An International Monetary Fund (IMF) mission met virtually with the Cypriot authorities on March 11–28, 2022 to discuss recent economic developments and policy priorities.
Recently in an interview with "K", Mr. Wojciech Maliszewski, IMF mission chief for Cyprus commented on the effects of the war in Ukraine on Cyprus, the impact of the economic shock and the structural reforms that are needed.
An economy that is overly dependent on one type of activity or a specific market will be more susceptible to shocks—in other words, it faces higher risks in growth—than a more diversified one.
How does IMF evaluate the effects of the war in Ukraine on Cyprus in relation to the European average?
We expect the overall impact to be significant, especially on tourism—which in part depends on arrivals from Russia—and on professional services, such as lawyers and accountants—which rely on Russian clients. These are important sectors in Cyprus’s economy, and the impact on activity in these sectors will have spillovers to others.
How do you evaluate the government's measures to support people and the economy during the pandemic and if there is enough "firepower" to support them again during Ukraine’s war?
The handling of the pandemic by thy Cyprus government has been remarkedly successful: vaccination rates are high, testing readily available, and pandemic restrictions are being adjusted to developments on the ground. Similarly, economic policy responses have been successful in preventing a collapse in output and a more significant increase in unemployment. Given the structure of Cyprus's economy—highly reliant on tourism and other contact-intensive services—these are remarkable achievements.
Regarding the "firepower", Cyprus still has some left. The public debt ratio has increased during the pandemic but we project that it will be on a declining path, even after taking into account the slowdown in growth from the war. But we do not see a need to use this firepower yet, except for normal support during an economic slowdown, such as higher spending on unemployment benefits when unemployment is on the rise. If Cyprus’s economic situation deteriorates, this firepower may need to be implemented, but it needs to be used wisely. Some parts of the economy may be hit hard by the war-related slowdown, but other parts may do fine. So it is important to make sure that the support is targeted to groups that are hit the most, while at the same time making sure that such support does not prevent workers from moving from activities that are shrinking to those that are expanding.
Do you think that the way the RCB Bank situation was handled was done in the best possible way?
Winding down operations of RCB Bank has been very smooth.
Do you believe that Cyprus has to reduce all business links with Russia to close to zero?
An economy that is overly dependent on one type of activity or a specific market will be more susceptible to shocks—in other words, it faces higher risks in growth—than a more diversified one. So it is important for Cyprus to continue structural reforms that would facilitate a transition to a growth model that is more diversified and less reliant on particular markets. The government has embarked on an ambitious reforms program in Cyprus’s Recovery and Resilience Plan and we would like to see even faster progress towards the goals set in this program.
I want you to comment about reducing the NPLs in Cyprus banking system. What more needs to be done to be more effective in reducing NPLs?
We are very impressed by the recent progress in reducing NPLs in the banking sector, although this has been achieved by offloading them to credit acquiring companies. The challenge now is to make sure that the NPLs held by these companies are quickly resolved. As we emphasized in the past, this requires a framework that produces the right incentives for banks or credit acquiring companies and debtors to engage in resolving problem loans. Such cooperation is missing if the ‘rules of the game’ in this process are not clear. A foreclosure framework sets such rules and that’s why it needs to be consistently applied to help solve the NPL problem in Cyprus. Further improvements to the working environment for credit acquiring and credit servicing companies, including their access to the land registry database, are also important for effective NPL workouts.
What are the biggest challenges that undermine development prospects?
This is related to the topic that we already discussed, namely the need to diversify the economy toward high-value-added activities. This requires a faster implementation of structural reforms. There has been progress in some areas, for instance, the recently passed anti-corruption laws will help address persistent weaknesses in governance. But faster progress is needed in several other areas such as making the judicial system work better, improving education and workers' skills, and building better digital infrastructure. Many of these policies are in Cyprus's Recovery and Resilience Plan, but it would help if they could be implemented even faster.
What are the biggest challenges that undermine our compliance with the goals of climate change?
Cyprus has ambitious climate change goals. Achieving these goals may be challenging because it requires substantial investments in green infrastructure, and funding still needs to be found. But moving toward these goals would help improve Cyprus’s energy security and resilience—an important consideration at the current junction.