Cypriot economy: resilience and structural weaknesses

By Andreas Charalambous and Omiros Pissarides

The favourable assessments from the European Commission and the IMF, as well as the global rating agencies, demonstrate the satisfactory course of the Cypriot economy and its resilience in the face of adverse conditions. The ability of Cyprus’ businesses to adapt to changing conditions and the attractiveness of the country, due to the high level of education of its human resources and its participation in the eurozone, are key positive factors.

Despite the unfavourable external environment and geopolitical tensions, the rising interest rates and the high inflation, Cyprus’ GDP growth rate is expected to amount to 2-2.5 per cent in 2023. Unemployment remains at a satisfactory level of 6.7 per cent, while intensifying labour shortages are covered by foreign workers. Inflation is on a downward trend and is expected to fall below 3 per cent in 2024. However, high price increases for basic necessities (electricity, food and so on) affect the living standards of wage earners and fuel an increasing degree of inequality.

At the same time, the surpluses in public finances, as well as the downward trend of public debt, are stabilising factors, which allow access to international markets at affordable borrowing costs.

The positive conditions for international tourism markets are a key contributor to the relatively satisfactory picture. Other important contributors include the sustained improvement in the services sectors, among others due to the establishment of a significant number of foreign companies (mostly in the IT sector), and the high level of activity in construction, despite the higher interest rates, rising construction costs and the termination of the controversial visa/passport investment plan to attract foreign investors.

Unfavourable evaluations, mainly regarding the transition to the green and digital economy, but also in matters of equal opportunities between the genders and diversity, reveal serious challenges in areas of key importance for future growth. Further risks of a geopolitical nature are also visible, such as the possibility of long-standing conflicts in Ukraine and Israel.

Overall, however, the medium-term outlook remains positive, and the favourable juncture offers an opportunity to focus policy on addressing long-term challenges, particularly in the critical areas of the energy and digital economy. Among other required actions, we cite the need for interventions in the electricity network and infrastructure, additional actions that will allow greater penetration of renewable energy sources, as well as the promotion of an ambitious strategic plan for the digitisation of the public sector.

As far as social policy is concerned, the European Commission rightly favours the promotion of targeted spending plans to support vulnerable groups and an end to ad-hoc price subsidies.

Given the looming long-term labour shortages, the promotion of a balanced immigration policy, which would allow the controlled importation of foreign workers, and their integration into the economy and society, is crucial for the future course of the economy.

The utilisation of the Recovery and Resilience Plan, and the corresponding political willingness, can and should be key tools for promoting the above policies.

Andreas Charalambous and Omiros Pissarides are economists