On 29 March 2022 the IMF published a report on the economic situation of Cyprus, following discussions under Article IV of the IMF’s articles of agreement.

Cyprus is vulnerable to the economic consequences of the geopolitical tensions and the war in Ukraine, following on from the crisis caused by the pandemic. Economic output was back to pre-Covid levels in 2021, and the support given during the pandemic has mostly been phased out. Tourism has not yet recovered and is further hit by the hostilities in Ukraine as the sector is dependent on arrivals from Russia which account for around 20% of total arrivals.

Economic growth was around 5.5% in 2021 but is projected to fall to around 2% in 2022 owing to the impact of the Ukraine war, the sanctions on the export of services and the effect of higher energy and food prices. If the geopolitical situation returns to normal the economic recovery is expected to recommence in 2023 and into the medium term with potential growth increasing to around 3% by 2027. The risks are however to the downside owing to the possibility of escalation of the war and sanctions. Uncertainties around the future course of the pandemic could also disrupt the recovery.

Any further support for businesses and households should be temporary and targeted so it does not affect the reallocation of labour to the growth sectors. The social safety net could be strengthened by extending unemployment benefits and tying them to labour market activation. Support may need to be given to viable businesses affected by the economic fallout from the war, for example tourism, but this may not be necessary if employment increases as a result of growth in other sectors.

Fiscal discipline must be continued, and Cyprus may need to reinstate the immovable property tax to help offset spending pressures. The additional government revenues flowing from the tax could be used to increase public investment.

The Recovery and Resilience Plan (RRP) presents an opportunity to pass reforms to deal with obstacles to growth. Weak governance, skills gaps and mismatches, and digital and infrastructure gaps hinder prospects for economic growth. The RRP involves reforms to strengthen the rule of law; control corruption; and increase government efficiency by promoting e-government and administrative decentralization. Skills gaps and mismatches can be addressed by enhancing digital skills at all stages of education; and strengthening vocational education. The RRP envisages public investments in digital infrastructure and improvements to the e-communications market. The IMF report considers that the reforms should be implemented faster.

Cyprus is targeting a reduction in carbon emissions of 32% by 2030, relative to 2005, for sectors outside the EU Emissions Trading Scheme (ETS). Energy efficiency will be increased by promoting generation of electricity from cleaner sources; increasing energy efficiency in the residential sectors; and enhancing public transport. The government intends to introduce a carbon tax on fuels used in non-ETS sectors. To finance the energy plans, further measures such as feebates may be required.