IMF warns of risks, government pledges to pay heed

The International Monetary Fund (IMF) executive board on Wednesday evening concluded its article four consultation for Cyprus, which included an assessment of the country’s economic and financial developments.

According to the report released by the IMF, the consultation ended with a broadly positive evaluation of the country’s current economic state and long-term outlook, although uncertainty and inflation remain near-future threats.

“[IMF] Executive Directors commended the authorities for their policy response to the pandemic, which supported the recovery of output and employment,” the IMF said in its assessment.

“The pace of the recovery is expected to slow down in the near-term—mainly due to the war in Ukraine—but should regain momentum over the medium-term,” it added.

However, the IMF explained that Cyprus’ economic outlook is still susceptible to a range of risks, particularly those resulting from an extended war in Ukraine.

Other risks include potentially unrestrained Covid-19 outbreaks, as well as sudden monetary tightening in larger and more advanced economies.

In addition, the IMF said that there is a strong need for the government to adjust its policies in order to handle short-term shocks related to both the pandemic and the war in Ukraine.

It also urged the government to press ahead with financial sector and structural reforms in order to lessen the potential impact of any lingering weakness and bolster growth prospects and economic resilience in the medium term.

The IMF praised Cyprus’ strong recovery in 2021, citing its successful management of the coronavirus outbreak combined with its robust policy support.

Cyprus’ economic recovery entailed a return to pre-pandemic output levels, in conjunction with an improvement in its employment rate.

With exports bouncing back to normal levels, the country’s deficit fell to 7.25 per cent of GDP, although it is still regarded as elevated.

The fiscal deficit fell to approximately 2 per cent of GDP, while the public debt ratio has remained broadly stable at 104 per cent of GDP.

In terms of the banking sector, the IMF said that liquidity continues to be ample while capital ratios are generally stable.

They also noted the progress that Cypriot banks have made in reducing legacy non-performing loans (NPLs), as well as banks’ resilience during the pandemic, particularly in terms of their credit quality during that time.
However, growth in 2022 is set to be impacted by the war in Ukraine, with a somewhat restricted recovery in both exports and private consumption.

In this context, the report projects Cyprus’ GDP growth at approximately 2 per cent.

The report notes that Cyprus’ economy will also be supported by investment spending under the country’s Recovery and Resilience Plan, which, paired with certain structural reforms, bolster the country’s medium-term growth prospects.

“The current account is projected to temporarily worsen with a deterioration in the terms-of-trade and higher imports. Inflation will increase further before declining in the medium term,” the report said.

“The slower recovery will stymie fiscal consolidation this year, but the fiscal deficit is still expected to narrow after the phase-out of Covid-related support, and the public debt ratio is set to remain on a firmly declining path,” it added, explaining that “

Meanwhile, government spokesman Marios Pelekanos on Thursday said “the government will continue until the last day of its term to govern with seriousness and rationality, providing solutions with targeted interventions, in order to successfully deal with this financial crisis”.

“The IMF has made note of Cyprus’ strong recovery last year due to its successful management of the pandemic, while GDP returned to pre-pandemic levels and unemployment having fallen further,” he added.

Pelekanos also said that despite the challenges posed by the increased inflation, as a result of the war in Ukraine, Cyprus’ forecasted growth of 2 per cent maintains the country’s positive trend.

“The IMF warns of the dangers that our country is called to face from the uncertainty and dangers created by a possible escalation and prolonged duration of the war, as well as its related sanctions, combined with high inflation and a possible new uncontrolled outbreaks of the coronavirus,” Pelekanos said.

Pelekanos also recounted the possible risks facing the Cypriot economy, saying that “the government will continue to take the IMF’s reports and recommendations seriously, such as the need to address the challenges of implementing green transition policies, including the planned green tax reform”.

“The government seeks to provide solutions with targeted interventions, so that we can face this crisis with the same success as the previous crises of 2013 and the coronavirus pandemic, without endangering the stable course of the country for political gains,” the government spokesman concluded.