The IMF in its 2018 Cyprus staff concluding statement notes that the growth momentum of the Cypriot economy has been strong bringing real GDP back to its pre-crisis level. ''The economy grew by over 4 percent in 2017 and the first half of 2018, supported by tourism, professional services, and construction’’.
However the IMF cautions that the Cypriot economy is weighed down by high private and public debt. NPL ratios, while declining are among the highest in Europe, the statement stresses.
The report explains that the recent resolution of the Cyprus Cooperative Bank together with the passage of a legislative package to strengthen the insolvency and foreclosure frameworks, have mitigated near-term risks to financial stability.
''While the resolution of the CCB has come at a high cost to the public purse, it marks a decisive step in dealing with the crisis legacy of a large NPL overhang and achieving consolidation in the banking system, which in turn has boosted confidence and earned Cyprus a sovereign ratings upgrade to investment grade status’’.
In terms of financial policy, the IMF argues for the need to strengthen the supervisory and governance framework for credit acquiring companies which includes the newly established Cyprus Asset Management Company. Moreover the proposed subsidy scheme Estia should be better targeted to those most in need of assistance in order to encourage distressed borrowers to begin servicing their loans.
Cyprus is projected to maintain large primary fiscal surpluses that should reduce public debt going forward, however ''strict spending discipline should be maintained as debt dynamics could be adversely affected if some of the large banking sector contingent liabilities were to materialize and growth were to slow more than expected’’.
The IMF paper warns that in order to mitigate these risks, ''transitory revenues arising from cyclical gains and one-off measures should not be relied upon to finance permanent spending initiatives’’.