Cyprus’ economic growth is gradually decelerating but remains strong, the International Monetary Fund (IMF) said in a news release on Tuesday, while noting the risks the economy faces by high levels of public and private debt, as well as non-performing loans.
Real GDP grew by 3.9 percent in 2018 as the economy of the country is buoyed by the services and construction sectors, partly financed with foreign direct investment, the IMF said, while employment is picking up, wage pressures and inflation remain low.
“Over the medium term, growth is expected to ease to potential, as the investment boom dissipates and households step up debt servicing,” it said.
The organisation gave credit to Cyprus for managing to reduce the number of non-performing loans (NPLs) in its banks, but noted that the number of NPLs in Cypriot banks is still high.
“The removal of CCB’s non-performing loans (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,” it said.
“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,” it added.
Nevertheless, the percentage of NPLs in Cyprus’ banks 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, the IMF said.
The Fund urged authorities to proceed with reforms such as the SOE (state-owned enterprises) law, privatisations, broader civil service reforms and the process to issue title deeds, and introduction of the e-justice system.
“Further efforts to mitigate AML/CFT risks and strengthen governance of commercial SOEs and the Central Bank of Cyprus will help reduce risks to growth and fiscal risks,” it said.
It also warned that the Cypriot economy could be negatively affected in the future by a “disorderly hard Brexit, tightening of foreign financing for investment, or realization of AML/CFT risks.”
Find the full IMF report on Cyprus here.