Following its visit to Cyprus on October 29, the IMF has published its 53-page staff report, as well as an additional report on special themes, whcih includes a statistical annex. The exective summary of the IMF Staff Report is as follows.
IMF EXECUTIVE SUMMARY
Joining the European Union in May 2004 was a signal event for the Cypriot economy, with adaptation to EU institutions and regulations bringing forward many important reforms. Though
these changes have posed significant challenges for the authorities and the private sector, they have also set the stage for enhanced economic growth.
After a period of relatively weak growth, the economy began to rebound in 2004, with real GDP growth now expected at 3.5 percent for 2004 and 3.8 percent for this year. Unemployment
remains low and—despite some recent pressures stemming from oil prices—inflation is subdued.
Fiscal consolidation is the key macroeconomic challenge currently facing Cyprus, given slippages in recent years and the authorities’ ERM2 ambitions. Demographic pressures over the
medium term also underscore the importance of bringing down the debt ratio. If assiduously implemented, the consolidation strategy laid out in the Convergence Program, which contains several politically difficult but essential measures, would put Cyprus back on the road to fiscal
sustainability. Over the medium term, policy credibility would be buttressed by establishing an explicit multi-year fiscal framework. The authorities’ interest in a fiscal ROSC is welcome.
Cyprus appears well-placed to join ERM2 in 2005 as intended, provided that the fiscal adjustment effort is resolutely maintained and structural reforms continue to advance. The longstanding use of an ERM2-type exchange rate regime provides continuity, and the current parity seems broadly in line with fundamentals, given continued full employment and the rebound in tourism.
More remains to be done on the structural reform agenda, despite the fact that Cyprus has made significant strides to meet the requirements of the EU. In particular, there is a need to foster
competition and promote efficiency, including in the public enterprise sector. In labor markets, the centralized wage bargaining system needs to be reformed to enhance competitiveness. Although financial sector regulation is generally strong, supervision of the cooperative sector should be strengthened. The authorities are encouraged to undertake a Financial Sector Assessment (FSAP).
IMF activities, including technical assistance, could help support reunification and contribute to improving the living standards of all Cypriots. The authorities’ consent to provide IMF
technical assistance to the Turkish Cypriot community in northern Cyprus could help establish a baseline for advancing all of Cyprus toward best practices in a number of areas.
