IMF Executive Board Concludes First Post-Program Monitoring Discussion with Cyprus
IMF News, June 8, 2017
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- Published: June 8, 2017
Economic developments and near-term outlook
- Cyprus’s economic recovery strengthened in the 15 months since exiting the Fund-supported program.
- Real GDP growth:
- 2016: 2.8 percent (robust)
- Projected 2017: 2.7 percent
- Projected 2018: 2.5 percent
- Drivers and dynamics:
- Growth in 2016 was broad-based and supported a sharp drop in the unemployment rate.
- Excluding large one-off imports, the current account deficit continued to narrow.
- Earlier gains in price competitiveness have been preserved.
- Restructuring of nonperforming loans has gained momentum, but balance-sheet clean-up (private and public) is progressing slowly and indebtedness remains very large.
- Labor market and prices:
- Unemployment rate (EU standard):
- 2014: 16.2 percent
- 2015: 14.9 percent
- 2016: 13.3 percent
- 2017 (proj): 11.8 percent
- 2018 (proj): 10.7 percent
- External balance:
- Current account balance (percent of GDP):
- 2014: -4.3
- 2015: -2.9
- 2016: -5.3
- 2017 (proj): -3.2
- 2018 (proj): -3.5
Fiscal outcomes and public debt outlook
- Fiscal performance:
- Fiscal primary surplus (cash basis) in 2016: 2.3 percent of GDP (sizable), supported by earlier reforms and improving cyclical conditions.
- Primary fiscal surplus expectations:
- 2017: 3 percent of GDP
- 2018–22: 2½ percent of GDP
- Public debt trajectory:
- General government debt (percent of GDP):
- 2014: 107.1
- 2015: 107.5
- 2016: 107.8
- 2017 (proj): 106.8
- 2018 (proj): 105.1
- Staff projection: public debt net of cash holdings to fall to just over 80 percent of GDP by 2022, helped by fiscal surpluses and repaid debt servicing.
- Sovereign financing:
- Cost of market-based borrowing by the sovereign has fallen considerably.
- Authorities intend to repay early part of Fund credit.
Medium-term growth and balance-sheet adjustment
- Growth prospects:
- Over the medium term, pace of growth expected to gradually ease to just over 2 percent.
- Main reasons: expected pickup in private sector debt servicing and rebuilding of savings buffers (trimming consumption growth), and gradual dissipation of the ongoing surge in investment.
- Debt deleveraging and banking sector health:
- Write-down of debt plus stepped-up debt servicing expected to gradually restore private indebtedness to a more sustainable level and improve banks’ financial health.
- Nonperforming loans: progress has been made, but reductions need to accelerate.
Executive Directors’ assessment and risks
- Overall assessment:
- Directors welcomed notable achievements: strengthening output and employment growth, sizable primary fiscal surpluses, and gradual healing of the banking system.
- However, high levels of private-sector debt, nonperforming loans, and general government liabilities have not yet been significantly reduced.
- Repayment capacity and risks:
- Cyprus’s capacity to repay the Fund is satisfactory but subject to risks.
- Sustained moderate GDP growth and primary fiscal surpluses, supported by a backloaded maturity profile of official debt and continued market access, underpin repayment capacity.
- Directors urged building policy buffers and reducing private and public sector debt to safeguard repayment ability against volatile growth or financial shocks.
Policy recommendations from Executive Directors
- Banking sector and private debt:
- Accelerate downward paths of nonperforming loans and private sector leverage to:
- Strengthen efficiency of credit allocation.
- Eliminate debt overhangs.
- Protect adequacy of banks’ capital.
- Improve the payment culture.
- Formulate tools that incentivize banks to offer sustainable loan workout packages to viable debtors.
- Increase reliance on third-party debt servicers.
- Streamline court procedures for claims settlement.
- Ensure regulations encourage timely recognition of losses.
- Fiscal policy and public debt reduction:
- Further efforts to curb public debt to create fiscal headroom and insulate the downward debt path from shocks. Measures could include:
- Saving overperformance and windfall revenues.
- Restarting stalled privatizations.
- A few Directors cautioned that additional fiscal effort could hinder the economic recovery.
- Allocate additional resources to growth-enhancing public investment.
- Implement structural fiscal reforms to avoid expenditure slippages and unfunded tax cuts.
- Directors welcomed authorities’ commitment to ensure healthcare, public sector wage bill, and public sector pension reforms do not pose risks to fiscal sustainability.
- Structural reforms to support growth:
- Restart macro-critical structural reforms to enhance competition and encourage broad-based investment and economic growth.
- Recommendations include:
- Establishing a dedicated commercial court.
- Strengthening enforcement of commercial claims.
- Reviving the privatization program.
Selected economic indicators (highlights from 2014–2018)
- Output and demand (percent change unless otherwise indicated):
- Real GDP: 2014: -1.5; 2015: 1.7; 2016: 2.8; 2017 (proj): 2.7; 2018 (proj): 2.5
- Domestic demand: 2014: 3.0; 2015: 3.9; 2016: 1.4
- Private consumption: 2014: 0.7; 2015: 1.9; 2016: 2.9; 2017 (proj): 2.3
- Fixed investment: 2014: -17.5; 2015: 12.0; 2016: 26.0; 2017 (proj): -4.5; 2018 (proj): 15.0
- Exports of goods and services: 2014: 4.2; 2015: 3.6; 2016: 5.0
- Imports of goods and services: 2014: 4.6; 2015: 2.1; 2016: 5.3; 2017 (proj): 7.4
- Potential GDP growth: 2014: 0.2; 2015: 1.3
- Output gap (percent of potential GDP): 2014: -6.6; 2015: -5.4; 2016: -3.4; 2017 (proj): -1.8; 2018 (proj): -0.7
- Prices:
- HICP (period average, percent): 2014: -0.3; 2015: 1.5
- HICP (end of period, percent): 2014: -0.9
- Employment:
- Employment growth (percent): (table includes employment growth line but specific annual values are not provided in the source excerpt)
- Public finance (percent of GDP):
- Revenue: 2014: 39.3; 2015: 38.9; 2016: 38.8; 2017 (proj): 39.2; 2018 (proj): 38.2
- Expenditure: 2014: 39.5; 2015: 40.3; 2016: 39.1; 2017 (proj): 38.5; 2018 (proj): 38.4
- General government balance: 2014: -0.2; 2015: 0.6
- Primary Fiscal Balance: (values not shown in table excerpt beyond narrative)
- Balance of payments:
- Trade Balance (goods and services): 2014: 1.2
- Nominal GDP (billions of euros): 2014: 17.6; 2015: 17.9; 2016: 18.4; 2017 (proj): 19.1
IMF Press Release No. 17/212 — June 8, 2017.