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IMF: Cyprus' economy is resilient

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Need for debt reduction and reforms

ΔΝΤ: Ανθεκτικor η οικονομΙα τησ Κyπρου

The International Monetary Fund (IMF) praised Cyprus for its strong economic recovery and fiscal discipline, recommending continued efforts to reduce public debt and address long-term needs, following the latest consultation under Article IV with the country.

The Executive Board endorsed the assessment of the IMF staff that visited Cyprus, underscoring the importance of maintaining large primary surpluses and phasing out subsidies, as well as the need for investment and reforms to sustain growth and address the challenges of aging population and climate change.

The IMF agreed that Cyprus' fiscal policy for 2024 is appropriate, stressing the need to reduce public debt below 60% of GDP.

According to IMF estimates, Cyprus will have stable economic growth in the coming years, with real GDP expected to stabilize between 2.5% and 3.1% annually from 2023 to 2027. In 2024 real GDP is expected to increase slightly compared to 2023 to 2.6%. GDP is expected to grow by 2.8% in 2025, 3% in 2026 and 3.1% in 2027.

The IMF notes that Cyprus has recovered quickly from the pandemic and has proven resilient to multiple adverse shocks. Growth moderated in 2023 to 2.5% but remained strong, above the euro area average, supported by continued recovery in tourism, financial services and expanding Information and Communication Technologies (ICT) activity and the strong investments.

Headline inflation, it said, has fallen below 2%, supported by falling energy prices and tighter monetary policy, but core inflation is more persistent. Inflation is expected to stabilize at around 2.0% by 2027.

It is also reported that strong fiscal performance continues due to strong revenue growth and contributing to a large reduction in public debt. The banking sector has sufficient capital and liquidity reserves and despite tight financial conditions, risks appear to have reduced.

Regarding the future path of the economy, the IMF forecasts stable growth for Cyprus in 2024, boosted by rising real incomes, foreign direct investment and inflows from the EU's Recovery and Resilience Plan (RESP).

< p>In the medium term, growth is expected to reach 3%, driven by strong investment and structural reforms. However, potential short-term risks, including a decline in major tourism markets, regional conflicts and delays in the implementation of the SAA, could pose challenges. It also states that medium-term risks from climate change are outweighed by upside potential from attracting more foreign investment and talent.

The IMF points to the need to reduce public debt and maintain large primary surpluses until debt levels fall comfortably below 60% of GDP. Recognizing the significant long-term spending needs arising from population aging and climate challenges, the Board emphasizes the importance of maintaining fiscal space to address these concerns.

Proposed measures include phasing out electricity subsidies and VAT exemptions, avoiding further indexation of wages, as well as prioritizing investment, implementing health sector reforms and strengthening oversight of parastatals.< /p>

The resilience of the Cyprus banking sector is also noted, with high capitalization and liquidity. While financial sector risks are seen as having eased, the IMF Executive Board calls for vigilance in monitoring loan renegotiations and systemic risks from the real estate market. They are calling on the authorities to allow the newly amended disposal framework to work alongside the Rent-to-Instalment scheme to speed up the resolution of the NPL problem.

In addition, the IMF underlines the necessity of structural reforms to diversify the development model of Cyprus. It calls for further justice and labor market reforms to streamline the business environment and address skills mismatches. In addition, it highlights the importance of strong AML/CFT frameworks in mitigating Cyprus' financial, reputational and regulatory risks. He also emphasizes that policies to promote domestic savings and business opportunities would also help balance the current account balance while supporting long-term growth.

Regarding Cyprus' climate goals, the IMF emphasizes the need for dynamic implementation of energy infrastructure projects and additional measures to achieve the goals. It also supports the planned green tax reform, but recommends the implementation of targeted sectoral policies to reduce greenhouse gas emissions faster.

Careful assessment of climate risks and the development of an adaptation strategy were also deemed necessary to mitigate long-term costs. of climate change.

Source: www.kathimerini.com.cy

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