Cyprus’ banking sector resilient, shows limited vigour

Although the banking sector in Cyprus remains resilient, it displays limited vigour, while any tampering with the foreclosures framework could slow the clearing out of bad loans and also raise the cost of borrowing, the International Monetary Fund said on Monday.

The IMF issued its ‘concluding statement’ after wrapping up its latest mission to Cyprus, which lasted from April 22 to May 4.

“The banking sector remains resilient, supported by strong capital and liquidity buffers, and improving asset quality,” read the statement issued by Alex Pienkowski, IMF mission chief for Cyprus.

The IMF said bank solvency and liquidity ratios are among the highest in the EU, supported by strong profitability.

“Asset quality has improved through a steady reduction in NPLs (non-performing loans). While property markets do not appear overvalued, real estate remains systemically important in the banking sector and should be carefully monitored.”

But the international organisation also cautioned that “despite the recent recovery of credit, the banking sector shows limited dynamism.”

The sector’s loan-to-deposit ratio is only 50 per cent, compared to over 100 per cent in the EU on average.

The IMF advised that changes to the foreclosure framework slowing the resolution process should be resisted.

“After years of compromise, the existing framework broadly strikes the right balance between debtors and creditors to support debt resolution. In contrast, some recently proposed legislative changes would significantly slow resolution and increase administrative costs. This could undermine borrower incentives, increase credit risk, and reduce access to finance. Future borrowing – for example, for first-time homebuyers or small-businesses – would become harder.”

Here the IMF was likely referring to the recent changes to the foreclosures legislation, passed by parliament in April.

Reacting later in the day, the Cypriot finance ministry agreed with these remarks, noting that loosening the foreclosures framework risks “abuse by strategic defaulters” – meaning borrowers who deliberately stop making payments on a debt (typically a mortgage) despite having the financial capacity to pay.

On the plus side, the IMF noted that economic growth in 2025 was among the highest in the EU:

“This impressive performance was supported by strong private consumption, and continued expansion of export-oriented services, particularly ICT and tourism. The labour market remains tight, with unemployment at the lowest rate since 2008 and still elevated vacancies.”

Despite disruption from the war in the Middle East, the IMF anticipates growth will remain robust in 2026 – around 2.5 per cent.

At the same time, it forecast that higher oil prices will push up inflation to around 3.5 per cent on average for the year, weakening real incomes and consumption, but underlying growth will remain robust. And while tourism has been affected in recent months it is expected to partially recover during the peak season.

The IMF also gave a thumbs-up to Cyprus’ fiscal performance.

“Despite some easing, fiscal performance has remained strong. While revenue growth was robust, the fiscal surplus narrowed in 2025 due to higher spending on public investment, wages and social transfers. However, strong economic growth, a continued fiscal surplus, and the use of cash buffers reduced public debt to an impressive 55 per cent of GDP, further strengthening economic resilience.”

The organisation also welcomed the recent tax reform undertaken by Cypriot authorities.

But it advised that “zero and reduced VAT rates, excise duty cuts, and other price-based measures to mitigate energy-related inflation are costly, poorly targeted, and distortionary, and should be rolled back.”

On the public payroll, the IMF said wage increases should not exceed the current CoLA (Cost of Living Allowance) index.