Cyprus should exploit the current favourable growth momentum to implement structural reforms that would boost the competitiveness of the economy, Hellenic Bank’s Department of Economic Research said in review for H1 2019.
The department’s baseline scenario forecasts a GDP growth rate of 3.4% in 2019 and 3.2% in 2020 with the unemployment rate declining to 6.6% this year and inflation in the region of 1%.
Hellenic said the “recovery phase has passed, and the economy is settling into its growth phase”.
It is encouraged by the fact that the “recent economic performance has not been driven by government public spending and the related multiplicative role, nor is it funded from unsustainable credit-fuelled consumption as observed in the pre-crisis period helping to avoid the repeat of the boom-bust cycle experienced in the economy”.
Hellenic economists highlight that “better than expected macroeconomic performance, does not justify complacency and does not signal a relaxation of efforts in further economic reform.”
They called for the implementation of important structural reforms that will help to strengthen the competitiveness of the Cypriot economy, such as privatization, along with reforms in key areas such as the Public Administration and local government, the justice system and education.
Moreover, further improvement was needed in Cyprus’ digital public services (e-government) including the promotion of electronic payments, which in turn will help develop a sustainable economy.
“It is essential to use the current growth momentum for the implementation of the above-mentioned reforms. Such reforms are easier to implement when economies are growing since fiscal buffers can absorb the required transitional costs,” the review said.
Hellenic argued that despite the important steps taken towards restoring the positive economic climate, some degree of uncertainty remains, as the country still has certain issues to resolve.
One key area is the high level of non-performing exposures (NPEs), high unemployment and the high private and public debt, which are however on a steady declining trend.
“The high level of NPEs, continue to pose significant risks to the stability of the domestic banking system and to the outlook for the economy.”
The improved macroeconomic environment is expected to support banks’ efforts to tackle the high level of delinquent loans, said Hellenic.
The review also warns that the economic outlook could be negatively influenced due to slower than expected growth in Europe and the global economy due to rising trade tensions between USA and China and uncertainty over the effects of Brexit and a weaker British pound.
Meanwhile, increased geopolitical tensions in the Middle East and Eastern Mediterranean could trigger adverse spillovers to economic confidence, tourism and consequently to the aggregate economic activity.
“Geopolitical tensions in neighbouring countries render Cyprus a safer tourist destination and could, therefore, counterbalance, to some extent, any potential reduction in tourist traffic from the UK,” said the review.
