IMF It records positive developments in the Cypriot economy

April 2, 2018

The positive developments in the Cypriot economy are recorded in a statement by the International Monetary Fund Expert Group, who visited Cyprus from 19-30 March for the regular annual survey of the economy of the member countries of the "Fund" under the provisions of the 4th article of its Statute .

The inspection was carried out in co-operation with the European Commission, the European Central Bank and the European Stability Mechanism, and the IMF team is to prepare a report to be submitted to its Board of Governors. The conclusions of this Communication are not binding on the IMF Board.

"Since our last visit, Cyprus's economic growth has continued to accelerate, supported by construction, tourism and professional services. Unemployment was further moderated. The fiscal situation improved significantly and government debt fell below 100% of GDP. Taking advantage of the declining cost of market-based financing, Cyprus made an early repurchase from the IMF in July 2017, "the fund's statement said.

It notes, however, that despite the significant and sustained improvement in macroeconomic conditions, private sector debt remains extremely high and the continued weak payment discipline has kept NPLs at very high levels. The need for additional forecasts and limited opportunities for new lending continue to affect banks' profitability. "

The IMF team predicts that the current rapid pace of economic growth will continue.

"GDP is expected to grow by 4-4.25 per cent during 2018-19, supported by a flow of mainly large-scale construction projects financed from abroad, despite somewhat slower private consumption growth due to better household compliance in respect of their contractual obligations'.

However, in the medium term, it estimates that the growth rate will be reduced to 2.5%, as construction projects are gradually being completed.

The IMF team estimates that large domestic demand for imports, especially building materials, is expected to keep the current account deficit at around 6-7% of GDP, while tax revenues will benefit from the escalation of activity.

In the context of this key scenario, the report writes, the repayment capacity of the Fund is considered sufficient, with repayments funded by large primary budget surpluses and newly issued debt securities on a relatively advantageous market basis. However, repayment capacity could be weakened if significant liabilities are created by the assets of troubled banks, so an excessive supply of luxury real estate would create a new vicious circle or weaken fiscal discipline by yielding to cost pressures. "

The IMF team believes that strengthening payment discipline, avoiding pro-cyclical policies and adopting critical macroeconomic structural reforms would help maintain financial stability, protect the downward trend in public debt, and support a balanced and steady growth . And that would ensure the possibility of repayment.

Regarding improving payment discipline and reducing non-performing loans, it states that a decisive and steady decline in non-performing loans requires strengthening the Cypriot payment culture.

"Changing legal frameworks on insolvency and seizures can support this goal by encouraging borrowers to cooperate with banks to reach mutually acceptable commercially-based restructuring solutions. Limited and well-targeted budget support to lower-income borrowers can enhance their financial sustainability and promote compliance of payments throughout the loan. "

It adds that trust in SIC service providers should be continued and made fully operational.

"The recently announced search for strategic investors in the Cyprus Co-operative Bank is a welcome development and should proceed smoothly," the IMF Group report said.

Regarding protection from pro-cyclical policies, it notes that recent fiscal performance has benefited from cyclical growth and incentives to support the construction sector.

"In order to avoid the use of cyclical or transitional revenue and to provide room for the absorption of any exceptional budgetary crises, the annual ceilings on nominal expenditure should be increased in line with the medium-term increase in production, downwardly adjusted to offset any future cuts in tax rates or a reduction in tax base, "he writes.

It also proposes to withdraw incentives to support the construction sector.

"It should," also writes, "to establish a viable mechanism for controlling wages in the public sector. A system of close monitoring of the budgetary costs of the national health plan should be adopted and properly designed expenditure safeguards should be established. "

It also suggests restarting targeted structural reforms.

"The effectiveness of the enforcement of commercial claims and the efficiency of the courts should be strengthened in order to improve the payment culture and the investment environment. The plans for fast-track investment processes and the phasing-out of incentives for construction could attract capital in innovative sectors and help diversify sources of GDP growth. Corporate governance and operational efficiency should be strengthened in key semi-private and private agencies to modernize the economy and increase its flexibility, "the report of the IMF Group concluded.

SOURCE: CNA