IMF Executive Board Concludes 2018 Article IV Consultation with Cyprus
IMF News, December 3, 2018
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- Published: December 3, 2018
Recent economic performance
- Cyprus is recovering strongly following the 2012–13 crisis.
- GDP grew by 4 percent (yoy) in the first half of 2018, driven by tourism, professional services and foreign investment in construction as well as continued strength in private consumption.
- The unemployment rate declined to 7.4 percent in September from 10.2 percent a year earlier.
- Inflationary pressures remain low.
- Supported by subdued unit labor costs, Cyprus has maintained its export competitiveness, although the current account deficit widened last year as strong domestic demand pushed up imports.
- Fiscal performance strengthened with the primary surplus widening to 4.3 percent of GDP in 2017.
- Banks are making progress in cleaning up their balance sheets, but the banking sector still faces one of the highest non-performing loan ratios in Europe.
- Both private and public sectors have a large debt overhang.
Outlook and risks
- Near-term outlook: growth expected to remain at around 4.2 percent in 2018–19, supported by the services sector and largely foreign-financed investments.
- Medium-term outlook: economic growth is projected to slow to its long-run potential rate of around 2½ percent, as the transitory effects of the investment boom gradually dissipate.
- Fiscal projections: primary surplus of around 5 percent in 2018–19.
- Public debt outlook: expected to be on a firm declining path, falling below 70 percent of GDP by 2023, despite a sharp increase earlier this year following the resolution of the Cyprus Cooperative Bank.
- Downside risks:
- Delay in implementation of NPL resolution could weaken the economic outlook.
- Realization of contingent liabilities or erosion of fiscal discipline could undermine public debt sustainability.
Executive Board assessment and policy recommendations
- Board welcomed the strong post-crisis recovery, large fiscal surpluses, and lowered unemployment.
- Directors noted recent reforms addressing banking vulnerabilities, including the resolution of a large systemic state-owned bank.
- Key concerns: large private and public debt and NPL ratios among the highest in Europe.
- Recommendations to reduce NPLs and strengthen the banking sector:
- Steadfast implementation of the amended legislative framework on foreclosure, insolvency, sale of loans, and securitization.
- Strengthen the court system and remove uncertainties related to title deeds.
- Enhance governance and supervisory framework for the recently-established asset management company.
- Ensure the proposed Estia scheme is better targeted and based on appropriate assessment of borrowers’ capacity to repay to limit moral hazard.
- Banks should continue to strengthen balance sheets, diversify income sources, and consolidate operations to improve cost-income ratios.
- Strengthen regulatory guidance on loan restructuring and exercise vigilance over bank lending policies, adequacy of provisioning, and debt-to-asset swap policies.
- Fiscal and public sector recommendations:
- Maintain strict spending discipline.
- Avoid relying on transitory revenues from cyclical gains and one-off measures to finance permanent spending initiatives.
- Cap expenditure increases, including the public wage bill, in line with the medium-term GDP growth rate to create room for growth-enhancing spending.
- Carefully manage the transition to public insurance in the health sector.
- Implement fiscal structural reforms: strengthen public financial management, monitor risks from local governments and the state-owned sector, and improve corporate governance of commercial state-owned enterprises.
- Institutional and structural reforms:
- Increase efficiency of the courts, speed up enforcement of commercial claims, and clear the backlog of cases.
- Expedite legislation to strengthen the governance and autonomy of the Central Bank of Cyprus.
- Mitigate AML/CFT risks.
- Implement active labor market policies and invest in higher value-added sectors to reduce high youth unemployment and skills mismatch.
Key economic indicators (as presented)
- Real GDP: 2.0; 4.8; 4.2; 4.1
- Domestic demand: 3.9; 6.1; 8.2; 0.7; 7.5
- Consumption: 1.9; 3.5; 3.0; 2.8
- Private consumption: 2.4; 4.5; 4.0; 3.1
- Public consumption: -0.5; -0.8; 0.3; 1.7
- Gross capital formation: 18.1; 21.9; 30.4; -8.8; 28.8
- Foreign balance 1/: -1.8; -1.2; -3.9; 3.6; -3.4
- Exports of goods and services: 5.2; 4.6; 6.0; 3.7; -2.0
- Imports of goods and services: 8.4; 6.6; 12.2; 3.4
- Potential GDP growth: 1.2; 2.1; 2.7
- Output gap (percent of potential GDP): -7.1; -4.3; -2.3; -0.6
- HICP (period average, percent): -1.5; 0.9; 1.8
- HICP (end of period, percent): 0.1; -0.4
- Unemployment rate (EU standard, percent): 14.9; 13.0; 11.1; 8.5; 7.0
- Employment growth (percent): -1.3; 1.4; 2.5
- General government balance: -0.3
- Revenue: 39.0; 38.0; 39.7
- Expenditure: 39.3; 37.7; 37.3; 37.0; 36.5
- Primary Fiscal Balance: 4.3; 5.1; 5.0
- General government debt: 108.0; 105.5; 96.1; 106.1; 99.7
- Current account balance: -5.1; -8.4; -4.1; -7.8
- Trade Balance (goods and services): 0.8; -3.5; -0.2; -3.8
- Nominal GDP (billions of euros): 17.7; 18.5; 19.6; 20.7
IMF Executive Board Concludes 2018 Article IV Consultation with Cyprus. December 3, 2018.
