Cyprus’ economy has been resilient to the fallout from Russia’s invasion of Ukraine, according to the conclusions released on Monday of the Executive Board of the International Monetary Fund (IMF).
The IMF also noted that output grew by 5.6 percent in 2022, as pandemic-affected pent-up demand boosted consumption, tourist arrivals rebounded, and the ICT sector expanded.
Employment recovered and unemployment dropped to a post-Cyprus-financial-crisis low, it added.
However, high energy prices contributed to inflation and a larger current account deficit. The fiscal surplus reached 2.3 percent of GDP and public debt declined strongly.
Liquidity and capital adequacy ratios in the banking sector have remained high, and profitability improved. Private sector deleveraging continues to be hindered by the slow resolution of legacy non-performing loans (NPLs).
Moreover, growth is expected to slow to around 2½ percent in 2023, reflecting an erosion in household incomes, tighter financial conditions, and delayed impacts from sanctions against Russia.
But growth is expected to average around 3 percent in the medium-term, supported by public and private investments, structural reforms, and further ICT expansion.
High inflation will recede only gradually amid elevated inflation expectations and wage pressures. Tight fiscal policy this year will help contain price pressures from aggregate demand and the public debt ratio is on a firmly declining path.
The external current account will improve moderately but remain in sizable deficit.
The outlook is uncertain with risks from an escalation of the war and a possible recession in Europe. Should inflation expectations rise further and the pass-through to wages intensify, inflation could be stickier than expected.
Adverse macroeconomic developments could amplify financial risks given high private debt.