International Monetary Fund (IMF) points out that economic growth in Cyprus is gradually decelerating but remains strong, buoyed by the services and construction sectors, partly financed with foreign direct investment, in its 3rd post-programme monitoring. At the same time it stresses that that the level of Non-performing Loans (NPLs) remains among the highest in the EU and that both public and private debt remain high.
According to the report issued Tuesday, while employment is picking up, wage pressures and inflation remain low. It adds that a large fiscal surplus is helping to lower public debt after a sizable one-off increase related to the sale of Cyprus Cooperative Bank (CCB) last year.
The removal of CCB’s NPLs and securitization of a large NPL portfolio has led to a sharp reduction in NPLs, earning Cyprus a sovereign rating upgrade back to investment grade status. Nevertheless, NPLs are still among the highest in the EU, public and private debt levels remain elevated and efforts to clean up bank balance sheets and build capital buffers are ongoing, IMF says.
It also notes Cyprus’ capacity to repay the Fund under the baseline scenario given the expected decline of gross public debt, a stable debt servicing profile, and continued favorable market conditions.
Regarding the risks to repayment capacity, IMF notes that they are declining and expected to be manageable. They mainly stem from contingent liabilities from the still-weak banking sector and increased fiscal spending pressures which could undermine investor confidence, raising interest costs and dragging down medium-term economic growth.
Spillovers from adverse external shocks could weaken growth momentum, adversely affecting public debt dynamics and increasing financing pressures. Large external liabilities and financing needs exacerbate these risks IMF notes.
To mitigate these risks, IMF suggest that Cyprus should steadfastly implement the recently amended legal tools to lower NPLs and the debt overhang, while encouraging greater bank efficiency to improve profitability and build capital buffers to strengthen the banking system.
It should also safeguard fiscal space and reduce risks to debt sustainability by maintaining strict spending discipline and pursue structural reforms, especially in the judiciary, anti-money laundering (AML) and public administration, to enhance productivity and strengthen investment.
As it points out these policies are critical to reduce vulnerabilities, make the economy more resilient to shocks and raise medium-term growth potential.
Source: Cyprus News Agency