IMF Executive Board Concludes 2022 Article IV Consultation with Cyprus
IMF News, June 1, 2022
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- Published: June 1, 2022
Macroeconomic performance and recent developments
- Cyprus staged a strong recovery in 2021 driven by successful pandemic management and sizeable policy support.
- Output returned to its pre-pandemic level and unemployment declined.
- The current account deficit narrowed to 7¼ percent of GDP with a recovery in exports.
- Inflation edged up, driven mainly by higher energy prices.
- The fiscal deficit dropped to around 2 percent of GDP on the back of a cyclical revenue recovery.
- The public debt ratio declined to 104 percent.
- Banking sector liquidity remained high and capital ratios broadly stable.
- Banks made progress in offloading legacy non-performing loans; pandemic effects on credit quality were limited.
Near-term outlook and projections
- Growth:
- Growth this year is forecast at around 2 percent, set back by the fallout from the war in Ukraine.
- Medium-term growth prospects are supported by investment under Cyprus’s Recovery and Resilience Plan combined with structural reforms.
- External sector:
- The current account is projected to temporarily worsen with a deterioration in the terms-of-trade and higher imports.
- Inflation:
- Inflation will increase further before declining in the medium term.
- Fiscal:
- The slower recovery will stymie fiscal consolidation this year, but the fiscal deficit is still expected to narrow after the phase-out of Covid-related support.
- The public debt ratio is set to remain on a firmly declining path.
- Uncertainty:
- The outlook is highly uncertain with risks from an escalation and prolonged duration of the war and sanctions, de-anchoring of inflation expectations in advanced economies, and uncontrolled and more severe Covid outbreaks.
Executive Board assessment and policy guidance
- General assessment:
- Directors commended the authorities for their policy response to the pandemic that supported output and employment recovery.
- Directors noted a near-term slowdown mainly due to the war in Ukraine, with momentum expected to return over the medium term.
- Fiscal policy:
- Fiscal policy should continue providing support but aim to gradually rebuild buffers.
- Support for a gradual fiscal adjustment; any additional discretionary measures, if needed, should be temporary and well-targeted, and not hinder labor reallocation.
- Emphasized fiscal discipline over the medium-term to place public debt on a firmly declining path.
- Encouraged efforts to control public sector wage growth, address risks from the National Health System, and monitor financial sector contingent liabilities.
- Financial sector:
- The financial system has stayed resilient but requires enhanced monitoring given the worsened outlook.
- Address asset quality by more forceful implementation of existing tools to resolve legacy non-performing loans.
- Improve the working environment for credit acquiring companies and credit servicing companies.
- Stress the criticality of an effective foreclosure framework to address strategic defaulters and provide incentives for borrower engagement in restructurings; enhance implementation of the 2019 amendments to the framework.
- Ensure the planned Mortgage-to-Rent scheme is well-targeted to minimize fiscal cost and to ensure transparency and accountability.
- Structural reforms and governance:
- Structural reforms are key to raise medium-term growth potential.
- Welcomed progress on the Recovery and Resilience Plan, including passing legislation on corruption and on civil service and local government reforms.
- Encouraged continued progress in strengthening AML-CFT and governance frameworks, and in tackling skills, digital, and infrastructure gaps.
- Reforms of the judicial system are a priority.
- Climate and green transition:
- Achieving national climate goals can help transition to a more resilient and sustainable growth model.
- Recommended continued efforts to address implementation challenges to the green agenda, including the planned green tax reform.
- Additional measures, including feebates, to enhance emissions reduction could be considered.
Selected economic indicators (2019–23) — key figures from IMF staff projections
- Output/Demand:
- Real GDP: 5.3 (2019), -5.0 (2020), 5.5 (2021), 2.0 (2022), 3.5 (2023)
- Domestic demand: 6.0 (2019), -2.9 (2020), 2.7 (2021), 2.6 (2022), 3.0 (2023)
- Private consumption: 3.7 (2019), -0.7 (2020), 2.3 (2021), 2.5 (2022)
- Public consumption: 12.7 (2019), 15.0 (2020), 8.4 (2021), 1.0 (2022), 2.8 (2023)
- Gross capital formation: 10.6 (2019), -11.5 (2020), -6.6 (2021), 5.8 (2022), 5.1 (2023)
- Foreign balance 1/: -1.9 (2019), -0.4 (2020), 0.5 (2021)
- Exports of goods and services: 7.5 (2019), -5.1 (2020), 13.4 (2021), 4.5 (2022)
- Imports of goods and services: 8.3 (2019), -2.5 (2020), 9.5 (2021), 3.9 (2022)
- Potential GDP growth: 4.6 (2019), -1.3 (2020), 4.3 (2021), 3.1 (2022)
- Output gap (percent of potential GDP): -0.2 (2019), -0.6 (2020)
- Prices:
- HICP (period average, percent): -1.1 (2019)
- HICP (end of period, percent): 0.7 (2019), -0.8 (2020), 4.8 (2021)
- Employment:
- Unemployment rate (EU standard, percent): 7.1 (2019), 7.6 (2020), 7.9 (2021)
- Employment growth (percent): 0.2 (2019), 3.4 (2020), 0.0 (2021), 1.5 (2022)
- Public finance:
- General government balance: 1.3 (2019), -5.7 (2020), -2.1 (2021), -0.1 (2022)
- Revenue: 39.7 (2019), 39.3 (2020), 42.1 (2021), 41.0 (2022), 41.2 (2023)
- Expenditure: 38.4 (2019), 45.0 (2020), 44.2 (2021), 42.3 (2022), 41.3 (2023)
- Primary Fiscal Balance: -3.6 (2019), -0.3 (2020), 1.4 (2021)
- General government debt: 91.1 (2019), 115.0 (2020), 103.9 (2021), 97.7 (2022), 94.1 (2023)
- Balance of payments:
- Current account balance: -10.1 (2019), -7.3 (2020), -8.2 (2021), -6.8 (2022)
- Trade Balance (goods and services): 1.1 (2019), 0.3 (2020)
- Nominal GDP (billions of euros): 23.0 (2019), 21.6 (2020), 23.4 (2021), 24.7 (2022), 26.4 (2023)
Source: IMF Press Release No. 22/178, "IMF Executive Board Concludes 2022 Article IV Consultation with Cyprus", June 1, 2022.
