The authorities highly appreciated the Second Post-Program Monitoring (PPM) discussions after exiting the Extended Arrangement under the Extended Fund Facility (EFF) in 2016. The authorities had requested the continuation of PPM after the 2017 early repayment which had led to a reduction of the amount of credit outstanding below the threshold for PPM, and express their strong willingness to continue to be engaged with the Fund until 2020.

The repayment capacity of Cyprus is underpinned by solid growth and a prudent fiscal position. Except for the banking industry, where needed deleveraging is taking place, growth has been broad-based. Strong growth is not limited to the construction sector and the tourist industry, but is also observed in trade, professional services and manufacturing services. Growth is projected to remain firm at around 4 percent of GDP in 2018–2019, and the authorities expect cross-sectoral growth to continue. Planned infrastructure projects do not only cover tourism and residential investment, but also areas including energy, education and transport. The growth momentum is unlikely to be threatened by a boom-bust cycle, as construction activity is mainly financed from FDI, and fiscal spending is not deficit financed.

The authorities are committed to maintaining a prudent fiscal stance. Cyprus’ primary surplus has been in positive territory for years and reached 4.5 percent of GDP in 2017. This shows that the authorities are focused on a sustained and gradual reduction of the general government debt to GDP ratio from 97.5 percent in 2017 to 72 percent in 2023, in full respect of the debt rule in the preventive arm of the European Stability and Growth Pact. The authorities’ 2018–2021 fiscal plans provide for a cap on expenditures increase set at the medium-term GDP growth rate. The authorities also maintain a policy of wage and salary restraint. The authorities have reached a collective agreement with public sector unions, introducing a control mechanism limiting the overall growth in the wage bill in the public sector below the growth of nominal GDP. A Law has also been adopted to suspend the recruitment of new personnel in the public sector, with exceptions being subjected to a strict control mechanism.

The current economic outlook in conjunction with a prudent fiscal stance is a good starting point to set in motion financial and structural reforms. The authorities aim to further facilitate the reduction of NPLs, which have witnessed a decline in absolute terms since 2016. Ongoing reforms include the strengthening of the effectiveness of the legal framework related to the management of non-performing exposures and strategic defaulters. Beside these improvements to the Insolvency and Foreclosure frameworks, the authorities are also addressing the most challenging portfolio of NPLs (mortgage loans or SME loans with primary residence of the borrower as collateral) through a targeted subsidy scheme that incentivizes debt servicing by distressed mortgage borrowers.

The authorities continue to strive towards advancing their structural reform agenda which spans over a range of policies. The authorities would like to point at the continued efforts deployed to increase the efficiency of the Judiciary and public and local administration. In addition, the authorities are addressing skills mismatches by improving the labor market relevance of the educational system and the quality of active labor market policies, particularly for young people. Finally, the authorities aim at relaunching their privatization plans in the coming 12 months, which include the state telecoms company, the state lottery, the port of Larnaca, the Cyprus Stock Exchange, and several real estate assets.

The authorities look forward to continuing fruitful discussions with the IMF on the occasion of the Article IV mission in September.