Filenews 8 May 2024
A high degree of uncertainty once again surrounds this year's economic forecast profile for the Cypriot economy due to the ongoing war in Ukraine, the US, UK and EU sanctions imposed on Russia, but also due to the conflict in the Middle East.
This is mentioned, inter alia, in the Stability Programme 2024-2027, as approved by the Council of Ministers on 30 April 2024 and submitted to the European Commission.
The overall objective of the fiscal policy strategy outlined in the Stability Programme 2024-2027 and published on the ministry's website is to support economic growth by maintaining fiscal sustainability and reducing public debt, as a percentage of GDP, in a sustainable manner.
At the heart of the Government, the strategy is guided by the implementation of the National Reform and Resilience Programme, which includes the main national policies for sustainable growth and enhancing competitiveness.
Consequences
The Ministry of Finance documents the consequences of the sanctions, which have affected professional services such as accountants and lawyers, while there are also consequences in the tourism sector due to the conflicts in the Middle East. Despite the slowdown in growth in 2023, the Cypriot economy is demonstrating continued strength and resilience even with the new external shock stemming from the conflict in the Middle East.
The forecast for 2024 itself
The growth forecast for 2024 has not been revised and remains unchanged at 2.9%, similar to the forecast included in the 2024 budget (October 2023). Real GDP growth is forecast to accelerate further to around 3.1% in 2025, 3.2% in 2026 and 3.3% in 2027.
From a sectoral perspective, growth is expected to be broad-based. The sectors expected to contribute most to growth in 2024-2027 are those related to trade and tourism activities. Other contributing factors, but to a lesser extent, are increased turnover in technology companies and the construction sector.
After 2023, only two sectors recorded little negative growth, finance and insurance and other business services (due to sanctions imposed against Russia).
However, they are projected to make a slightly positive contribution over the period 2025-2027. The expected decline in tourist arrivals and per capita spending from Israel in 2024 will be partially offset by increased arrivals from other high-spending countries, such as the Nordic countries, Switzerland and France. Tourism is expected to continue, improving in 2025-2027 but at a slower pace since reaching pre-crisis levels.
Where are the risks identified?
Risks related to the projections presented in the update of the Stability Programme are mainly tilted to the downside, given the highly uncertain external economic environment, the Ministry said in its Stability Programme.
In particular, the ongoing conflict in the Middle East and a possible escalation could lead to a negative deviation from the baseline macroeconomic scenario presented in the Programme, mainly through its impact on tourism and investment.
Moreover, the ongoing war in Ukraine, showing no signs of significant de-escalation, poses risks through the channel of further sanctions that will negatively affect the services sector.
Moreover, considering Cyprus' high sensitivity to the price of oil and its impact on the cost of electricity production in the country, geopolitical unrest around the Middle East region and Ukraine threatens a new round of oil price increases.
The increase in the cost of electricity is transmitted to the price of finished products, thereby affecting disposable incomes and, as a result, consumption. Private consumption and investment may also be dampened by tighter than expected financing conditions. Developments in the banking sector continue to be seen as a source of downside risk due to the ratio of non-performing loans (NPLs), although the risk can be classified as medium to low, taking into account the ongoing efforts to effectively reduce the level of NPLs.
Which sectors support growth?
Growth in 2024 will be supported by domestic demand.
The ministry states in the program that investments will be enhanced by implementing a significant number of projects included in the sectors of tourism, transport, energy, health and education, which are also supported by the RRF (Recovery and Resilience Plan) projects and will have an impact on growth in the period 2023-2026, but mainly in 2024-2025. Private consumption is expected to slow down in 2024, but is projected to remain the main driver of GDP growth alongside government consumption.
Regarding the Technology, Information and Communication sector, which has shown significant growth in recent years, the state will continue to support growth through the expansion of the turnover of foreign companies in the technology sector that have established themselves in Cyprus in recent years.
Climate change, Fit-for-55 and structural plans
Efforts to decarbonise the Cypriot economy through the EU Green Strategy, including the Fit-for-55 package, include the long-term energy policy agenda and this will be reflected in the updated Energy and Climate Plan currently underway. Climate change is at the forefront of the Government's agenda, the Stability Programme says, and the fiscal implications of the green transition must be taken into account.
In this context, the Government is also in the process of tax reform, which will include a green tax in order to improve the framework of Cyprus' Long-Term Development Strategy.
2024 is a transitional year, in which Member States have submitted their stability plans in April for the last time, while preparing to submit their new medium-term fiscal structural plans later in the year, together with their annual progress plans.
Therefore, this year's Stability Programme is drafted along the lines of the existing Code of Conduct, albeit more concise, focusing on the presentation of the Cypriot government's spring forecast for the period 2024-2027, as prepared by the Ministry of Finance.
The macroeconomic and budgetary projections underlying this update of the Stability Programme were submitted to the Fiscal Board for approval and the Council concluded that the aggregates for GDP and the budget balance, as projected by the Ministry of Finance, are considered realistic for the programming period under review.
