Journal Issue

IMF Executive Board Concludes 2014 Article IV Consultation with Cyprus

International Monetary Fund. European Dept.
Published Date:
October 2014
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On October 20, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Cyprus.

Large imbalances accumulated prior to the global financial crisis culminated in the collapse of Cyprus’s banking system in early 2013. In response, the authorities took unprecedented measures upfront to resolve and recapitalize weak systemic banks at no fiscal cost and adopted a three-year economic-adjustment program aiming to secure financial stability and fiscal sustainability. The program is supported by international financial assistance of about €10 billion, of which about €1 billion is provided by the IMF under the Extended Fund Facility arrangement, and €9 billion by the European Stability Mechanism. About €5.75 billion has already been disbursed under the program by the IMF and the ESM.

Cyprus has made considerable progress in addressing the crisis. In the context of their adjustment program, the authorities have restructured and recapitalized the financial sector while preserving fiscal sustainability, removed domestic payment restrictions imposed at the height of the crisis, consolidated the public finances, and initiated structural reforms. These achievements helped Cyprus re-access international capital markets earlier this year.

However, overcoming the legacies of the crisis is still challenging, and the outlook remains difficult. The economy contracted sharply in 2013, and unemployment is very high. Output is expected to decline this year by a further 3.2 percent before recovering modestly next year. The private and public sectors are heavily indebted. The banking sector remains vulnerable given high and rising non-performing loans and tight funding conditions, with external payment restrictions still needed to protect financial stability. Achieving a durable economic recovery will critically depend on maintaining the reform momentum, which requires overcoming recent delays in program implementation.

Executive Board Assessment2

Executive Directors commended the authorities’ strong efforts to address the recent economic and financial crisis, including measures to recapitalize and restructure the banking sector, liberalize domestic-payment flows, consolidate the public finances, and initiate structural reforms. Nevertheless, Directors agreed that Cyprus’ macroeconomic situation continues to be difficult and full and timely implementation of the adjustment program supported by the IMF’s Extended Fund Facility remains critical for a durable recovery.

Directors stressed that addressing the high level of non-performing loans to help revive credit and support growth should be a priority. Acknowledging progress in establishing bank internal debt-restructuring units, they highlighted the need for an effective and fair foreclosure regime, complemented by reforms of the legal-insolvency framework that facilitate debt restructuring and preserve the payment culture.

Directors welcomed the recapitalization of the financial sector in a manner consistent with maintaining fiscal sustainability, including the recent market recapitalization of the largest bank. Looking ahead, they called for capital buffers in line with the outcome of the European Central Bank’s comprehensive assessment and for further efforts to restructure banks and the cooperative sector. Directors also supported plans to strengthen bank supervision and regulation in the transition to the pan-European Single Supervisory Mechanism and steps to enhance the implementation of the anti money-laundering framework.

Directors called for prudent management of external-payment restrictions to safeguard financial stability and agreed that their relaxation should be gradual and transparent. In this context, they underscored the importance of normalizing bank funding and liquidity and noted that Eurosystem support remains essential.

Directors welcomed the authorities’ ambitious fiscal consolidation so far. However, with public debt still high, they noted that additional efforts will be required to achieve medium-term fiscal targets. Directors emphasized the need for a judiciously paced adjustment based on permanent measures aimed at reversing the pre-crisis increase in spending.

Directors commended the authorities for putting in place comprehensive structural reforms. They underscored that continued implementation of reforms of revenue administration, public financial management, and the welfare system are key to safeguarding the sustainability of the fiscal position while protecting vulnerable groups. Directors also encouraged the authorities to privatize state-owned enterprises and develop a strategy to boost competitiveness and potential growth.

Cyprus: Selected Economic Indicators, 2008–20
Real Economy(Percent change, unless otherwise indicated)
Real GDP3.6−−2.4−5.4−
Domestic demand8.0−7.01.9−1.5−3.8−10.1−4.3−
Private consumption7.8−−2.0−5.7−2.4−
Public consumption6.16.81.0−0.3−3.8−5.0−4.7−2.1−3.2−0.6−
Fixed investment6.0−9.7−4.9−8.7−18.3−21.6−
Inventory accumulation 1/0.9−1.51.8−0.71.3−
Foreign balance 1/−5.16.0−
Exports of goods and services−0.5−−2.5−
Imports of goods and services8.5−18.64.8−0.2−5.4−14.1−1.8−
Potential GDP growth2.−1.5−5.4−3.1−
Output gap (percent of potential
HICP (period average)
HICP (end of period)−
Unemployment rate EU stand.
Employment growth (percent)−1.5−3.3−5.2−
Public Finance(Percent of GDP)
General government balance0.9−6.1−5.3−6.3−6.4−4.9−4.4−3.9−1.3−−0.1
Primary Fiscal Balance3.8−3.6−3.0−4.0−3.2−1.9−1.0−
General government debt48.958.561.371.586.6111.5117.4126.0122.5116.4111.1106.5102.6
Balance of Payments(Percent of GDP)
Current account balance−15.6−10.7−9.8−3.4−6.9−1.9−1.1−0.8−0.3−0.1−0.2−0.2−0.2
Trade Balance (goods and
Exports of goods and services45.040.241.342.942.943.945.546.346.947.347.647.948.2
Imports of goods and services56.445.747.547.
Goods balance−32.4−25.5−26.8−24.3−21.8−17.8−16.7−16.4−16.2−16.2−16.3−16.4−16.5
Services balance21.019.920.620.118.719.719.319.720.120.320.520.620.7
Income, net−3.9−4.1−2.22.0−2.6−2.7−2.7−3.1−3.2−3.3−3.5−3.5−3.5
Transfer, net−0.4−1.1−0.7−1.1−1.2−1.0−1.0−1.0−1.0−1.0−1.0−1.0−1.0
Capital account, net0.
Financial account, net16.−26.3−11.4−16.8−
Direct investment−
Portfolio investment−74.2−101.1−−5.2−1.6−2.21.610.03.0
Other investment93.898.219.0−28.8−32.4−98.6−27.4−16.0−5.3−1.0−4.3−13.3−6.0
Reserves (- inflow; + outflow)
Program financing0.−0.3−0.6−0.8
European Union0.
Errors and omissions−0.5−0.50.2−1.32.0−
Savings-Investment Balance
National saving7.78.610.
Gross capital formation23.319.419.816.615.
Foreign saving−15.6−10.7−9.8−3.4−6.9−1.9−1.1−0.8−0.3−0.1−0.2−0.2−0.2
Memorandum Item:
Nominal GDP (billions of euros)17.216.917.417.917.716.515.815.916.417.117.818.519.2
Sources: Eurostat, Central Bank of Cyprus, and IMF staff estimates.

Contribution to growth.

Sources: Eurostat, Central Bank of Cyprus, and IMF staff estimates.

Contribution to growth.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here:

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