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IMF: Cyprus should continue fiscal support and turn to growth-friendly policies

17/06/2021 14:46

Cypriot authorities should continue fiscal support measures to mitigate economic scarring amid the Covid pandemic but should focus on growth-friendly policies such as digitisation and transition to green economy as recovery takes hold, the International Monetary Fund has said.

In a press release following the conclusion of the article IV consultation, the IMF said that the Cypriot economy following a downturn of 5.1% in 2020, the Cypriot economy is estimated to grow by 3% in 2021 and accelerate by 3.9% the following year but with “significant risks titled to the downside.”

Noting that Cyprus has managed the Covid crisis relatively well the IMF said that despite the economy’s dependence on tourism and the high private and public debt levels, wide-spread defaults and high unemployment have largely been avoided so far, thanks in part to timely policy support and balance sheet buffers accumulated before the COVID-19 crisis.

“The near-term outlook points to a gradual but uneven recovery, with significant risks on the downside, the IMF stressed however, adding that key uncertainties are associated with the pace of the vaccine rollout and potential new waves of infection.

The Fund further noted that a weakening of the underlying fiscal position leading to increased risk premia and a larger than expected drop in foreign direct investment inflows due to the termination of the Cyprus Investment Program could further dampen the recovery.

“Given the high economic uncertainties, a premature withdrawal of fiscal support should be avoided,” the IMF said, adding that “with near-term financing risks limited, policies need to cushion the adverse impact of the crisis and mitigate risks of economic scarring. To this end, the fiscal stance in 2021, which includes continued sizeable policy support, is appropriate”.

However, the IMF underscored that recalibrating fiscal support measures to target viable but vulnerable firms (such as in the tourism sector) would help avoid unnecessary bankruptcies,” adding that efforts to front-load mature public investment projects, while promoting private investment through the utilization of the EU’s RRF are welcome.

Furthermore, the Fund noted that as the recovery takes hold, the focus should shift to maintaining fiscal sustainability and promoting inclusive, growth-enhancing policies.

“Efforts should continue to further modernize tax administration, contain the growth of the public wage bill, and reorient spending in a more growth-friendly direction, including by improving human capital, facilitating digitalization, and transitioning to a green economy,” the Fund said, adding that fiscal risks from the National Health Scheme.

On the banking sector, the IMF said that non-performing loans (NPL) resolution and sustainable debt workouts “remain key priorities” and added that “close monitoring and transparency f or assessing and addressing asset quality should be continued.”

In this context, the IMF called for continued progress with complementary judicial reforms is needed to improve collateral execution and incentives for debt workouts, highlighting that “a reversal of reforms to the foreclosure framework should be avoided, as failure to do so would obstruct ongoing NPL resolution and pose risks for financial stability”.

According to the IMF as the Estia scheme (a scheme to subsidise non-performing home owners with houses up to €350,000) is approaching its conclusion, “banks should consider stepping up foreclosure on NPLs of borrowers who did not apply for the scheme, while the authorities should ensure further burden sharing or consider targeted support measures for applicants deemed unviable.”

It also called for targeted credit support measures such as interest subsidy schemes for SMEs and guaranteed loans are needed to incentivize banks to supply much needed credit, noting that “support measures should seek to ensure viability of firms, fully utilizing banks’ assessments of the creditworthiness of borrowers.”