“Emergency bank liquidity has been fully repaid and bank deposits are rising,” the IMF staff said in a statement on its website after their visit in Nicosia last month. “These results were underpinned by generally prudent macroeconomic and financial policies and progress on structural reforms that enabled the sovereign to access capital markets on increasingly favourable terms, accompanied by a series of upgrades to the credit rating, which now stands close to investment grade.”

Economic recovery has helped reduce unemployment amid recovering property prices and improve fiscal results, the fund said.

“While much has been achieved, important legacies from the earlier boom-bust cycle have yet to be erased,” the IMF continued, adding that private debt remains at extremely high levels and the non-performing loans ratio of Cypriot banks are among the highest worldwide, even after recent growth improved repayment capacity of many borrowers.

“Public sector debt also remains elevated,” and combined with high delinquent loans, they render the economy vulnerable to adverse shocks.

The Cypriot economy should therefore seek to consolidate the past achievements by reducing in a non-disruptive manner private indebtedness and delinquent loans, and achieving broad-based growth without depending on foreign financing unduly, the IMF said. The government, which is facing re-election early next year, should avoid pro-cyclical spending and improve contract enforcement and increase competition and governance.

The Cypriot economy which expanded last year 2.8% and is forecast to grow this year 3.6%, has benefited from strong external demand for tourism and professional services which also gave a boost to construction, the IMF said.

Growth benefited from increased consumption fuelled by increased spending, as a result of rising disposable income, declining unemployment, incoming tourism and, “albeit undesirable,” debt remaining unserviced.

“The current dynamic growth momentum is expected to persist for the next few years, before gradually easing,” the IMF staff said, adding that they expect growth to average around 3.75% in 2017 and 2018, before slowing down after the completion of investment projects.

The IMF did not rule out “upside surprises to growth” as a result of foreign-financed construction which on the other hand exposes the economy to “a new boom-bust cycle”.

Should the resolution of non-performing loans — around 46% of banks’ portfolio — continue at the current slow pace, the vulnerabilities of the financial sector will remain elevated, the IMF said.

The IMF, which participated in the financing of Cyprus’s adjustment programme agreed after the fiscal and banking crisis of 2013, warned that the island should avoid “a potentially unsustainable increase in construction activity” resulting from the government’s citizenship-by-investment scheme.

The scheme, which allows investors who place €2m in Cyprus, including in the acquisition of a residence worth €500,000, has supported construction and helped the economy immediately after the crisis, the IMF continued.

“However, this support has now achieved its goal, and could turn pro-cyclical,” the IMF said. “Further decoupling the scheme’s eligibility requirements from real estate would help avoid excessive concentration of economic activity, and reduce the risk of over-supply of luxury properties. Procedures for issuing and transferring title deeds for new properties should be streamlined, with timely transfer of titles to buyers”.

“If signs emerge that construction in the luxury market is becoming reliant on domestic credit or activity is spilling over to other segments, tightening bank lending standards and raising macroprudential capital requirements would be appropriate,” it added, and advised the re-introduction of the immovable property tax and increase property transfer fees as they would have a countercyclical impact.

Source: Cyprus Mail