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IMF Executive Board Concludes 2024 Article IV Consultation with Cyprus
May 28, 2024
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IMF Communications Department
MEDIA RELATIONS
PRESS OFFICER: Boris Balabanov
Phone: +1 202 623-7100Email: MEDIA@IMF.org
May 28, 2024
PRESS OFFICER: Boris Balabanov
Phone: +1 202 623-7100Email: MEDIA@IMF.org
Washington, DC: On May 22, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Cyprus and endorsed the staff appraisal.
Cyprus recovered swiftly from the pandemic and has proven resilient to multiple adverse shocks. Growth moderated in 2023 but remained robust, above the euro area (EA) average, supported by a continued recovery in tourism, financial services and expanding ICT activity, and strong investments. Headline inflation has fallen below 2 percent, supported by declining energy prices and tighter monetary policy, but core inflation has been more persistent. Strong fiscal performance continues driven by robust revenue growth and contributing to a large decline in public debt. The banking sector has sizable capital and liquidity buffers, and despite tight financial conditions, risks appear to have declined.
The outlook is positive but near-term are to the downside. Growth is expected to remain stable in 2024, supported by rising real incomes and FDI and EU RRP inflows, before gradually rising to its estimated potential of 3 percent over the medium term, driven by robust investment and structural reforms. The unwinding of negative energy price effects and administrative price measures will push inflation, but high interest rates, negative base effects, and more stable international prices should keep it contained to around 2 percent in 2024. Short-term risks are mostly external and to the downside including a downturn in major tourism markets, an escalation of regional conflicts, and delays in RRP implementation. Medium term risks from climate change are counterbalanced by upside potential from attracting more foreign investment and talent.
Executive Board Assessment[2]
The Executive Directors agreed with the thrust of the staff appraisal. They commended the economy’s resilience to multiple adverse shocks. Directors looked forward to continued implementation of sound policies and reforms to support fiscal sustainability, financial stability, and potential growth.
Directors agreed that fiscal policy should aim at reducing debt and maintaining space for long‑term spending needs. They concurred that the authorities’ planned fiscal stance in 2024 is appropriate and large primary surpluses should be maintained until public debt falls comfortably below 60 percent of GDP. Directors highlighted the sizable long‑term spending needs from aging and climate challenges, and called for fiscal space to be preserved to accommodate those needs. Important supporting measures will include phasing out electricity subsidies and VAT exemptions as planned, avoiding further wage indexation, prioritizing investments, implementing healthcare reforms, and strengthening SOE oversight.
Directors noted the high capitalization and liquidity of the banking system. They concurred that financial sector risks appear to have declined, despite tightening financial conditions, while calling for the recent uptick in loan renegotiations to be closely monitored. Directors welcomed the increase in counter‑cyclical buffers and called for continued vigilance of systemic real estate risks and non‑bank financial institutions. They encouraged the authorities to allow the recently amended foreclosure framework to operate together with the mortgage‑to‑rent scheme to accelerate the resolution of legacy NPLs.
Directors stressed the importance of structural reforms to support the ongoing diversification of Cyprus’s growth model. They called for further judicial and labor market reforms to streamline the business environment and address skill‑mismatches. A robust AML/CFT framework, with a single supervisory framework for administrative services and further strengthening of implementation efforts, including in real estate, will also be important to mitigate financial, reputational, and regulatory risks. Policies to promote domestic savings and entrepreneurial opportunities would also help to rebalance the current account while supporting long‑term growth.
Directors commended the authorities for Cyprus’s ambitious climate objectives. They emphasized that a forceful implementation of energy infrastructure projects, along with additional mitigation measures, are needed to achieve these targets. The authorities’ green taxation plans would be helpful in reducing emissions with manageable growth and distributional impacts. But the scope of the carbon tax should be widened and coupled with targeted sectoral policies to achieve faster emission reduction. Careful assessment of climate risks along with an adaptation strategy are also needed to limit the cost of climate change.
[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm
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Cyprus: Summary of Economic Indicators, 2022−27 |
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|
2022 |
2023 |
2024 |
2025 |
2026 |
2027 |
|
|
|
Projections |
||||
|
Real Economy |
(Percent change, unless otherwise indicated) |
|||||
|
Real GDP |
5.1 |
2.5 |
2.6 |
2.8 |
3.0 |
3.1 |
|
Domestic demand |
8.9 |
5.3 |
2.5 |
3.1 |
3.1 |
3.1 |
|
Consumption |
7.2 |
3.8 |
3.8 |
3.0 |
3.1 |
3.2 |
|
Private consumption |
8.6 |
4.2 |
3.8 |
2.9 |
3.1 |
3.3 |
|
Public consumption |
3.1 |
2.3 |
3.5 |
3.1 |
3.0 |
3.1 |
|
Gross capital formation |
15.3 |
10.8 |
-1.9 |
3.5 |
3.2 |
2.5 |
|
Foreign balance 1/ |
-3.7 |
-2.8 |
0.5 |
-0.4 |
-0.2 |
-0.1 |
|
Exports of goods and services |
13.6 |
-1.2 |
0.0 |
1.9 |
2.3 |
2.7 |
|
Imports of goods and services |
18.3 |
1.7 |
-0.5 |
2.3 |
2.4 |
2.7 |
|
Potential GDP growth |
4.5 |
3.3 |
3.1 |
3.1 |
3.2 |
3.2 |
|
Output gap (percent of potential GDP) |
1.9 |
1.1 |
0.6 |
0.3 |
0.1 |
0.0 |
|
HICP (period average) Seasonally Adjusted |
8.1 |
3.9 |
2.2 |
2.0 |
2.0 |
2.0 |
|
HICP (end of period) Seasonally Adjusted |
7.6 |
1.9 |
2.0 |
2.0 |
2.0 |
2.0 |
|
GDP deflator |
6.1 |
4.7 |
3.7 |
2.5 |
2.3 |
2.3 |
|
Unemployment rate (percent, period average) |
6.8 |
6.1 |
5.9 |
5.7 |
5.5 |
5.3 |
|
Employment growth (percent, period average) |
4.4 |
2.8 |
1.2 |
1.1 |
1.1 |
1.1 |
|
Labor force |
3.6 |
2.1 |
0.9 |
0.9 |
0.9 |
0.9 |
|
Public Finance |
(Percent of GDP, unless otherwise indicated) |
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|
General government balance |
2.7 |
3.1 |
2.7 |
2.5 |
2.5 |
1.4 |
|
Revenue |
41.5 |
43.3 |
43.6 |
43.6 |
43.5 |
42.8 |
|
Expenditure |
38.8 |
40.2 |
41.0 |
41.1 |
41.1 |
41.3 |
|
Primary Fiscal Balance |
4.2 |
4.5 |
4.1 |
4.0 |
3.9 |
3.0 |
|
General government debt |
85.6 |
77.3 |
71.1 |
65.7 |
60.7 |
56.7 |
|
Balance of Payments |
|
|
|
|
|
|
|
Current account balance |
-7.9 |
-12.1 |
-11.1 |
-10.2 |
-10.0 |
-9.6 |
|
Trade Balance (goods and services) |
0.3 |
-0.9 |
-0.9 |
-0.7 |
-0.6 |
-0.5 |
|
Exports of goods and services |
95.0 |
89.4 |
85.9 |
84.7 |
83.8 |
82.9 |
|
Imports of goods and services |
94.7 |
90.3 |
86.8 |
85.4 |
84.3 |
83.4 |
|
Goods balance |
-21.5 |
-23.9 |
-22.3 |
-21.7 |
-21.3 |
-20.9 |
|
Services balance |
21.8 |
23.0 |
21.4 |
21.0 |
20.7 |
20.4 |
|
Primary income, net |
-7.5 |
-10.1 |
-9.5 |
-8.6 |
-8.6 |
-8.2 |
|
Secondary income, net |
-0.7 |
-1.1 |
-0.7 |
-0.9 |
-0.9 |
-0.9 |
|
Capital account, net |
0.2 |
0.0 |
0.3 |
0.2 |
0.2 |
0.1 |
|
Financial account, net |
-7.2 |
-9.7 |
-10.8 |
-10.0 |
-9.8 |
-9.5 |
|
Direct investment |
-30.4 |
-12.6 |
-12.1 |
-12.0 |
-11.9 |
-19.3 |
|
Portfolio investment |
4.1 |
10.5 |
4.7 |
4.4 |
3.1 |
3.0 |
|
Other investment and financial derivatives |
18.7 |
-7.6 |
-3.4 |
-2.5 |
-1.1 |
6.8 |
|
Reserves ( + accumulation) |
0.3 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
|
Program financing 2/ |
0.0 |
0.0 |
0.0 |
-1.0 |
-2.8 |
-2.7 |
|
Errors and omissions |
0.6 |
2.5 |
0.0 |
0.0 |
0.0 |
0.0 |
|
Saving-Investment Balance |
|
|
|
|
|
|
|
National saving |
28.4 |
34.2 |
32.9 |
32.1 |
32.1 |
31.8 |
|
Government |
6.2 |
7.3 |
6.2 |
6.2 |
6.1 |
5.2 |
|
Non-government |
22.3 |
26.9 |
26.7 |
25.9 |
25.9 |
26.5 |
|
Gross capital formation |
20.5 |
22.1 |
21.8 |
21.9 |
22.0 |
22.2 |
|
Government |
3.4 |
4.2 |
3.6 |
3.7 |
3.7 |
3.8 |
|
Private |
17.1 |
17.8 |
18.3 |
18.2 |
18.3 |
18.4 |
|
Foreign saving |
7.9 |
12.1 |
11.1 |
10.2 |
10.0 |
9.6 |
|
Memorandum Item: |
|
|
|
|
|
|
|
Nominal GDP (billions of euros) |
27.8 |
29.8 |
31.7 |
33.4 |
35.2 |
37.1 |
|
Structural primary balance |
3.5 |
3.9 |
3.9 |
3.8 |
3.8 |
2.9 |
|
External debt |
609.6 |
576.0 |
558.3 |
523.2 |
491.0 |
460.8 |
|
Net IIP |
-96.2 |
-96.4 |
-106.5 |
-111.1 |
-113.9 |
-116.0 |
|
Sources: Cystat, Eurostat, Central Bank of Cyprus, and IMF staff estimates. |
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1/ Contribution to real GDP growth |
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2/ Program financing (+ purchases, - repurchases) is included under the Financial Account, with consistent sign conversion |
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