IMF praises Cyprus' economic resilience, recommends debt reduction and reforms

The International Monetary Fund (IMF) has praised Cyprus for its robust economic recovery and fiscal discipline, recommending continued efforts to reduce public debt and accommodate long-term spending needs, following its latest Article IV consultation with the country.

The IMF's Executive Board, endorsed the staff appraisal, highlighting the importance of maintaining large primary surpluses and phasing out subsidies.

The Board concurred that Cyprus’s planned fiscal stance for 2024 is appropriate, emphasizing the necessity of reducing public debt to below 60 percent of GDP. They noted the country's significant long-term spending requirements, particularly in addressing demographic changes and environmental challenges, pointing out the need to preserve fiscal space.

According to IMF estimates, Cyprus is set to experience steady economic growth over the next few years, with real GDP projected to stabilize between 2.5% and 3.1% annually from 2023 to 2027.

In 2024 real GDP is expected to increase slightly compared to 2023 to 2.6%. The GDP is expected to grow by 2.8% in 2025  3% in 2026 and 3,1% in 2027.

The IMF notes that Cyprus recovered swiftly from the pandemic and has proven resilient to multiple adverse shocks. Growth moderated in 2023 to 2.5% 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%, supported by declining energy prices and tighter monetary policy, but core inflation has been more persistent. Inflation, is expected to stabilize around 2.0% by 2027.

It is added that 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.

Looking ahead, the IMF forecasts stable growth for Cyprus in 2024, bolstered by rising real incomes, foreign direct investment (FDI), and EU Recovery and Resilience Plan (RRP) inflows. Over the medium term, growth is expected to reach 3%, driven by strong investments and structural reforms. However, potential short-term risks, including downturns in major tourism markets, regional conflicts, and delays in RRP implementation, could pose challenges. Medium term risks from climate change are counterbalanced by upside potential from attracting more foreign investment and talent.

Directors advocated for a reduction in public debt and the maintenance of large primary surpluses until debt levels comfortably fall below 60 percent of GDP. Acknowledging the significant long-term spending needs arising from ageing populations and climate challenges, the Board stressed the importance of preserving fiscal space to address these concerns. Proposed measures included the phasing out of electricity subsidies and VAT exemptions, avoiding further wage indexation, along with prioritizing investments, implementing healthcare reforms, and strengthening oversight of state-owned enterprises.

The Directors also took note of the resilience of Cyprus' banking sector, highlighting its high capitalization and liquidity. While financial sector risks were deemed to have declined, the Board called for vigilance in monitoring loan renegotiations and systemic real estate risks. They encouraged authorities to allow the recently amended foreclosure framework to operate together with the mortgage‑to‑rent scheme to accelerate the resolution of legacy NPLs.

Furthermore, the Executive Board underscored the necessity of structural reforms to diversify Cyprus's growth model. They called for further judicial and labor market reforms to streamline the business environment and address skill‑mismatches. Additionally, they emphasized the importance of robust anti-money laundering and counter-terrorism financing frameworks to mitigate financial, reputational, and regulatory risks. They also stressed that policies to promote domestic savings and entrepreneurial opportunities would also help to rebalance the current account while supporting long‑term growth.

Commending Cyprus's ambitious climate objectives, the Board stressed the need for forceful implementation of energy infrastructure projects and additional mitigation measures to achieve targets. They supported the authorities' green taxation plans but recommended widening the scope of carbon taxes and implementing targeted sectoral policies for faster emission reduction. A careful assessment of climate risks and the development of an adaptation strategy were also deemed essential to mitigate the long-term costs of climate change.

(Source: CNA)