The IMF said Thursday it expected Cyprus to maintain the capacity to repay its debt but warned that this could change under certain circumstances, including court cases, a hard Brexit, and weaker growth in Europe.
In its report following a visit to Cyprus as part of its post-programme monitoring, the IMF said the island’s economy had showed strong growth mainly supported by construction, tourism and professional services.
It said the banks’ balance sheets were being strengthened and non-performing loans had declined sharply after loan portfolio transfers out of the banks.
“While this progress is welcome, continued efforts are needed to address challenges that remain from elevated public and private indebtedness, still high level of bank NPLs, large fiscal risks, and increasing headwinds to sustained growth,” the report said.
As things stand, Cyprus’ capacity to repay the fund is adequate, the IMF said, but things could change if growth slowed significantly “or if some specific risks materialise from banks’ still weak asset quality; the realisation of fiscal guarantees; or unexpected spending, including from court cases. This could be exacerbated in the event of weaker than expected growth in Europe, or a hard Brexit.”
To avoid the risks, the IMF recommended facilitating deleveraging, reducing NPLs and strengthening bank profitability through additional efforts to address troubled legacy assets—which remain among the highest in Europe and steadfast implementation of the foreclosure framework, including e-auctions.
It also suggested keeping the growth of the wage bill below nominal GDP growth given the gradual reversal of crisis-era public wage and pension cuts.
“Reforms aimed at making the public health sector more competitive and managing incentives for providers and patients adequately are crucial to mitigate fiscal risks from the introduction of a public health insurance system.”
Cyprus must also strengthen structural reforms: “Ongoing judicial reforms to increase the efficiency of courts and accelerate enforcement of commercial claims should help address the legacy of the crisis and improve the investment climate.”
Reforms of the civil procedure code and introduction of the e-justice system should be completed and the issuance and transfer of property titles should be accelerated.