20220531-IMF-Cyprus_2022_Article_IV_Consultation-Press_Release_Staff_Report_and_Statement_by_the_Executive_Director_for_Cyprus_79页_5mb

Summary of the 2022 Article IV Consultation with Cyprus

Core Content

The 2022 Article IV consultation with Cyprus, conducted by the IMF, assessed the country's economic recovery post-pandemic, its exposure to the war in Ukraine, and the path for sustainable growth. The consultation concluded on May 25, 2022, following discussions with Cypriot officials from March 28, 2022. The staff report, press release, and statement by the Executive Director were released as part of the consultation.

Main Points

Economic Recovery and Performance

• Post-pandemic Recovery: Cyprus experienced a strong recovery in 2021, with real GDP growth of around 5.5% and unemployment declining to 7.5% (pre-pandemic level).
• Output: Output returned to pre-pandemic levels, driven by a rebound in exports and consumption.
• Public Consumption: Public consumption remained a major contributor to growth.
• Private Consumption: Started to recover due to a stronger labor market.
• Unemployment: Declined sharply to 6.3% by 2021Q4.

Impact of the War in Ukraine

• Economic Fallout: The war has significantly impacted Cyprus, especially the tourism sector and professional services due to reduced Russian and Ukrainian tourist arrivals.
• GDP Forecast: Growth is projected at 2% in 2022, partially due to a partial recovery in exports and private consumption.
• Current Account: The current account deficit is expected to worsen due to a deterioration in the terms of trade and increased imports.
• Inflation: Inflation is anticipated to rise in 2022, primarily due to higher energy prices, and then decline gradually in the medium term.

Fiscal Policy

• Fiscal Deficit: The fiscal deficit dropped to around 2% of GDP in 2021, driven by cyclical revenue recovery and reduced expenditure.
• Public Debt: Public debt declined to 104% of GDP from 115% in 2020, but remains relatively high.
• Fiscal Adjustment: A gradual fiscal adjustment is recommended to maintain fiscal sustainability, with a focus on rebuilding fiscal buffers.
• Discretionary Support: Any additional fiscal support should be temporary, targeted, and not hinder labor reallocation.

Financial Sector

• Banking Sector: The banking sector remains resilient with high liquidity and stable capital ratios (Tier 1 capital ratio at 19.0%).
• NPLs: Banks have made progress in offloading non-performing loans (NPLs), reducing the ratio to 10% in 2021 from 17.7% in 2020.
• Legacy NPLs: Resolution of legacy NPLs is still slow and requires more forceful implementation of existing tools.
• Mortgage-to-Rent Scheme: The planned scheme should be well-targeted to minimize fiscal cost and ensure transparency.

Structural Reforms and Green Transition

• Recovery and Resilience Plan (RRP): The RRP includes reforms aimed at improving governance, addressing skill mismatches, and closing the digital infrastructure gap.
• Structural Reforms: Progress has been made on corruption and civil service reforms, but further efforts are needed.
• Green Transition: Achieving climate goals is seen as a priority, with challenges in implementation and green investment. A carbon tax and green tax reform are planned.

Risks and Uncertainties

• Downside Risks: Include prolonged war in Ukraine, sanctions, de-anchoring of inflation expectations, and uncontrolled pandemic outbreaks.
• Upside Risks: A stronger-than-expected impact of the RRP, particularly from productivity-enhancing reforms, could boost long-term growth potential.

Key Economic Indicators (2019–2023)

Key Policy Recommendations

• Fiscal Policy: Continue fiscal support but gradually rebuild buffers; ensure temporary and well-targeted discretionary measures.
• Financial Sector: Strengthen the foreclosure framework, enhance monitoring of NPLs, and improve the working environment for credit acquiring and servicing companies.
• Structural Reforms: Accelerate reforms under the RRP, including governance, digital infrastructure, and skills development.
• Green Transition: Implement green tax reforms and consider feebates to enhance emissions reduction.

Conclusion

The IMF acknowledged Cyprus's strong recovery post-pandemic and its resilience in the financial sector, but emphasized the need for continued fiscal discipline and structural reforms to address long-term vulnerabilities. The outlook remains uncertain due to the war in Ukraine and potential pandemic resurgence, but the RRP and reforms are expected to support medium-term growth and resilience.