Inflation steadies, unemployment drops, banks in the spotlight

The Cypriot economy demonstrated remarkable resilience in 2024, achieving a growth rate of 3.7 per cent despite persistent geopolitical and internal challenges.

Tourism, construction, and the wholesale and retail trade sectors have made significant contributions to economic activity, benefiting from increased investment activity.

Meanwhile, unemployment, which hovered at around 5 per cent, indicated conditions of full employment.

The stabilisation of inflation, estimated at around 2.2 per cent in 2024 compared to 3.9 per cent in 2023, stands out as one of the year’s key achievements.

Cyprus maintained a strong fiscal surplus of €867.5 million in the third quarter, while public debt continues to decrease steadily, aiming for 56.7 per cent of GDP by 2026.

However, the need for vigilance was underlined throughout 2024. This stems from increased economic risks arising from geopolitical developments in the region close to Cyprus.

Internal risks have also played a significant role. These include non-performing loans (NPLs) carried over from previous years, the rising public payroll, and deficits in semi-governmental and local government pension funds.

Additional concerns include the activation of state guarantees and potential compensation from court rulings, which could amount to tens of millions.

Alongside economic growth, calls have increased for support of the real economy, particularly vulnerable groups.

In response, the government has introduced measures to reduce energy costs for vulnerable social groups, provide housing solutions, and apply zero VAT to essential goods.

A positive start

Amidst significant geopolitical uncertainty, the Cypriot economy began 2024 following Hamas’ attack on Israel in October 2023, which heightened global fears of a spike in oil prices, potentially rekindling inflationary pressures that had begun to subside in 2023 after reaching historic highs.

This situation unfolded as speculation grew regarding when the European Central Bank (ECB) and other central banks worldwide might begin reducing interest rates to boost consumption and accelerate economic growth.

Inflation in Cyprus showed a marked deceleration in December 2023, dropping to 3.5 per cent from the 7.1 per cent seen at the start of the year.

Meanwhile, the Gross Domestic Product (GDP), in constant prices (volume measures), grew by an annual rate of 2.6 per cent in 2023, laying a solid foundation for continuing the trend of lower inflationary pressures and robust growth rates into 2024.

Despite uncertainties, the Cypriot economy demonstrated resilience in the initial months of 2024, continuing to ease inflationary pressures, with inflation dropping further to 1.7 per cent in January and 1.8 per cent in February.

At the same time, growth rates accelerated, with GDP in constant prices increasing by 3.6 per cent in Q1 2024 compared to the corresponding quarter of 2023, up from 2.5 per cent in the final quarter of the previous year.

This was the highest annual growth since Q4 2022, driven by domestic demand stemming from strong private consumption, rising household disposable income, and the continued resilience of the labour market.

Significant reduction in inflation

The decline in inflation was significantly aided by the ECB’s high-interest rate policy, the zero VAT rate on certain essential goods, VAT subsidies on 11 specific product categories, and reduced excise duty on fuels—by 8.3 cents per litre for petrol (95 octane) and diesel, and by 6.3 cents for heating oil.

For nine product categories, the VAT subsidy ended on April 30, while for the remaining two categories (meat and vegetables), it concluded on May 31.

As a result of these measures, inflation further declined in March 2024, registering the lowest annual growth rate in nearly three years at 1.2 per cent.

However, oil prices remaining above $80 per barrel led to a renewed rise in fuel prices, causing inflation in Cyprus to accelerate to 2.7 per cent in May, the highest rate in six months.

After another slight increase in July, inflation trended downward again, reaching 1.46 per cent in November.

Positive economic indicators

Positive news for the Cypriot economy continued, with the statistical service reporting in June that the general government surplus approached €600 million in Q1 2024, representing a 58 per cent annual increase, as revenue growth outpaced expenditure growth.

Meanwhile, the Central Bank of Cyprus (CBC) revised its GDP growth forecast for 2024 upwards to 3 per cent, from the 2.8 per cent predicted in March.

Investor confidence in the economy’s strong performance during the first half of the year was underscored by the very strong demand for a €1 billion 7-year bond issued by the Republic of Cyprus in June, which attracted an astonishing €9.6 billion.

Contract termination for Larnaca port and marina development

In late May, the Cypriot government cancelled its contract with the Kition Ocean Holdings consortium for the redevelopment of the Larnaca port and marina, a project budgeted at €1.2 billion.

This was due to the consortium’s failure to renew a guarantee letter worth €4.2 million despite its assurances.

The Cabinet decided to assign the management, operation, and maintenance of the Larnaca port and marina to private operators for a five-year period or until the broader redevelopment processes are completed, with no requirement for development works during this period.

Significant energy developments

What is more, 2024 was marked by significant developments and challenges in the energy sector.

The year saw the cancellation of the contract for the Liquefied Natural Gas (LNG) receiving terminal at Vasilikos.

The Chinese consortium CMC is claiming an additional €200 million in compensation, while the arbitration court in London is yet to decide on the guarantees amounting to €69 million.

Nevertheless, the government managed to secure the delivery of the floating unit Prometheas, which began its journey from Shanghai in December.

The Great Sea Interconnector project for the Cyprus-Crete electricity link progressed following intense discussions about Cyprus’ participation and contribution.

In July, the cost-benefit study was submitted by the implementation body, while €125 million in funding for the project, covering 2025–2029, was announced by the Cyprus Energy Regulatory Authority (CERA) through the EU Emissions Trading System revenues.

Regarding natural gas developments, the Republic of Cyprus and Chevron agreed to seek a consensual solution for the development of the Aphrodite gas field, aiming to avoid delays and maximise the field’s benefits.

Italian company ENI successfully drilled the Cronos 2 target in Block 6 of Cyprus’ Exclusive Economic Zone (EEZ).

This marks the fourth discovery in Block 6, following Zeus (estimated reserves of 2–3 trillion cubic feet), Cronos 1 (approximately 2.5 tcf), and Calypso, which was previously described as a “promising find” with characteristics similar to Egypt’s Zohr field.

The year closed with high expectations for ExxonMobil’s drilling programme, scheduled to begin in January 2025.

The drillship will initially target Electra in Block 5 before moving to Pegasus in Block 10.

The geological structures at Electra are considered promising, raising hopes for commercially viable reserves.

Robust banking landscape

Cyprus’ banking sector maintained and significantly strengthened its resilience in 2024, partly due to the European Central Bank’s policy of raising lending rates to combat high inflationary pressures.

Major banking institutions reported substantial profits and strong capitalisation, sparking intense debate about the need for greater support for the Cypriot economy and society.

A bill proposed by Akel to tax excess banking profits was narrowly rejected by parliament, but it heightened political pressure on banks to better address societal needs.

Towards the end of the year, Cypriot banks announced reductions in lending rates and charges, following the downward trend in ECB rates and a meeting with the President of the Republic.

Another significant development was the completion of Eurobank S.A.’s public offer to acquire Hellenic Bank, further reshaping the Cypriot banking sector in 2024.

Moreover, in March 2024, Christodoulos Patsalides was appointed governor of the Central Bank of Cyprus (CBC).

By the end of the year, he unveiled a new organisational structure and institutional framework for the CBC.

Tourism hits record levels

2024 was a landmark year for Cypriot tourism, with a 5 per cent increase in tourist arrivals between January and November, reaching 3.91 million during that time.

Revenue from tourism and arrivals, especially during the summer months, broke new records.

Towards the end of the year, an agreement was signed with Hermes Airports for the second phase of developments at Cyprus’ international airports in Larnaca and Paphos.

The agreement resolved disputes related to the concession agreement for the two airports.

Rating agencies make note of Cyprus’ economic progress

In 2024, rating agencies and international organisations issued repeated positive evaluations of the Cypriot economy, upgrading its creditworthiness and highlighting positive prospects for the coming years.

The year’s highlight was the upgrade of Cyprus’ economy to an “A” rating by major agencies after 13 years.

Reports from the European Commission and the International Monetary Fund (IMF) during the year confirmed the economy’s healthy foundation, forecasting growth and declining inflation.

Notable upgrades included Moody’s revising Cyprus’ outlook to positive, Fitch elevating its long-term rating from “BBB” to “BBB+” with positive prospects, and Standard & Poor’s following suit.

By October, Scope Ratings upgraded Cyprus to “A-,” marking the first recognition of an “A” level.

In December, both Fitch and S&P Global Ratings placed Cyprus at “A-” with stable outlooks, solidifying its reputation among the EU’s most reliable economies.

Labour: positive developments and disputes

2024 was also a year of intense activity and challenges in Cyprus’ labour sector, with positive developments in key indicators but tensions in various industries.

According to the Cyprus Statistical Service (Cystat), unemployment fell to a 15-year low, while a 30.4 per cent increase in job vacancies compared to 2023 underscored the positive outlook.

In addition, a significant agreement between the government and unions granted 1.5 per cent general salary increases for public sector employees after 15 years, effective from October 1, 2024, with the total cost for 2024–2025 reaching €52.7 million.

The year was also marked by strikes, particularly in the hotel industry, the ready-mix concrete sector, and among government doctors.