By Stelios Orphanides
The Central Bank of Cyprus said that it expects the Cypriot economy to expand 2.8 per cent this year before growth speeds up to 3 per cent over the next two-year period.
“The expected course partly reflects an increase in scheduled investment in tourism, construction and other business activities,” the central bank said in its 2016 annual report on Friday. In December, the central bank forecast a 3.1 per cent growth rate in 2019.
By comparison, the finance ministry in April projected a 2.9 per cent growth rate this year and in 2018, before growth slows down to 2.7 per cent in 2019. The economy expanded 2.8 per cent last year after emerging from a prolonged recession in 2015.
The supervisory authority maintained its 0.9 per cent harmonised inflation rate forecast for 2016 unchanged and also did the same for 2018 and 2019 keeping its projections at 1.5 per cent and 1.6 per cent respectively.
The central bank said that global uncertainty following the June 2016 Brexit referendum as well as a slower than expected reduction of Cyprus’s non-performing loans -roughly half of the banks’ loan portfolio- that can lead to a deterioration of domestic credit conditions, are downside risks to growth.
On the other hand, the planned construction of a casino, “expected to contribute to the differentiation of the tourism product, likely offering more choices to tourists,” and the discovery of hydrocarbons in Cyprus’s exclusive economic zone, leading to higher revenue and economic activity in the medium term, are upside risks to growth, it added.
With respect to inflation, the central bank said that risks are mostly downside and related to a drop in demand for services, the central bank said. A further drop in oil prices, combined with the subsequent transmission effect on other goods and services, as well as a deterioration of domestic credit conditions, is likely to affect inflation negatively. Upside risks to inflation are related to a better than expected economic recovery.