## IMF Executive Board Concludes 2018 Article IV Consultation with Cyprus

_IMF News, December 3, 2018_

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## Bibliographic details
- Published: December 3, 2018

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### Recent economic performance
- 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.

### Outlook and risks
- 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:
  - Delay in implementation of NPL resolution could weaken the economic outlook.
  - Realization of contingent liabilities or erosion of fiscal discipline could undermine public debt sustainability.

### Executive Board assessment and policy recommendations
- 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:
  - Steadfast implementation of the amended legislative framework on foreclosure, insolvency, sale of loans, and securitization.
  - Strengthen the court system and remove uncertainties related to title deeds.
  - Enhance governance and supervisory framework for the recently-established asset management company.
  - Ensure the proposed Estia scheme is better targeted and based on appropriate assessment of borrowers’ capacity to repay to limit moral hazard.
  - Banks should continue to strengthen balance sheets, diversify income sources, and consolidate operations to improve cost-income ratios.
  - Strengthen regulatory guidance on loan restructuring and exercise vigilance over bank lending policies, adequacy of provisioning, and debt-to-asset swap policies.
- Fiscal and public sector recommendations:
  - Maintain strict spending discipline.
  - Avoid relying on transitory revenues from cyclical gains and one-off measures to finance permanent spending initiatives.
  - Cap expenditure increases, including the public wage bill, in line with the medium-term GDP growth rate to create room for growth-enhancing spending.
  - Carefully manage the transition to public insurance in the health sector.
  - 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.
- Institutional and structural reforms:
  - Increase efficiency of the courts, speed up enforcement of commercial claims, and clear the backlog of cases.
  - Expedite legislation to strengthen the governance and autonomy of the Central Bank of Cyprus.
  - Mitigate AML/CFT risks.
  - Implement active labor market policies and invest in higher value-added sectors to reduce high youth unemployment and skills mismatch.

### Key economic indicators (as presented)
- 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

*IMF Executive Board Concludes 2018 Article IV Consultation with Cyprus. December 3, 2018.*

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## References

- [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)

_Source: https://www.imf.org/en/news/articles/2018/11/30/pr18448-cyprus-imf-executive-board-concludes-2018-article-iv-consultation_