Panayiotis Rougalas
The International Monetary Fund (IMF) has issued clear warnings and observations about the Cypriot economy following the conclusion of its mission to the country, which took place from the last 10 days of April through early May.
In its statements, the IMF focused on key issues including inflation management, energy prices linked to the war, proposed changes to the foreclosure framework, and reforms in the energy sector, which it described as necessary. The Fund also stressed the need for targeted policies that support long-term growth without creating market distortions.
The IMF said any new spending measures or tax cuts should be aimed at strengthening long-term growth. Priority, it said, should be given to quality public investments in energy, climate adaptation, digital infrastructure, and sustainable transport, backed by strong investment management.
At the same time, measures such as zero or reduced VAT rates, cuts to excise taxes, and other price interventions aimed at easing energy inflation were described as costly, untargeted, and distortionary and should therefore be withdrawn. Instead, the IMF recommends targeted and temporary support measures, combined with policies that improve energy efficiency and infrastructure, as a more effective way to help vulnerable households.
Foreclosures and non-performing loans
The IMF placed particular emphasis on the foreclosure framework, warning that changes that slow down the resolution process should be avoided.
It said the current framework, after years of compromises, broadly strikes the right balance between borrowers and creditors and helps facilitate the management of private debt.
However, the IMF warned that recent legislative proposals could significantly delay procedures and increase administrative costs, potentially weakening incentives for borrowers, increasing credit risk, and limiting access to financing.
As a result, future borrowing, including loans for first homes or small businesses, could become more difficult.
Energy and reforms
The IMF stressed that advancing reforms in the energy sector is crucial to reducing costs, strengthening energy security, and supporting the green transition.
Electricity generation in Cyprus remains heavily dependent on oil, while the island’s non-interconnected system continues to drive up both prices and emissions.
Progress on electricity interconnection projects, liquefied natural gas (LNG) infrastructure, and the development of a competitive electricity market is expected to help lower costs, diversify energy sources, and allow for greater integration of renewable energy.
Public spending and tax policy
The IMF also reiterated that both new spending and tax relief measures should be clearly focused on supporting long-term growth.
It again highlighted quality public investments in areas such as energy, climate adaptation, digital infrastructure, and sustainable transport as key priorities, alongside strong management of investment projects.
The Fund repeated its position that measures such as reduced VAT rates, cuts to excise duties and other price interventions to combat energy inflation are expensive, poorly targeted, and distort the market and should therefore be phased out.
Instead, it said a more effective approach would be targeted and temporary support measures, combined with policies that improve energy efficiency and infrastructure to protect vulnerable households.
Finance Ministry agrees
The Finance Ministry welcomed the IMF’s observations and recommendations.
In particular, it agreed with the fund's assessment that the Cypriot economy has shown resilience, fiscal performance has been exceptionally strong, and, despite recent disruptions, the outlook remains positive.
In a written statement, the ministry said fiscal policy should become more efficient in terms of spending, avoid distortions, and focus on investments that strengthen growth, especially in light of the reference path agreed under the EU’s new economic governance framework regarding increases in net primary expenditure.
Regarding the foreclosure framework, the ministry said any revision must protect genuinely vulnerable borrowers without creating loopholes that could be exploited by strategic defaulters at the expense of the economy, consistent borrowers, and taxpayers.
It warned that exemptions or blanket freezes could create such loopholes and ultimately undermine the effectiveness of the debt recovery system.
On energy and climate issues, the ministry said the challenges facing the country in the energy sector, including those caused by external factors, are clear to all.
“The government is implementing a specific energy strategy to address these challenges and has launched projects and undertaken targeted actions that will ensure adequacy, security of supply, and lower electricity costs,” the ministry said.
