## IMF Executive Board Concludes First Post-Program Monitoring Discussion with Cyprus

_IMF News, June 8, 2017_

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## Bibliographic details
- Published: June 8, 2017

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### 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.*

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## References

- [Cyprus and the IMF](http://www.imf.org/external/country/CYP/index.htm)
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- [http://www.imf.org/external/np/sec/misc/qualifiers.htm](http://www.imf.org/external/np/sec/misc/qualifiers.htm)
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_Source: https://www.imf.org/en/news/articles/2017/06/07/pr17212-imf-executive-board-concludes-first-post-program-monitoring-discussion-with-cyprus_