GDP projected to grow by 4 – 4.25% during 2018 – 2019 IMF says

The IMF, in its Staff Concluding Statement after the second post-program monitoring mission, has referred to the rapid pace of Cyprus’ economic expansion, noting that GDP is projected to grow by 4 � 4.25% during 2018 � 2019, but has also pointed out the need for improving payment discipline and reducing NPLs, as well as guarding against procyclical policies and restarting targeted structural reforms.

Since our last visit, Cyprus’s economic growth has continued to accelerate, supported by construction, tourism and professional services, reads the concluding statement of the IMF’s Staff, which completed its second post � program monitoring mission, in the island, on Friday.

Unemployment has moderated further, it says, adding that the fiscal position has improved markedly and public debt has declined below 100 percent of GDP.

Taking advantage of the declining cost of market-based financing, Cyprus made an early repurchase to the IMF in July 2017, it recalls.

However, it points out, despite a sizable and sustained improvement in macroeconomic conditions, private sector indebtedness remains extremely high and continued weak payment discipline has kept nonperforming loans (NPLs) at very high levels.

The need for additional provisions and limited opportunities for new lending continue to weigh on banks’ profitability, it says.

The statement continues noting that the current rapid pace of economic expansion is forecast to continue. GDP is projected to grow by 4�4� percent during 2018�19, underpinned by a pipeline of mainly foreign-funded, large construction projects, notwithstanding somewhat slower growth in private consumption due to better compliance by households with regard to their contractual debt obligations.

Over the medium term, growth is projected to ease to 2� percent as construction projects are gradually completed, it reads.

The high import content of domestic demand, especially for construction materials, is projected to keep the current account deficit around 6�7 percent of GDP, it adds.

It also notes that tax revenue will benefit from the escalation in activity.

Under this baseline scenario, capacity to repay the Fund is seen as adequate, with repayments funded by large fiscal primary surpluses and by newly issued market-based debt securities on relatively favorable terms, it reads.

However, it warns, repayment capacity could be weakened if significant contingent liabilities from banks’ distressed assets materialize, an excess supply of luxury properties were to generate a new boom-bust cycle, or fiscal discipline were eroded by yielding to spending pressures.

Strengthening payment discipline, avoiding pro-cyclical policies and adopting macro-critical structural reforms would help preserve financial stability, protect the downward trajectory of public debt, and support balanced and durable growth, it stresses.

A decisive and durable reduction in NPLs requires strengthening Cyprus’s payment culture, it says.

According to the statement amending the legal frameworks for insolvency and foreclosure can support this goal by incentivizing borrowers to engage with banks to reach mutually-agreeable restructuring solutions based on commercial terms.

Limited, well-targeted fiscal support to lower-income distressed borrowers can strengthen their financial viability and promote payment compliance throughout the duration of the loan, it says.

Reliance on third-party loan servicing companies should continue and be made fully operational, and any NPLs transferred to nonbank entities should not be merely warehoused, it advises.

It also points out that the recently-announced search for strategic investors in the Cyprus Cooperative Bank is a welcome development and should proceed in a smooth manner.

Recent fiscal performance has benefited from the cyclical upswing and incentives supporting the construction sector, it says.

It also proposes that to avoid spending cyclical or transitory revenue and to create space to absorb possible contingent fiscal shocks, annual ceilings on nominal spending should increase in line with medium-term output growth, with downward adjustment to compensate for any future cuts in tax rates or narrowing of tax bases.

Incentives supporting the construction sector should be withdrawn, it says.

A durable mechanism for keeping the public-sector wage bill in check should be instituted, it adds.

A system for close monitoring of the fiscal costs of the new National Health Service should be adopted and well-designed spending safeguards should be introduced, it notes.

Referring to the reforms, it notes that the effectiveness of commercial claims enforcement and the efficiency of the courts should be strengthened to improve the payment culture and investment environment.

According to the statement plans for expedited investment procedures while also phasing out incentives for construction could attract capital into innovative sectors and help diversify the sources of GDP growth.

Corporate governance and operational efficiency should be strengthened in key semi-governmental and private entities to modernize the economy and make it more flexible, it concludes.

Source: Cyprus News Agency