IMF Lending Case Study: Cyprus

Source details

Publication: Cyprus: Restoring the Banking Sector and Public Finances, May 2019, by the International Monetary Fund.
Cyprus approached the IMF for a three-year lending arrangement of about €1 billion with two goals: putting the banking sector on a sound footing and returning public finances to a sustainable path.
The IMF arrangement was part of a combined financing package with the European Stability Mechanism.

Immediate priority: stabilize the banking sector.
Measures undertaken:
- Completed a challenging bank recapitalization process and restored liquidity.
- Undertook decisive steps to restructure weak banks.
- Introduced new foreclosure and insolvency rules to encourage banks and borrowers to find workable solutions for unpaid loans.
- Strengthened supervision and regulation of banks.
Outcome: While legacy challenges remained at the conclusion of the arrangement, much progress was made in restoring stability.

The Cypriot authorities undertook a strong fiscal adjustment under difficult economic circumstances.
Measures undertaken:
- Reduced overall public spending while protecting the most vulnerable through a well-targeted income support program.
- Introduced legislation to modernize the budget process, strengthen accountability for public spending, and establish medium-term fiscal planning.
- Made tax collection more efficient and equitable.
Fiscal outcomes cited:
- Fiscal balances swung to large surpluses, which helped public debt decline rapidly and permitted repayment earlier than scheduled.

Market access:
- Cyprus regained access to international financial markets barely 16 months after the crisis.
- Cyprus has successfully issued debt on favorable terms multiple times since then.
Growth and labor market:
- The economy returned to a growth track and the banking system to more solid footing.
- Growth returned earlier than expected, and unemployment began to fall.
Program completion:
- Thanks to strong performance, Cyprus ended its IMF bailout program before term.

The publication emphasizes that sustaining progress requires continued policy discipline and reform.
Key recommendation:
- Only steady and resolute implementation of reforms can ensure a sustained return to jobs and prosperity.
Implementation priorities highlighted:
- Secure recent achievements and overcome remaining challenges by steadfast continuation of economic reforms and policy discipline.