IMF Executive Board Concludes 2024 Article IV Consultation with Cyprus
IMF News, May 28, 2024
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- Published: May 28, 2024
Recent performance and macroeconomic setting
- Cyprus recovered swiftly from the pandemic and proved resilient to multiple adverse shocks.
- Growth moderated in 2023 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 percent, supported by declining energy prices and tighter monetary policy; core inflation has been more persistent.
- Strong fiscal performance driven by robust revenue growth has contributed to a large decline in public debt.
- The banking sector has sizable capital and liquidity buffers; despite tight financial conditions, risks appear to have declined.
Outlook and risks
- Growth projections:
- Real GDP: 2022: 5.1; 2023: 2.5; 2024: 2.6; 2025: 2.8; 2026: 3.0; 2027: 3.1.
- Potential GDP growth: 4.5 (most recent).
- Inflation projections:
- HICP (period average, Seasonally Adjusted): 2022: 8.1; 2023: 3.9; 2024: 2.2; 2025: 2.0.
- HICP (end of period, Seasonally Adjusted): 2022: 7.6; 2023: (value not listed for 2024 end).
- Unemployment and labor:
- Unemployment rate (percent, period average): 2022: 6.8; 2023: 5.9; 2024: 5.7; 2025: 5.5.
- Employment growth (percent, period average): 2022: 4.4; 2023: 1.2.
- Labor force: 2022: 3.6; 2023: 2.1; 2024: 0.9.
- External position and financial flows:
- Current account balance: 2022: -7.9; 2023: -12.1; 2024: -11.1; 2025: -10.2; 2026: -10.0; 2027: -9.6.
- Trade Balance (goods and services): 2022: -0.9; 2023: -0.7; 2024: -0.6.
- Goods balance: 2022: -21.5; 2023: -23.9; 2024: -22.3; 2025: -21.7; 2026: -21.3; 2027: -20.9.
- Services balance: 2022: 21.8; 2023: 23.0; 2024: 21.4; 2025: 21.0; 2026: 20.7; 2027: 20.4.
- Direct investment: 2022: -30.4; 2023: -12.6; 2024: -12.0; 2025: -11.9; 2026: -19.3.
- Nominal GDP (billions of euros): 2022: 27.8; 2023: 29.8; 2024: 31.7; 2025: 33.4; 2026: 35.2; 2027: 37.1.
- Outlook summary:
- Growth is expected to remain stable in 2024, supported by rising real incomes and FDI and EU RRP inflows, before gradually rising to its estimated potential of 3 percent over the medium term.
- Inflation around 2 percent in 2024 due to unwinding of negative energy price effects and administrative price measures, offset by high interest rates, negative base effects, and more stable international prices.
- Risks:
- Short-term risks are mostly external and to the downside, including a downturn in major tourism markets, an escalation of regional conflicts, and delays in RRP implementation.
- Medium-term risks from climate change are counterbalanced by upside potential from attracting more foreign investment and talent.
Executive Board assessment and policy recommendations
- Executive Directors agreed with the thrust of the staff appraisal and commended the economy’s resilience.
- Fiscal policy:
- Aim at reducing debt and maintaining space for long‑term spending needs.
- Authorities’ planned fiscal stance in 2024 judged appropriate.
- Large primary surpluses should be maintained until public debt falls comfortably below 60 percent of GDP.
- Directors highlighted sizable long‑term spending needs from aging and climate challenges and called for preserving fiscal space.
- Supporting measures recommended: phasing out electricity subsidies and VAT exemptions as planned; avoiding further wage indexation; prioritizing investments; implementing healthcare reforms; strengthening SOE oversight.
- Financial sector:
- Noted high capitalization and liquidity of the banking system.
- Financial sector risks appear to have declined despite tightening conditions; recent uptick in loan renegotiations should be closely monitored.
- Welcomed the increase in counter‑cyclical buffers; called for continued vigilance of systemic real estate risks and non‑bank financial institutions.
- Encouraged allowing the recently amended foreclosure framework to operate together with the mortgage‑to‑rent scheme to accelerate resolution of legacy NPLs.
- Structural reforms and governance:
- Stressed importance of structural reforms to support diversification of Cyprus’s growth model.
- Called for further judicial and labor market reforms to streamline the business environment and address skill‑mismatches.
- Recommended a robust AML/CFT framework, with a single supervisory framework for administrative services and further strengthening of implementation efforts, including in real estate.
- Policies to promote domestic savings and entrepreneurial opportunities to help rebalance the current account while supporting long‑term growth.
- Climate and energy:
- Commended authorities for ambitious climate objectives.
- Emphasized need for forceful implementation of energy infrastructure projects and additional mitigation measures.
- Authorities’ green taxation plans deemed helpful; the scope of the carbon tax should be widened and coupled with targeted sectoral policies.
- Careful assessment of climate risks along with an adaptation strategy are needed to limit the cost of climate change.
Key fiscal and balance-sheet indicators
- General government balance (percent of GDP): 2022: 1.4.
- Revenue (percent of GDP): 2022: 41.5; 2023: 43.3; 2024: 43.6; 2025: 43.5; 2026: 42.8.
- Expenditure (percent of GDP): 2022: 38.8; 2023: 40.2; 2024: 41.0; 2025: 41.1; 2026: 41.3.
- Primary Fiscal Balance (percent of GDP): 2022: 4.1; 2023: 4.0.
- General government debt (percent of GDP): 2022: 85.6; 2023: 77.3; 2024: 71.1; 2025: 65.7; 2026: 60.7; 2027: 56.7.
- External debt: 2022: 609.6; 2023: 576.0; 2024: 558.3; 2025: 523.2; 2026: 491.0; 2027: 460.8.
- Net IIP: 2022: -96.2; 2023: -96.4; 2024: -106.5; 2025: -111.1; 2026: -113.9; 2027: -116.0.
- National saving (percent of GDP): 2022: 28.4; 2023: 34.2; 2024: 32.9; 2025: 32.1; 2026: 31.8.
- Government saving (percent of GDP): 2022: 6.2; 2023: 7.3; 2024: 5.2.
- Non‑government saving (percent of GDP): 2022: 22.3; 2023: 26.9; 2024: 26.7; 2025: 25.9; 2026: 26.5.
- Memorandum items and balances: Saving‑Investment Balance and components shown in source table.
Source: Press Release No. 24/186 — IMF Executive Board Concludes 2024 Article IV Consultation with Cyprus (May 28, 2024).