The IMF warned Cyprus that its economy faces “substantial downside risks”.
In its annual review on the Island’s economy, the IMF urged the government to intensify efforts to balance its budget by 2014 and to implement spending cuts to reverse large increases in public sector pay and social benefits.
Worries have grown since a July munitions explosion that crippled its largest power plant that Cyprus’s tiny economy could be the fourth in the euro zone to need a bailout.
“We think the situation at the moment is very serious. The fact that the government cannot access the capital markets is very serious and the risks to the banking sector compound that,” said assistant director in the European Department Erik Jan de Vrijer. “The first priority for Cyprus is to do all it can to avoid that these problems get out of hand”, he continued.
The IMF expects that the government budget deficit will reach 7% of GDP in 2011, more than twice the European Union’s upper limit.
Cyprus’s credit ratings have been cut this year as a result of the exposure of its banking sector to Greek debt and fiscal slippage domestically, pushing up its cost of borrowing on financial markets.
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