Cyprus’ Fiscal Council on Thursday released its mid-year report for 2024, delving into the country’s economic performance so far, and flagging up areas of strength and vulnerability.
In addition, the report underscored the need for careful fiscal management to sustain growth while addressing long-term challenges.
The report observed that the Cypriot economy has shown resilience, with a growth rate projected to reach 3 per cent in 2024, a figure significantly higher than the broader Eurozone average.
This growth is largely driven by increased investment activities and stable private consumption.
The report stated that “the economy is exhibiting continued dynamism, bolstered by heightened investment activity coupled with sustained private consumption”.
Despite these positive trends, the council warned of potential risks that could derail this growth trajectory.
It noted the pressures on household disposable incomes, which have seen a decline, yet consumer demand remains steady.
This paradoxical situation, the council said, is explained by the rise in consumer loans, which, while sustaining consumption, also increase household debt levels.
“There is an increased demand for consumer loans by domestic households, which maintains their consumption levels, but also leads to imbalances in growth, partially sustained by a slight increase in household debt,” the council said.
The council said that it remains cautiously optimistic, predicting that household disposable incomes will recover over the next two years, which should support private demand and mitigate some of the current debt-related concerns.
Inflation remains a key concern, with the council acknowledging the significant pressure it places on consumers.
The report noted that while inflation has driven up prices, leading to stagnant or declining real incomes, the private sector has managed to maintain consumption levels.
“Despite the rising pressures due to the relative stagnation of incomes against the generalised price increases of the past two years, consumer demand remains stable,” the council said.
Moreover, the Cost of Living Adjustment (CoLA) mechanism, which has seen wages partially adjusted to inflation, has also played a role in supporting consumer spending.
However, the council warned that this mechanism could exacerbate inflationary pressures if not carefully managed.
The report outlined several strategic recommendations aimed at ensuring fiscal stability and sustainable growth.
A key priority, according to the council, is controlling public expenditure, especially in areas where spending is inflexible.
The council advised “restraining inflexible expenditures to levels that align with the medium and long-term revenue prospects of the Republic of Cyprus, rather than short-term and non-recurring revenue growth rates”.
It also called for adherence to the new European Union fiscal governance rules, which necessitate that any increase in spending be offset by corresponding savings in other budget areas.
This approach, the council argued, will help maintain fiscal discipline and avoid unsustainable debt levels.
The report also addressed the challenges in the healthcare sector, particularly the financial sustainability of the State Health Services Organisation (Okypy).
The council suggested that any further funding for hospitals should be contingent upon strict timelines and deliverables, ensuring that the healthcare system becomes more self-sufficient.
“Any extension of funding for Okypy hospitals should be accompanied by a strict timeline and a roadmap of deliverables,” the council said in its report.
Environmental commitments, particularly regarding climate change, were also highlighted in the report.
The council stressed the importance of calculating the Republic’s obligations related to climate and energy in the projected expenditures.
In this context, it advocated for investing in infrastructure and initiatives that will deliver long-term benefits, rather than merely paying for emission rights.
The council also underscored the need for better data collection to support policy-making, particularly in understanding the impact of foreign businesses and investments on the Cypriot economy.
The report called for comprehensive data gathering to “support the development of policy options that strengthen the positive footprint of foreign businesses in Cyprus while supporting the permanence of these foreign direct investments”.
“The strengthening of the currently shallow capital market will be key to this goal,” the council added.
It noted, however, that this “must be preceded by a targeted improvement in the currently inadequate data collection, which leaves the Republic in a state of ignorance and, consequently, in a position where it is unable to develop policies to protect the economy from the increased risk of reversal of flows, particularly when these concern productive investments”.
