The International Monetary Fund (IMF) has warned Cyprus against relying too heavily on the construction sector as the country's economy make an "impressive" recovery from the 2013 banking crisis.
In its latest report on the small island state released Thursday, Washington-based IMF forecast that the Cypriot economy will grow by 3.8 percent this year and 3.6 percent in 2018 on the back of fiscal and structrual refoms. But bad loans left behind by the crisis have failed to come down significantly, currently amounting to some 46% of loans held by Cypriot banks.
Cyprus' strong growth momentum is expected to persist for the next few years, underpinned by ongoing large construction projects and the weak payment discipline wihch is supporting consumption. But risks to this growth model lurk, warns the IMF.
"This strong growth cycle could be threatened by excessive concentration of activity into construction and real estate and by potentially-volatile capital flows," said the IMF.
It also cautioned banks against warehousing properties on their balance sheets that were acquired through debt-to-asset swaps, and reiterated its call for Cyprus to take more steps in reducing bad loans.