Cyprus’ economy is still characterised by large economic imbalances, which, unless addressed, may impede its medium-term economic prospects, the European Commission said on Wednesday.
In its 2020 country report the EC said Cyprus’ large imbalances are a legacy of the 2013 crisis and include high stocks of private, public and external debt and nonperforming loans. In this context, there is also a need to step up reforms in key areas to attract productivity-enhancing investments, diversify the economy and help foster inclusive and environmentally sustainable growth in the long term.
The report notes that economic growth has remained resilient so far, but is expected to slow down in the coming years. GDP growth, projected to be 3.2%% in 2019, has remained strong, supported by resilient
domestic demand. Meanwhile, net exports had a negative impact, reflecting a less supportive external environment.
The economy is expected to continue growing — albeit at a slower pace — by around 2.8%% in 2020 and 2.5% in 2021, in view of the anticipated weakness of the global economy.
The current account deficit is significantly negative, and is set to worsen to around 10%% of GDP in 2019-2021 due to lower exports and increased imports in the context of strong domestic demand. Unemployment fell to 7.5%% in 2019, the lowest level since 2011, and is expected to fall further. Inflation remained low, and this trend is projected to continue over the next couple of years.
Cyprus is expected to record a significant budget surplus in 2019. The headline budget balance is set to return to surplus in 2019 (above 3.5%% of GDP) and to remain in surplus in 2020 and 2021, which would enable considerable debt reduction. To safeguard fiscal sustainability going forward expenditure developments should be carefully monitored, especially in the light of possible future risks to the robustness of revenues.
The long-term sustainability of the growth model of Cyprus is put at risk by rising external uncertainties and pending structural reforms.
Growth relies heavily on specific sectors, such as tourism, foreign-funded residential construction and services linked to foreign companies, which are vulnerable to potential negative external
developments.
There is a need to improve the environmental sustainability of tourism and to diversify the sector further. More generally, investment lags behind in areas that could strengthen Cyprus’ economic structure and
increase its potential growth, such as digital transformation, R&D, renewable sources of energy, sustainable transport and the circular economy. At the same time, to ensure that growth benefits all groups of the population, more investment is needed in vocational education and training, adult learning, early childhood education and care, and health.
Overall, Cyprus has made limited progress in addressing the 2019 country-specific recommendations.
There has been some progress:
in improving the governance of state-owned enterprises;
in facilitating the reduction of non-performing loans;
in strengthening the effectiveness of the public employment services and getting more young people into jobs and training;
on the National Health Insurance System;
on energy efficiency and renewable energy;
in improving R&D; and
in improving access to finance for small and medium-sized enterprises.
Cyprus has made limited progress:
in improving the efficiency of the public administration and local governments;
in tackling aggressive tax planning;
in reforming the education system; and in increasing employers’ engagement and learners’ participation in vocational education and training;
in improving the affordability of childhood education and care;
in focusing investment-related economic policy on sustainable transport, waste and water management, digitalisation and digital skills;
in improving the effectiveness of the justice system and payment discipline;
in setting up a reliable system to issue and transfer immovable property rights; and
in accelerating anti-corruption reforms and safeguarding the independence of the prosecution.
Cyprus has made no progress:
on privatisations.
