## Cyprus: Staff Concluding Statement of the 2022 Article IV Mission

_IMF News, March 30, 2022_

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**Canonical URL:** [Cyprus: Staff Concluding Statement of the 2022 Article IV Mission](https://www.imf.org/en/news/articles/2022/03/30/cyprus-staff-concluding-statement-of-the-2022-article-iv-mission)

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## Bibliographic details
- Published: March 30, 2022

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### Mission summary
- IMF mission met virtually with Cypriot authorities from March 11–28, 2022.
- Key near-term challenge: calibrate policy response to the economic fallout from the war in Ukraine.
- Baseline: automatic stabilizers allowed to operate; 2022 budget provides sufficient fiscal support in the baseline.
- If shock is larger than expected, any additional discretionary support should be temporary, targeted, and not hinder reallocation of labor to expanding sectors.
- Medium-term objective: gradual fiscal adjustment to rebuild buffers, aiming to bring the budget close to balance by 2024.
- Financial vulnerability reduction: more forceful implementation of existing deleveraging strategy, including:
  - removing uncertainties in implementation of the foreclosure framework;
  - improving the working environment for credit acquiring companies (CACs);
  - using examinership and restructuring tools for viable businesses.
- Structural reforms recommended: strengthen governance, improve judicial efficiency, address skills gaps and mismatches, and close infrastructure gaps to improve growth prospects.

### Context and outlook
- Vulnerabilities:
  - Cyprus remains highly vulnerable to the economic fallout from the war in Ukraine despite reduced exposures to Russia.
  - Tourism has not fully recovered and is highly dependent on arrivals from Russia (about 20 percent of the total).
  - Pandemic largely phased out policy support; limited impact on private balance sheets overall, but some debtors weakened.
  - Direct financial sector impact from sanctions likely limited given diminished exposures and winding down of RCB Bank.
- Growth projections:
  - Growth projected to slow from 5½ percent in 2021 to around 2 percent in 2022.
  - Recovery expected in 2023 if situation normalizes; potential growth gradually increasing from 2½ percent to about 3 percent by 2027.
- Inflation and risks:
  - Inflation expected to rise in 2022 and then start declining but will remain elevated in 2023 and beyond given prolonged pass-through.
  - Key risks tilted to the downside: escalation/longer duration of the war and sanctions; uncontrolled Covid outbreaks; abrupt monetary tightening in advanced economies; higher-than-expected credit default rates.

### Gradually rebuilding fiscal buffers
- Fiscal position and targets:
  - 2021 deficit declined to 1¾ percent of GDP from 5¾ percent in 2020.
  - Public debt: 104 percent at end-2021.
  - Government fiscal target: a ¾ percent of GDP surplus in 2024.
- Short-term policy stance:
  - 2022 budget provides sufficient support in the baseline; automatic stabilizers should be allowed to operate fully.
  - Cyprus’s social safety net based on a Guaranteed Minimum Income scheme will cushion the most vulnerable.
  - Additional discretionary support, if needed, should be temporary, targeted, and not hinder labor reallocation; options include extending unemployment benefits tied to labor market activation and scaling up active labor market policies.
  - Support to viable businesses—especially in tourism—may be needed but could be less necessary if other sectors absorb idle workers.
  - To cushion higher energy prices: recommend stricter targeting through temporary transfers and avoid pushing the cost onto the energy sector.
- Medium-term measures:
  - Maintain strict fiscal discipline; control public sector wage bill and strengthen finances of the National Health System (NHS).
  - NHS: authorities should address irregularities and continue plan to ensure financial self-sufficiency of public hospitals by [2024].
  - Reinstating the immovable property tax would help offset spending pressures or alternatively could be used to scale up public investment.
- Next Generation EU (NGEU) / RRP:
  - Total budget of Cyprus’s RRP amounts to €1.2 billion (over 5 percent of 2021 GDP).
  - RRP expected to implement pro-growth reforms and support transition to greener, digital, sustainable economy.
  - Absorption could be challenging; strengthened public investment management would help.

### Safeguarding financial stability
- Current resilience and challenges:
  - Financial system resilient: liquidity high and capital ratios broadly stable.
  - ‘stage 2’ loans—performing exposures with significantly deteriorated credit quality—have remained elevated post-pandemic.
  - Significant progress offloading legacy NPLs, but resolution has been slow; legacy NPLs mostly reside in CACs and public asset management company (KEDIPES).
- Monitoring and asset-quality measures:
  - Worsened outlook calls for enhanced monitoring; problem loans concentrated in tourism-related sectors.
  - Insolvency tools and timely implementation of the EU Directive on Preventive Restructuring and Second Chance are key to restructure viable businesses.
- NPL resolution and foreclosure framework:
  - More forceful implementation of existing tools required.
  - Effective foreclosure framework critical to address strategic defaulters and incentivize restructurings.
  - Address uncertainties arising from implementation of the 2019 amendments of the Foreclosure Law.
  - Improve working environment for CACs, including access to the land registry database; continue strengthening CAC oversight.
- Measures for vulnerable borrowers:
  - Authorities plan to transfer primary residences and business premises with market value below €350,000 used as collateral to NPLs to KEDIPES after debt-to-asset swap, and introduce a subsidized mortgage-to-rent scheme for vulnerable borrowers.
  - Scheme should be limited to the most vulnerable households on a means-tested basis, timebound, include robust transfer pricing to minimize fiscal costs and risks, and have strong governance with emphasis on transparency and accountability.

### Structural reforms and green transition
- RRP-driven reforms:
  - RRP measures target rule of law (recruiting and training judges; improving processing to reduce backlog), control of corruption (whistle-blower protection legislation; new independent anti-corruption agency), and government efficiency (e-government, public service reform, administrative decentralization).
  - Skills and education measures: improve teaching quality, enhance digital skills at all education levels, and strengthen vocational education.
  - Public investments in digital infrastructure and steps to improve e-communications market functioning.
  - Mission recommends faster implementation of these well-targeted reforms.
- Emissions reduction plans:
  - Authorities target a reduction of 32 percent for the sectors not included in the EU Emissions Trading Scheme (ETS) by 2030 (relative to 2005).
  - Planned measures: reduce energy dependency and enhance energy efficiency by promoting electricity generation from cleaner sources, improving electricity connectiveness, increasing energy efficiency in the residential sectors, and enhancing public transport.
  - Government plans to introduce a carbon tax on fuels used in non-ETS sectors.
  - Planned measures would go a long way toward meeting the target, but financing needs to be identified and additional measures (such as feebates) may be needed to fully achieve it.

*Source: Cyprus: Staff Concluding Statement of the 2022 Article IV Mission (March 30, 2022).*

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## References

- [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)

_Source: https://www.imf.org/en/news/articles/2022/03/30/cyprus-staff-concluding-statement-of-the-2022-article-iv-mission_