InsiderBusinessFinance Minister says economy has been resilient against challenges

Finance Minister says economy has been resilient against challenges

The European and Cypriot economies have shown remarkable resilience despite the global economic uncertainty, Cypriot Finance Minister Makis Keravnos said.

Keravnos was speaking on the current economic situation and outlook, at the CFA Society Cyprus Forecast Dinner on “Economic Outlook 2023-2024” in Limassol.

“We are going through very challenging times, facing multi-dimensional issues, some of which require immediate action and response in a coordinated manner with our economic partners,” Keravnos noted, adding that the war in Ukraine and its impact on energy supply and prices, supply chain disruptions and higher interest rates are significant economic challenges.

“This is of great concern to us, particularly as those most affected – vulnerable households and businesses – are those most in need of support from the state,” he stressed.

Economy affected by inflation and loss of Russian tourism

The Finance Minister said that “despite the high level of global uncertainty, the European economy and the Cypriot economy have shown remarkable resilience. Our economy has been affected mainly through two channels, the tourism sector and imported inflation”.

In 2021, Russia was the second largest tourism source market for Cyprus after the UK, accounting for about 20% of tourists. Therefore, the ban on the use of EU airspace by Russia and vice versa created a gap in the tourism sector.

Keravnos added that when it comes to inflationary pressures, it should be noted that Cyprus is in a better position than the majority of EU and eurozone member states. However, the problem still exists and should be addressed, he stressed.

In 2022, the Minister said, the Cypriot economy recorded a strong positive growth rate, the country’s fiscal position improved, while public debt continued its downward trend, falling to 86.5% of the GDP at the end of the year.

With all the above, Keravnos said, “I would like to convey the message that the Cypriot economy will continue in 2023 from a strong position, where the budget surplus will be maintained, mainly driven by the economic performance throughout the year, albeit with a marginal decline as a percentage of the GDP”.

Inflation outlook

The Minister also warned that high energy prices are driving inflation higher. Disposable income and subsequent consumption are both under pressure, while production costs are rising. “This toxic mix of challenges forces us to remain cautious,” Keravnos said.

According to the latest baseline macroeconomic scenario, growth is expected to continue on a positive path in 2023, albeit at a slower pace of around 2.8%, while the labour market is expected to improve further. In the medium term (2024-2026), growth is projected to regain momentum and be robust, he said.

At the same time, inflation is expected to decelerate to 2.5% in 2024 and then remain around 2.0% in 2025-2026.

2+1 pillars of new government’s economic policy

The Finance Minister explained that the wider economic policy of the new government is based on two plus one main pillars. “First, we remain committed to ensuring macroeconomic stability and maintaining fiscal sustainability, including the reduction of public debt,” he said. “Second, having improved our credit rating, we are now focusing on the implementation of our long-term growth strategy for Cyprus, or ‘Vision 2035,’ which aims to further enhance our resilience while investing in higher value-added sectors for our future. Finally, we recognise that in order to effectively maintain the positive trajectory of our economy and socially equitable development, we should continue to monitor and intervene to ensure that external shocks are effectively absorbed,” the Minister added.

Keravnos also said that the timely and proper implementation of the National Recovery and Resilience Plan, which includes a significant number of structural reforms and investments, is an important component in increasing the potential output of the economy.

Financial services sector remains integral part of economy

He noted that the financial services industry is and will remain an integral part of the economy and therefore the government is working to improve the regulatory framework around the sector. Specifically, he explained, the government is working on the preparation of a new framework, which regulates partnerships in funds, and fund management, while introducing a new screening mechanism for foreign direct investment.

He added that in a constantly evolving international economic environment, “it is imperative that we remain vigilant and follow developments closely. Our government is ready to take all necessary measures to keep the economy on a sustainable footing to safeguard the interests and living standards of our people”.

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