Cyprus: Staff Concluding Statement of the 2021 Article IV Mission

March 30, 2021

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

Washington, DC: An International Monetary Fund (IMF) mission met virtually with the Cypriot authorities from March 8–29, 2021 to discuss recent economic developments and policy priorities. At the conclusion of the visit, Ms. Anita Tuladhar, IMF mission chief for Cyprus, made the following statement:

The COVID-19 pandemic has halted the strong economic growth momentum of recent years. Despite the economy’s dependence on tourism and the high private and public debt levels, wide-spread defaults and high unemployment have largely been avoided so far, thanks in part to timely policy support and balance sheet buffers. Growth is projected to recover to 3 percent in 2021 from -5.1 percent last year. However, high uncertainties overshadow the near-term economic outlook, including the pace of vaccine rollout and the potential for new waves of infection, and risks are tilted toward the downside. Policy priorities will thus depend crucially on the evolution of the health and economic crises. In the near term, policies should focus on mitigating the adverse impact of the crisis on households and firms most affected while ensuring adequate resources to address the health crisis. Withdrawal of support measures should thus be gradual and conditioned on the durability of the recovery. As the recovery takes hold, policies should aim to avoid unnecessary bankruptcies and efficiently reallocate resources, in order to minimize economic scarring and ensure more inclusive and sustained growth. Furthermore, it is crucial that the progress made in addressing pre-pandemic macro-financial vulnerabilities is not reversed. Sustained reform efforts are critical to mitigate risks and support the economic recovery.

Context and Outlook

1. Cyprus has managed the unprecedented COVID-19 pandemic shock relatively well. Swift implementation of containment measures and high testing rates have kept hospitalization and mortality rates at relatively low levels. A wide range of economic and financial policy support measures was promptly implemented and flexibly adapted over time to mitigate the adverse impact to target firms and households most affected. In addition, the economy entered the crisis more resilient than at the onset of the 2012–13 crisis, with reduced non-performing loans (NPLs), higher capital and liquidity buffers and large fiscal surpluses. Hence, despite still high levels of public and private debt and dependence on tourism, widespread defaults and rapid increases in unemployment have been avoided, and payment arrears after the termination of the loan repayment moratorium have been limited.

2. The near-term outlook points to a gradual but uneven recovery . An effective vaccine is assumed to be widely distributed from mid-2021 while international tourism is expected to recover slowly to around 30 percent of its pre-crisis level in 2021. Contact-intensive sectors would therefore continue being heavily impacted in the near term. After a decline of 5.1 percent in 2020, staff project growth to recover moderately to 3 percent in 2021, strengthening further in 2022 to around 4 percent, helped by continued policy support including the EU Recovery and Resilient Facility (RRF) funded investments.

3. The outlook remains highly uncertain with risks tilted on the downside. The pace of vaccine rollout and behavior of the pandemic remain key uncertainties. In the absence of continued policy support and adequate liquidity access, bankruptcies and destruction of jobs could become more prevalent. Realization of contingent liabilities from the banking system—particularly if debt workouts become more challenging under a weakened foreclosure framework—and higher-than-expected cost of the National Health System (NHS) could also weaken the underlying fiscal position and increase risk premia. A larger than expected drop in foreign direct investment inflows due to the termination of the Cyprus Investment Program could further dampen the recovery.

Policy Priorities

Financial Sector Policy: Strengthening Bank Balance Sheets and Supporting Credit Growth

4. The financial sector has weathered the crisis well, but challenges remain . Bank balance sheets have been strengthened by sizable offloading of legacy NPLs. The banking system is highly liquid and well capitalized. Additional provisions for loan impairment have reduced profitability, weighing on existing structural challenges from a low interest rate environment and high operational costs. Looking ahead, risks of wider bankruptcies and loan repayment difficulties are high if policy support is withdrawn prematurely or if the economic recovery, particularly in the tourism sector, lags. Effective resolution of the legacy and potential new NPLs by banks, and increasingly by the credit acquiring companies, will be crucial for supporting new credit and economic recovery.

5. In this context, targeted extension of credit support measures is needed. The extension of debt repayment moratoria aimed at individuals and business sectors that are most at risk is welcome. Interest subsidy schemes targeting small and medium enterprises (SMEs) that are most vulnerable should continue while new measures such as loan guarantees would incentivize banks to supply credit, providing needed liquidity. Support measures should seek to ensure viability of firms, fully utilizing banks’ assessments of the creditworthiness of borrowers.

6. Flexible use of macroprudential buffers should be maintained. It is important to ensure that bank capital is available to address potential new non-performing exposures with suitable restructuring measures. The capital buffers will also help banks provide new credit and deal with legacy NPLs. In this regard, supervisory guidance encouraging banks to flexibly use capital buffers and to continue limiting dividend distributions is welcome.

7. NPL resolution and sustainable debt workouts remain key priorities .

  • Close monitoring and transparency for assessing and addressing asset quality is crucial . The repayment moratorium has masked borrowers’ underlying repayment capacity, leading potentially to under-provisioning of impaired loans. Under supervisory guidance, banks have stepped up efforts to scrutinize the risks and make provisions to ensure timely recognition of losses. Data reporting requirements should continue to be updated to support enhanced supervisory monitoring, including on loan restructuring. Property price developments should also be closely monitored to ensure adequate asset valuation.
  • A reversal of reforms to the foreclosure framework would obstruct ongoing NPL resolution and pose risks for financial stability. An effective foreclosure framework is critical to address strategic defaults and provide incentives for borrowers to enter restructuring negotiations or avail themselves of insolvency tools. Current proposals under discussion in Parliament risk reducing the threat of foreclosures and create uncertainties by weakening prospects for collateral recovery necessitating additional provisions and capital increases. It is important that any uncertainties arising from the implementation of the 2019 amendments of the Foreclosure Law be addressed.
  • Use of appropriate insolvency tools enabling timely restructuring of viable businesses will be key. As debt collection and enforcement activities resume, more borrowers may encounter financial difficulties. To support the reorganization of viable companies, obstacles surrounding the use of the examinership process—the use of which has thus far been very limited—need to be addressed swiftly. The ongoing transposition of the EU Directive on Preventive Restructuring and Second Chance provides a good opportunity to examine these issues and consider the scope for an additional out-of-court restructuring procedure with the view of reducing complexity, cost, and duration.
  • The take-up rate on the Estia subsidy scheme for NPLs collateralized by primary residence has been below expectations, partly reflecting strategic defaults by eligible borrowers. Banks should be encouraged to step up foreclosure on these NPLs while for applicants deemed unviable, the authorities should ensure further burden-sharing or consider targeted support measures to protect living conditions of the vulnerable borrowers. Any scheme should consider the fiscal and implementation costs, as well as moral hazard implications.
  • Oversight of Credit Acquiring Companies (CACs) should continue to be strengthened , given that they hold nearly two-thirds of the nation’s NPLs. Further improvements to the working environment for CACs, including their access to the land registry database, are crucial for effective NPL workouts. Subject to the EC’s state aid approval, the authorities are currently considering an expansion of the public asset management company. The authorities should carefully assess the costs and benefits of such a move, including direct and contingent fiscal costs as well as implications on repayment behavior. It will be crucial to ensure that safeguards are in place to identify and address willful defaults and non-cooperative borrowers as part of the legal enforcement framework.

Fiscal Policy: Mitigating Crisis Impact and Maintaining Debt Sustainability

8. The 2021 budget envisages a gradual improvement in the fiscal balance, supported by the economic recovery and phase-out of crisis-related measures, allowing the public debt ratio to start declining . Given the high economic uncertainties, a premature withdrawal of support should be avoided to ensure that the recovery is sustained and to mitigate risks of economic scarring. Despite the elevated debt level—118 percent of GDP at end-2020—a sizable cash buffer and extremely low financing costs are expected to provide a cushion for debt sustainability for some time. Reducing the deficit in the medium term to achieve a primary surplus of around 2.0 percent of GDP by 2024 from a primary deficit of 2.7 percent in 2020 would anchor fiscal policies to meet the medium-term budgetary objective.

9. Near-term policies should continue to fight the health crisis and alleviate its adverse economic impact through well-targeted and time-bound measures . Recalibrating fiscal support measures to target viable but vulnerable firms (such as in the tourism sector) would help avoid unnecessary bankruptcies. Measures encouraging equity increases, including by providing tax credits, could help address potential solvency problems. Efforts to front-load mature public investment projects and promote private investment through the utilization of the EU’s RRF is welcome. Providing transparency and accountability on the use of COVID-19 related spending will be important to build public support.

10. As the recovery takes hold, the focus should shift to maintaining fiscal sustainability and promoting inclusive, growth-enhancing policies . Efforts should continue to further modernize tax administration, contain the growth of public wage bill, and reorient toward more growth-friendly spending, including by improving human capital, facilitating digitalization, and transitioning to a green economy. Fiscal risks from the NHS should be contained as it embarks on the first year of the full implementation of the NHS reform.

Structural Reforms: Supporting Resource Allocation, Strengthening Growth Potential, and Ensuring Inclusive Growth

11. Structural reforms are essential to limit the long-term economic costs of the crisis and make the most of the opportunities presented by the recovery. Labor market policies should gradually transition from preserving jobs toward facilitating efficient labor reallocation. Specifically, active labor market policies such as retraining and public employment services should be further boosted given that spending on training and direct job creation in Cyprus is among the lowest in the European Union. The proposed Digital Academy will be important to upgrade digital skills and increase labor supply in the digital domain. In addition, efforts are needed to implement climate-friendly policies and facilitate the transition to a green economy. More investments are needed to support renewable energy penetration, promote energy saving projects, and scale up green infrastructure. Increasing fuel excises, promoting greater fuel efficiency through a feebate system, and introducing a gradually increasing carbon tax would help meet the 2030 emission targets set in the Cyprus National Energy and Climate Plan.

12. Continued judicial reform efforts are needed to better support the enforcement of commercial claims and the effective functioning of the insolvency regime . The recruitment of additional judges is a welcome step and should be accompanied with completion of the reforms of the rules for civil procedures, progress on the clearance of the backlog of cases, and the launching of the e-justice system. Continued progress on strengthening the institutional framework for the insolvency service and professionals is also important. Progress here is essential to ensure the smooth flow of capital to new and more productive firms and to take advantage of the opportunities offered in the green and digital economies .

13. Priority should be given to mitigating the repercussions of the crisis on inequality. The crisis has had a more adverse impact on young people and women. Policies should seek to enhance female labor participation by improving childcare and flexible working arrangements. For young people, policies should aim towards job search assistance, incentives for part-time work, and payroll subsidies for new staff. Any consideration of a national minimum wage should take due account of the potential impact on competitiveness and youth employment. These priorities will be crucial to ensure a more inclusive and sustainable recovery.


We thank the Cypriot authorities and our other interlocutors for informative discussions and their cooperation. We also thank the European Commission, the European Central Bank, and the European Stability Mechanism for their collaboration during part of the mission .

IMF Communications Department


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