Cyprus

Following a period of very rapid growth in the aftermath of the crisis, growth is gradually settling in at a more sustainable but still relatively robust pace despite the external slowdown. Output is projected to rise by around 3 percent in 2019–20, supported by construction and services sectors. Good progress has been made in addressing domestic and external stability risks arising from legacies of the financial crisis. Sales of non-performing loans (NPLs), amendments to the foreclosure and insolvency framework and resolution of a large systemic bank have helped strengthen bank balance sheets. Large fiscal surpluses have reduced risk premia to historical lows and reduced financing risks. Nonetheless, vulnerabilities remain: political pressure to unwind some of these reforms has recently escalated; NPLs in the banking system and debt levels are still high; bank profitability remains low; and difficulties in debt workouts and the resulting debt overhang weigh on productive investments. Productivity growth has also been weak, reflecting financial sector difficulties as well as a slower pace of technological diffusion and institutional inefficiencies.