Following a deep recession in 2020 and further contraction in 2021Q1, the euro area economy recovered rapidly in the second and third quarters thanks to high vaccination levels, increasing household and business adaptability to the virus, and continued forceful policy support. Looking ahead, while supply chain disruptions, elevated energy prices, and resurgences of Covid-19 cases—including those related to the Omicron variant—are likely to pose near-term headwinds to growth, the recovery is set to continue in 2022 as the impact of the pandemic on economic activity continues to weaken over time and supply-side constraints ease. Medium-term output losses relative to pre-crisis trends will vary significantly across countries and sectors as will the extent of labor market scarring. Price pressures are building up as production bottlenecks are set to persist for a while. However, inflation—despite increasing significantly in recent months due to transitory factors—is projected to moderate during 2022 and remain below the ECB’s inflation target over the medium term. Uncertainty surrounding the outlook remains high and largely related to pandemic dynamics and legacies, including induced behavioral and preference changes.
International Monetary Fund. Monetary and Capital Markets Department
This technical assistance report focuses on further strengthening their debt and cash management framework in Cyprus. The mission found that Cyprus’ current liquidity buffer is appropriately sized given current uncertainties. Some features of the current approach can lead to overfunding. The funding plan is on an annual basis; however, the cash buffer size is determined monthly. The mission recommended that the level of cash buffer be closely monitored and managed. This necessitates a cash-management policy framework, and the necessary infrastructure. A key consideration in the Public Debt Management Office’s (PDMO) investment decisions pertains to the determination of investment options for the excess liquidity stock. The report recommends that investment options of the cash surplus are rather limited at present but should improve as market conditions change. In the prevailing negative interest rate environment, the PDMO can either deposit funds with the Central Bank of Cyprus, at a rate of -0.50 percent, or with commercial banks at a similar rate. The mission offered some general considerations for involving external investment managers for investing in other euro-zone countries’ instruments or undertaking buyback operations.
The COVID-19 pandemic has interrupted Cyprus’s strong economic growth over the past few years. High dependence on service sectors and strict containment measures led real output to contract by 5.1 percent (yoy) during 2020. Growth is projected to recover to 3 percent in 2021 as the vaccine rollout gathers pace despite the ongoing new wave of infections, but significant downside risks remain, reflecting the high uncertainty of the path of the epidemic.