IMF Executive Board Concludes 2025 Article IV Consultation with Cyprus

IMF News, June 2, 2025

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Canonical URL: IMF Executive Board Concludes 2025 Article IV Consultation with Cyprus

Real GDP growth:
- 2024: 3.4 percent
- 2025 (projected): 2.5 percent
- Medium term: 3 percent
Drivers of 2024 growth: strong tourism season, continued ICT sector expansion, robust public and private consumption.
Inflation:
- Headline inflation fell to 2.1 percent by March 2025.
- Inflation is anticipated to hit the 2 percent target later this year.
Near-term risks: downside, including elevated uncertainty from global trade tensions.
Longer-term risks: more balanced; insufficient progress on structural reforms could restrain upside potential.

Fiscal outcomes:
- Fiscal surplus in 2024: 4.3 percent of GDP
- Primary fiscal surplus in 2024: 5.6 percent (as cited)
- Public debt at end-2024: 65 percent of GDP
- Authorities committed to maintaining fiscal surpluses through 2028 (as specified in the MTFSP under the new EU economic governance framework).
Policy guidance:
- Prioritize debt reduction to reduce vulnerabilities and build buffers against shocks; target reduction to well below 60 percent of GDP.
- Avoid new discretionary measures that would ease fiscal policy and add to inflationary pressures.
- Emphasize public spending on investment (capital expenditures) to enhance potential growth and facilitate the climate transition.
- Retain flexibility to respond to economic shocks while constraining expansion of current spending (avoid increasing public wages, broadening subsidies, or introducing untargeted social programs).
- Specifically resist further increases to the COLA indexation or new ad-hoc salary increases to contain the public-private wage gap and prevent additional pressure on real wage growth.
- Careful management of fiscal space is essential given costs of climate and digital transitions and aging-related pension and healthcare pressures.

Banking sector strengths:
- Substantial capital and liquidity buffers.
- Profitability metrics reached record highs for the second consecutive year.
- Capitalization levels are among the highest in Europe.
- Asset quality improving despite elevated interest rates.
Risks and legacy issues:
- Overall banking sector risks appear contained, but vigilance is needed, particularly concerning the real estate sector.
- Legacy NPLs continue to decrease but remain at elevated levels; most have been transitioned away from the banking sector.
- Full operationalization of the foreclosure framework and strong uptake of the mortgage-to-rent scheme are expected to accelerate NPL resolution and help mobilize domestic capital.
Macroprudential stance:
- Recent tightening (including announced increase in the CCyB) will bolster resilience by securing already high capital buffers without adversely affecting credit availability or growth.
- Future macroprudential calibration should balance financial stability and effective credit intermediation.

External position: current account deficit estimated to have moderated in 2024 but assessed as weaker than the level implied by fundamentals.
External vulnerabilities and financing:
- Net IIP:
- 2021: -105.7
- 2022: -95.2
- 2023: -92.7
- 2024: -98.5
- 2025: -99.3
- 2026: -102.6
- 2027: -106.9
- 2028: -111.7
- 2029: -114.6
- 2030: -118.8
- External debt (levels):
- 2021: 994.1
- 2022: 879.7
- 2023: 828.3
- 2024: 767.6
- 2025: 706.8
- 2026: 669.0
- 2027: 631.4
- 2028: 595.8
- 2029: 564.1
- 2030: 534.0
Current account and trade balances (selected entries):
- Current account balance:
- 2021: -5.4
- 2022: -9.7
- 2023: -6.1
- 2024: -7.1
- 2025: -7.7
- 2026: -8.2
- 2027: -8.7
- 2028: -9.1
- 2029: -9.4
- Services balance:
- 2021: 21.6
- 2022: 23.3
- 2023: 24.7
- 2024: 24.0
- 2025: 22.9
- 2026: 23.2
- 2027: 23.5
- 2028: 23.9
- 2029: 24.4
- 2030: 24.9
- Goods balance:
- 2021: -16.9
- 2022: -19.7
- 2023: -23.7
- 2024: -20.4
- 2025: -21.4
- 2026: -22.4
- 2027: -23.3
- 2028: -24.2
- 2029: -24.9
- 2030: -25.6

Structural priorities:
- Enhance judicial efficiency, including insolvency and creditor rights, and improve court efficiency.
- Boost labor productivity by addressing skill gaps and mismatches and engaging remaining segments of the labor force, particularly youth and the long-term unemployed.
- Create a stable and streamlined business environment to sustain investment-driven growth and capital deepening.
Energy sector priorities:
- Expedite key energy projects and reforms to reduce energy costs, enhance energy security, and fulfill climate commitments.
- Complete the LNG terminal and improve electricity interconnectedness.
- Increase competition in the electricity market to lower costs and emissions.
- Planned introduction of green taxation to facilitate the energy transition.
AML and sanctions implementation:
- Maintain a strong AML framework to mitigate reputational risks and business uncertainty.
- Commendable efforts to broaden the definition of obliged entities for AML supervision.
- Proposed establishment of the National Sanctions Implementation Unit at the Ministry of Finance will enhance clarity for reporting entities regarding sanctions compliance.

Board assessment highlights:
- Cyprus demonstrated remarkable economic resilience, with growth among the highest in the EA.
- Labor market remains tight with declining unemployment and elevated job vacancy levels.
- Indications of potential overheating in the economy.
- External position weaker than implied by fundamentals.
Risks:
- Downside near-term risks: escalation of trade conflicts (including services trade and FDI), escalation of regional tensions, new energy price shocks, and more accommodative fiscal policy domestically.
- Medium-to-long-term risk: insufficient progress on structural reforms could undermine investment-driven growth.
- Upside: Cyprus's agile and dynamic economy offers substantial potential for growth if reforms proceed.

Real GDP growth: 11.4 (2021), 7.2 (2022), 2.8 (2023), 3.4 (2024), 2.5 (2025), 2.7 (2026), 3.0 (2027)
Domestic demand contributions: 5.6 (2021), 8.5 (2022), 5.2 (2023), 0.7 (2024), 4.6 (2025)
Unemployment rate (percent, period average): 6.3 (2021), 4.9 (2022)
Revenue (percent of GDP): 41.0 (2021), 40.6 (2022), 43.7 (2023), 44.3 (2024), 44.7 (2025), 43.3 (2026), 43.2 (2027)
Expenditure (percent of GDP): 42.6 (2021), 38.0 (2022), 42.0 (2023), 40.0 (2024), 40.9 (2025), 40.8 (2026), 41.1 (2027)
General government debt (percent of GDP): 96.5 (2021), 81.1 (2022), 73.6 (2023), 65.1 (2024), 60.2 (2025), 54.9 (2026), 49.7 (2027), 44.5 (2028), 41.2 (2029), 38.3 (2030)
Nominal GDP (billions of euros): 25.7 (2021), 29.4 (2022), 31.3 (2023), 33.6 (2024), 36.0 (2025), 37.6 (2026), 39.3 (2027), 42.9 (2028), 44.9 (2029), 46.9 (2030)

Source: IMF Executive Board press release on the conclusion of the 2025 Article IV Consultation with Cyprus.