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Civil service pay, Gesy risks to economy says EC forecast

Strong investment in construction has been seen in 2019

The European Commission expects a deceleration of foreign direct investment connected to the island’s citizenship by investment scheme as stricter requirements came into force, according to its autumn economic forecast, which was published on Thursday.

The forecast expects Cyprus’ growth momentum to moderate mainly due to external factors.

The report said Cyprus enjoyed strong investment in construction in 2019 as the sector benefitted from the citizenship scheme “which has brought in substantial foreign direct investment (FDI), concentrated in the real estate sector.”

The government’s decision to introduce stricter criteria prompted interested parties to file applications before they came into force.

“The tighter requirements of the scheme caused a frontloading of applications, thus also FDI in the first half of the year before their entry into force; hence, a deceleration in the second half of the year is expected,” the report said.

According to the forecast, GDP growth is projected to 2.9 per cent for 2019, 2.6 per cent for 2020 and 2.3 per cent for 2021.

Unemployment will continue declining from 7.2 per cent in 2019 to 6.3 per cent in 2020 and 5.7 per cent in 2021 and public debt will fall from 93.8 per cent in 2019 to 87.8 per cent in 2020 and 81.8 per cent in 2021.

The government budget surplus will remain high at 3.7 per cent, 2.6 per cent and 2.4 per cent for the three years.

The European Commission said “key risks include the court cases that could lead to the reversal of civil service pay cuts implemented during the crisis as well as the potential deficit of public healthcare providers during the first years of the NHS.

“The potential realisation of contingent liabilities remains a major risk to public finances”, but “positive cash balances from the resulting Cyprus Cooperative Bank (CCB) entities constitute an upside risk”.

More specifically, the European Commission forecasts that “Cyprus’ economic expansion remains strong but is set to gradually moderate, mainly due to external headwinds”.

Domestic demand is projected to stay the main driver of growth, supported by private consumption and an improving labour market. Meanwhile inflation should remain subdued, it said.

“The general government budget is expected to remain in surplus and public debt to steadily decline from 2019 onwards” and “risks to the fiscal outlook are also mainly on the downside”.

 

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