Front Matter Page
IMF Country Report No. 18/153
CYPRUS
SECOND POST-PROGRAM MONITORING
DISCUSSIONS—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR CYPRUS
June 2018
In the context of the Second Post-Program Monitoring Discussions with Cyprus, the following documents have been released and are included in this package:
A Press Release summarizing the views of the of the Executive Board as expressed during its June 4, 2018, consideration of the staff report that concluded the Second Post-Program Monitoring discussions with Cyprus.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on June 4, 2018, following discussions that ended on March 30, 2018, with the officials of Cyprus on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on May 22, 2018.
A Statement by the Executive Director for Cyprus.
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
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© 2018 International Monetary Fund
Front Matter Page
CYPRUS
SECOND POST-PROGRAM MONITORING DISCUSSIONS
May 22, 2018
Executive Summary
The economic recovery has gathered further momentum. Strong GDP growth has supported employment. While the current account deficit has widened reflecting the high import content of demand, persistent price and wage moderation have sustained competitiveness. Improving cyclical conditions contributed to a sizable primary fiscal surplus and a decline in the public debt ratio.
However, the economy is still burdened with legacies from the crisis. Despite accelerating growth, private sector debt continues to be very high reflecting the slow pace of deleveraging. Banks’ asset quality remains poor, weighing adversely on profitability. To support the position of the Cyprus Cooperative Bank and deal with NPLs more broadly across the banking system, the government has taken actions aimed at encouraging consolidation and reinforcing banks’ balance sheets.
Capacity to repay the Fund is expected to be adequate under the baseline scenario, but is subject to significant downside risks. Strong economic growth, sizeable fiscal primary surpluses, the large share of official loans in public debt and the back-loaded repayment schedule of those loans are expected to support market access on favourable terms. However, repayment capacity could weaken if direct and contingent fiscal liabilities from NPLs are realized, growth falls abruptly or a boom-bust cycle re-emerges, or weak payment discipline continues.
To strengthen capacity to repay against adverse shocks, ambitious macroeconomic policies and structural reforms are needed:
Restructuring NPLs in a decisive and durable manner by adhering to prudent capital and provisioning requirements and avoiding merely warehousing loans;
Restoring a responsible payment culture by amending the foreclosure framework and ensuring that strategic default is no longer politically or socially acceptable;
Avoiding procyclical fiscal policy by setting a ceiling for nominal spending that increases in line with medium-term output growth;
Restarting a comprehensive structural reform agenda targeting more diversified and sustainable growth and reducing reliance on construction activity.
Approved By
Philip Gerson (EUR) and Kevin Fletcher (SPR)
Discussions took place in Nicosia during March 19–30, 2018. The staff team comprised R. van Elkan (head), S. Choi, H. Takizawa (all EUR), F. Narita (SPR), G. Mitchell Casselle (MCM) and V. Guzzo and M. Heracleous (IMF resident representative office in Nicosia). T. Chen and D. Noren (both EUR) supported the mission from headquarters. J. de Lint (office of the Executive Director) joined some of the meetings.
Contents
BACKGROUND
RECENT DEVELOPMENTS AND GROWTH PROSPECTS
CAPACITY TO REPAY
A. Repayment Capacity Under the Baseline Scenario
B. Risks to Repayment Capacity
POLICIES TO REDUCE REPAYMENT RISKS
A. Financial Sector Policy
B. Fiscal Policy
C. Structural Reforms
STAFF APPRAISAL
BOXES
1. Strategy for the CCB
2. Bank Interventions and Sovereign Bond Spreads
3. Challenges in Setting Up a Centralized Asset Management Company (AMC)
FIGURES
1. Macroeconomic Performance
2. Inflation and Labor Market
3. External Indicators
4. Credit and Balance Sheets
5. Banking Sector
6. Housing Market
7. Fiscal Developments
TABLES
1. Selected Economic Indicators, 2015–23
2. Fiscal Developments and Projections, 2015–23
3. General Government Gross Financing Requirements and Sources of Financing, 2018–23
4. Balance of Payments, 2013–23
5. External Financing Requirements and Sources, 2013–23
6. Monetary Indicators, 2010–17
7. Financial Soundness Indicators, 2010–17
8. Indicators of Fund Credit, 2013–26
ANNEXES
I. Public Sector Debt Sustainability Analysis
II. Risk Assessment Matrix
III. Financial Position in the Fund
Front Matter Page
Press Release No. 18/221
FOR IMMEDIATE RELEASE
June 7, 2018
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