IMF warns Cyprus of weak productivity growth, large private sector debt
Cyprus’s weak productivity growth and high private sector indebtedness pose risks to the recovery of its economy achieved after the 2013 economic meltdown, the International Monetary Fund (IMF) warned in a report on Tuesday.
The IMF directors said in the report following a periodic review of the Cypriot economy that productivity growth has been weak as a result of “institutional bottlenecks and the slow pace of technology adoption,” adding that the high level of private debt could not be reduced.
The IMF has contributed one billion euros (1.1 billion U.S. dollars) on top of a nine-billion euro assistance package offered by the Eurogroup and carries out periodic surveys of the economy to make sure that Cyprus can repay its sovereign debt, currently standing at about 100 billion euros.
Cyprus’s finance minister has said in a recent speech on the budget that the debt will settle at about 91 percent at the end of 2020.
“Looking ahead, given the significant downside risks, the directors encouraged further steadfast efforts to address crisis legacies by continuing to reduce debt vulnerabilities, improve public spending efficiency, and raise economic growth potential and inclusiveness,” the report said.
The IMF emphasized the importance of steady non-performing loan resolution and sustainable debt workouts.
The directors “highlighted the need for ensuring a well-functioning non-performing loans resolution toolkit, including through implementation of a credible foreclosure framework, along with complementary reforms in the judiciary,” the report said.
Cyprus’s non-performing loans standing at about 10 billion euros or 30 percent of the total bank portfolio remain among the highest in Europe.
A large private sector debt overhang persists, given continued difficulties in debt workouts. Lagging productivity growth and political pressure to unwind key reforms also weigh on the outlook, the IMF said.
However, the IMF acknowledged that Cyprus has achieved a high rate of economic growth after 2013, reaching four percent last year.
It said the economic growth momentum was gradually slowing down to 3.2 percent year-on-year in the first semester of 2019, amid a slowing global economy and Brexit-related uncertainty, which have taken a toll on tourism receipts and service exports.
The Statistical Service of the Republic of Cyprus said on Monday that economic growth in the third quarter of this year reached 3.4 percent.
The IMF directors emphasized that structural reforms are key to raising the country’s medium-term growth potential.
Given low labor productivity growth and challenges to investment and economic efficiency, the directors called for policies to support greater market diversification, competition and technology adoption, the report said.