Cyprus Central Bank Statement

Author: IFLR Correspondent | Published: 24 Sep 2019
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Following the recent banking crisis, Cyprus has turned the corner, with sustained growth and improving labour market conditions. Cyprus has been enjoying broad-based growth since 2015, driven by all sectors of production except banking, which is still deleveraging. In future years, significantly positive, albeit decelerating, growth rates are expected. As a result, unemployment is expected to continue to decline further.

Economic growth is expected to be driven by increases in domestic demand, particularly from investment and to a lesser extent, private consumption. The latter is constrained by the envisaged acceleration of loan repayments owing to efforts to reduce the level of non-performing facilities (NPFs) and to the introduction of contribution rates towards the national health system (NHS).

Significant private sector investment projects, including infrastructure, have already begun and are scheduled to be completed in the next few years. Simultaneously, net exports are expected to contribute negatively to real GDP growth, owing to the significant imports in consumption and investment, coupled with a positive but decelerated export performance. The latter is driven by improvements in competitiveness, partly owing to the significant reduction in wages over recent years.

Structural reforms, at different stages of implementation, including labour market policies, and the reform of the judiciary system, also support long-term growth. Tourism is set to further diversify, reflecting various infrastructure projects including a luxury casino resort and a number of marinas. Cyprus has also been diversifying into other types of export services, such as education and health.

Despite the robust economic expansion, only moderate wage increases are foreseen, owing to the scope for further correction in the labour market. As a result, HICP inflation is expected to gradually increase but remain subdued over a three-year horizon, in line with euro area developments.

One of the main challenges facing Cyprus' economy is the continuing adjustment of the banking sector. In 2018 there were significant steps towards consolidation in the banking sector in conjunction with the carving out of a significant portion of NPFs. The elimination of uncertainty stemming from one significant bank reinforced confidence in the system, with growth in domestic private sector deposits reverting to an accelerating trend since Q3 2018, after a temporary deceleration between Q3 2017 and Q2 2018. This trend is expected to continue over the medium term, in line with the robust economic activity.

Overall, economic growth is on a sustainable track and confidence is high. The strengthening of the NPF legislative framework, the sale of bad loans and the exchange of debt for assets, have brought about a sharp decrease in the level of NPFs in the banking system. These, however, continue to weigh on the real economy as the private sector is still burdened with the repayment of these loans. NPF levels are expected to decline, supported by macroeconomic developments and the forthcoming ESTIA project, which aims to tackle distressed loans that are collateralised against primary residences.

Overall, the strong momentum from all parties involved to fully and effectively address all remaining weaknesses in the Cyprus economy must be maintained and strengthened. This should support confidence in the economy and pave the way for sustainable strong growth in the future.