The Cyprus economy faces challenges despite positive assessments

By Andreas Saralambus and Omiros Pissaridis

Assessments by international organizations, most recently the International Monetary Fund (IMF) and the Fitch rating agency, confirm the satisfactory performance of the Cyprus economy. The growth rate reached 2.5 percent in 2023, while it is expected to fluctuate between 2.5 and 3 percent in the coming years.

Taking into account prevailing adverse factors such as geopolitical tensions and high interest rates, this performance can be considered positive. In fact, the economic growth of Cyprus is currently higher than the average growth rate of the Eurozone and supports the continuous arrival and establishment of foreign companies in our country, primarily in the high-tech sector.

Unemployment hovers around 6 percent, showing a downward trend and reflecting a labor shortage that is covered by foreign workers. A number of factors, including stable oil prices, falling food prices, modest wage increases and high interest rates, have kept inflation close to the long-term target of 2 percent.

Surpluses in public finances contribute to a downward trend in sovereign debt, thereby creating margins to support public investments. In parallel, there has been significant improvement in the banking sector, reflected in strong profitability, capitalization and liquidity ratios of the country’s largest banks.

Regarding the overall macroeconomic picture, the IMF points to the following weaknesses: (a) risks from over-reliance on the real estate construction sector, (b) persistent high deficits in the country’s current account, which reflect overcapacity. private corporate debt, and (c) elevated long-term spending needs to address demographic and pension funding challenges, as well as climate change, estimated at 2.5 percent of GDP. It is worth noting that other studies project the costs of climate change much higher.

In the area of ​​social policy, the IMF proposes to replace general subsidies for electricity and oil prices (a politically sensitive issue) with targeted social measures for the benefit of vulnerable groups. In terms of structural changes, the IMF correctly identifies the need for reforms and increased efficiency in the areas of justice, public administration and education, as well as aligning the latter with the real long-term needs and employment opportunities of the economy.

In addition to the IMF analysis, it is worth noting: (a) the relatively low level of absorption of funds available through the Resilience and Recovery Fund, which places particular emphasis on climate and digital transformations, two key areas where Cyprus lags behind, (b) the financial limitation arising from the steady decline in public debt, and Allows more public investments in the direction of climate and digital transformations, as well as in other important sectors of the economy. Favorable long-term prospects.

In summary, the Cyprus economy currently presents a positive picture in terms of macroeconomic performance. However, it has so far failed to grasp the opportunities created by favorable macroeconomic conditions to address long-term structural challenges and promote urgently needed solutions for society. Through its assessment, the IMF makes recommendations that can make a substantial positive contribution to this effort.

Andreas Charalampus and Omiros Pissaritz are economists