Cyprus Warned of Sizeable Downside Risks

The International Monetary Fund urged Cyprus to get rid of “important legacies from its earlier boom bust cycle”, despite an “impressive turnaround” of the economy following the 2013 bailout and the banking crisis.

“The Cypriot economy has achieved an impressive turnaround since the 2012-13 banking crisis...and GDP growth has accelerated for three consecutive years,” the IMF said in a report following a survey by its mission in Cyprus, Xinhua reported.

It also said that the fiscal balance has swung from a large deficit to a small surplus, emergency bank liquidity has been fully repaid, bank deposits are rising, and property prices have begun to edge up following a large drop in value.

The IMF praised the Cypriot government for its “prudent macroeconomic and financial policies and progress on structural reforms that enabled the sovereign to access capital markets on increasingly favorable terms.”

The current Cypriot government, ending its five-year term next February, led the economy out of its tatters after it was salvaged by a €10 billion ($11.73 billion) Eurogroup and IMF economic assistance program when it assumed office in March, 2013.

But despite its praise for a robust GDP growth, the IMF said “sizeable downside risks” still exist, citing an extremely high private sector debt and a high proportion of nonperforming loans which it said were among the highest in the world.

The IMF estimated that “the current dynamic growth momentum is expected to persist for the next few years, before gradually easing” thanks to mainly foreign-financed construction projects and growing private consumption.

The IMF noted that various investment incentives, including the citizenship-by-investment scheme, which provided welcome support to construction in the aftermath of the crisis, and construction of luxury residential and tourist properties have achieved their goal and could turn “procyclical”—meaning they could lead to an over-expansion of the property sector.