Cyprus’s economy is likely to grow between 1.5 percent and 2 percent this year as a “gradual” recovery continues, an International Monetary Fund official said today.

Prospects for a continued upturn in 2012 are also “favorable,” Wes McGrew, IMF deputy division chief at the organization’s European department, told reporters in Nicosia.

The Cypriot economy grew 0.9 percent in 2010 after shrinking 1.7 percent in 2009, according to initial estimates, the Cyprus Statistical Service said today.

While bad loans at Cypriot banks have increased, “the rate of increase seems to be stabilizing” and unless problems intensify, such as a renewed sharp drop in real estate prices, “the impact on the banking sector will be manageable,” McGrew said.

The share of non-performing loans, excluding fully collateralized loans, rose to 8.5 percent in September 2010 from 7.9 percent in March, the Central Bank of Cyprus said Dec. 10. The central bank forecasts home prices to have dropped an annual 3 percent in 2010.

The loan portfolio of Cyprus’s banks in Greece “is a relatively conservative one” and the Cyprus central bank has carried out “rigorous stress testing,” which showed that there are strong buffers in place, McGrew said.

Cyprus banks are unlikely to require fiscal support and any problems would be related to liquidity rather than solvency, he said. The European Central Bank would have several ways to provide liquidity, McGrew added.

- March 18, 2011, www.bloomberg.com