20240527-IMF-Cyprus_2024_Article_IV_Consultation-Press_Release_Staff_Report_and_Statement_by_the_Executive_Director_for_Cyprus_79页_11mb

Cyprus 2024 Article IV Consultation Summary

Core Content

The 2024 Article IV Consultation with Cyprus by the IMF highlights the country's economic resilience, fiscal performance, and structural reforms. The consultation concluded on May 22, 2024, with the Executive Board endorsing the staff appraisal. Key areas of focus include fiscal sustainability, financial sector stability, structural reforms, and the green transition.

Main Points

Economic Recovery and Performance

• Economic Resilience: Cyprus recovered swiftly from the pandemic and has shown resilience to multiple adverse shocks.
• Growth: Growth moderated in 2023 to 2.5% but remained robust, above the euro area (EA) average, supported by tourism recovery, financial services, expanding ICT activity, and strong investments.
• Output Gap: The output gap is estimated to have declined but remained in positive territory.
• Inflation: Headline inflation fell below 2%, while core inflation was more persistent, at 2.5% in March 2024. Inflation expectations are moderating.

Fiscal Policy

• Fiscal Performance: Strong fiscal performance continued in 2023, with a primary surplus of 4.5% of GDP, contributing to a significant decline in public debt.
• Public Debt: Public debt fell to 77% of GDP in 2023, a reduction of over 30 percentage points from 2014, and is expected to continue falling.
• Fiscal Stance: The authorities' planned neutral fiscal stance in 2024 is appropriate. Primary surpluses should be maintained until public debt falls comfortably below 60% of GDP.
• Fiscal Space: Fiscal space is needed to address long-term spending pressures from aging and climate change.
• Fiscal Measures: Several fiscal measures were implemented in 2023, including the reinstatement of fuel excise reductions, extension of electricity subsidies, and increased cost-of-living adjustments (CoLA) for public sector employees.

Financial Sector

• Capital and Liquidity Buffers: The banking sector has sizable capital and liquidity buffers, and risks have declined despite tight financial conditions.
• Asset Quality: Strong growth and robust labor and housing markets have supported asset quality.
• Loan Renegotiations: An uptick in loan renegotiations requires close monitoring.
• Counter-Cyclical Buffers: The increase in the positive neutral Counter-Cyclical Capital Buffer (CCyB) is welcomed.
• Foreclosure Framework: The recently amended foreclosure framework should be allowed to operate without further changes to accelerate the resolution of legacy non-performing loans (NPLs).

Structural Reforms

• Business Environment: Further judicial and labor market reforms are needed to streamline the business environment and reduce skill mismatches.
• AML/CFT Framework: A single supervisory framework for administrative services and greater oversight of the real estate sector are important to strengthen the anti-money laundering and countering the financing of terrorism (AML/CFT) framework.
• Green Transition: The green transition requires the completion of energy infrastructure projects and additional mitigation and adaptation measures.

Key Economic Indicators (2022–2027)

Outlook and Risks

• Growth Outlook: Growth is expected to stabilize in 2024 and gradually rise to an estimated potential of 3% over the medium term, driven by robust investment and structural reforms.
• Inflation Outlook: Inflation is expected to remain around 2% in 2024, supported by the unwinding of negative energy price effects and administrative price measures, with high interest rates and more stable international prices helping to contain it.
• Short-Term Risks: External risks include a downturn in major tourism markets, escalation of regional conflicts, and delays in RRP implementation.
• Medium-Term Risks: Climate change poses challenges, but there is upside potential from attracting more foreign investment and talent.

Policy Recommendations

• Fiscal Policy: Maintain large primary surpluses until public debt falls below 60% of GDP, preserve fiscal space for long-term needs, and prioritize investments while avoiding further wage indexation.
• Financial Sector: Continue vigilance on real estate risks and non-bank financial institutions, and allow the recently amended foreclosure framework to operate alongside the mortgage-to-rent scheme.
• Structural Reforms: Implement judicial and labor market reforms, strengthen AML/CFT framework, and support the green transition with energy infrastructure and additional measures.
• Climate Change: Careful assessment of climate risks and an adaptation strategy are needed to limit the cost of climate change. The scope of the carbon tax should be widened and coupled with targeted sectoral policies.

Summary of Key Issues

• Economic Resilience: Cyprus has shown resilience to adverse shocks.
• Fiscal Sustainability: Continued fiscal discipline and maintaining primary surpluses are crucial.
• Financial Stability: The banking sector is resilient, but risks must be closely monitored.
• Structural Reforms: Needed to support long-term growth and diversification.
• Green Transition: Essential for achieving climate goals and mitigating risks.

Executive Board Statement

The Executive Directors commended the resilience of the economy and supported the continuation of sound policies and reforms. They emphasized the need for fiscal sustainability, financial stability, and long-term growth. The assessment of debt sustainability was upgraded to 'low' due to falling public debt and strong fiscal performance.