IMF says turnaround impressive, new boom-bust possible


By Stelios Orphanides

The International Monetary Fund (IMF) said Cyprus’s economy performed “an impressive turnaround” but remains vulnerable to shocks because of high debt levels and to a probable boom bust resulting from the government’s passport schemes.

“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 procyclical spending and improve contract enforcement and increase competition and governance.

The Cypriot economy which expanded last year 2.8 per cent and is forecast to grow this year 3.6 per cent, 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 per cent 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 per cent 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 procyclical,” 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.


About Author

Stelios Orphanides is a journalist at To contact Stelios Orphanides: [email protected]

  • Kevin Ingham

    Cyprus has the potential to be the most prosperous little country in the world.

    However a series of political disasters have reduced it to bankrupt banana republic status now dependent on dodgy external “investment” schemes that primarily benefit those “investors” and an elite providing those services for a premium price (all of which doesn’t really benefit “ordinary” Cypriots one iota)

  • Cydee

    This reads like an informed report and makes some important suggestion – particularly in the area of ‘luxury investor properties’.
    Will anyone note the advice, or will it be shoved in the bottom-drawer…….

  • AnalogMind

    You do the best with the ingredients you have. As all economies, Cyprus has its own limitations.

  • Mist

    Some of the ‘junk’ properties they are building in Paphos are just that. A house costing 500,000k and you look out of the window and see the neighbor 20 mtrs away in an identical house looking back at you. Worth to anyone else apart from a passport seeker 100,000k tops. it would not suprise me if they were also stuffed with 10k per annum site management fee.

  • Neroli

    Does the IMF really know what goes on here? An impressive turnabout!!?? Really!

    • SuzieQ

      I think they were mistakenly given the wrong accounts to peruse….

      • Neroli

        Me thinks you could be right!

  • desres

    Save this article to read again in 5 years time; what will have changed?