Apr 2, 2024

IMF: Cyprus growth is surpassing its European peers

IMF: Cyprus growth is surpassing its European peers

Quoting Alex Pienkowski, International Monetary Fund (IMF) mission chief for Cyprus, “supported by robust policies, Cyprus recovered swiftly from the pandemic, and has proved broadly resilient to multiple adverse shocks. Growth is above most European peers, and inflation is close to 2%. Fiscal performance continues to be strong, significantly reducing public debt.”

The IMF’s recent consultations under Article IV (of the IMF’s Articles of Agreement) in late March 2024 with Cypriot authorities highlighted key priorities, including maintaining fiscal surpluses until public debt comfortably falls below 60% of gross domestic product (GDP). In accordance with the Staff Concluding Statement of the 2024 Article IV Mission, Cyprus’ financial sector remains resilient but requires continued vigilance, particularly in the non-bank financial sector.

According to Pienkowski’s statement, Cyprus has exhibited resilience against higher interest rates and weak activity in trading partners, the tourism sector is continuing the post-pandemic recovery, combined with significant growth in the Information & Communication Technology (ICT) and diversification of financial services on the island. Growth is expected to be around 2.5% in 2024, as rising real incomes support consumption, foreign direct investment (FDI) and EU Recovery and Resilience Program (RRP) financing inflows support investment. Labor markets are expected to remain strong.

Inflation has normalized at 2% and “is expected to remain contained going forward”, supported by falling energy prices and tighter monetary policy, while strong fiscal policy and robust growth have reduced public debt to 77% of GDP. “Among other factors, fiscal discipline, falling debt, ample cash buffers, and recently demonstrated economic resilience have supported credit rating upgrades and improved market sentiment”, stated Pienkowski.

Efforts to diversify the economy, promote structural reforms, and preserve fiscal space to address long-term spending pressures, including from aging and climate change, are emphasized. The completion of the General Health System (GHS) rollout, governance reforms of State-Owned Enterprises (SOEs), and strengthening of the judicial and education sectors are deemed critical for long-term growth.

The banking sector exhibits large capital and liquidity buffers, though continued vigilance is required, especially concerning non-performing loans (NPLs) and real estate risks. The foreclosure framework should be allowed to function without further changes, and efforts to enhance financial oversight of SOEs should persist.

To bolster anti-money laundering and combating the financing of terrorism (AML/CFT) efforts, the IMF supports establishing a single supervisory agency, “to oversee self-regulation by accountants and lawyers, and by strengthening AML/CFT efforts in real estate. The creation of a national sanctions enforcement unit will reduce risks from potential sanction evasion”.

Pienkowski urged Cyprus to capitalize on its economic performance by pushing ahead with structural reforms, particularly in the judiciary, education, and green transition sectors. Investments in education, principally in STEM fields (Science, Technology, Engineering and Mathematics), are essential to capitalize on the thriving ICT sector. Moreover, “plans to connect the electricity network with neighbors, import liquefied natural gas (LNG), increase the share of renewable energy sources, and introduce competition in the energy market are critical”.

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