IMF Executive Board concludes 2024 Article IV consultation with Cyprus


IMF Executive Board concludes 2024 Article IV consultation with Cyprus







May 28, 2024















Washington D.C.: On May 22, the Executive Board of the International Monetary Fund (IMF) concluded its Article IV consultation(1) with Cyprus and supported the staff evaluation.

Cyprus recovered quickly from the pandemic and has proven resilient to multiple adverse crises. Growth moderated in 2023 but remained strong, above the euro area average (EA), supported by a continued recovery in tourism, financial services and expanding ICT activity, as well as strong investments. Headline inflation has fallen below 2 percent, supported by falling energy prices and tighter monetary policy, but core inflation has been more persistent. Strong fiscal performance continues to be driven by strong revenue growth and contributing to a large decline in public debt. The banking sector has considerable capital and liquidity reserves and, despite tight financial conditions, risks appear to have diminished.

The outlook is positive, but in the short term they are downward. Growth is expected to remain stable in 2024, supported by rising real income and FDI inflows and EU RRP, before gradually rising to its estimated potential of 3 percent in the medium term, driven for solid investment and structural reforms. Removing the negative effects of energy prices and administrative price measures will boost inflation, but high interest rates, negative base effects and more stable international prices should keep it contained at around 2 percent. in 2024. Near-term risks are mostly external and downsides include a slowdown in major tourism markets, an escalation of regional conflicts and delays in PRR implementation. The medium-term risks from climate change are offset by the positive potential of attracting more foreign investment and talent.

Executive Board Evaluation(2)

The Executive Directors agreed with the central objective of the staff evaluation. They praised the economy’s resilience in the face of multiple adverse shocks. Directors looked forward to continued implementation of strong policies and reforms to support fiscal sustainability, financial stability and potential growth.

Directors agreed that fiscal policy should aim to reduce debt and maintain room for long-term spending needs. They agreed that the authorities’ planned fiscal stance for 2024 is appropriate and that large primary surpluses must be maintained until public debt falls comfortably below 60 percent of GDP. Directors highlighted the considerable long-term spending needs arising from aging and climate challenges, and called for preserving fiscal space to meet those needs. Important support measures will include phasing out electricity subsidies and VAT exemptions as planned, avoiding further wage indexation, prioritizing investments, implementing health reforms and strengthening supervision of state-owned enterprises.

The directors noted the high capitalization and liquidity of the banking system. They agreed that financial sector risks appear to have diminished, despite the tightening of financial conditions, and called for the recent spike in loan renegotiations to be closely monitored. Directors welcomed the increase in countercyclical reserves and called for continued monitoring of systemic real estate and non-bank financial institution risks. They encouraged authorities to allow the newly amended foreclosure framework to operate alongside the rental mortgage scheme to accelerate the resolution of legacy non-performing loans.

Directors highlighted the importance of structural reforms to support the ongoing diversification of Cyprus’ growth model. They called for more judicial and labor market reforms to streamline the business environment and address skills mismatches. A robust AML/CFT framework will also be important to mitigate financial, reputational and regulatory risks, with a single supervisory framework for back-office services and further strengthening of implementation efforts, including in the real estate sector. Policies to promote domestic savings and entrepreneurial opportunities would also help rebalance the current account while supporting long-term growth.

Directors praised the authorities for Cyprus’ ambitious climate goals. They emphasized that aggressive implementation of energy infrastructure projects, along with additional mitigation measures, is needed to achieve these goals. Green taxation plans by authorities would be useful in reducing emissions with manageable growth and distributional impacts. But the scope of the carbon tax must be expanded and combined with specific sectoral policies to achieve faster emissions reductions. A careful assessment of climate risks along with an adaptation strategy is also needed to limit the cost of climate change.

(1) Under Article IV of the IMF Articles of Agreement, the IMF holds bilateral discussions with its members, normally annually. A team of staff visits the country, collects economic and financial information and analyzes with officials the country’s economic developments and policies. Upon returning to headquarters, staff prepare a report that forms the basis for the Executive Committee’s discussion.

(2) At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of the Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of the qualifiers used in the summaries can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm

Cyprus: Summary of economic indicators, 2022-27

2022

2023

2024

2025

2026

2027

Projections

real economy

(Percentage 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

23

3.5

3.1

3.0

3.1

Gross capital formation

15.3

10.8

-1.9

3.5

3.2

2.5

External 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

23

2.7

Imports of goods and services

18.3

1.7

-0.5

23

2.4

2.7

Potential GDP growth

4.5

3.3

3.1

3.1

3.2

3.2

Production gap (percentage of potential GDP)

1.9

1.1

0.6

0.3

0.1

0.0

Seasonally adjusted HICP (period average)

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

23

23

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

Labour

3.6

2.1

0.9

0.9

0.9

0.9

Public finance

(Percent of GDP, unless otherwise stated)

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

Spent

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 public debt

85.6

77.3

71.1

65.7

60.7

56.7

Balance of payments

Checking 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

Merchandise 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 investigation

-30.4

-12.6

-12.1

-12.0

-11.9

-19.3

Investment portfolio

4.1

10.5

4.7

4.4

3.1

3.0

Other investments 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

Savings-Investment Balance

national savings

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

Nongovernmental

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

External savings

7.9

12.1

11.1

10.2

10.0

9.6

Informative article:

Nominal GDP (billion 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 PII

-96.2

-96.4

-106.5

-111.1

-113.9

-116.0

Sources: Cystat, Eurostat, Central Bank of Cyprus and IMF staff estimates.

1/ Contribution to real GDP growth

2/ The financing of the program (+ purchases, – repurchases) is included in the Financial Account, with consistent sign conversion


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