{
  "title": "IMF Executive Board Concludes 2018 Article IV Consultation with Cyprus",
  "publication": "IMF News, December 3, 2018",
  "sourceUrl": "https://www.imf.org/en/news/articles/2018/11/30/pr18448-cyprus-imf-executive-board-concludes-2018-article-iv-consultation",
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  "summary": "<p>Cyprus is recovering strongly following the 2012&ndash;13 crisis. GDP grew by 4 percent (yoy) in the first half of 2018, driven by tourism, professional services and foreign investment in construction as well as continued strength in private consumption.</p>",
  "publishDate": "2018-12-03",
  "sections": [
    {
      "heading": "Recent economic performance",
      "content": "- Cyprus is recovering strongly following the 2012–13 crisis.\n- GDP grew by 4 percent (yoy) in the first half of 2018, driven by tourism, professional services and foreign investment in construction as well as continued strength in private consumption.\n- The unemployment rate declined to 7.4 percent in September from 10.2 percent a year earlier.\n- Inflationary pressures remain low.\n- Supported by subdued unit labor costs, Cyprus has maintained its export competitiveness, although the current account deficit widened last year as strong domestic demand pushed up imports.\n- Fiscal performance strengthened with the primary surplus widening to 4.3 percent of GDP in 2017.\n- Banks are making progress in cleaning up their balance sheets, but the banking sector still faces one of the highest non-performing loan ratios in Europe.\n- Both private and public sectors have a large debt overhang."
    },
    {
      "heading": "Outlook and risks",
      "content": "- Near-term outlook: growth expected to remain at around 4.2 percent in 2018–19, supported by the services sector and largely foreign-financed investments.\n- Medium-term outlook: economic growth is projected to slow to its long-run potential rate of around 2½ percent, as the transitory effects of the investment boom gradually dissipate.\n- Fiscal projections: primary surplus of around 5 percent in 2018–19.\n- Public debt outlook: expected to be on a firm declining path, falling below 70 percent of GDP by 2023, despite a sharp increase earlier this year following the resolution of the Cyprus Cooperative Bank.\n- Downside risks:\n  - Delay in implementation of NPL resolution could weaken the economic outlook.\n  - Realization of contingent liabilities or erosion of fiscal discipline could undermine public debt sustainability."
    },
    {
      "heading": "Executive Board assessment and policy recommendations",
      "content": "- Board welcomed the strong post-crisis recovery, large fiscal surpluses, and lowered unemployment.\n- Directors noted recent reforms addressing banking vulnerabilities, including the resolution of a large systemic state-owned bank.\n- Key concerns: large private and public debt and NPL ratios among the highest in Europe.\n- Recommendations to reduce NPLs and strengthen the banking sector:\n  - Steadfast implementation of the amended legislative framework on foreclosure, insolvency, sale of loans, and securitization.\n  - Strengthen the court system and remove uncertainties related to title deeds.\n  - Enhance governance and supervisory framework for the recently-established asset management company.\n  - Ensure the proposed Estia scheme is better targeted and based on appropriate assessment of borrowers’ capacity to repay to limit moral hazard.\n  - Banks should continue to strengthen balance sheets, diversify income sources, and consolidate operations to improve cost-income ratios.\n  - Strengthen regulatory guidance on loan restructuring and exercise vigilance over bank lending policies, adequacy of provisioning, and debt-to-asset swap policies.\n- Fiscal and public sector recommendations:\n  - Maintain strict spending discipline.\n  - Avoid relying on transitory revenues from cyclical gains and one-off measures to finance permanent spending initiatives.\n  - Cap expenditure increases, including the public wage bill, in line with the medium-term GDP growth rate to create room for growth-enhancing spending.\n  - Carefully manage the transition to public insurance in the health sector.\n  - Implement fiscal structural reforms: strengthen public financial management, monitor risks from local governments and the state-owned sector, and improve corporate governance of commercial state-owned enterprises.\n- Institutional and structural reforms:\n  - Increase efficiency of the courts, speed up enforcement of commercial claims, and clear the backlog of cases.\n  - Expedite legislation to strengthen the governance and autonomy of the Central Bank of Cyprus.\n  - Mitigate AML/CFT risks.\n  - Implement active labor market policies and invest in higher value-added sectors to reduce high youth unemployment and skills mismatch."
    },
    {
      "heading": "Key economic indicators (as presented)",
      "content": "- Real GDP: 2.0; 4.8; 4.2; 4.1\n- Domestic demand: 3.9; 6.1; 8.2; 0.7; 7.5\n- Consumption: 1.9; 3.5; 3.0; 2.8\n- Private consumption: 2.4; 4.5; 4.0; 3.1\n- Public consumption: -0.5; -0.8; 0.3; 1.7\n- Gross capital formation: 18.1; 21.9; 30.4; -8.8; 28.8\n- Foreign balance 1/: -1.8; -1.2; -3.9; 3.6; -3.4\n- Exports of goods and services: 5.2; 4.6; 6.0; 3.7; -2.0\n- Imports of goods and services: 8.4; 6.6; 12.2; 3.4\n- Potential GDP growth: 1.2; 2.1; 2.7\n- Output gap (percent of potential GDP): -7.1; -4.3; -2.3; -0.6\n- HICP (period average, percent): -1.5; 0.9; 1.8\n- HICP (end of period, percent): 0.1; -0.4\n- Unemployment rate (EU standard, percent): 14.9; 13.0; 11.1; 8.5; 7.0\n- Employment growth (percent): -1.3; 1.4; 2.5\n- General government balance: -0.3\n- Revenue: 39.0; 38.0; 39.7\n- Expenditure: 39.3; 37.7; 37.3; 37.0; 36.5\n- Primary Fiscal Balance: 4.3; 5.1; 5.0\n- General government debt: 108.0; 105.5; 96.1; 106.1; 99.7\n- Current account balance: -5.1; -8.4; -4.1; -7.8\n- Trade Balance (goods and services): 0.8; -3.5; -0.2; -3.8\n- Nominal GDP (billions of euros): 17.7; 18.5; 19.6; 20.7\n\nIMF Executive Board Concludes 2018 Article IV Consultation with Cyprus. December 3, 2018.\n\n---\n\n\n References\n\n- https://www.imf.org/-/media/images/imf/bios/imfboard.jpg\n- The Executive Board\n- Cyprus and the IMF\n- IMF Policy Advice -- A Factsheet\n- Press Releases\n- PRESS CENTER\n- http://www.imf.org/external/np/sec/misc/qualifiers.htm.\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2018/11/30/pr18448-cyprus-imf-executive-board-concludes-2018-article-iv-consultation"
    }
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    "Published: December 3, 2018",
    "Cyprus is recovering strongly following the 2012–13 crisis.",
    "GDP grew by 4 percent (yoy) in the first half of 2018, driven by tourism, professional services and foreign investment in construction as well as continued strength in private consumption.",
    "The unemployment rate declined to 7.4 percent in September from 10.2 percent a year earlier.",
    "Inflationary pressures remain low.",
    "Supported by subdued unit labor costs, Cyprus has maintained its export competitiveness, although the current account deficit widened last year as strong domestic demand pushed up imports.",
    "Fiscal performance strengthened with the primary surplus widening to 4.3 percent of GDP in 2017.",
    "Banks are making progress in cleaning up their balance sheets, but the banking sector still faces one of the highest non-performing loan ratios in Europe.",
    "Both private and public sectors have a large debt overhang.",
    "Near-term outlook: growth expected to remain at around 4.2 percent in 2018–19, supported by the services sector and largely foreign-financed investments.",
    "Medium-term outlook: economic growth is projected to slow to its long-run potential rate of around 2½ percent, as the transitory effects of the investment boom gradually dissipate.",
    "Fiscal projections: primary surplus of around 5 percent in 2018–19.",
    "Public debt outlook: expected to be on a firm declining path, falling below 70 percent of GDP by 2023, despite a sharp increase earlier this year following the resolution of the Cyprus Cooperative Bank.",
    "Downside risks:",
    "Board welcomed the strong post-crisis recovery, large fiscal surpluses, and lowered unemployment.",
    "Directors noted recent reforms addressing banking vulnerabilities, including the resolution of a large systemic state-owned bank.",
    "Key concerns: large private and public debt and NPL ratios among the highest in Europe.",
    "Recommendations to reduce NPLs and strengthen the banking sector:",
    "Fiscal and public sector recommendations:",
    "Institutional and structural reforms:",
    "Real GDP: 2.0; 4.8; 4.2; 4.1",
    "Domestic demand: 3.9; 6.1; 8.2; 0.7; 7.5",
    "Consumption: 1.9; 3.5; 3.0; 2.8",
    "Private consumption: 2.4; 4.5; 4.0; 3.1",
    "Public consumption: -0.5; -0.8; 0.3; 1.7",
    "Gross capital formation: 18.1; 21.9; 30.4; -8.8; 28.8",
    "Foreign balance 1/: -1.8; -1.2; -3.9; 3.6; -3.4",
    "Exports of goods and services: 5.2; 4.6; 6.0; 3.7; -2.0",
    "Imports of goods and services: 8.4; 6.6; 12.2; 3.4",
    "Potential GDP growth: 1.2; 2.1; 2.7",
    "Output gap (percent of potential GDP): -7.1; -4.3; -2.3; -0.6",
    "HICP (period average, percent): -1.5; 0.9; 1.8",
    "HICP (end of period, percent): 0.1; -0.4",
    "Unemployment rate (EU standard, percent): 14.9; 13.0; 11.1; 8.5; 7.0",
    "Employment growth (percent): -1.3; 1.4; 2.5",
    "General government balance: -0.3",
    "Revenue: 39.0; 38.0; 39.7",
    "Expenditure: 39.3; 37.7; 37.3; 37.0; 36.5",
    "Primary Fiscal Balance: 4.3; 5.1; 5.0",
    "General government debt: 108.0; 105.5; 96.1; 106.1; 99.7",
    "Current account balance: -5.1; -8.4; -4.1; -7.8",
    "Trade Balance (goods and services): 0.8; -3.5; -0.2; -3.8",
    "Nominal GDP (billions of euros): 17.7; 18.5; 19.6; 20.7",
    "[https://www.imf.org/-/media/images/imf/bios/imfboard.jpg](https://www.imf.org/-/media/images/imf/bios/imfboard.jpg)",
    "[The Executive Board](https://www.imf.org/external/np/sec/memdir/eds.aspx)",
    "[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)",
    "[Press Releases](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[http://www.imf.org/external/np/sec/misc/qualifiers.htm.](http://www.imf.org/external/np/sec/misc/qualifiers.htm)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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