(Updates with deficit, suggested measures starting in third paragraph.)
Oct. 12 (Bloomberg) -- Cyprus’s economy faces substantial challenges and “bold” measures are needed to help jumpstart the expansion, the International Monetary Fund said.
The eastern Mediterranean island-state will show little or no growth this year and shrink slightly in 2012, the Washington- based lender said in an annual review e-mailed by the Nicosia- based Central Bank of Cyprus today.
Reversing the deterioration in public finances is urgent, and the country must reduce a budget deficit of some 7 percent of gross domestic product in 2011 to halt the rapid increase in debt over the past three years, the IMF said.
“Decisive and credible measures to reverse the fiscal slippage and put the public debt ratio on a declining path are essential to restore access to capital markets, safeguard the confidence of investors that underpins Cyprus’s role as an international financial center, and protect the competitiveness of the economy,” the IMF said.
Measures to achieve fiscal savings should focus mostly on expenditure reductions, according to the statement. An overhaul of the pension system is vital as the country faces one of the largest increases in retirement costs in the 17-nation single- currency area, with the system becoming unsustainable as the population ages, the IMF said.
While Cyprus’s banking industry is a pillar of the economy, financial turbulence in the region and lenders’ holdings of Greek sovereign debt and presence in Greece’s retail-banking market have hurt asset performance, profitability, and capital and liquidity buffers, the IMF said.
Cyprus should be ready for further negative shocks and undertake rigorous stress tests on banks to identify capital and liquidity shortfalls under adverse scenarios, and require lenders to strengthen buffers accordingly, the statement said.
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