Cyprus grapples with economic uncertainty amid regional instability

Amid the war in the Middle East, high energy prices, persistent inflation, and high interest rates, the country is facing serious challenges, all of which have contributed to increased economic uncertainty.

“The issues before us have both internal and external causes,” said Andreas Theophanous, President of the Cyprus Centre for European and International Affairs, as well as the head of the Department of Political Science and Governance of the University of Nicosia, during an interview with local outlet Stockwatch.

“Under these circumstances, it is crucial to understand the complex data and position ourselves accordingly,” he said.

Moreover, concerns regarding inflation continue to dominate the conversation despite the fact that it appears to have been contained in recent months.

“If we evaluate the prices of products and services, we will find that the increases are ranging between 25 per cent and 50 per cent,” Theophanous said, noting that this involves housing costs, electricity, fuel, and food, among other things.

He explained that the real incomes of workers and pensioners have significantly decreased compared to 2010.

The ongoing global crises have contributed to the challenging conditions. He stated that the Eurozone crisis, the pandemic, the war in Ukraine, and the sanctions against Russia have created very difficult conditions.

“With the developments in Israel and Gaza, the problems are increasing. The rise in prices cannot be stopped only by a restrictive monetary policy,” he added.

In response to this situation, Theophanous said that it is time for a rapid transition for Cyprus to become a regional provider of support during humanitarian crises, itself seeking support for this endeavour from the EU and other international organisations.

Linking these economic challenges to the data from the Cyprus Statistical Service (Cystat), Ioannis Tirkides, the Director of Economic Research at the Bank of Cyprus, and President of the Cyprus Economic Society, said in his blog that “if this conflict is left unchecked, it could lead to the collapse of the entire region and even develop into a nuclear one”.

“If the war escapes from Gaza and develops into a regional one, no one will be able to know what form it will take, or how long it will last,” he added.

Moreover, Tirkides points out the dangers of a prolonged war that may spiral out of control, putting Israel at risk. He noted the case of America’s 20-year war against ISIS, which achieved limited success and cost many lives and trillions of dollars.

He added that “it will skyrocket oil and gas prices and plunge economies into an inflationary recession”.

He also said that “the mix of an energy crisis, recession, and inflation will fuel political unrest not only in the Middle East but also in Europe and the United States”.

Acknowledging these challenges, Minister of Finance, Makis Keravnos, raised concerns over the economic effects of the ongoing European war.

He said that “we are going through a period of serious challenges and geopolitical realignments”.

He further explained that crises such as the pandemic, energy crisis, inflation, and extreme weather conditions, create enormous pressures on the economy and public finances.

Haris Polycarpou, Head of the Economy Sector of Akel this week expressed concerns about the unstable economic environment.

“We have just emerged from an unprecedented pandemic that has fundamentally changed the way we perceive the economy and economic relations,” he said during his speech at the Akel Economic Forum.

Relating geopolitical and economic consequences, Polycarpou added that “referring to the geopolitical turmoil in the region and more broadly, they have escalated significantly and are creating a new security status, but also a new situation in terms of the economy, affecting production costs, distribution networks, energy supply and demand”.

Highlighting the broader implications, the International Monetary Fund (IMF) Managing Director, Kristalina Georgieva, at an investor conference in Riyadh, Saudi Arabia, said that “what is happening in the Middle East is happening at a time when growth is slow, interest rates are high, and the cost of servicing debt has increased because of Covid and war”.

Finally, Georgieva added that in countries such as Egypt, Lebanon, and Jordan, the repercussions of this situation can already be seen.