Filenews 31 December 2023 - by Dr Onisiforos Iordanous
As we bid farewell to 2023, we look back on the past and look ahead to the economic challenges of 2024.
Despite the economic consequences of Russia's war against Ukraine, the Israeli-Hamas conflict and the economic crisis as a result of the pandemic that affected the entire spectrum of the economy, with the help of the European Union, the Cypriot Government and the sacrifices of society, Cyprus managed to manage in the best possible way their economic consequences compared to other European countries. Through measures to support businesses and employees, utilizing European support tools and domestic financial resources, measures were adopted to strengthen the economy, preventing to a significant extent a wave of business bankruptcy and staff layoffs.
Today, the Cypriot economy continues to resist despite experiencing an economic slowdown with a growth rate of 2.5%, with unemployment close to 6% and steadily approaching the level of full employment and with a harmonized Consumer Price Index that in October 2023 increased by 3.6% compared to October 2022. Tourist arrivals for 2023 are slightly below the record set in 2019 and with record revenue. Fiscal indicators remain positive, while recently Moody's upgraded the credit rating of the Republic of Cyprus after 11 years back to investment grade.
In general, we can say that in 2023 the Cypriot economy developed not so badly, at a time with a volatile international economic environment, mainly due to the ongoing wars and their consequences. The major challenges facing the Cypriot economy remain, 2023 leaves behind many open fronts. Problem management needs to be tackled effectively if we are to see a better future. Let 2024 be years of major reforms.
Challenges and reforms
Efforts should be made to further strengthen new dynamic sectors of the economy beyond the traditional ones that are currently tourism and the service sector in general. These new sectors will give the economy greater flexibility and openness and will bring about sustainable growth, ensuring greater future prosperity for citizens. Such areas are innovation, digital technology, research, private education, but also green growth. Cyprus in particular can and needs to further improve its research and innovation sector in order to be able to increase its productivity. This will come through the reform of the secondary and higher education system and the entrepreneurship sector, including the significant strengthening of research centres, start-ups, and spin-offs.
It is very important to continue to further promote the digital transformation. Taking measures to address the problem of labour shortages especially in sectors such as tourism, catering, agricultural production and construction. Continue and complete public sector and local government reforms. Further implement the modernisation of the judicial system and the legislative framework for faster administration of justice and ensure transparency and a more effective fight against corruption. Change the tax system by giving more tax incentives that will promote domestic and foreign investment and help grow the economy. Implementation of the new green tax reform that will encourage through incentives investments based on green energy but also by increasing the taxation of technologies / sectors that potentially pollute the environment, resulting in the reduction of environmental pollution and the increase of green energy. Reform of the pension system and more effective management of our biggest problem after the Cyprus migration problem, where more drastic measures are needed to better manage the problem.
The opportunities of the European Union's Recovery and Resilience Fund must be fully exploited. Through this programme, Cyprus will be able to raise funds linked to specific sectors of productive investment related to green and digital reform. If it makes good use of them, it will be able to modernize its economy, create new and better quality jobs, and create high growth rates.
Public debt and government expenditure
Although fiscal indicators remain positive, a continued reduction in public debt does not give rise to complacency. Lately we have seen an increase in government spending, we must tame this if we do not want to see public debt rise again and any surpluses we expect evaporate. Today, state payroll spending amounts to 28% of total state budget spending, limiting the government's potential for more development spending. From 2012 until today, in 11 years the state payroll has increased by €1.1 billion. Due to the increase in the permanent inelastic expenditure of the state that will come from the release of 2400 jobs in the public sector in just the last nine months, the medium and long-term risk of fiscal derailment is real, so any decisions should be taken within the framework of fiscal discipline and which will not create a tendency to derail the state wage bill.
International environment and inflation
The European economy has proved resilient to the energy crisis caused by the Russian-Ukrainian conflict and the NextGenerationEU package provides a boost to the economies of the European Union. Currently, inflation at European level is on a downward trend, possibly remaining somewhat high for a few more months but estimated to decline towards mid-2024 to close to 2%. This assessment is subject to a high degree of uncertainty and is influenced by developments in the Russian-Ukrainian crisis but also by the crisis in the Middle East and the degree of safe passage of ships through the Red Sea.
The European Central Bank's interest rate hike has stalled, with its current interest rate level appearing to gradually achieve the desired effect, ensuring that inflation stabilizes close to 2% in 2024, which is its policy. The continuous increases in the base rate have resulted in more expensive borrowing for businesses, households, but also for the states of the European Union, where the refinancing of their public debt is done at higher interest rates, with all the negative consequences on its management.
Today's statistics on the European economy suggest that the European Central Bank will succeed in the new year in achieving its goal of reducing inflation without causing a recession in the eurozone. In order not to risk with its policies to cause a further slowdown of the economy and an increase in unemployment, possibly even a recession, it will stop implementing a contractionary monetary policy and will proceed to reduce interest rates after the 2nd quarter of 2024 in my view in case we do not have some negative developments in the coming months. the war in the Middle East and Ukraine that will breed inflation. A possible spillover of the war into the Middle East could turn into a disaster because it would affect the production and distribution of oil and its price, which would once again fuel inflation.
*Professor of Economics and Finance – Vice-President of the Department of Economics, European University.
