October 6, 2017
The Cypriot economy has achieved an impressive turnaround since the 2012-13 banking crisis.
", "publishDate": "2017-10-06", "sections": [ { "heading": "Overview and recent achievements", "content": "- The Cypriot economy has achieved an impressive turnaround since the 2012-13 banking crisis.\n- Key outcomes achieved:\n - GDP growth has accelerated for three consecutive years.\n - Unemployment is on a declining trend.\n - The underlying current account deficit has narrowed sharply alongside improved external price competitiveness.\n - The fiscal balance has swung from a large deficit to a small surplus.\n - Emergency bank liquidity has been fully repaid and bank deposits are rising.\n - Property prices have begun to edge up following a large correction.\n - Sovereign access to capital markets improved and the credit rating was upgraded to close to investment grade." }, { "heading": "Recent developments, outlook, and risks", "content": "- Recent developments and indicators:\n - GDP grew by 3.6 percent (year-on-year) in H1:2017, accelerating from 2.8 percent in 2016.\n - Output lifted to 5 percent below its pre-crisis peak and narrowed the output gap to about 2 percent below its potential.\n - Fixed investment is growing by more than 14 percent (with housing construction rising by 23 percent) since mid-2016.\n - Fixed investment directly contributed one half of GDP growth.\n - Domestic financial intermediation is contracting, reflecting deleveraging by banks, which is a drag on activity.\n - Current dynamic growth momentum driven by large, mainly foreign-financed, construction projects and assumed weak payment discipline sustaining private consumption.\n- Outlook and projections:\n - Growth is expected to average around 3¾ percent during 2017-18, and to gradually moderate thereafter as investment projects are completed.\n - Longer-term growth is expected to lift to 2½ percent as new construction alleviates capacity constraints in tourism.\n - Output is expected to overshoot potential within the next few years, exerting upward pressure on prices and productivity-adjusted wages.\n - NPL recovery is likely to remain subdued absent improved payment discipline.\n- Risks and scenarios:\n - Upside: growth could remain elevated if foreign-financed construction momentum is sustained.\n - Downside: sizable risks if external financing slows abruptly (e.g., due to faster-than-expected policy tightening by major central banks) or property supply outstrips demand, potentially triggering a new boom-bust cycle.\n - Continued slow NPL resolution could keep financial sector vulnerabilities elevated.\n - Erosion of fiscal discipline could raise external financing costs and weaken growth.\n - Cyprus’s role as a business and financial hub could be affected by international initiatives on corporate taxation or retrenchment by foreign correspondent banks.\n - Growth could be significantly boosted if development of offshore hydrocarbon deposits proves financially viable." }, { "heading": "Key policy priorities (summary)", "content": "- Consolidate achievements by:\n - Significantly reducing, in a non-disruptive manner, excessive private indebtedness and banks’ NPLs.\n - Ensuring growth is broad-based and avoids undue dependence on external financing.\n - Avoiding procyclicality in public spending.\n - Speeding up the legal process for enforcement of commercial claims.\n - Enhancing competition and governance." }, { "heading": "Achieving sustainable deleveraging and NPL reduction", "content": "- Context and challenges:\n - Private sector debt remains extremely high; banks’ NPLs relative to total loans or GDP are among the highest in the world.\n - Nonbank sources of liquidity (including nonpayment of debt service obligations and foreign equity financing) are supporting growth but may be finite or unreliable.\n - High private indebtedness and NPLs limit prudent new bank lending and concentrate investment in a few sectors.\n- Policy recommendations:\n - Implement comprehensive and ambitious strategies to deliver sizable deleveraging.\n - Ensure banks remain adequately provisioned and capitalized.\n - Incentivize borrowers to engage with banks by strengthening legal and restructuring measures.\n - Simultaneously adopt a combination of tools—debt-asset (D-A) swaps, borrowers’ repayments using their own funds, use of banks’ provisions, and lower spending by borrowers—to reduce debt and NPLs with limited GDP dampening given strong external demand.\n - Improve payment discipline by:\n - Further strengthening the foreclosure framework to better deter strategic default.\n - Promoting use of new debt restructuring tools for corporates and individuals.\n - Continuing transfer of property titles to eligible trapped buyers.\n - Adopting the planned credit scoring system by the Credit Registry.\n - Maintain prudent lending and loan classification standards; step up supervision of banks’ risk management practices and conduct targeted inspections of loan restructuring practices (focus on classification accuracy, frequency of re-restructurings and adequacy of provision coverage)." }, { "heading": "Fiscal policy: avoiding procyclicality", "content": "- Fiscal outlook:\n - The headline fiscal position is expected to continue to strengthen during 2017-19 on strong revenue collection.\n - Gross public debt relative to GDP would begin declining in 2017 and then fall significantly thereafter, while a sizable cash buffer would still be maintained to help pre-fund scheduled debt repayments.\n - Forecast incorporates the planned net-neutral fiscal impact of the new National Health Service (NHS), scheduled to be rolled out in mid-2019.\n - Adjusting for the economy’s cyclical position and one-offs, the structural fiscal balance would remain largely unchanged during the next few years.\n- Policy recommendations:\n - Cap fiscal spending by medium-term GDP growth to avoid perceiving temporary or cyclical revenue as permanent.\n - Set an annual ceiling for nominal spending that increases in line with medium-term GDP growth, with downward adjustment to compensate for future tax cuts or narrowing tax bases.\n - Institute a durable mechanism to keep the public-sector wage bill in check, accompanied by broader civil service reforms, while making room for growth-enhancing spending.\n - Closely monitor the cost of the NHS (including establishing an arrears monitoring system).\n - Improve financial oversight of municipal and local governments, semi-government organizations and state-owned enterprises; reform their governance structures.\n - Further strengthen revenue administration by legislating the Tax Procedure Code." }, { "heading": "Balanced and sustainable growth: sectoral priorities", "content": "- Real estate and construction:\n - Risks of potentially unsustainable increase in construction activity, supported earlier by investment incentives including the citizenship-by-investment (CbI) scheme.\n - Policy recommendations:\n - Decouple the CbI scheme’s eligibility requirements from real estate to avoid concentration and risk of over-supply of luxury properties.\n - Streamline procedures for issuing and transferring title deeds for new properties; ensure timely transfer of titles to buyers.\n - If luxury market construction relies on domestic credit or spills over to other segments, tighten bank lending standards and raise macroprudential capital requirements.\n - Consider reinstating the recently rescinded immovable property tax and raising transfer duty on immovable property to provide additional countercyclical tools.\n- Enforcement of commercial claims:\n - Strengthen effectiveness of commercial claims enforcement and increase efficiency of the courts to improve the investment climate and support NPL reduction.\n - Policy recommendations:\n - Review and update the civil procedure law.\n - Modernize rules for appeals and interim injunctions to limit undue delays.\n - Consider introducing a streamlined procedure for enforcement of small claims.\n - Establish a commercial court and introduce specialization of judges in the lower courts for more expeditious case handling.\n- Competition and governance:\n - Improve the investment climate through efficiency-enhancing reforms to attract capital into innovative sectors and diversify investment beyond traditional sectors.\n - Policy recommendations:\n - Introduce expedited procedures for investment.\n - Restart the privatization agenda and allow entry into protected sectors to increase competition and raise productivity.\n - Strengthen governance and operational efficiency in key public and private sectors, including through pending reforms to state-owned enterprises and restarting privatization.\n - Allow firms to absorb the 6-percentage point increase in the tax wedge on employment for funding the new NHS through improved efficiency and competition.\n\nCyprus: Staff Concluding Statement of the 2017 Article IV Mission — October 6, 2017.\n\n---\n\n\n References\n\n- Cyprus and the IMF\n- IMF Policy Advice -- A Factsheet\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2017/10/06/ms100617-cyprus-staff-concluding-statement-of-the-2017-article-iv-mission" } ], "bullets": [ "[Markdown version](/en/news/articles/2017/10/06/ms100617-cyprus-staff-concluding-statement-of-the-2017-article-iv-mission/index.md)", "[Structured JSON version](/en/news/articles/2017/10/06/ms100617-cyprus-staff-concluding-statement-of-the-2017-article-iv-mission/index.json)", "[Bundle manifest](/en/news/articles/2017/10/06/ms100617-cyprus-staff-concluding-statement-of-the-2017-article-iv-mission/bundle-manifest.json)", "Published: October 6, 2017", "The Cypriot economy has achieved an impressive turnaround since the 2012-13 banking crisis.", "Key outcomes achieved:", "Recent developments and indicators:", "Outlook and projections:", "Risks and scenarios:", "Consolidate achievements by:", "Context and challenges:", "Policy recommendations:", "Fiscal outlook:", "Policy recommendations:", "Real estate and construction:", "Enforcement of commercial claims:", "Competition and governance:", "[Cyprus and the IMF](http://www.imf.org/external/country/CYP/index.htm)", "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)", "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)", "[PRESS CENTER](http://presscenter.imf.org/)", "[https://www.imf.org/en/home](https://www.imf.org/en/home)" ], "alternates": { "markdown": "/en/news/articles/2017/10/06/ms100617-cyprus-staff-concluding-statement-of-the-2017-article-iv-mission/index.md", "json": "/en/news/articles/2017/10/06/ms100617-cyprus-staff-concluding-statement-of-the-2017-article-iv-mission/index.json", "bundleManifest": "/en/news/articles/2017/10/06/ms100617-cyprus-staff-concluding-statement-of-the-2017-article-iv-mission/bundle-manifest.json" }, "generatedAtUtc": "2026-09-25T21:15:16.103Z" }