IMF Executive Board Concludes 2023 Article IV Consultation with Cyprus
IMF News, June 5, 2023
Source details
- Canonical URL
- IMF Executive Board Concludes 2023 Article IV Consultation with Cyprus
Other formats
Bibliographic details
- Published: June 5, 2023
Macroeconomic performance and near-term outlook
- Output grew by 5.6 percent in 2022, supported by pandemic-affected pent-up demand, rebounding tourist arrivals, and expansion in the ICT sector.
- Employment recovered and unemployment dropped to a post-Cyprus-financial-crisis low.
- High energy prices contributed to inflation and a larger current account deficit.
- The fiscal surplus reached 2.3 percent of GDP and public debt declined strongly.
- Growth is expected to slow to around 2½ percent in 2023, reflecting an erosion in household incomes, tighter financial conditions, and delayed impacts from sanctions against Russia.
- Growth is expected to average around 3 percent in the medium-term, supported by public and private investments, structural reforms, and further ICT expansion.
- High inflation will recede only gradually amid elevated inflation expectations and wage pressures.
- The external current account will improve moderately but remain in sizable deficit.
- The outlook is uncertain with risks from an escalation of the war and a possible recession in Europe; higher-than-expected inflation expectations and intensifying pass-through to wages could make inflation stickier; adverse macroeconomic developments could amplify financial risks given high private debt.
Executive Board assessment and policy guidance
- Growth and external position
- Growth will slow in 2023 due to inflation and financial tightening; rebound in tourism and ICT expansion expected to continue.
- Growth forecast to gradually pick up from 2024 and average 3 percent in the medium-term, supported by structural reforms under the RRP.
- The external position was weaker in 2022 than implied by fundamentals and desirable policies and is set to strengthen only gradually.
- Fiscal policy
- A moderately contractionary fiscal stance in 2023 remains appropriate to contain price pressures and further reduce public debt.
- The 2023 budget generates a small negative fiscal impulse of 0.2 percent of GDP in 2023.
- Fiscal policy should stand ready to respond if growth turns out weaker than expected—allowing automatic stabilizers to work and using targeted and time-bound support measures; relax the fiscal stance only if significant slack emerges.
- Fiscal decisions on wage indexation and support measures should be based on a holistic macroeconomic view.
- Avoid a fuller automatic adjustment of wages to inflation through the CoLA mechanism: it would likely make inflation more persistent, adversely affect competitiveness, and reduce fiscal space and flexibility.
- The guaranteed minimum income may need careful recalibration while strengthening activation requirements.
- Rebuild buffers over the medium-term; sustain primary surpluses to reduce public debt, supported by a risk-based fiscal framework.
- As buffers are rebuilt, direct available fiscal space to productive investments for the green and digital transitions.
- Put the NHS on a sound fiscal footing and strengthen governance and accountability of SOEs to help maintain the planned fiscal path.
- Financial sector and macroprudential policy
- Despite improved bank resilience, risks remain: higher policy rates have boosted bank profitability so far, but credit risks are likely to rise with financial tightening—especially given high private sector indebtedness—and should be monitored.
- Initiation of a positive neutral CCyB rate will improve resilience; build larger buffers over time.
- Growth of NBFIs contributes to diversification but requires a stronger supervisory framework.
- Non-performing loans and restructuring
- Steadfast implementation of policies to address legacy NPLs would facilitate faster resolution and private sector deleveraging.
- Implement the foreclosure framework forcefully to address strategic defaulters.
- Banks should proactively use all available tools to enable timely restructurings, supported by recent legislative progress.
- Continue efforts to advance work on the newly envisaged hybrid/out-of-court restructuring procedure.
- The MtR scheme will help advance resolution of NPLs from vulnerable borrowers, but efforts should be taken to minimize fiscal risks from the scheme.
- Further strengthen the AML/CFT framework to address reputational risks.
- Structural reforms and labor market
- Further structural reforms are key to unlocking growth potential.
- Streamline immigration to help address labor market shortages; address related housing affordability concerns through supply-side measures.
- Reforms in the RRP are critical for overcoming structural bottlenecks—improve governance and future-proof workers’ skills through education system reforms, which could be usefully accelerated.
- Investments in digital infrastructure will support the digital transition.
- Green transition and energy security
- A greener growth model is an important element of reforms; Cyprus aims to become emissions neutral by 2050.
- Integration into the regional electric grid and expansion of renewables—together with liberalization of the domestic electricity market—are key elements of this strategy and will improve energy security, but require large public and private investments.
Key statistics and projections (selected)
- Real GDP growth: -4.4 (2020); 6.6 (2021); 5.6 (2022); 2.5 (2023); 2.8 (2024)
- Domestic demand: -3.6 (2020); 3.0 (2021); 9.8 (2022); 2.6 (2023); 2.9 (2024)
- Private consumption: -6.8 (2020); 4.5 (2021); 7.7 (2022); 3.1 (2023)
- Gross capital formation: -6.0 (2020); -5.2 (2021); 23.9 (2022); 4.2 (2023); 3.4 (2024)
- Exports of goods and services: 2.2 (2020); 13.6 (2021); 14.3 (2022); 3.3 (2023); 3.3 (2024)
- Imports of goods and services: 3.2 (2020); 9.0 (2021); 19.5 (2022); 6.1 (2023); 6.1 (2024)
- Output gap (percent of potential GDP): -2.4 (2020); -0.5 (2021); 1.4 (2022); 0.3 (2023)
- HICP (period average, percent): -1.1 (2020); 2.3 (2021); 8.1 (2022); 3.9 (2023)
- HICP (end of period, percent): 4.8 (2020); 7.6 (2021); 2.7 (2022); 2.7 (2023)
- Unemployment rate (EU standard, percent): 7.5 (2020); 6.8 (2021); 6.5 (2022); 6.2 (2023)
- Employment growth (percent): 0.2 (2020); 1.2 (2021); 1.1 (2022)
- General government balance: -5.8 (2020); -1.7 (2021); 1.9 (2022)
- Revenue (percent of GDP): 38.8 (2020); 41.4 (2021); 42.1 (2022); 40.6 (2023); 40.4 (2024)
- Expenditure (percent of GDP): 44.6 (2020); 43.1 (2021); 39.9 (2022); 38.5 (2023)
- Primary Fiscal Balance: 0.1 (2020); 3.8 (2021)
- General government debt (percent of GDP): 113.5 (2020); 101.1 (2021); 86.5 (2022); 78.3 (2023); 70.6 (2024)
- Current account balance (percent of GDP): -10.1 (2020); -9.1 (2021); -7.9 (2022); -7.4 (2023)
- Trade Balance (goods and services, percent of GDP): -1.4 (2020); -0.4 (2021); 0.5 (2022); 0.8 (2023)
- Nominal GDP (billions of euros): 21.9 (2020); 24.0 (2021); 27.0 (2022); 29.5 (2023); 31.3 (2024)
Press Release No. 23/197, IMF, June 5, 2023.
