Geopolitical risks highlighted in Cyprus’ fiscal outlook for 2024

Cyprus’ Fiscal Council released its final 2024 report on Monday, delivering a comprehensive analysis of the nation’s economic trajectory.

While acknowledging the country’s robust growth and fiscal prudence, the report also sounded caution over emerging risks and structural vulnerabilities that could undermine long-term stability.

The council, chaired by Michalis Persianis, highlighted Cyprus’ continued resilience in maintaining fiscal surpluses and reducing public debt.

The report stressed that these achievements have been driven by a combination of diverse economic contributions, strategic fiscal policies, and favourable external conditions.

However, the council warned that complacency could jeopardise any progress achieved so far, especially in the face of mounting pressures from inflation, geopolitical instability, and the need for structural reforms.

Persianis, in a statement accompanying the report, underscored the importance of vigilance and adaptability in navigating an increasingly complex economic environment.

“Cyprus has demonstrated commendable economic resilience,” he said.

“But resilience is not a guarantee of future success,” he continued. “Strategic foresight and proactive policymaking are essential to sustain growth while addressing vulnerabilities.”

One of the report’s central themes was the broad-based nature of Cyprus’ growth, with significant contributions from sectors such as information technology, tourism, and financial services.

This diversity, the council noted, has played a critical role in bolstering the economy’s ability to withstand external shocks.

The influx of foreign businesses from conflict zones, particularly in the technology and IT sectors, has been a boon to growth.

However, the council cautioned that this reliance on external factors could prove precarious if geopolitical dynamics shift unfavourably.

The report also highlighted the country’s strong fiscal performance, with Cyprus achieving consistent surpluses and steadily reducing its public debt.

Government revenues have surged, aided by robust economic activity and inflationary effects, while debt servicing costs remain manageable.

These trends, according to the council, provide the government with fiscal flexibility to address future challenges.

Despite these positive indicators, the council raised concerns over inflationary pressures, particularly in non-tradeable sectors such as housing and personal services.

While headline inflation has stabilised at levels close to the European Central Bank’s target, core inflation—excluding volatile items like food and energy—remains elevated.

The council explained that this disparity underscores the structural nature of some price pressures, particularly those driven by domestic demand.

“Inflationary pressures have eased but not disappeared,” the report stated.

“The elevated cost of living continues to strain households, particularly in areas where prices are sticky, such as housing and essential services,” it added.

It also said that “these issues warrant targeted interventions to provide relief without fuelling further inflation”.

Another area of concern identified in the report was the sustainability of Cyprus’ fiscal discipline.

While the government has successfully navigated short-term challenges, the council cautioned against over-reliance on temporary revenue increases to fund permanent expenditure commitments.

Furthermore, the report urged policymakers to ensure that any new spending is backed by stable and recurring revenue streams.

“Fiscal discipline is not merely an option but a necessity,” the council said.

“Permanent increases in spending must be underpinned by permanent revenues,” it added.

“Failure to adhere to this principle,” the council continued, “could erode the hard-won fiscal stability Cyprus has achieved in recent years.”

The council also addressed the broader macroeconomic risks posed by geopolitical uncertainty.

The ongoing instability in the Middle East and Eastern Europe, coupled with the potential rise in global protectionism, were flagged as significant threats to Cyprus’ economic outlook.

These risks, the report noted, could disrupt trade flows, investment inflows, and broader economic activity.

“The risks posed by geopolitical instability are not hypothetical; they are very real,” the council warned.

“Cyprus must proactively develop strategies to mitigate these risks and ensure that its economy remains resilient in the face of external shocks,” it added.

One of the most pressing issues highlighted in the report was the need to address the green transition and the broader challenges posed by climate change.

The council called for more ambitious targets and a comprehensive approach to integrating environmental considerations into economic planning.

While acknowledging the steps taken so far, the report emphasised that much work remains to be done to meet Cyprus’ commitments to sustainability.

“The green transition is not a luxury; it is a necessity,” the council stated.

“Failure to act decisively risks not only undermining Cyprus’ economic sustainability but also its ability to address the mounting challenges posed by climate change,” it added.

The council also advocated for the digital transformation of public services as a means to enhance efficiency and reduce costs.

This recommendation aligns with the broader goal of ensuring that Cyprus remains competitive in a rapidly evolving global economy.

The report noted that embracing digital reforms could yield significant benefits, from streamlining administrative processes to improving service delivery.

“The digital transformation of public services is critical,” the report noted.

“It is not merely about reducing costs but about enhancing the quality and efficiency of services delivered to citizens and businesses alike,” it added.

In addition to these recommendations, the council stressed the importance of addressing structural weaknesses in Cyprus’ economy.

These include the need to diversify exports, reduce reliance on external factors, and enhance the competitiveness of small and medium-sized enterprises.

The report said that while the country has made progress in these areas, significant challenges remain.

“Structural weaknesses must be addressed proactively,” the council said.

“Failure to do so could undermine Cyprus’ economic potential and leave it vulnerable to external shocks,” it added.

Persianis also underscored the importance of long-term planning and strategic investments.

“Emerging challenges require forward-thinking solutions,” he said.

“Whether it is addressing the green transition, enhancing digital efficiency, or ensuring fiscal sustainability, Cyprus must plan for the future with both ambition and pragmatism,” he added.

What is more, the council’s recommendations included prioritising investments in green and digital infrastructure, restraining non-productive expenditures, and ensuring that fiscal policies align with long-term sustainability goals.

It also called for greater vigilance in monitoring emerging risks, particularly those related to inflation, geopolitical instability, and external economic dependencies.

“Cyprus has the tools and the resilience to succeed,” Persianis said.

“What is needed now is the determination to act decisively and the foresight to plan strategically for the future,” he concluded.