 loans accounted for 15 percent of total loans as of December 2021 (EU average is 9 percent); these loans are concentrated in tourism-related sectors. - NPL dynamics: NPL ratio reduced to around 10 percent in December 2021 (from 17.7 percent a year earlier) after large NPL sales; CACs and KEDIPES already held 74 percent of total NPLs in the economy before these transactions. - Margin pressures and high costs continue to weigh on banks’ profitability. - Public finances and external position: - Headline fiscal deficit dropped from 5.7 percent in 2020 to 2.1 percent of GDP in 2021 due to cyclical revenue recovery, underutilization of Covid support measures, and a lower-than-budgeted wage bill. - Public debt declined from 115 percent in 2020 to 104 percent in 2021. - A sizable cash buffer from the 2020 Eurobond issuance covered 2021 financing needs and allowed some debt redemption; sizeable deposits expected to cover financing needs for the first 9–12 months of 2022. - Current account deficit declined to -7.3 percent of GDP in 2021 (from -10.1 percent in 2020) but remained higher than the 2019 level of -5.7 percent of GDP. - The deficit was largely financed by Foreign Direct Investment; termination of the CIP from end-Nov 2020 has not had a material impact. - The Fund’s EBA-lite Current Account model suggests the external position is weaker than implied by fundamentals and desirable policy settings. ### Outlook and risks (overview from available text) - Recovery is vulnerable to: - Further deterioration in tourism due to pandemic developments or fallout from the war in Ukraine. - Energy-price-driven inflation and its pass-through to utilities and transport. - Concentration of credit risk in tourism-related sectors, reflected in elevated Stage 2 loans and debt-payment moratoria take-up. - Confidence indicators weakened in the aftermath of the war in Ukraine despite prior improvements; business confidence in services was still in positive territory in March 2022. - Financial sector resilience is supported by liquidity and capital buffers, but profitability pressures and elevated Stage 2 exposures pose risks to the credit-growth nexus. - External vulnerabilities persist given the relatively large current account deficits and high external debt. *International Monetary Fund — Cyprus: Selected findings and developments through March 28, 2022.* ### 17. In the near term, recovery will be set back by the fallout from the war in Ukraine. Staff’s ### 17. In the near term, recovery will be set back by the fallout from the war in Ukraine. Staff’s ### Near-term outlook - Baseline forecast assumptions: - Theater of conflict remains limited to Ukraine. - Sanctions on Russia (and European plans to become independent of Russian energy) do not tighten beyond those announced by end March and remain in place over the forecast horizon. - Expected near-term impacts for Cyprus: - Tourism arrivals and demand for professional services will be affected given Cyprus’s exposures to Russia. - GDP is projected to grow by around 2 percent this year, supported by: - partial recovery in exports (with non-Russian tourist arrivals close to their 2019 level), - private consumption (notwithstanding a negative terms-of-trade shock from higher energy prices), - investment (boosted by new spending under Cyprus’s Recovery and Resilience Plan (RRP)). - Current account is projected to worsen due to a deterioration in the terms-of-trade and a recovery in imports. - Inflation is expected to rise this year and then start declining but will remain elevated next year given the prolonged pass-through. ### Medium-term recovery and drivers - A stronger recovery is expected over the medium term, supported by RRP spending and reforms: - Recovery driven by external demand, with lingering war-related effects on tourism and professional services. - RRP investments and structural reforms are expected to increase potential GDP growth by about ½ percentage point (to about 3 percent) by the end of the projection period. - Assumes progress on the reduction of NPLs to strengthen credit’s role in financing private investment. - Current account expected to improve gradually, reflecting only a moderate increase in savings and higher investments. ### Risks (tilted to the downside) - Downside risks: - Escalation and prolonged duration of the war and sanctions. - De-anchoring of inflation expectations in advanced economies leading to unexpected and abrupt monetary tightening, flow reversals, rollover difficulties and higher risk premia. - Uncontrolled and more severe Covid outbreaks could further disrupt recovery of services and external demand. - These shocks could lower growth, increase defaults, and strain banks’ balance sheets; given high public debt, lower growth and realization of contingent liabilities from the financial sector could undermine fiscal sustainability (favorable debt profile mitigates financing risks). - Upside risk: - Higher-than-expected impact of the RRP—particularly productivity-enhancing reforms—would boost long-run growth potential. ### Economic fallout from the war in Ukraine (Box 1) - Tourism and services: - Tourists from Russia accounted for around 20 percent of total arrivals before the pandemic; arrivals from Ukraine were around 2½ percent of the total. - Staff estimate corresponding revenues amounted to around 2½ percent of GDP in 2019. - War and sanctions likely reduce Russian arrivals to nearly zero, though partial substitution from other source countries is possible. - Professional services and investment links with Russia: - Cyprus-reported outward position with Russia: $161 billion in 2020 (over 850 percent of GDP). - Cyprus-reported inward position from Russia: $119 billion (625 percent of GDP). - Russia-related activities account for about 10 percent of revenues in professional services; professional services together with scientific and tech activities generate 11 percent of Cyprus’s value added. - Russian citizens were the largest investors through the CIP between 2013 and 2020, concentrated in luxury real estate. - Energy and terms-of-trade: - Cyprus is heavily dependent on imported refined petroleum: $1.94 billion in 2019; 11.5 percent of total imports and 8.3 percent of GDP. - Cyprus does not import natural gas, potentially shielding it from direct gas supply disruptions from Russia. - Direct financial sector linkages: - Russian depositors accounted for about 4 percent of total deposits at the end of 2021. - RCB Bank: VTB held 46 percent stake until February 24th (transferred to two companies controlled by the bank’s management); on March 24th the bank announced plan to phase out banking operations in Cyprus. ECB restricted RCB Bank’s business and approved sale of its domestic loan portfolio (up to around €560 million) to Hellenic Bank. First tranche executed; RCB should now be capable of covering all its deposits. It will give up its banking license after full payout of depositors (excluding sanctioned individuals) and continue to operate as a CAC upon approval from the Central Bank of Cyprus. - Refugees: - By end-March, Cyprus received around 10,000 Ukrainians and provided them a 12-month right to residence, food, education, health care, and employment. - Fiscal impact from supporting refugees expected to be small; refugees could alleviate labor shortages and bring entrepreneurship. ### Policies for sustainable recovery and growth - Overarching challenge: - Calibrate policy as pandemic impact wanes but war-related shocks take a toll. - Risks of policy errors: too restrictive policies may weaken private balance sheets already affected by legacy NPLs; too much accommodation may deplete fiscal buffers and undermine market confidence. - Priority: more forceful implementation of NPL reduction strategy, which hinges on long-pending structural reforms to make the judicial system more efficient. - Broader reforms: strengthen governance, address skills gaps and mismatches, and infrastructure gaps. ### Fiscal policy and rebuilding buffers - Fiscal stance and objectives: - Fiscal policy should aim to rebuild buffers but remain flexible to absorb shocks and provide discretionary support if needed. - Staff project a deficit of 1¼ percent of GDP this year based on the current budget (stronger than the deficit of 2 percent of GDP in 2021). - Authorities’ Stability Program 2022–25 targets a fiscal balance of 1¾ percent of GDP in 2025; staff projects a slower adjustment but a small fiscal surplus in 2024. - 2022 recalibration recommendations: - Allow automatic stabilizers to operate; Cyprus has a robust social safety net based on a Guaranteed Minimum Income (GMI) scheme. - Cushion higher energy prices via targeted transfers to vulnerable households rather than lowering taxes or capping prices; authorities reduced VAT rates on electricity and excise duties on gasoline and diesel until June. Total cost of these measures is manageable (below 0.2 percent of GDP). - If the shock is larger or longer, additional support should be targeted, temporary, and not hinder labor reallocation to expanding sectors: - Staff simulations: in an adverse scenario of zero growth in 2022, a 1½ percent of GDP higher deficit in 2022 would not jeopardize debt sustainability. - Measures should facilitate absorption of laid-off workers by expanding sectors (extend unemployment benefits but tie to activation requirements; scale up active labor market policies). - Temporary support to viable companies may be warranted to prevent scarring; ensure transparency and accountability drawing on Covid experience. - Fiscal consolidation measures and buffers: - Reinstating the immovable property tax would increase revenue by about ½ percent of GDP and could offset spending pressure or finance public investment (including financing climate adaptation and mitigation). - Contingent liabilities from the banking sector estimated at around 8 percent of GDP (arising from legacy NPLs, potential new NPLs, and planned expansion of KEDIPES). - Next Generation EU / RRP: - Total budget of Cyprus’s RRP amounts to €1.2 billion (5.2 percent of 2021 GDP). - RRP supports greener, digital, and more sustainable transition: 41 percent of allocation to support climate objectives and 23 percent to support the digital transition. - Cyprus received the first tranche of NGEU grants of €157 million (0.7 percent of GDP) as pre-financing. - Around 30 percent of funds expected to support existing projects; staff baseline assumes use of funds for new projects paced gradually but concentrated over 2022–24. - Absorption could be challenging due to many ministries involved; paced spending and strengthened public investment management (including SOE investment planning) recommended. _Italic: Source: IMF staff._ ### 27. The authorities are committed to maintaining fiscal discipline and rebuilding fiscal ### 1cypea2022002 - 27. The authorities are committed to maintaining fiscal discipline and rebuilding fiscal ### Fiscal stance and policy guidance - The authorities are committed to maintaining fiscal discipline and rebuilding fiscal buffers. - They currently do not envisage the need for new schemes to support the economy because that would, “at the current juncture, only increase inflationary pressures.” - If additional support is warranted, measures should be: - temporary, - targeted, and - promote rather than hinder labor reallocation. - Re-introduction of an immovable property tax should only be considered in the context of a broader tax reform and with consideration of the impact on the real estate sector. - The government fiscal plan is consistent with achieving a small fiscal surplus in 2024 and placing public debt on a firmly declining path. - Automatic stabilizers should be allowed to operate to cushion the most vulnerable. ### Nonperforming loans (NPLs), foreclosure framework, and resolution tools - Persistently high NPLs have limited credit in supporting investment and growth; pandemic and political pressures have worsened impediments to foreclosure and claims enforcement. - Recommendations to speed NPL reduction and reduce economic costs: - Foreclosure framework: - Recent foreclosure activity (including e-auctions) remains limited and stalled for primary residences. - An effective foreclosure framework is critical to address strategic defaulters and provide incentives for restructurings. - Staff recommend addressing any uncertainties arising from the implementation of the 2019 amendments to the framework. - Credit Acquiring Companies (CACs): - CACs are critical to addressing high NPLs among households and NFCs. - Progress has been made improving the working environment for CACs and credit servicing companies, but gaps remain (including online access to the land registry database). - Oversight of CACs needs strengthening and transparency should be enhanced through public disclosure of aggregate CAC statistics. - Banks have made significant progress offloading legacy NPLs but resolution has been slow; legacy NPLs now mostly reside in CACs and KEDIPES. ### KEDIPES expansion and Mortgage-to-Rent (MtR) proposal - Authorities plan to transfer primary residences and business premises with a market value below €350,000 used as collateral for NPLs (after a debt-to-asset swap) to KEDIPES. - Once transferred, a MtR scheme and rent subsidies would be introduced for vulnerable borrowers. - House price statistics indicate that over half of primary residences could be eligible. - Without targeting, staff estimates the upper bound of the fiscal cost of the expansion at about 3½ percent of 2022 GDP. - To avoid weakening credit discipline and to minimize fiscal impact, the scheme should: - be limited to the most vulnerable households on a strictly means-tested basis, - be timebound, - include a robust transfer pricing mechanism to minimize fiscal costs and risks, and - have a strong governance framework emphasizing transparency and accountability. ### Restructuring, insolvency, and judicial reforms - Improved restructuring tools are needed to support timely restructuring of potentially viable businesses. - Banks have been actively restructuring loans post-pandemic, but bankruptcies/liquidations/examinership applications remain relatively low. - Key steps underway: - Amend legislative framework to implement the EU Restructuring Directive on Preventive Insolvency Procedures (changes undergoing review before submission to Parliament). - Improve examinership process and institutional framework for insolvency (steps to set up a new Department of Insolvency and digitalize insolvency cases). - Develop a new hybrid/out-of-court restructuring procedure. - Timely implementation of the EU Directive on Preventive Restructuring and Second Chance would help viable businesses in financial difficulties. ### Macroprudential policy and financial stability monitoring - Macroprudential policy should balance containing vulnerabilities and avoiding procyclicality. - Work is ongoing to draft a policy to enable the CBC to set a positive neutral countercyclical capital buffer (CCyB). - For now, broad tightening of financial conditions should be avoided: the credit gap remains negative and there appear to be no signs of overheating in the real estate market. - Planned sales of repossessed collateral properties by banks and CACs could potentially depress real estate prices; supervisors should monitor risks of excessive holding or sales of foreclosed properties. - Despite recent declines, ‘stage 2’ loans—performing exposures with significantly deteriorated credit quality—have remained elevated post-pandemic and are concentrated in tourism-related sectors. ### AML/CFT and governance - Cyprus continues progress in strengthening AML/CFT regulation and supervision; an interim solution for collection of beneficial owner data was developed and a final solution system is expected to be implemented in 2022. - MONEYVAL noted some progress since the 2019 assessment but Cyprus has not been re-rated on any recommendations. - Cyprus should continue addressing identified weaknesses, especially: - supervision of banks and gatekeepers (lawyers, accountants, trust and company service providers), - preventive measures (customer due diligence and measures for politically exposed persons), - follow-up on potential misuse of the terminated CIP. - Strengthening AML/CFT and governance frameworks can help manage reputational risks related to the war in Ukraine and potential sanctions-evasion misuse. ### Structural reforms and green transition - The RRP aims to tackle weaknesses in governance, skills, digital and infrastructure gaps; reforms are expected to underpin projected improvement in growth prospects (improvement is backloaded). - Suggested accelerations include: - Strengthening governance: - recruit and train judges, improve processes to reduce case backlog, - legislation on whistle-blower protection and a new independent anti-corruption agency, - public service reform to improve government efficiency. - Address skills gaps and digital infrastructure: - improve teaching quality, enhance digital skills at all education levels, strengthen vocational education, - public investments in digital infrastructure and steps to improve the e-communications market. - National climate target: 2030 greenhouse gas reduction target of 32 percent (relative to 2005) for sectors not covered by the EU ETS. - To achieve targets: - Reduce energy dependency and enhance energy efficiency; total public funding needs for these initiatives are estimated at 25 percent of GDP. Financing planned via national budgets and EU funding (including RRP). - Green tax reform: introduce a carbon tax on fuels used in non-ETS sectors in 2023. Staff simulations: - carbon tax starting at €25 per metric ton in 2023 and gradually increasing to €100 by 2030 would: - reduce total emissions by 7½ percent relative to the baseline, - reduce emissions of the non-ETS sectors by 12 percent, - generate a revenue of about ¾ percent of GDP to help address growth and distributional impacts. - Implementation challenges: financing and capacity constraints, and current high energy prices. Staff analysis suggests additional measures (including feebates at the sectoral level) may be required. ### Staff appraisal—key conclusions and recommendations - Cyprus handled the pandemic successfully but faces fallout from the war in Ukraine; recovery projected to stall in 2022 and regain momentum in 2023, with medium-term growth supported by investments and RRP reforms. - Fiscal policy should continue providing support while gradually rebuilding buffers; strict fiscal discipline is needed to achieve medium-term adjustment. - Authorities should keep public sector wages under control, address NHS irregularities, and continue plans to ensure financial self-sufficiency of public hospitals. - Reinstating the immovable property tax would help offset spending pressures or alternatively scale up public investment to address growth bottlenecks. - Closely monitor contingent liabilities from the banking system due to legacy and potential new NPLs. - Financial system remains resilient (liquidity high, capital ratios broadly stable) but authorities should enhance monitoring and address asset quality given the worsened outlook. - Resolving legacy NPLs requires more forceful implementation of existing tools: address foreclosure framework uncertainties, improve working environment and oversight for CACs and credit-servicing companies. - The planned MtR scheme should be strictly means-tested and include timebound support, robust transfer-pricing, and strong governance with transparency and accountability. - Timely and effective implementation of RRP structural reforms (including judicial reforms and measures to boost potential growth in education and infrastructure/digital gaps) should be accelerated. - Achieving national climate goals would support energy diversification and security; authorities should continue green agenda implementation and consider additional sectoral measures to enhance emissions reduction. *CYPRUS INTERNATIONAL MONETARY FUND* ### 48. It is proposed that the next Article IV consultation take place on the standard ### 1cypea2022002 - 48. It is proposed that the next Article IV consultation take place on the standard ### Inflation and Wages - Headline and core inflation "edged up sharply"; HICP reached the level in par with the Euro area. - Contributions to HICP Inflation shown by components: Food, beverage, clothing; Utilities; Transport/Comm.; Recreation/Hotel; Others; Headline; Core inflation (no numerical breakdown beyond chart). - HICP (period average) projections: - 2019: 0.5 - 2020: -1.1 - 2021: 2.3 - 2022: 5.3 - 2023: 2.3 - 2024: 2.0 - 2025: 1.8 - 2026: 1.8 - 2027: 1.9 - HICP (end of period) projections: - 2019: 0.7 - 2020: -0.8 - 2021: 4.8 - 2022: 3.0 - 2023: 2.5 - 2024: 2.0 - 2025: 1.8 - 2026: 1.8 - 2027: 2.0 - GDP deflator projections (2019–27): 1.1, -1.1, 2.4, 3.8, 3.3, 3.0, 2.6, 2.6, 2.7 - Consumer inflation expectations (percent balance 1/, seasonally adjusted) and producer inflation expectations shown in charts (percent balances; no tabulated values). - Hourly compensation indices (Index 2015=100, seasonally adjusted) and unit labor costs (2009Q1 = 100) presented; statement: overall compensation is recovering while unit labor cost remains stable. ### Banking Sector and Balance Sheets - Deposits of households are steadily increasing; corporates’ debt has declined. - New credit has grown markedly. - NPL ratio continues to decline, mainly reflecting sizable NPL sales. - Outflows from NPLs components (Billions of euro): Migration into performing; NPL cash repayment; D2A/E swaps; Write-offs; Debt instruments held for sale (chart shown; no tabulated values). - Balance sheet snapshots (Billions of Euros) for household, corporate (NFC), and banking sector assets/liabilities shown in charts (no tabulated values). - Pure New Loans: 12-m Rolling Sum (yoy percent change) series for Consumer credit, Housing loans, Non-financial corporate loans (chart). ### Fiscal Developments - The fiscal balance only improved marginally in 2021 as expenditure remained high due to Covid-related spending; revenue is recovering. - Public debt declined reflecting GDP growth and the utilization of cash buffers. - Bond yields have increased recently; spreads remain low compared with some peer countries. - 10-Year Government Bond Spreads and Yields charts (Italy, Ireland, Portugal, Greece, Spain, Cyprus) referenced. - Overall and Primary Balance (accrual basis, percent of GDP) historic series chart; 2021 shown. - Expenditure by main component (percent of GDP) — 2021 composition charts: Wages and salaries; Goods and services; Social Transfers; Subsidies; Interest payments; Capital expenditure; Other current expenditure. - Revenue by main component (percent of GDP) — 2021 composition charts: Other current revenue; Social security contributions; Direct taxes; Indirect taxes. ### External Developments - Current account deficit remains elevated even as service exports have recovered. - Net IIP remains highly negative; net capital inflows to the private sector increased. - Gross external debt remains high; the real effective exchange rate has declined. - Real Effective Exchange Rate indices (2009=100): REER - GDP, REER - ULC, REER - CPI (chart for 2015Q1–2021Q4). - Service exports (Million Euros, SA) chart by component: Others, ICT, Finance, Travel, Transport, Total. - Financial Flows by Sector (Percent of GDP, + indicates net inflows) series for All sectors, Central bank incl. reserves, Government (estimate), Private sector (estimate). - Current Account (Percent of GDP) series 2015–2021 and Current account adjusted for SPEs indicated. - Net IIP by Functional Categories (Percent of GDP) and Impact of SPEs charts. ### Housing Market - Transaction-based property prices are rising together with surging construction cost; property sales staged a recovery. - Residential Prices and Construction Costs (2010Q1 = 100) — indices for Residential property price index, Real residential property index, Construction cost index (2021Q3). - Value Added and Real Growth in Construction Activities (Year-on-year percent change) — 2021Q4. - Housing Loans (Stock, Bn Euro) by Domestic residents, Nonresidents, EA residents — 2021Q4 (chart). - Mortgage Interest Rate (Percent) — 2021Q4 (chart). - Building Permits (Million Sq. M) — 2021Q4 (chart). - Property Sales 1/ (Thousand units) series with note: "Post-2018 and pre-2018 data on sales to non-residents are not directly comparable as the methodology to compile data has changed." ### Growth Inclusiveness Indicators - Youth unemployment rates were pushed up in 2020 and declined slower than overall in 2021. - Large share of young population inactive. - Long-term unemployment declined slower than overall unemployment rate; long-term and very long-term unemployment series shown through 2021Q3. - Social safety nets spending in Cyprus are relatively low (Social Spending, 2019, percent of GDP chart). - NEET Youth from 15 to 29 years, 2020 (percentage) chart lists countries; Cyprus included. - At-Risk-Poverty Rate, 2020 (Percent of total population) chart lists countries; Cyprus shows below EU average. - Gini Coefficient of Equivalized Disposable Income, 2020 (scale 0–100) chart: Gini and Gini before social transfers by country. - Unemployment Rate series 2007–2021 by total and youth (age 15–29) and female subsets. ### Selected Economic Indicators, 2019–27 (Table 1 highlights) - Real GDP: - 2019: 5.3 - 2020: -5.0 - 2021: 5.5 - 2022: 2.0 - 2023: 3.5 - 2024: 3.0 - 2025: 2.7 - 2026: 2.8 - 2027: 2.9 - Domestic demand: - 2019: 6.0 - 2020: -2.9 - 2021: 2.7 - 2022: 2.6 - 2023: 3.0 - 2024: 3.0 - 2025: 2.8 - 2026: 3.1 - 2027: 3.4 - Unemployment rate (percent, period average): - 2019: 7.1 - 2020: 7.6 - 2021: 7.5 - 2022: 7.9 - 2023: 7.5 - 2024: 7.0 - 2025: 6.5 - 2026: 6.0 - 2027: 5.5 - General government balance (percent of GDP): - 2019: 1.3 - 2020: -5.7 - 2021: -2.1 - 2022: -1.3 - 2023: -0.1 - 2024: 0.6 - 2025: 1.2 - 2026: 1.5 - 2027: 1.6 - General government debt (percent of GDP): - 2019: 91.1 - 2020: 115.0 - 2021: 103.9 - 2022: 97.7 - 2023: 94.1 - 2024: 87.8 - 2025: 84.5 - 2026: 78.2 - 2027: 73.6 - Current account balance (percent of GDP): - 2019: -5.7 - 2020: -10.1 - 2021: -7.3 - 2022: -8.2 - 2023: -6.8 - 2024: -5.7 - 2025: -5.5 - 2026: -5.2 - 2027: -5.0 - Nominal GDP (billions of euros): - 2019: 23.0 - 2020: 21.6 - 2021: 23.4 - 2022: 24.7 - 2023: 26.4 - 2024: 28.0 - 2025: 29.5 - 2026: 31.2 - 2027: 32.9 - External debt: - 2019: 843.3 - 2020: 880.9 - 2021: 825.2 - 2022: 762.4 - 2023: 719.7 - 2024: 684.3 - 2025: 656.1 - 2026: 626.7 - 2027: 599.0 - Net IIP: - 2019: -116.1 - 2020: -136.2 - 2021: -123.3 - 2022: -124.3 - 2023: -122.8 - 2024: -121.1 - 2025: -120.2 - 2026: -118.8 - 2027: -117.3 ### Fiscal Developments and Projections (Table 2 highlights) - Revenue (percent of GDP) series: - 2019: 39.7 - 2020: 39.3 - 2021: 42.1 - 2022: 41.0 - 2023: 41.2 - 2024: 41.1 - 2025: 40.8 - 2026: 40.1 - 2027: 39.8 - Expenditure (percent of GDP) series: - 2019: 38.4 - 2020: 45.0 - 2021: 44.2 - 2022: 42.3 - 2023: 41.3 - 2024: 40.5 - 2025: 39.5 - 2026: 38.6 - 2027: 38.2 - Current revenue (percent of GDP) shown for 2019–27; tax revenue and social security contributions series provided in table. - Primary balance (percent of GDP): - 2019: 3.5 - 2020: -3.6 - 2021: -0.3 - 2022: 0.5 - 2023: 1.4 - 2024: 1.9 - 2025: 2.5 - 2026: 2.4 - 2027: 2.5 - Cash holding (eop, memorandum, Millions of Euros): - 2019: 947 - 2020: 3,616 - 2021: 2,762 - 2022: 2,354 - 2023: 3,022 - 2024: 2,931 - 2025: 3,625 - 2026: 3,496 - 2027: 3,882 ### General Government Financing Requirements and Sources (Table 3 highlights) - Gross borrowing needs (Millions of Euros): - 2019: 3,034 - 2020: 3,677 - 2021: 2,919 - 2022: 2,782 - 2023: 1,727 - 2024: 2,491 - 2025: 1,702 - 2026: 2,479 - 2027: 2,359 - Overall deficit (Millions of Euros): - 2019: -287 - 2020: 1,270 - 2021: 543 - 2022: 321 - 2023: 137 - 2024: -168 - 2025: -366 - 2026: -461 - 2027: -517 - Interest payments (Millions of Euros): 523, 496, 480, 450, 399, 379, 365, 298, 312 (2019–27) - Amortization (Millions of Euros) total and breakdowns by medium- and long-term, foreign, eurobonds, domestic, and short-term provided in table. - Net financing sources and use of deposits series presented; cash holding (eop) and general government debt (eop, percent of GDP) repeated. ### Balance of Payments (Table 4 highlights) - Current Account Balance (percent of GDP): - 2019: -5.7 - 2020: -10.1 - 2021: -7.3 - 2022: -8.2 - 2023: -6.8 - 2024: -5.7 - 2025: -5.5 - 2026: -5.2 - 2027: -5.0 - Trade Balance (Goods and Services) (percent of GDP) 2019–27: 0.2, -2.5, 1.1, -1.1, 0.3, 1.2, 1.8, 2.1, 2.3 - Exports (percent of GDP) series: - Exports (goods and services) 2019–27: 75.6, 75.8, 81.3, 86.4, 86.1, 85.6, 85.2, 84.7, 84.3 - Services exports (percent of GDP): 62.2, 62.1, 65.9, 68.0, 68.2, 68.3, 68.2, 68.3, 68.4 - Imports (percent of GDP) series: - Imports (goods and services) 2019–27: 75.4, 78.3, 80.2, 87.6, 85.8, 84.4, 83.4, 82.6, 82.0 - Services imports (percent of GDP): 41.9, 45.4, 46.5, 48.7, 48.2, 47.8, 47.6, 47.5, 47.4 - Primary income net (percent of GDP): -4.7, -5.9, -7.4, -6.6, -6.6, -6.6, -6.4, -6.2, -6.1 - Financial Account ( - financing) (percent of GDP): -4.4, -12.5, -4.8, -8.0, -6.4, -5.4, -5.2, -4.9, -4.9 - Gross External Debt (percent of GDP): - 2019: 843.3 - 2020: 880.9 - 2021: 825.2 - 2022: 762.4 - 2023: 719.7 - 2024: 684.3 - 2025: 656.1 - 2026: 626.7 - 2027: 599.0 - Short-term Debt (percent of GDP): 187.4, 177.2, 170.1, 157.7, 143.5, 133.5, 125.1, 117.2, 109.8 ### External Financing Requirements and Sources (Table 5 highlights) - Gross financing requirements (Millions of Euros): - 2019: 48,415 - 2020: 54,319 - 2021: 46,847 - 2022: 53,480 - 2023: 51,984 - 2024: 51,516 - 2025: 50,619 - 2026: 50,575 - 2027: 50,387 - Current account deficit (Millions of Euros): 1,308; 2,177; 1,696; 2,035; 1,792; 1,602; 1,624; 1,611; 1,661 (2019–27) - Medium- and long-term debt amortization (Millions of Euros): 12,392; 8,319; 6,834; 11,239; 11,179; 11,969; 11,220; 11,008; 11,186 - Short-term debt amortization (Millions of Euros): 34,714; 43,118; 38,317; 40,206; 39,013; 37,945; 37,424; 36,956; 36,541 - Sources of financing breakdown: capital account (net), foreign direct investment (net), cypriot investment abroad, foreign investment in Cyprus, new borrowing and debt rollover, medium- and long-term borrowing, short-term borrowing, other (table provides detailed series). - Rollover rates: - General government: 120%, 89%, 1523%, 180%, 182%, 103%, 160%, 179%, 177% (2019–27) - Central bank: 105%, 17%, 989%, 100%, 100%, 100%, 100%, 100%, 100% - Private: 103%, 90%, 103%, 97%, 97%, 98%, 98%, 99%, 100% - Banks: 79%, 86%, 114%, 98%, 99%, 104%, 104%, 100%, 96% - Non-financial corporates: 114%, 91%, 100%, 97%, 97%, 97%, 97%, 99%, 102% ### Financial Soundness Indicators (Table 6 highlights, 2013–21) - Capital adequacy: - Total capital ratio: 13.5, 15.3, 16.6, 16.8, 16.3, 17.5, 19.9, 20.4, 20.3 (2013–2021) - Tier I capital ratio: 12.3, 14.6, 16.0, 16.4, 15.4, 16.5, 19.0, 18.9 (2013–2021; last value 18.9) - Asset quality: - Non-performing loans (NPLs) to total gross loans (European Banking Association definition): - 2013: 44.4 - 2014: 47.5 - 2015: 45.3 - 2016: 46.4 - 2017: 42.5 - 2018: 30.5 - 2019: 28.0 - 2020: 17.7 - 2021: 11.1 - Provisions to NPLs series (chart values; table shows evolution with last value 48.8) - Restructured loans classified as NPLs to total NPLs: 28.0, 33.9, 40.1, 40.8, 40.9, 44.8, 44.6, 43.7, 49.1 (2013–2021) - Earnings and profitability: - Return on assets (annual): -4.3, -0.6, -0.6, -0.3, -1.1, 0.2, 0.3, -0.3, 0.0 - Return on equity (annual): -69.5, -8.1, -7.4, 1.7, -11.2, 6.4, 3.4, -3.9, 1.6 - Net interest margin: 2.4, 2.9, 2.8, 2.6, 2.3, 1.8, 1.9, 1.8, 1.5 - Liquidity: - Cash, trading and available-for-sale assets to total assets ratio: 7.0, 14.4, 19.8, 22.9, 27.9, 27.6, 29.3, 28.8, 37.2 - Other indicators: - Total loans and advances to total assets ratio: 83.6, 73.4, 73.6, 69.1, 64.1, 54.6, 53.8, 51.0, 44.3 - Total deposits (other than from credit institutions) to total assets ratio: 63.8, 63.0, 65.1, 74.9, 75.6, 79.2, 82.8, 80.7, 74.7 *Sources: Central Bank of Cyprus; Eurostat; Haver Analytics; Bloomberg Finance L.P.; Ministry of Finance; Statistical Service of the Republic of Cyprus; IMF IFS; IMF staff calculations and estimates.* ### Annex I. Status of Article IV Recommendations ### Annex I. Status of Article IV Recommendations ### Strengthen Financial Sector Policies - Recommendation: Reduce private sector debt and high NPLs, including by: - (i) addressing impediments in the foreclosure and insolvency frameworks and asset sales legislation, - (ii) relying on a broad set of tools that includes burden sharing and keeps banks well provisioned and capitalized; and - (iii) strengthening supervisory and governance framework for credit-acquiring companies (CACs), including the government-owned CAMC. - Policy actions and status: - The amendments to the foreclosure and insolvency legislation and the sales of loans law as well as the adoption of a law on securitization have enhanced the toolkit to address NPLs (2018). - Banks have made significant progress in offloading NPLs. - Successful workout outside of the banking system is still needed; Parliament recently made further amendments to foreclosure law to weaken the effectiveness of its framework. - A subsidized MtR scheme is planned to resolve NPLs backed by primary residences and business premises of vulnerable borrowers; the key terms of the plan are yet to be decided. - CAMC has yet to become fully operational. ### Mitigate Crisis Impact and Maintain Debt Sustainability - Recommendations: - Fighting the health crisis and contain the adverse economic impact of the crisis and recalibrating fiscal support measures. - Control the growth of the public sector wage bill. - Reorient to more growth-friendly and inclusive spending and enhance fiscal transparency and accountability. - Containing the fiscal risks from the National Health System (NHS). - Policy actions and status: - The authorities took measures to mitigate the economic impact of the pandemic. Most measures have been withdrawn given the improvement of the pandemic. - The authorities have contained the public wage bill within the nominal GDP growth. A more durable mechanism to keep the public-sector wage bill in check has not been adopted by Parliament. - The implementation of the Recovery and Resilience Plan is underway. Legislative reform of SOEs, however, has stalled. - The authorities are implementing cost control measures for the NHS. Reforms are ongoing to make the public health sector more competitive. ### Implement Structural Reforms - Recommendations: - Strengthen judicial efficiency and commercial claims enforcement. - Strengthen central bank governance and undertake Local government and civil service reforms. - Continue to improve the AML/CFT framework, including by ensuring effectively mitigating inherent AML/CFT risks. - Policy actions and status: - The legislation for the establishment of a commercial court is [currently undergoing legal vetting]. An action plan is being drawn based on issues identified in a functional review of the Cyprus’s Court System prepared by the Irish Institute of Public Administration. - The amending legislation to strengthen the governance and autonomy of the CBC is undergoing legal vetting. - The legislations on civil services and local government reforms have been passed. - The CIP scheme has been terminated from end-Nov 2020. - Cyprus continues to make progress in strengthening AML/CFT regulation and conducting on-site and off-site supervision. In December 2021, Cyprus published an assessment of money laundering and terrorist financing risks presented by virtual assets and the related services providers. *Source: Annex I. Status of Article IV Recommendations (content unit: 1cypea2022002).* ### 8. GDP growth and fiscal outturns have surpassed staff’s forecasts in recent years, in ### 1cypea2022002 - 8. GDP growth and fiscal outturns have surpassed staff’s forecasts in recent years, in ### Recent GDP and fiscal performance - Recent GDP growth and the fiscal balance have been stronger than expected, due in part to robust external demand and private financial inflows that have substituted for new bank lending. - Over-performance occurred despite the sizable structural fiscal consolidation during the program. - Forecast error for primary balance in 2018 mainly reflects the fiscal impact of the Cyprus Cooperative Bank (CCB) transaction and state-owned AMC. - Projection errors during 2012–13 indicate excessive optimism but reflect difficult-to-foresee events (damage to the sole power plant in 2011 and the write-down of banks’ holdings of Greek public debt in 2012). - The relatively high 3-year average level of projected cyclically-adjusted primary balance is underpinned by consistent overperformance of tax revenue in recent years and the authorities’ commitment to expenditure restraint. ### Stress tests and alternative scenarios — summary of impacts - Given Cyprus’s high debt-to-GDP ratio and contingent liabilities from the banking sector, debt reduction is highly susceptible to growth shocks and realization of contingent liabilities. - Growth shock scenario: - One standard deviation (5.1 percentage points) decrease in growth during 2023–24. - Accompanied by a 65 and 133 basis points (bps) rise in interest rates in 2023 and 2024 respectively (corresponding to 25 bps rise per one percentage point reduction in primary balance). - Decrease in inflation by 0.25 percentage points per percentage point reduction in GDP growth. - Result: public debt would be raised by 20 percentage points relative to the baseline to 108 percent of GDP by 2024, before declining to 93 percent of GDP by 2027. - Primary balance shock and real interest rate shock: - Decrease in the primary surplus by 1.5 percent of GDP during 2023–24. - Accompanied by 37 bps rise in interest rates (corresponding to 25 bps rise per one percentage point reduction in primary balance). - Increase in the real interest rate by 648 bps during 2023–27. - Result: public debt would marginally rise to 76 percent and 78 percent of GDP by 2027, respectively. - Combined macro-fiscal shocks: - Combining the growth, interest rate, and primary balance shocks above. - Result: public debt would peak at 111 percent of GDP in 2024 before declining to 102 percent of GDP by 2027. - Gross financing needs would peak at 18 of GDP in 2024 before falling back. - Lower fiscal balance + realization of contingent liabilities scenario: - Primary fiscal balance assumed permanently lower than baseline by ½ standard deviation (could result from reversal of expenditure measures or higher-than-expected fiscal cost of forthcoming National Health System (NHS) implementation). - Realization of contingent liabilities from government guarantees to public entities and pension deficits of public entities also assumed. - Risk premiums rise: interest rate higher than baseline by 177 basis points in 2023 and 37 basis points thereafter. - Result: public debt would rise to 101 percent of GDP in 2023 and thereafter decline to 86 percent in 2027. - Gross financing needs would spike to 14 percent of GDP in 2023 before declining to 10 percent in 2027. - Adverse macro-fiscal-banking scenario (lower growth, weaker primary balances, banking-sector contingent liabilities, KEDIPES expansion): - Real GDP growth and the primary fiscal balance assumed permanently lower than baseline by ½ standard deviation. - Decrease in inflation and a rise in interest rates assumed. - Estimated cost of planned expansion of KEDIPES included for 2023 at 3.4 percent of 2023 GDP. - Further realization of contingent liabilities from the banking sector assumed at 4.3 percent of GDP in 2023 (on top of support already provided to the CCB). - Result: public debt would rise to 106 percent of GDP in 2023 and would decline only slowly to 104 percent of GDP in 2027. - Gross financing needs would spike to 16 percent of GDP in 2023 before declining to 12 percent of GDP over the medium term. ### External debt sustainability and risks - Cyprus is a regional financial center with very large external assets and liabilities; external DSA focuses on gross external debt and associated gross interest payments. - Large historical residuals suggest past increases in external debt were accompanied by increases in external assets (SPEs expanding or shrinking balance sheets). - Baseline projections: - External debt-to-GDP ratio declined in 2021, partially reversing the increase in 2020. - In 2021, external debt declined to 825 percent of GDP. - Government external debt was generally stable at 92 percent of GDP in 2021. - Net debt estimated to decline to 253 percent of GDP for the economy and -15 after excluding SPEs in 2021. - In 2022, gross external debt projected to decline to 762 percent of GDP. - Gradual decline to 599 percent of GDP by 2027 projected. - Government external debt projected to gradually decline over the medium-term to around 74 percent of GDP, supported by GDP growth and fiscal consolidation. - Vulnerabilities despite projected decline: - High external debt level leaves Cyprus vulnerable to interest rate and growth shocks, which would increase debt service costs and weaken the denominator effect on debt-to-GDP. - Standardized current account deficit shocks would have a more limited impact on the debt ratio. - Gross external financing needs projected to remain elevated (over 150 percent of GDP) through the projection period, reflecting a sizable stock of short-term debt of the private sector. ### Key quantitative figures and assumptions (selected) - One standard deviation growth shock: 5.1 percentage points. - Interest rate rises in growth shock: 65 bps in 2023 and 133 bps in 2024. - Inflation response in growth shock: decrease by 0.25 percentage points per percentage point reduction in GDP growth. - Primary surplus shock: decrease by 1.5 percent of GDP during 2023–24. - Real interest rate shock: increase by 648 bps during 2023–27. - Interest rate increase in lower fiscal balance scenario: 177 bps in 2023 and 37 bps thereafter. - KEDIPES expansion cost included: 3.4 percent of 2023 GDP. - Further banking contingent liabilities assumed in adverse scenario: 4.3 percent of GDP in 2023. - External debt levels: 825 percent of GDP in 2021; projected 762 percent of GDP in 2022; projected 599 percent of GDP by 2027. - Government external debt: 92 percent of GDP in 2021; projected around 74 percent of GDP over the medium-term. ### Policy implications and recommendations - Maintain strict fiscal discipline post-pandemic to ensure fiscal sustainability and to create space to absorb possible contingent fiscal shocks. - Sound financial sector policies to contain risks from the banking sector, including addressing contingent liabilities and ensuring adequate provisioning. - Structural reforms to enhance resilience and diversify the economy to limit risks of a new boom-bust cycle. - Align maturity of external assets and liabilities closely to reduce liquidity risk. - In event of shocks: allow automatic stabilizers to operate, extend targeted fiscal support as needed, and consider regulatory forbearance and broader policy support from the ECB to help banks withstand shocks. *Source: IMF staff report (excerpt provided).* ### Annex VI. Climate Policies in Cyprus ### Annex VI. Climate Policies in Cyprus ### Overview - Cyprus is planning a fiscally neutral green tax reform that intends to introduce a carbon tax for fuels used in sectors not covered by the EU emissions trading system (ETS). - Together with planned investment to increase the share of Renewable Energy Sources (RES) and increase energy efficiency, Cyprus is projected to move closer—but not fully achieve—its ambitious climate goals. - The National Energy and Climate Plan (NECP) envisages the investment of €3.3 billion on RES and €2.3 billion on energy efficiency from 2021 to 2030. ### Emissions profile and targets - Cyprus has cut its total greenhouse gas emissions (GHGs) by about 5 percent since 2005, but the pace of emission reduction has been at a slower pace than the EU average. - Emissions per capita and emissions per GDP are notably above EU average. - Cyprus aims to reduce emissions by 32 percent in non-ETS sectors by 2030 (relative to 2005) and is expected to become emission neutral by 2050. - Energy, domestic transport, and industrial process are the top three sectors with the largest GHG emissions. - Liquid fuel accounts for more than 95 percent of emissions from total fuel. - Cyprus relies mainly on imports of liquid fuel for power generation. ### Carbon tax design and emissions impact (CPAT estimates) - Policy proposal: introduce a carbon tax for fuels used in Non-ETS sectors, starting at €25 per metric tonne of carbon emission in 2023 and gradually increasing to €100 by 2030. - Projected emissions impacts (relative to baseline by 2030): - Total emissions reduced by 7.5 percent. - Emissions in Non-ETS sectors reduced by 12 percent. - Scenario comparisons reported: - Carbon tax €100 alone versus baseline. - Carbon tax €100 + National Existing Measures. - Carbon tax €100 + National Planned Measures. - NDC Target shown for comparison. - NECP analysis: emissions are expected to decline by 12 percent under existing policy scenario and by a further 10 percent under the planned measures scenario, compared with the baseline (8% for Non-ETS sectors, respectively). ### Fiscal revenue and macroeconomic effects - A carbon tax of €100 is estimated to generate additional fiscal revenue of 0.85 percent of GDP by 2030. - A carbon tax of €100 would reduce the GDP growth rate by 0.5 percentage point by 2030. - Revenue recycling assumption: 70 percent of the revenue from carbon taxes is used for public investment, 15 percent is used for social protection, and 15 percent is used for current spending to facilitate sector transition. - If revenue gains are recycled—particularly for investments—most of the negative impact on GDP would be offset, and the net impact would become positive from 2030. - Fiscal revenue trajectory presented in both real 2018 €bn and % of GDP terms (CPAT; IMF staff estimates). ### Distributional and household effects - A carbon tax of €100 is estimated to reduce household consumption by 1 percent. - Transition measures recommended to assist low-income households and vulnerable workers include targeted transfer and retraining. - It is estimated that 15 percent of revenue gains could be used for compensating consumption loss of the bottom 30th percentile of households. - Relative consumption effects charted by Indirect, Direct, Transfer (Cash), and Net Change (% of Consumption). ### Complementary measures and co-benefits - Effectively implementing other government planned measures would further contribute to emissions reduction. - Staff estimates that achieving the targets on RES could reduce the import needs of fuel and improve the current account by around 1 percent of GDP each year. - Public investment on climate-related projects, if fully implemented, could increase the GDP level by over 10 percent by 2030. - Since carbon pricing alone may not be sufficient to rapidly decarbonize in some sectors, feebates can be applied to specific sectors to enhance emissions reduction. - Cyprus could use the green transition as an opportunity to achieve a more sustainable growth model and consider additional measures to achieve its climate goals. ### Policy implications and design considerations - Use revenue gains from carbon pricing to minimize potential adverse impacts on growth and household welfare—prioritizing public investment and targeted social protection. - Complement carbon pricing with NECP investments and energy-efficiency measures to move closer to the NDC and 2030 targets. - Apply sector-specific instruments (e.g., feebates) where carbon pricing alone is insufficient to decarbonize rapidly. *Source: Annex VI. Climate Policies in Cyprus (IMF staff; CPAT; NECP; IMF staff estimates).* ### 5. The impact of reforms on growth will be strong but backloaded. ### 5. The impact of reforms on growth will be strong but backloaded. ### Fiscal stimulus and immediate demand effects - RRP-related spending is projected to increase in total by about 3½ percent of GDP over 2021-26 (considering that the RRP will finance some existing projects). - Spending is projected to reach its peak (of around 1 percent of GDP) in 2024. - Simulations from the IMF FSGM model (Andrle et al., 2015) indicate: - In 2024, growth is projected to be ½ percentage points higher. - The current account will deteriorate by ½ percent of GDP in 2024. - Leakage through higher imports dampens the immediate impact on activity. - The additional spending—mainly on investments—will add to production capacity. ### Structural reforms and timing of effects - Cross-country evidence for Emerging Markets and Developing Economies (EMDEs) suggests: - Major governance reforms could boost output by 2-3 percent at their peaks. - Product market reforms could boost output by about 1 percent at their peaks, three years after implementation (IMF, 2019). - The impact of reforms in Cyprus is expected to be smaller than in EMDEs, given Cyprus’s closer position to the efficiency frontier. - The effects of structural reforms will materialize later (backloaded effects). ### Overall simulated impact (FSGM model) - Taken together, higher spending and structural reforms are estimated in the FSGM model to: - Boost GDP by 1¼ percent by 2027. - Have a stronger cumulative impact of nearly 4 percent beyond the medium-term. - Improvements in productivity will be accompanied by higher investments. - Higher investment will temporarily worsen the current account deficit. ### Risks, vulnerabilities, and macro context - Pandemic and war in Ukraine create adverse shocks and uncertainty, with vulnerabilities concentrated in tourism and professional services: - About 20 percent of arrivals in 2017–2019 came from Russia. - Exports of financial and other business services to Russia accounted for 2.7 percent of GDP on average over 2016–2021. - Exports of goods and services to Russia amounted to about 15 percent of total exports over 2016–2021. - Inflation developments: - Harmonized Index of Consumer Prices (HICP) year-on-year inflation is estimated at 8.6 percent in April 2022, climbing from 5.0 percent in January 2022. - Rising international oil prices are a main driver of domestic energy price increases. - Authorities’ and staff growth projections for 2022: - Authorities project GDP growth in 2022 to range between 2.3 and 2.7 percent. - Staff projection for 2022 growth is 2.0 percent. - May 2022 flash estimate for 2022-Q1: growth 5.8 percent over Q1 of 2021. ### Key statistics and fiscal/external outcomes (selected figures from the text) - Real GDP growth: -5.0 percent in 2020; 5.5 percent in 2021. - RRP spending increase: about 3½ percent of GDP over 2021-26; peak around 1 percent of GDP in 2024. - FSGM simulated outcomes: - Growth: ½ percentage points higher in 2024 (immediate impact). - Current account: deterioration of ½ percent of GDP in 2024 (immediate impact). - GDP boost: 1¼ percent by 2027; nearly 4 percent beyond the medium-term (cumulative). - Tourism and external shares: - Tourist arrivals from Russia: about 20 percent of arrivals (2017–2019). - Tourist arrivals in 2022 projected by authorities to reach 70 percent of 2019 arrivals. - Exports to Russia: 2.7 percent of GDP (financial and other business services, 2016–2021 average); about 15 percent of total exports (2016–2021). - Inflation: HICP 8.6 percent in April 2022; 5.0 percent in January 2022. - Current account: narrowed in 2021 by about 3 percentage points to 7.2 percent of GDP. - Public finances: Budget deficit declined to -1.7 percent of GDP in 2021 from -5.8 percent in 2020; public debt dropped to 103.6 percent (figure truncated in source). *Source: IMF Staff Estimates.* ### 115.0 percent. This contributed to the build-up of extensive buffers to cope with near-term ### 1cypea2022002 - 115.0 percent. This contributed to the build-up of extensive buffers to cope with near-term ### Fiscal position, pandemic support, and fiscal buffers - Pandemic support measures largely lapsed towards the end of last year; a limited set of measures remains to alleviate the impact from rising inflation on production costs and incomes. - Current measures include: - Targeted fiscal transfers to protect vulnerable households and to support affected agricultural sector segments. - Across-the-board temporary reductions in VAT for electricity and excise duties on fuels. - Authorities' stance and projections: - Additional support should be temporary, targeted, and not hinder labor reallocation; contingency plans already foresee this. - Authorities project for 2022 a return to a primary budget surplus and a reduction in public debt to below 100 percent of GDP, as expected before the pandemic, and sustained fiscal consolidation thereafter to anchor public debt reduction on a firmly downward path. - Staff projects the same trend albeit at a more gradual pace. - Policy priorities highlighted: - Ensure the public wage bill does not accelerate beyond productivity. - Undertake efficiency reforms in the National Health System (NHS). - Market recognition: - Credit rating actions: one rating upgrade in April and two affirmations in March, amid the current challenging environment. ### Financial sector resilience and risks - Banking sector resilience: - Banking sector remained resilient during the pandemic and faced the fallout from the Russian invasion of Ukraine from a sound position, reflecting adequate capitalization and ample liquidity. - Nonperforming loans and asset quality: - Nonperforming loans (NPLs) fell to 11.3 percent (including branches of third countries) at the end of February 2022 from around 50 percent of total loans during the financial crisis in 2013. - Reduction achieved mainly by sales and transfers to credit acquiring companies (CACs) and write-offs. - Exposures exiting pandemic moratoria: about 92 percent of the exposures started being repaid as of December 2021; only a small residual is either in default or arrears. - Lending shows signs of recovery for both households and NFCs, despite economic shocks and high indebtedness. - Stage 2 loans and profitability concerns: - Stage 2 loans increased during the pandemic to 15 percent of total loans as of December 2021, versus a 9 percent EU average. - Profitability improved over 2021 owing to lower loss provisioning, but remains a challenge amidst a low-interest environment and cost rigidities. - Direct exposure to Russia: - Russian deposits accounted for 3.5 percent of total deposits (including interbank deposits) in end-December 2021 and declined to 1.8 percent at the end of March 2022. - Loan exposure to Russia amounted to 0.6 percent of total lending (including interbank loans) at the end of March 2022. - The Central Bank of Cyprus does not hold reserves with the Central Bank of the Russian Federation. - RCB Bank is voluntarily winding down its banking operations; proactive measures by the Central Bank of Cyprus and the Single Supervisory Mechanism safeguarded all deposits without any loss to the taxpayer or any negative spillover to the rest of the banking sector. - NPL resolution and institutional measures: - Plans to transform the Cyprus Asset Management Company (KEDIPES) into a national asset management company are ongoing, conditional on, among other things, a well-functioning foreclosure framework and in conjunction with a mortgage-to-rent scheme for indebted households and firms. - Authorities agree KEDIPES expansion should be well-targeted and include safeguards to avoid weakening credit discipline. - Authorities promote improvements in the working environment of CACs and credit servicing companies, including access to data from the land registry. - Anti-money laundering and governance: - Cyprus is fully or largely compliant with 36 out of the 40 FATF recommendations, based on a follow-up assessment by MONEYVAL in December 2021, and rated as partially compliant with 4 recommendations. - Ongoing efforts to fully address MONEYVAL findings. - Cyprus Investment Program (CIP) abolished in October 2020 and citizenships granted without due diligence were revoked. - A law establishing a national anti-corruption authority and a bill regulating political lobbying were ratified by the Parliament in February 2022, after the adoption of the whistleblower protection law in January 2022. ### Structural reforms, digitalization, and the green transition - Recovery and Resilience Plan (RRP) financing and allocation: - Allocated amount to Cyprus from the Recovery and Resilience Facility (RRF) of Next Generation EU (NGEU) corresponds to EUR 1.2 billion in grants and loans, spread over 2021- 2026. - RRP allocation breakdown: 41 percent for financing the green transition, 23 percent for advancing digitalization, and the remaining amount for other related issues such as promoting resilience and efficiency in the health care sector. - Structural reforms included in the RRP: - Judicial reforms envisaged to enable timely proceedings and enhance the resilience of the financial sector, including through accelerating NPL workouts. - Recent approved legislation refers to civil service and public administration reforms. - Growth impact assessments: - University of Cyprus study (May 2021) estimates the RRP can increase the GDP of Cyprus by about 3 percent in the short-term and by around 7 percent in the medium-term, compared to baseline. - Authorities welcome staff’s analysis projecting a more moderate but still significant impact. - Climate policy stance: - Authorities reiterate the importance of achieving national climate targets as part of the country’s environmental agenda. - Despite rising energy prices, efforts on advancing the green transition continue unabated; authorities welcome staff’s analysis of climate policies and dynamics. *Source: IMF staff report excerpt as provided in the content unit.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1cypea2022002.pdf_