Cyprus’ productivity growth has been weak and private sector indebtedness remained high, the IMF said on Tuesday, urging the government to intensify efforts to address crisis legacies, given the significant downside risks.
In a report following its Article IV consultation on the island, IMF directors pointed out that productivity growth has been weak, “reflecting institutional bottlenecks and the slow pace of technology adoption,” and that private sector indebtedness remained high amid ongoing challenges in debt workouts.
“Looking ahead, given the significant downside risks, directors encouraged further steadfast efforts to address crisis legacies by continuing to reduce debt vulnerabilities, improve public spending efficiency, and raise economic growth potential and inclusiveness.”
The IMF emphasised the importance of steady non-performing loan resolution and sustainable debt workouts.
“They highlighted the need for ensuring a well‑functioning NPL resolution toolkit, including through implementation of a credible foreclosure framework, along with complementary reforms in the judiciary.”
At 30 per cent of loans, NPLsed remain among the highest in Europe.
A large private sector debt overhang persists, given continued difficulties in debt workouts. Lagging productivity growth and political pressure to unwind key reforms also weigh on the outlook, the IMF said.
The IMF said Cyprus’ economic growth momentum was gradually slowing – down to 3.2 per cent (year-over-year) in the first semester of 2019, from 4 per cent in 2018, amid a slowing global economy and Brexit-related uncertainty, which has taken a toll on tourism receipts and service exports.
Directors emphasized that structural reforms are key to raise medium‑term growth potential.
“Given low labour productivity growth and challenges to investment and economic efficiency, they called for policies to support greater market diversification, competition, and technology adoption.”
Directors welcomed the authorities’ strategy to improve STEM training and research and development innovation and to ease access to finance, as well as their national digital strategy.
They also underlined the importance of minimizing moral hazard risks inherent in the state‑subsidy scheme for primary homeowners (Estia).