Cyprus Mail

IMF expects growth to slow down in the medium term

The International Monetary Fund said it expects Cyprus’s economy to expand 2.7 per cent this year, 2.5 per cent in 2018, and the pace economic expansion to further decelerate as the impact from consumption and investment weakens.

“Over the medium term, the pace of growth is expected to gradually ease to just over 2 per cent,” the IMF, which participated in Cyprus’s bailout programme in 2013, said in a statement on its website on Thursday. “Economic growth has been broad-based and reached a robust 2.8 per cent in 2016, supporting a sharp drop in the unemployment rate. Excluding large one-off imports, the current account deficit continued to narrow and earlier gains in price competitiveness have been preserved”.

The statement, which reflects the conclusions of the IMF directors following the first post-programme monitoring discussion with Cyprus, said that “an expected pickup in private sector debt servicing and rebuilding of savings buffers, which will trim consumption growth,” and a “gradual dissipation of the current ongoing surge in investment,” will be responsible for the expected economic slowdown in the medium term. The IMF also suggested that Cyprus should resumes reforms included in its bailout terms, which have been left undone.

Private consumption, which rose 2.9 per cent last year is expected to drop to 2.3 per cent this year, and 1.7 per cent in 2018, the IMF said. After increasing 26 per cent in 2016, fixed investment is expected to drop 4.5 per cent this year and recover 15 per cent in 2018.

By contrast, the finance ministry predicted in April that growth will accelerate to 2.9 per cent next year and 2018, and slow down to 2.7 per cent in 2019 and 2020. Private consumption is expected to increase 2.3 per cent this year and continue at this rate until 2020. Gross fixed capital formation is expected to increase marginally this year before peaking at 6.5 per cent in 2018 and grow 5.2 per cent over 2019 to 2020.

Cyprus’s capacity to repay its debt to the Fund is considered “satisfactory,” aided by economic recovery “but subjected to risks,” the IMF said. It added that the IMF directors also welcomed the intention of Finance Minister Harris Georgiades to repay early, part of the roughly €1bn loan received from the Fund thus reducing debt servicing cost.

“Nonetheless, to safeguard repayment ability in the event of volatile economic growth and financial shocks, directors urged more ambitious policies to increase policy buffers and reduce private and public sector debt.”

Even after the restructuring of private debt gained momentum, progress is slow in reducing non-performing loans in the banking system, roughly half of the banks’ portfolio, the IMF continued.

“Directors recommended measures to accelerate the downward paths of nonperforming loans and private sector leverage to strengthen the efficiency of credit allocation, eliminate debt overhangs, protect the adequacy of banks’ capital, and improve the payment culture,” the Fund added, days after Central Bank of Cyprus governor Chrystalla Georghadji said a more effective law on insolvency and foreclosure is needed. “Directors advised formulating tools that incentivize banks to offer sustainable loan workout packages to viable debtors and increase reliance on third-party debt servicers, while also streamlining court procedures for claims settlement and ensuring that regulations encourage timely recognition of losses”.

The IMF also recommended resumption of the privatisations programme to reduce public debt — and create a buffer to absorb possible future shocks — in addition to saving fiscal “overperformance and windfall revenues”.

“A few directors cautioned, however, that additional fiscal effort could hinder the economic recovery,” the IMF added.

“Directors encouraged the authorities to restart macro-critical structural reforms to enhance competition and encourage broad-based investment and economic growth” and to establish “a dedicated commercial court” and strengthening enforcement of commercial claims, the IMF said.

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