Cyprus: 2023 Article IV Consultation-Press Release; and Staff Report

IMF Staff Country Reports, June 5, 2023

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Cyprus’s economy has been resilient to the fallout from Russia’s invasion of Ukraine.
The outlook is uncertain with risks from:
- an escalation of the war;
- a possible recession in Europe.
Inflation risks:
- If inflation expectations rise further and the pass-through to wages intensifies, inflation could be stickier than expected.
Financial sector vulnerability:
- Adverse macroeconomic developments could amplify financial risks given high private debt.
Recent shocks demonstrate fiscal policy can be a powerful tool to foster resilience.

Fiscal strategy recommendations:
- Rebuild buffers over the medium term.
- Aim at sustaining primary surpluses to reduce public debt over time.
- Support fiscal policy with a risk-based fiscal framework.
Use of fiscal space as buffers are rebuilt:
- Direct available fiscal space to productive investments for the green and digital transitions.

Cyprus’s climate objective:
- Cyprus aims to become emissions neutral by 2050.
Key elements of the greener growth strategy:
- Integration into the regional electric grid.
- Expansion of renewables.
- Liberalization of the domestic electricity market.
Expected benefits:
- Improved energy security.
Requirements:
- These measures require large public and private investments.

Promote a greener growth model as an important element of reforms.
Strengthen resilience by combining fiscal consolidation (sustained primary surpluses) with targeted public investment in green and digital priorities.
Implement a risk-based fiscal framework to guide medium-term fiscal consolidation and investment choices.

International Monetary Fund. Cyprus: 2023 Article IV Consultation-Press Release; and Staff Report.