{
  "title": "Cyprus -- 2010 Article IV Consultation: Preliminary Conclusions",
  "publication": "IMF News, July 6, 2010",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs070510",
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  "summary": "Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries).",
  "publishDate": "2010-07-06",
  "sections": [
    {
      "heading": "Overview",
      "content": "- IMF mission presents preliminary findings and main recommendations of the 2010 Article IV surveillance mission.\n- Key messages:\n  - Economic conditions have started to stabilize after the downturn; the economy is poised to return to modest growth in 2011.\n  - Global financial risks remain elevated and growth prospects in main trading partners remain muted, weighing on Cyprus’s outlook.\n  - Pressures in Euro area sovereign debt markets have intensified.\n  - Cyprus should act forcefully and with greater urgency to reverse high fiscal deficits to safeguard public financing sustainability and increase scope for private sector growth.\n  - Banking sector remains sound overall, but growth in non-performing loans calls for vigilance.\n  - Containing public spending growth and enhancing wage flexibility are needed to boost productivity and improve medium-term growth.\n\nIMF Mission Concluding Statement, Cyprus — 2010 Article IV Consultation (July 6, 2010)."
    },
    {
      "heading": "Economic outlook",
      "content": "- Crisis impact and recent developments:\n  - The global crisis hit Cyprus in the second half of 2009.\n  - Conservative financial sector practices, strict supervision, and euro adoption initially sheltered the economy.\n  - Deteriorating international conditions and close links with the U.K. and Russia exposed Cyprus to sharp corrections in housing demand and declines in tourism and service revenues.\n  - Downturn led by declines in private consumption and fixed investment and significant destocking.\n- External balance:\n  - Current account deficit fell by more than half in 2009, to 8.5 percent of GDP.\n  - The current account deficit will likely stabilize in 2010 and decline gradually toward more sustainable levels over the medium term as external demand recovers.\n- Growth outlook:\n  - The economy is projected to bottom out in 2010 and give way to a mild recovery in 2011 and stronger growth in following years.\n  - The mission expects growth to be around zero or slightly below in 2010, followed by a modest recovery in 2011 and a gradual acceleration in later years.\n  - Headwinds include sizeable increase in unemployment, declining consumer borrowing, negative confidence shock, subdued investment due to weak property and construction sectors, and restrained public consumption because of fiscal consolidation needs."
    },
    {
      "heading": "Fiscal policy",
      "content": "- Main challenge:\n  - Foremost policy challenge is reversing the large structural fiscal deficit that has emerged in recent years.\n- Drivers of the deficit:\n  - Rapid growth in public sector wages and employment.\n  - Expansion of social spending, much of which was not well-targeted.\n  - End of the real estate boom causing enduring loss of associated revenues.\n- Fiscal position and targets:\n  - Cyprus has moderate levels of public debt relative to many other Euro area countries, but must act to preserve this legacy and protect debt sustainability.\n  - Government targets reducing the deficit to below 3 percent of GDP by 2012, which would put the public debt ratio on a declining path, are appropriate but require bold measures.\n  - Recent measures (gradual reduction in public sector employment; foregoing general public sector wage increases) will help stabilize the deficit near last year’s levels of 6 percent of GDP, but further actions are needed to meet official targets.\n- Recommended measures to reduce expenditures while keeping tax rates low:\n  - Reduce the wage bill and better target social transfers, given the large size of the public sector (close to half of GDP).\n  - Consider adjustments to incremental salary step increases.\n  - Introduce contributions of government employees toward their unfunded government pensions.\n  - Reform the cost of living adjustment to increase wage flexibility while protecting lower paid workers.\n- Pensions:\n  - Further pension reforms are needed; last year’s reforms helped prolong solvency, but as workforce matures pension outlays will rise and outstrip contributions.\n  - Long-term solution will require bringing pension outlays more in line with contributions through some combination of lower replacement rates and higher retirement age."
    },
    {
      "heading": "Financial sector",
      "content": "- Overall assessment:\n  - Banking sector remains sound, helped by focus on traditional banking activities and conservative balance sheet management.\n  - Predominant reliance on more stable retail funding, negligible exposure to complex securities, high liquidity, and strong supervision helped shield the sector.\n  - Recent and ongoing stress tests by the Central Bank of Cyprus indicate the system has capacity to absorb further shocks.\n  - Deposits have continued to grow.\n- Bank and supervisory responses:\n  - Banks are securing funding, preserving high liquidity, retaining a greater proportion of earnings, and tightening risk management.\n  - Supervisors have stepped-up vigilance and strengthened the regulatory framework.\n  - Significant progress in implementing European Union Directives and recommendations from the IMF’s 2008 Financial Sector Assessment Program.\n  - Forthcoming introduction of a legal framework for covered bonds should improve access to liquidity from markets and the European Central Bank.\n  - Draft law on crisis management should facilitate preemptive addressing of potential insolvency problems.\n- Risks and priorities:\n  - Preserve stability through continued strong supervision and early detection of risks.\n  - Economic downturn has negatively affected bank profitability, non-performing loan ratios, and capital buffers; these pressures likely to persist until recovery.\n  - Large size of banking sector relative to economy and high concentration ratios mean sector problems could escalate to systemic proportions with spillovers to the economy and public finances.\n  - Pursue cross-border cooperation with Greece and other Southeastern European supervisors given extensive international financial linkages.\n- Cooperative credit societies:\n  - Improve transparency and supervision to prevent undetected problems:\n    - Impose uniform definitions of non-performing loans across commercial banks and cooperative credit sectors.\n    - Apply the same stress testing framework used for commercial banks to cooperatives.\n    - Full and timely reporting of financial system indicators by the Authority for Supervision and Development of Cooperative Societies consistent with commercial bank requirements.\n  - Over the medium term, establish a single independent supervisor for all credit institutions operating in Cyprus to enhance efficiency, reduce risks, and create a level playing field."
    },
    {
      "heading": "Structural reforms",
      "content": "- Objectives:\n  - Preserve competitiveness to support near-term recovery and enhance longer-term growth potential.\n- Challenges:\n  - Growth of wage and labor costs in excess of productivity has reduced competitiveness, particularly in manufacturing and tourism.\n  - Medium-term potential growth likely to be permanently lower due to the global crisis, fading construction and real estate boom, and convergence toward per capita income levels of other Eurozone countries.\n- Recommended structural measures:\n  - Improve labor market flexibility.\n  - Streamline regulatory framework, reduce red tape, and improve the business climate.\n  - Reverse steady growth of public sector wages and employment to free resources for growth and reduce wage pressures while protecting a low tax environment.\n  - Implement active labor market policies:\n    - Training programs for low skilled and immigrant workers.\n    - Measures to reduce the high gender gap to ease labor market segmentation and increase productivity.\n    - Promote flexible forms of employment to enhance market flexibility and employment conditions.\n    - Reduce incentives for early retirement to enhance long-term fiscal sustainability and support labor supply in view of demographic aging.\n\nIMF Mission Concluding Statement, Cyprus — 2010 Article IV Consultation (July 6, 2010).\n\n---\n\n\n References\n\n- Cyprus and the IMF\n- Mission Concluding Statements\n- PRESS CENTER\n- Article IV\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs070510"
    }
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    "Published: July 6, 2010",
    "IMF mission presents preliminary findings and main recommendations of the 2010 Article IV surveillance mission.",
    "Key messages:",
    "Crisis impact and recent developments:",
    "External balance:",
    "Growth outlook:",
    "Main challenge:",
    "Drivers of the deficit:",
    "Fiscal position and targets:",
    "Recommended measures to reduce expenditures while keeping tax rates low:",
    "Pensions:",
    "Overall assessment:",
    "Bank and supervisory responses:",
    "Risks and priorities:",
    "Cooperative credit societies:",
    "Objectives:",
    "Challenges:",
    "Recommended structural measures:",
    "[Cyprus and the IMF](http://www.imf.org/external/country/CYP/index.htm)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
  ],
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