The International Monetary Fund has pointed out the need for Cyprus to preserve the resilience of its banking sector and avoid policy reversals that could undermine progress in reducing non-performing loans (NPLs), warning in particular against changes to the foreclosure framework that could slow debt resolution and tighten access to credit.
In a statement concluding an IMF mission to Cyprus from 22 April to 4 May, mission chief Alex Pienkowski said the banking system remains strong, supported by robust capital and liquidity buffers, high profitability, and improved asset quality following a steady decline in NPLs. However, he stressed that vulnerabilities persist, especially outside the banking sector, and called for intensified efforts to address legacy debt.
The IMF cautioned that proposed legislative changes to the foreclosure framework could prove counterproductive. While the current system broadly balances the interests of borrowers and lenders, any loosening that slows resolution processes would risk weakening borrower discipline, increasing credit risk, and ultimately restricting financing for households and businesses, including first-time homebuyers and small enterprises.
“Despite the recent recovery of credit, the banking sector shows limited dynamism. The sector’s loan-to-deposit ratio is only 50 percent, compared to over 100 percent in the EU on average”, it is noted.
Remaining frictions in resolving NPLs outside the banking sector, it is added, structural constraints related to market size and concentration, scarring from the 2014 crisis, and frictions within the EU banking union all contribute to this lack of dynamism.
According to IMF, addressing these challenges through judicial reforms, improved cross-border banking integration, and faster NPL resolution would help strengthen credit intermediation and competition.
Strong growth performance
More broadly, the IMF noted that Cyprus has demonstrated strong economic performance in recent years, with growth among the highest in the European Union and public debt declining to below 60 percent of GDP. Economic expansion in 2025 was driven by robust private consumption and continued growth in export-oriented services, particularly in ICT and tourism, while unemployment fell to its lowest level since 2008.
Growth is expected to remain solid in 2026 at around 2.5 percent, despite headwinds from higher oil prices and geopolitical tensions in the Middle East, which are projected to push inflation to approximately 3.5 percent and weigh on real incomes. Tourism, although recently affected, is expected to partially recover during the peak season.
Fiscal performance remains strong, with continued surpluses and prudent management contributing to a further decline in public debt to around 55 percent of GDP. However, the IMF pointed to a narrowing surplus in 2025 due to increased spending on public investment, wages, and social transfers.
Long-term fiscal pressures and reforms
The Fund recommended a gradual fiscal loosening to support growth while maintaining debt sustainability, emphasizing that any easing should prioritize high-quality investment in areas such as energy, digital infrastructure, climate adaptation, and sustainable transport. At the same time, it advised against broad-based tax cuts or price-based measures to counter inflation, describing them as costly, poorly targeted, and distortionary.
The IMF also highlighted rising long-term spending pressures linked to population ageing, healthcare, defense, and climate needs, calling for proactive fiscal planning. It also welcomed recent tax reforms but urged further steps to broaden tax bases, streamline capital income taxation, and advance environmental tax measures.
Energy sector challenges
Energy sector reform was identified as another critical priority. Cyprus’ heavy reliance on oil for electricity generation and lack of interconnection contribute to high costs and emissions. Advancing projects such as electricity interconnection, LNG infrastructure, and a competitive electricity market would help lower prices, enhance energy security, and support the green transition.
While near-term risks are tilted to the downside—particularly from a potential escalation of geopolitical tensions—the IMF said medium- to long-term prospects remain broadly balanced, with significant upside potential if structural reforms are sustained and the digital economy continues to expand.
Unlocking long-term growth potential
The IMF pointed to Cyprus’ expanding role on the European stage.
“A successful EU Presidency has pushed Cyprus into a leading role in European policymaking. The authorities should capitalize on this by pushing further reforms to deepen integration, including on banking and capital markets, energy interconnectedness, and non-tariff trade barriers”, it is noted.
Sustaining long-term growth will increasingly depend on productivity and investment rather than labour expansion, given already high employment levels. In this context, the Fund highlighted the importance of strengthening skills and innovation, with a particular focus on digital education, as well as upskilling and reskilling the existing workforce to adapt to the impact of artificial intelligence.
Encouraging the adoption of AI—especially among small and medium-sized enterprises—while supporting workers through the transition was identified as a key priority. At the same time, improving judicial efficiency through faster case resolution, greater specialization, adequate staffing, and enhanced digitalisation was described as essential to underpin investment, facilitate lending, and support effective debt resolution.
Finance Ministry: IMF findings on economy are positive
Cyprus' Ministry of Finance welcomes the findings of IMF on the Cypriot economy, while at the same time sending a clear message regarding the foreclosure framework, stressing that no room should be created for abuse by strategic defaulters.
The Ministry noted that “any revision of the foreclosure framework must protect genuinely vulnerable borrowers, without creating opportunities for exploitation by strategic defaulters at the expense of the economy, compliant borrowers and taxpayers.”
It added that “the creation of exemptions or blanket suspensions could open such ‘loopholes’ and undermine the overall effectiveness of the debt recovery mechanism.”
The Ministry welcomed the IMF’s observations and recommendations, noting that it shares the assessment that the Cypriot economy has demonstrated resilience, fiscal performance has been strong, and, despite recent disruptions, the outlook remains favourable.
As for the energy sector, the Ministry acknowledges increased challenges due to external factors, noting that the government is implementing a targeted strategy aimed at ensuring adequacy and security of supply, as well as reducing electricity costs.
With regard to environmental policy, it is noted that the National Strategy for the period 2025–2050 aims to address critical challenges such as rising temperatures, prolonged droughts and coastal erosion, through interventions in sectors including agriculture, energy, water, infrastructure and health.
(Source: CNA)
