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articles | 26 September 2019

Economy faces external headwinds as growth rate slows, IMF warns

The International Monetary Fund (IMF) foresees a cocktail of challenges and risks for the Cyprus economy, as external headwinds are decelerating GDP growth expected to be 3% this year and in 2020.

In a mission statement issued after talks with Cypriot authorities, the IMF said: “Cyprus has made significant progress in recovering from the financial crisis.”

“Real GDP has now surpassed its pre-crisis peak and the unemployment rate has declined rapidly coming close to the pre-crisis level.”

It said: “Large disposals of non-performing loans (NPL) have strengthened bank stability, and sizable fiscal surpluses have lowered risk premia and reduced financing risks.”

The IMF warned that challenges remain in sustaining the relatively robust growth momentum “given still-high NPLs, recent efforts to undo key reform initiatives are undermining the hard-won gains in restoring macro-financial stability.”

It said increasing external headwinds are slowing near-term growth, while a sizable debt overhang and weak productivity growth also hold back medium-term growth potential.

“Over the medium term, growth is expected to slow to its long-run potential growth rate of around 2½ percent, as the transitory effect of the investment boom gradually dissipates.”

The IMF urged Cyprus to focus on reforms to secure financial stability and raise the growth potential of the economy.

By “strengthening legal tools to lower NPLs and private debt and to build bank capital buffers; to reduce public debt by ensuring strict spending discipline and improving the efficiency of public spending; and to increase productivity through institutional reforms and the promotion of technology adoption”.

The IMF pointed to the need to continue strengthening the supervisory and regulatory framework of credit acquiring companies and efforts should be made to address the moral hazard risks inherent in the Estia subsidy scheme for distressed homeowners.

It said bank profitability and capitalization are crucial and that macro-financial risks from the property market appear limited for now but warrant close monitoring.

Fiscal performance is viewed as strong, but risks remain, and “spending should be firmly controlled to reduce risks to debt sustainability”.

Productivity-enhancing structural reforms are seen as key to bolstering medium-term growth potential and that policies to support greater market diversification, competition, and technology adoption are needed to enhance competitiveness.

“While Cyprus has maintained its cost competitiveness, it suffers from low labour productivity growth and faces challenges to investment and economic efficiency.

These include difficulties with access to finance, costly and lengthy judicial processes, inefficiency of government administration, low investment in new innovations, and skills mismatches.”

Source: Financial Mirror

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