The Cypriot economy continues to display remarkable growth and resilience in the face of a challenging global economic environment, Central Bank of Cyprus (CBC) governor Christodoulos Patsalides said on Monday.

Patsalides’ comments were delivered in his introduction to the CBC’s economic bulletin for June 2024, where he highlighted the positive economic indicators that underscore Cyprus’ robust economic performance.

In the bulletin, Patsalides noted that the growth rate in the first quarter of 2024 exceeded expectations, while unemployment dropped to 6 per cent, marking its lowest level since 2009.

“Domestic inflation decreased to 2.2 per cent in the first five months of the year, which is close to the ECB’s medium-term target of 2 per cent, and a significant improvement compared to 5.4 per cent in the same period last year,” he stated.

Moreover, he mentioned that the fiscal surplus for 2023 recorded the highest performance since 2007, further solidifying the country’s economic stability.

The CBC governor also pointed to recent upgrades in Cyprus’ credit rating by various rating agencies as evidence of the economy’s upward trajectory.

These agencies, Patsalides explained, “highlighted the improvement in fiscal metrics, strong economic growth, and the resilience of the banking sector”.

Patsalides added that “the positive performance of the Cypriot economy has been acknowledged in recent reports by the International Monetary Fund (IMF) and the European Commission“.

Discussing domestic economic developments, Patsalides mentioned that Cyprus’ Gross Domestic Product (GDP) saw an annual increase of 3.5 per cent in the first quarter of 2024, which was higher than originally expected.

“This growth reflects, among other factors, the gradual easing of the economic impact of ongoing sanctions against Russia and the limited effects of the Middle East conflict,” he stated.

“The GDP growth for the whole of 2024 is expected to reach 3 per cent, compared to 2.5 per cent in 2023, driven primarily by investments and private consumption,” Patsalides added.

He also pointed out that exports are expected to grow, albeit to a lesser extent than imports, due to the ongoing effects of the Russia-Ukraine conflict on professional services and the anticipated loss of Israeli tourists.

“However, these impacts are expected to subside in the medium term, supporting growth through the diversification of markets for tourism, financial, and professional services,” he explained.

“Furthermore, the growth of foreign-interest technology companies established in Cyprus in recent years will continue to support GDP,” he added.

Looking ahead, the CBC’s forecasts for June 2024 predict GDP growth of 3.1 per cent in 2025 and 3.2 per cent in 2026.

“For the entire period of 2024-2026, the projected GDP growth is primarily based on domestic demand, which will be supported by the increase in households’ real disposable income due to the expected decline in inflation, rising wages, and the resilience of the labour market,” Patsalides said.

Significant contributions are also expected from major private investments and digital and green development projects, as well as reform projects under the National Recovery and Resilience Plan.

In terms of inflation, Patsalides highlighted that the Harmonised Index of Consumer Prices (HICP) in Cyprus is expected to decrease to 2.1 per cent in 2024, down from 3.9 per cent in 2023.

This decline, he explained, reflects developments in energy prices, the ongoing restrictive impact of the ECB’s monetary policy, and the easing of inflationary pressures from supply chain disruptions in previous years.

Furthermore, inflation is projected to drop to 1.9 per cent in 2025 and 1.8 per cent in 2026, thereby “improving citizens’ purchasing power and creating a more favourable environment for businesses and economic growth”.

The structural inflation rate is also expected to drop from 3.8 per cent in 2023 to 2.5 per cent in 2024, 2.1 per cent in 2025, and 2.0 per cent in 2026, mainly due to the continued dampening effect of the eurozone’s monetary policy and the normalisation of external inflationary pressures.

Turning to the banking sector, Patsalides reported that despite ongoing challenges, “the Cypriot banking system continues to show positive progress, as reflected in key supervisory indicators”.

The Common Equity Tier 1 (CET1) ratio at the end of the first quarter of 2024 stood at 21.5 per cent, compared to the European ratio of 15.9 per cent in March of this year.

Additionally, the liquidity coverage ratio stood at 341 per cent in March, well above the minimum supervisory requirement.

“Non-performing loans (NPLs) continue to decline, with their share of the consolidated loan portfolio of banks at 7.3 per cent at the end of March 2024,” Patsalides stated.

The banking sector’s profitability has also increased due to rising interest rates, with significant contributions from the placement of excess liquidity in ECB deposits.

Specifically, the Cypriot banking system recorded profits of €345 million in the first quarter of 2024.

However, Patsalides cautioned that despite this performance, there is no room for complacency, saying that “the banking system faces an increased number of risks that require careful management”.

The CBC governor also said that “geopolitical developments, climate change, and the critical yet unpredictable technology sector are key supervisory priorities in recent years, which banks need to address to maintain their strength, resilience, and competitiveness”.

“Strengthening corporate governance is a fundamental requirement for achieving these goals,” he added.

In the context of the aforementioned information, Patsalides asserted that the “Cypriot economy remains strong and competitive“.

He explained that this is “thanks to the continuous upgrade of the services sector, the attraction of foreign investments, the support of small and medium-sized enterprises, prudent fiscal management, and the ongoing progress in the banking sector”.

“To ensure a stable and flexible growth path, it is essential to continue the structural reforms of the Recovery and Resilience Plan, which include the digitalisation of public administration, the improvement of the education system, and the promotion of green development,” he added.

“These reforms will enhance competitiveness, create new jobs, and ensure sustainable growth for future generations,” he concluded.