IMF official urges Cyprus to seize economic momentum for structural reforms

Cypriot authorities must capitalise on the economy’s robust performance and promote structural changes that will further unlock the country’s potential growth and development outlook, an official of the International Monetary Fund (IMF) said on Thursday.

Speaking to the Cyprus News Agency (CNA), on the occasion of the completion of discussions with the Cypriot authorities under Chapter 4, Alex Pienkowski, head of the IMF mission for Cyprus, praised the resilience shown by the Cypriot economy, weathering successive external shocks, adding that it is time to promote reforms in the fields of justice, education, and the green transition.

“I believe the economy has shown impressive resilience,” Pienkowski said.

In addition to strong growth, Pienkowski referred to the decline in inflation towards the target of 2 per cent, as well as the rapid reduction of debt, which, he said, is estimated to achieve the “significant milestone” of falling below the 60 per cent threshold set by the Maastricht Treaty.

He also referred to Cyprus achieving a primary surplus, which is the highest in the EU. He also mentioned the banking sector performing well, as well as the robust labour market.

“This is essentially a significant proof of the strong policy decisions in recent years in Cyprus,” he explained.

Asked how Cypriot authorities could further boost the resilience and diversification of the economy, enhancing potential growth, Pienkowski referred to investment in education, so that Cypriots can benefit from the growing Information and Communication Technology (ICT) sector, combined with reforms in the justice sector.

“You know, when the economy is so healthy, when there are high reserves, this is the time to push for some deep structural reforms,” he stated.

“It is much more difficult to make structural changes while the economy is not doing so well or is in recession,” he added, noting that “it is time to be ambitious in these kinds of deep structural changes in the economy”.

Clarifying his point about the economy further, Pienkowski said that the “real anchors” of resilience are fiscal policy and the financial sector.

“That is, to ensure that there is no doubt in the minds of the markets that you are committed to debt reduction,” he stated.

“By maintaining strong primary surpluses, there is room if there is a new crisis like a pandemic or another shock, to relax policy and respond,” he added.

Furthermore, he explained that the second anchor is the financial sector, noting that increasing countercyclical capital buffers, strong liquidity, and significant capital buffers are “very important.”

Regarding the diversification of the economy, Pienkowski mentioned, among other things, the significant turn towards the ICT sector and the transformation of the tourism sector to offset the loss of Russian tourists due to the war in Ukraine.

Clarifying that the IMF does not recommend policies in specific sectors but horizontal ones, Pienkowski said that Cypriot authorities should remain focused on promoting changes in the justice sector, increasing the number of judges, speeding up reforms related to civil regulations, and implementing electronic justice.

“This is something we want to emphasise. It is very important. It is important for new lending, but also for a stable business environment,” he explained.

Referring to the education sector, Pienkowski emphasised that authorities must ensure that more Cypriots could benefit from the dynamic ICT sector, adding that focus should be given to science, technology, engineering, and mathematics studies (STEM).

“A resilient and well-educated workforce is what drives differentiation and entrepreneurship from within Cyprus,” he said.

Regarding the green transition, Pienkowski referred to the need for the completion of projects such as the liquefied natural gas terminal and the Cyprus-Greece-Israel electricity interconnection, indicating that such projects, in combination with renewable energy sources, can reduce dependence on oil, while promoting resilience and sustainability.

“It is important for Cyprus not to fall behind in the green transition,” he stated.

Moreover, Pienkowski expressed the IMF’s agreement with the goal of Cypriot authorities regarding the establishment of a unified supervisory authority, which will oversee professional bodies, such as lawyers and accountants, in terms of their compliance with anti-money laundering rules.

“I think it is important to have someone who has broad oversight of how the Cyprus Bar Association and the Institute of Certified Public Accountants (Selk) operate,” he said.

“I believe this is the model in many countries,” he concluded.