Nicosia: The International Monetary Fund has emphasized the importance of Cyprus maintaining its current foreclosure policies to preserve the stability of its banking sector. The IMF warns against potential legislative changes that could hinder the resolution of non-performing loans (NPLs) and restrict credit access.
According to Cyprus News Agency, the IMF's mission to Cyprus, led by mission chief Alex Pienkowski, highlighted the country's resilient banking system supported by solid capital and liquidity buffers, strong profitability, and improved asset quality due to a decline in NPLs. However, the IMF stressed the ongoing vulnerabilities outside the banking sector and the need for efforts to tackle legacy debt.
The IMF expressed concerns that proposed changes to the foreclosure framework could be detrimental. The current system balances borrower and lender interests, but any changes that delay resolution processes might weaken borrower discipline, heighten credit risk, and ultimately limit financing options for households and businesses.
The IMF noted that despite a recent recovery in credit, the Cypriot banking sector lacks dynamism, with a loan-to-deposit ratio of only 50 percent, compared to over 100 percent in the EU on average. Challenges include difficulties in resolving NPLs outside the banking sector, structural constraints related to market size and concentration, and frictions within the EU banking union.
According to the IMF, addressing these issues through judicial reforms, improved cross-border banking integration, and expedited NPL resolution could enhance credit intermediation and competition.
Strong Growth Performance
The IMF recognized Cyprus's strong economic performance in recent years, with growth rates among the highest in the European Union and a decline in public debt to below 60 percent of GDP. Economic expansion in 2025 was driven by robust private consumption and growth in export-oriented services, particularly in ICT and tourism. Unemployment also fell to its lowest level since 2008.
Growth is projected to remain solid in 2026 at around 2.5 percent, despite challenges from higher oil prices and geopolitical tensions in the Middle East, which could push inflation to approximately 3.5 percent and impact real incomes. Tourism is expected to recover partially during the peak season.
Fiscal performance remains strong, with continued surpluses and prudent management contributing to a further decline in public debt to around 55 percent of GDP. However, the IMF noted a narrowing surplus in 2025 due to increased spending on public investment, wages, and social transfers.
Long-term Fiscal Pressures and Reforms
The IMF recommended gradual fiscal loosening to support growth while maintaining debt sustainability. It emphasized prioritizing high-quality investment in areas like energy, digital infrastructure, climate adaptation, and sustainable transport. The IMF advised against broad-based tax cuts or price-based measures to counter inflation, describing them as costly and poorly targeted.
The IMF also highlighted rising long-term spending pressures linked to population aging, healthcare, defense, and climate needs, calling for proactive fiscal planning. It welcomed recent tax reforms but urged further steps to broaden tax bases, streamline capital income taxation, and advance environmental tax measures.
Energy Sector Challenges
Energy sector reform was identified as a critical priority. Cyprus heavily relies on oil for electricity generation, contributing to high costs and emissions. Advancing projects such as electricity interconnection, LNG infrastructure, and a competitive electricity market would help lower prices, enhance energy security, and support the green transition.
The IMF noted that while near-term risks are tilted to the downside due to potential geopolitical tensions, medium- to long-term prospects remain broadly balanced, with significant upside potential if structural reforms are sustained and the digital economy continues to expand.
Unlocking Long-term Growth Potential
The IMF pointed to Cyprus's expanding role in European policymaking, following a successful EU Presidency. It encouraged further reforms to deepen integration in banking, capital markets, energy interconnectedness, and non-tariff trade barriers.
Sustaining long-term growth will depend more on productivity and investment rather than labor expansion, given high employment levels. The IMF emphasized the importance of strengthening skills and innovation, focusing on digital education, upskilling, and reskilling the workforce to adapt to artificial intelligence.
Encouraging AI adoption among small and medium-sized enterprises while supporting workers through the transition was identified as a key priority. Improving judicial efficiency through faster case resolution, specialization, adequate staffing, and digitalization was also deemed essential to underpin investment, facilitate lending, and support effective debt resolution.
Finance Ministry: IMF Findings on Economy Positive
Cyprus' Ministry of Finance welcomed the IMF's findings on the economy, while sending a clear message regarding the foreclosure framework, stressing that no opportunities should be created for exploitation by strategic defaulters.
The Ministry noted that any revision of the foreclosure framework must protect genuinely vulnerable borrowers without creating loopholes for strategic defaulters that could undermine the economy, compliant borrowers, and taxpayers.
It added that creating exemptions or blanket suspensions could open such loopholes and undermine the overall effectiveness of the debt recovery mechanism.
The Ministry welcomed the IMF's observations and recommendations, noting that it shares the assessment that the Cypriot economy has demonstrated resilience, fiscal performance has been strong, and despite recent disruptions, the outlook remains favorable.
Regarding the energy sector, the Ministry acknowledges increased challenges due to external factors, noting that the government is implementing a targeted strategy aimed at ensuring adequacy and security of supply, as well as reducing electricity costs.
In terms of environmental policy, the National Strategy for 2025-2050 aims to address critical challenges such as rising temperatures, prolonged droughts, and coastal erosion through interventions in sectors including agriculture, energy, water, infrastructure, and health.