The shadow economy in Cyprus is on the rise and certainly much higher than the European Union’s average, according to IMF’s report “Explaining the shadow economy in Europe: size, causes and policy options”.
“While the average size of the shadow economy in Europe remained broadly similar to the mid-2000s, the dynamics are heterogeneous across countries,” it said.
“In many countries the shadow economy increased since early 2000s – for example in Croatia, Cyprus, Greece, Serbia, while in others – Czech Republic, Macedonia – it declined,” it added.
The recently-released report also said that in most European countries the shadow economies increased in 2008–2010 and then declined to around pre-crisis levels.
Not so in Cyprus where the shadow economy accounted for 30% of GDP in 2016, according to latest IMF data. In Greece it accounted for 30.2% that same year. Both countries are far behind from developed EU countries where the shadow economy is at 10-20% levels.
In 2009, shadow economy in Cyprus was at 31.7% of GDP, 31.3% in 2010 and the same in 2011. It increased to 32.1% in 2012, remaining at the same level in 2013. In 2014, it was 31.9% of GDP, 31.8% in 2015 and in 30.4% in 2016.
The shadow economy in Cyprus in the 2000s was slightly lower. Specifically, it was at 28.6% of GDP in 2000, 28.2% in 2001, 28.5% in 2002 and 29.5% in 2003, 29.7% in 2004, 29.9% in 2005, 30.4% in 2006, 29.7% in 2007 and 29.8% in 2008.
The shadow economy in Cyprus slightly decreased in 2016 compared to 2015, but it remains at 30% which is still very high.
The government is now pushing ahead with a bill providing for the filing of a tax return by all income-earning individuals – even those below the set minimum. There is also a provision for all companies offering services and products to accept payment electronically, that is through credit cards.
Another big issue for Cyprus now under legislation review is the taxation of revenue coming from property rentals through AirBnB-type of electronic platforms.
The IMF notes that a comprehensive package of reforms is needed to successfully combat the shadow economy, carefully designed based on the determinants most relevant in that specific case. And that measures can range from regulatory and institutional reforms, to tax policies and administration.
The menu of policies most relevant for emerging economies would include: reducing regulatory and administrative burdens, promoting transparency and improving government effectiveness as well as improving tax compliance, automating procedures and promoting electronic payments.
In addition, a well-designed policy set should address incentives for informal workers to transition to the formal sector, especially in countries reliant on remittances and where the shadow economy provides a social safety net.
European countries with a single-digit percentage of shadow economy in 2016 was Austria with 9.6% of GDP and Luxembourg with 9.7%.
For the rest of EU countries the percentage was: Belgium 22.1%, Bulgaria 37.8%, Croatia 35%, Czech Republic 19.4%, Denmark 18.4%, Estonia 34.6%, Finland 20 %, France 15%, Germany 16.7%, Ireland 15.8%, Italy 27.3%, Latvia 29.6%, Lithuania 35.3%, Netherlands 13.3%, Poland 27, 8%, Portugal 24.5%, Romania 34.8%, Slovakia 19.5%, Slovenia 28%, Spain 20.3%, United Kingdom 12.9%.