Ageing population means more spending on healthcare, pensions, IMF notes in Cyprus report
Source: in-cyprus.com
The International Monetary Fund (IMF) has lauded Cyprus’s strong performance in the fiscal and financial sectors but cautioned the government against relaxing its fiscal policy in the medium term, citing potential risks.
An IMF mission visited Cyprus from March 17–28 to discuss recent economic developments, prospects, risks, and policy priorities. On Friday, Alex Pienkowski, head of the IMF mission, presented the report’s findings, commending fiscal management while also outlining several policy recommendations.
“Over the past five years, the Cypriot economy has recorded an impressive growth rate. This is a particularly significant achievement given the shocks that have affected the economy. We had the pandemic, the impact of sanctions on Russia, and the increase in the cost of living,” Pienkowski said.
Despite Cyprus experiencing one of the highest growth rates in the euro zone, driven by foreign investment, tourism, and the technology sector, the IMF noted signs of moderate economic overheating. Inflation, while decreasing, remains above 2%, posing risks to economic stability, the report said.
The IMF report, published on its website, highlights the need for continued fiscal prudence, particularly regarding reducing public debt and the state payroll, leaving limited room for spending increases.
“Fiscal policy should prioritise debt reduction. Given overheating risks, new discretionary measures that loosen fiscal policy should be avoided,” the IMF mission stated. It recommended that fiscal policy should aim to reduce debt well below 60% of GDP and noted that Cyprus’s commitment to fiscal surpluses until 2028 through its Medium-Term Budgetary Framework aligns with this goal.
The IMF also warned that increasing fiscal pressures necessitate careful safeguarding of fiscal space. “Population ageing will require increased spending on pensions and healthcare beyond other potential long-term needs. As a result, the scope for loosening in the medium term is limited,” the report cautioned.
Regarding the state payroll, the IMF report advised against further increases in cost-of-living allowances (ATA) or new wage hikes to contain the already significant public-private sector wage gap and avoid further pressure on real wage growth.
The IMF also stressed the need to expedite key energy projects and reforms to lower energy prices, enhance energy security, and meet climate commitments. It highlighted the completion of the Vasilikos LNG terminal and the Great Sea Interconnector as crucial steps towards these objectives, adding that opening the electricity market to greater competition would help reduce costs and emissions through market mechanisms.
Asked about the Great Sea Interconnector project’s viability, Pienkowski underscored the need for a thorough cost-benefit analysis given its high cost. However, he noted that Cyprus should aim to become a renewable energy hub, and decisions should be based on long-term strategic planning rather than short-term considerations.
On the financial sector, the IMF pointed out that banks’ profitability is at record levels for the second consecutive year, while capitalisation levels have increased and are among the highest in Europe.
“Despite high interest rates, asset quality improved further as non-performing loans declined, supported by strong economic growth. However, continued vigilance is needed, including close monitoring of the real estate sector,” the report stated.
Finally, the IMF emphasised the need for comprehensive reforms in the administration of justice and the strengthening of labour market productivity to ensure long-term economic growth. It particularly highlighted the justice sector, where interventions are needed to strengthen the institutional framework governing insolvency procedures and creditor rights, as well as to improve the efficiency of the courts.
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