IMF Executive Board Concludes 2019 Article IV Consultation with Cyprus
IMF News, December 10, 2019
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Bibliographic details
- Published: December 10, 2019
Context and timing
- Press Release No. 19/447
- December 10, 2019
- On November 27, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Cyprus.
Near-term outlook and growth projections
- Growth decelerated to 3.2 percent (year-over-year) in the first semester of 2019, from 4.0 percent in 2018.
- Real GDP growth is projected to moderate to around 3 percent in 2019–20.
- Over the medium term, economic growth is projected to slow to its long-run potential rate of around 2½ percent.
- Private consumption expected to remain resilient due to tightening labor markets and gradual credit recovery.
- Public debt is projected to decline to 65 percent of GDP by 2024 on the back of continued high primary surplus.
- Risks: Predominantly on the downside arising from sharper-than-expected external shocks.
Banking sector and financial vulnerabilities
- Non-performing loans (NPLs) remain high at 30 percent of loans.
- A large private sector debt overhang persists, given continued difficulties in debt workouts.
- Directors emphasized steady NPL resolution and sustainable debt workouts:
- Ensure a well‑functioning NPL resolution toolkit, including implementation of a credible foreclosure framework.
- Complementary reforms in the judiciary.
- Strengthen supervisory and regulatory framework of credit acquiring companies.
- Finalize the governance structure of state‑owned Cyprus Asset Management Company.
- Minimize moral hazard risks inherent in the state‑subsidy scheme for primary homeowners (Estia).
- Need for broader efforts to further strengthen banks’ balance sheets and profitability:
- Banks should continue to maintain adequate provisions and capital buffers.
- Policies should encourage lower cost‑to‑income ratios through diversifying income sources, rationalizing operations, and implementing digitization solutions.
- Macro‑financial risks from the property market appear limited now but warrant close monitoring.
Fiscal performance and public finances
- Underlying general government primary surplus rose to 5.4 percent of GDP in 2018.
- Directors welcomed strong fiscal performance and stressed need to reduce debt sustainability risks and enhance expenditure efficiency.
- Recommendations on spending:
- Contain expenditure growth, particularly the wage bill.
- Improve efficiency of education spending.
- Increase investment in technological innovation and human capital buildup to reduce skills mismatches and achieve more inclusive growth, particularly among the youth.
- Manage incentives and costs of services and ensure competitiveness of the public health sector to control fiscal risks from the recently implemented National Health System.
Structural policies and growth potential
- Productivity growth has been weak, reflecting institutional bottlenecks and slow technology adoption.
- Directors emphasized structural reforms to raise medium‑term growth potential:
- Support greater market diversification, competition, and technology adoption.
- Continue authorities’ strategy to improve STEM training and research and development innovation and to ease access to finance, as well as implement the national digital strategy.
- Continue efforts to improve the efficiency of the judiciary and strengthen public sector governance.
- Mitigate existing inherent AML/CFT risks as a critical priority.
Executive Board assessment (summary of Directors’ views)
- Welcomed strong economic recovery and declining unemployment rate.
- Commended authorities for progress in addressing banking sector vulnerabilities and improving macroeconomic fundamentals.
- Highlighted weak productivity growth and high private sector indebtedness amid ongoing debt workout challenges.
- Encouraged steadfast efforts to address crisis legacies by:
- Continuing to reduce debt vulnerabilities,
- Improving public spending efficiency,
- Raising economic growth potential and inclusiveness.
Selected economic indicators, 2016–2020 (highlights from IMF staff projections)
- Real GDP: 2016: 6.7; 2017: 4.4; 2018: 4.1; 2019: 3.1; 2020: 2.9
- Domestic demand: 2016: 8.2; 2017: 7.2; 2018: 2.5; 2019: 3.5; 2020: (not listed)
- Consumption (annual percent): 2016: 3.4; 2017: 4.0; 2018: 3.3; 2019: 3.0
- Private consumption: 2016: 4.5; 2017: 3.6; 2018: 3.2
- Gross capital formation: 2016: 37.9; 2017: 22.1; 2018: 7.8; 2019: 5.9
- Foreign balance (contribution to growth, percentage points): 2016: -1.1; 2017: -2.7; 2018: 1.5; 2019: -1.3; 2020: -0.7
- Exports of goods and services: 2016: 8.7; 2017: 4.6; 2018: 0.2
- Imports of goods and services: 2016: 9.0; 2017: 12.8; 2018: 1.9
- Potential GDP growth: 2016: 1.8; 2017: 2.2; 2018: 2.6; 2019: 2.8
- Output gap (percent of potential GDP): 2016: -3.0; 2017: -1.0; 2018: 0.6; 2019: 1.0; 2020: 1.1
- HICP (period average, percent): 2016: -1.2; 2017: 0.7; 2018: 0.8; 2019: 1.6; 2020: (not listed)
- HICP (end of period, percent): 2016: 0.1; 2017: -0.3; 2018: 1.2; 2019: 1.3
- Unemployment rate (EU standard, percent): 2016: 13.0; 2017: 11.1; 2018: 8.4; 2019: 7.0; 2020: 6.0
- Employment growth (percent): 2016: 1.4; 2017: 5.6; 2018: 2.0
- General government balance: 2016: 1.7; 2017: -4.4
- Revenue (percent of GDP): 2016: 37.7; 2017: 38.6; 2018: 39.2; 2019: 41.4; 2020: 43.7
- Expenditure (percent of GDP): 2016: 37.6; 2017: 36.9; 2018: 43.6; 2019: 37.8; 2020: 41.3
- Primary Fiscal Balance (percent of GDP): 2016: 4.2; 2017: -2.0; 2018: 4.8
- General government debt (percent of GDP): 2016: 103.4; 2017: 93.9; 2018: 100.6; 2019: 94.8; 2020: 87.9
- Current account balance (percent of GDP): 2016: -4.2; 2017: -5.1; 2018: -5.2; 2019: -4.8
- Trade Balance (goods and services): 2016: -0.4; 2017: -1.4
- Nominal GDP (billions of euros): 2016: 18.9; 2017: 20.0; 2018: 21.1; 2019: 22.0; 2020: 23.1
- Memorandum item — Underlying primary fiscal balance: 5.4
IMF Communications Department, Press Release No. 19/447, December 10, 2019.
