Cyprus welcomes IMF progress report

Nicosia has welcomed as “positive” IMF’s second annual report on the Cyprus economy, following the country’s exit from the bailout in 2016.

Government spokesman Prodromos Prodromou said the IMF has confirmed that “the country is continuing on the steady growth path it embarked on in recent years, while it predicts that economic growth is to accelerate this year and the next”.

“IMF Executive Directors have welcomed the boosted recovery of the economy, which is accompanied by a continuing drop in the unemployment rate, a significant primary surplus and a reduction in the government debt ratio, “Prodromou said.

Prodromou said that the government is especially pleased with IMF’s forecast of GDP growth of 4% for 2018 and a further acceleration in 2019 reaching 4.2%.

The IMF report states that if the current fiscal policy continues being implemented with significant primary surpluses of 4.04.5% combined with the robust growth, then the government debt ratio will be limited to 72% of GDP by the end of the 2018-2023 period.

And the IMF foresees the unemployment rate falling this year to an average of 9.5% from 11% last year, before dropping to 8% in 2019.

At the same time however, the IMF issued a warning for the Cyprus economy, stating that it is still at risk from legacies left behind from the crisis in 2013.

“Despite strong recovery, non-performing loans continue to exacerbate the profitability of banks and have prevented a significant improvement in the economic robustness of households and businesses,” said the IMF report.

Commenting on the Cyprus Cooperative sale procedure, the monetary fund said that the CCB is highly exposed to non-performing housing loans.

“It has made little progress in addressing non-performing loans, currently close to 58%, while the bank has provisions for only 47% of its NPLs. The coverage target of 65% would require some EUR 800 million in additional provisions, resulting in a significant capital deficit.”

IMF officials also appeared to be concerned over the government’s intention to set up a non-performing loan management body which is to take over CCB’s NPLs and potentially the NPLs of the whole of the Cyprus banking system.

In its report, the IMF states that it considers the venture to entail more risks than benefits, it “fears a weak governance structure, political interventions and slow restructuring processes”.

Furthermore, the IMF appears to be concerned over the situation formulated in the construction sector.

The Fund advises Cyprus to avoid excessive concentration in construction, currently aided by investment in real estate made by high net worth individuals acquiring real estate to benefit from the government’s Citizenship by Investment scheme.

It said there were risks from an abrupt growth slowdown or a renewed boom-bust cycle.

“Current strong GDP growth is dependent on construction activity and tourism and could be sensitive to a scaling back of the CbI scheme, a much sharper-than-expected tightening of global financial conditions, or a reduction of tourism demand owing to regional geopolitical developments. “

It said incentives supporting the construction sector should be withdrawn.