19 July 2021
The Recovery and Resilience Facility, digital transformation and the Stability Programme 2021-2024 are only some of the factors underpinning the Government’s attempts to revive and revamp the island’s economy. Finance Minister Constantinos Petrides explains how, following the health crisis that turned into an economic one, Cyprus is now recovering, growing and overcoming challenges and obstacles.
By Marianna Nicolaou
How would you assess the state of the Cyprus economy today? What are the major existing structural weaknesses we need to overcome?
The economy is currently at the stage of recovering from the COVID-19 pandemic, which has caused significant disruption to business activity and consumer demand. However, the real recovery is expected to begin in the second half of this year and we envisage reaching pre-crisis levels by 2022. Going forward, it is imperative to deal with a number of structural challenges that the economy is facing, which are, in general, related to competitiveness, the justice system (for contract enforcement), productivity in the public sector, Local Authority reform and much more. These structural issues constitute part of the reforms that are envisaged to be implemented through the national Recovery and Resilience Plan and it is therefore imperative to achieve maximum political support for their implementation.
Cyprus’ public debt reached €26 billion, or 124% of GDP, at the end of February, pushed by increased Government borrowing to support the real economy during the coronavirus pandemic. When do you expect to see the public debt back under 100% of GDP?
It is true that, by the end of December 2020, Cyprus’ public debt had reached €25 billion or about 119% of GDP compared to 94% at the end of 2019. However, this increase was largely reflected in the accumulation of significant cash reserves (about 20% of GDP) and to a lesser extent in the decrease of nominal GDP and the widening of the primary deficit as a result of the pandemic. During the first two months of 2021, Cyprus’s public debt saw an increase, reaching €26 billion, which was attributed to a new EMTN issue of the order of €1 billion in February 2021. As a percentage of GDP, the public debt remains at the same level, given the positive GDP growth rate in 2021. Based on the latest Ministry of Finance projections, which were incorporated into the Stability Programme 2021-2024, the public debt is expected to decline to below 100% of GDP by the end of 2023.
When do you predict the economy returning to pre-COVID growth levels?
We expect GDP to return to its pre-crisis levels by 2022. Economic activity in 2020 contracted due to the pandemic (by -5.1%) mainly due to the restrictive measures imposed, which significantly reduced economic activity in several sectors of the economy. For 2021, we expect moderate but significant growth in the first half of the year and more pronounced growth in the second half. For 2021, we initially expected GDP to grow by around 3.6% and to accelerate to around 3.8% in 2022, as developments in the tourism sector point to a slow recovery and return to pre-crisis levels in 2023-2024. Taking into account recent statistical data and the implementation of projects included in the Recovery and Resilience Plan, we expect an even better performance than originally anticipated for 2021, where growth is expected to fluctuate between 4.5% and 5.0% and a faster recovery of the economy to pre-COVID19 growth levels.
What are the aims of the Cyprus National Recovery and Resilience Plan?
The Recovery and Resilience Facility that was recently agreed at EU level is expected to be instrumental in the revamping and the resilience of our economy. The National Recovery and Resilience Plan, which will basically constitute the blueprint for our growth policies for the years to come, includes a combination of investments and reforms that will be undertaken over a period of six years. It takes into account the need to mitigate the economic and social effects of the current economic crisis and to strengthen the resilience and the competitiveness of the economy, through a new growth model based on a green and digital transition. The strategic goal of this Plan is “to strengthen the resilience of the country’s economy and potential for economic, social and environmentally sustainable long-term growth and prosperity.” Through the Plan, Cyprus is expected to emerge as (a) a country with high levels of resilience, productivity and competitiveness through a sustainable model of long-term growth, a reformed and efficient public administration, a more efficient judicial system and a modernized tax system; (b) a country where the education system and workforce development are aligned with the skills needed for the future; (c) a country that is one of the pioneers in Green and Digital transition; (d) a country with a resilient health system that follows the best practices of top health systems around the world; (e) a country with rule of law, transparency and accountability and with strong anti-corruption mechanisms; and (f) a welfare state that will strengthen the protection network of those in need of state assistance. Moreover, the Plan also includes the national priorities as reflected in the last National Reform Programme, existing national strategies and action plans, notably the National Energy and Climate Action Plan of January 2020 and the National Digital Strategy of June 2020 and the new growth strategy for Cyprus, which is currently at an advanced stage of preparation.
Where does Cyprus stand in relation to the rest of Europe regarding the digitalization of the public sector?
Cyprus is making notable progress in its development towards becoming a knowledge-based economy and digital technology is a key enabler for this transformation. Even though in the 2020 edition of DESI (Digital Economy and Society Index), Cyprus ranked 24th out of 27 EU countries, the report highlighted the improvement to Cyprus’ scores in all areas, especially in connectivity and use of the Internet, as well as the effective digital solutions introduced to tackle challenges related to the pandemic. Our initial reaction to the pandemic focused on mitigation and containment, which then evolved into a number of proactive measures such as accelerating digitization, not only as a means to support economic recovery, but also to reinforce the country’s resilience against future threats and challenges. By speeding up digital transformation and optimizing excellence in eGovernment, advancing digital skills, facilitating ultra-fast connectivity and broadband penetration and investing in advanced technologies, we aim at developing a sustainable, competitive economy and an accessible, inclusive society, and further strengthening Cyprus’ position as a dynamic regional business hub.
Given the importance of Foreign Direct Investment to reviving the economy, have new initiatives been taken to attract investment in sectors other than real estate and/or renew investor interest in large-scale projects?
Having a competitive economy is a catalyst for attracting corporations and investors that are looking for investment destinations which can provide high returns. In this context, the overarching objective of this Government is to maintain a macroeconomic environment characterized by stability, combined with a favourable investment framework. In addition, Cyprus boasts an extensive network of double tax treaties with 65 countries, and these are an important policy tool with which to promote international economic activity by preventing international double taxation. Furthermore, as part of a package of incentives to promote the island’s economic recovery, investors are able to take advantage of a favourable environment for investments and the Fast- Track Business Activation Mechanism for the setting up of businesses in Cyprus by third-country nationals, which was approved by the Council of Ministers in September 2020. This framework aims to facilitate businesses wishing to relocate or expand to the country and allows company registration and incorporation to be completed within seven working days. Taking all these into account, it should come as no surprise that Cyprus is gradually growing into an international headquartering centre.
Is capitalism as we understand it today failing us? Where do you stand in the debate regarding the adoption of alternative economic systems?
In my opinion, the economic challenges that we are currently facing at a global level do not stem from capitalism as such, even though I do acknowledge that this type of economic system has its drawbacks and weaknesses. For example, the crisis we are now facing is a health crisis which has developed into an economic one. However, it has been shown internationally through the provision of massive fiscal and monetary support packages, that state support is key and instrumental in times when economies are in urgent need of assistance, especially when the causes of the crisis are exogenous, as in the current case.
Can you envisage the global economy in 2030 and its effects on Cyprus?
Even though it is, admittedly, difficult to predict what the global economy will look like in ten years’ time, I expect to see a significant transition towards a greener world, based on international commitments such as the Paris Agreement and the European commitment to reduce CO2 emissions by 55% by 2030. I also expect it to be a more digitalised world, where citizens are able to do business in a much more effective way. Of course, this transition towards green and digital will not be achieved without any negative distributional consequences and it is therefore up to governments to support those segments of society that will be in need of assistance, especially regarding the green transition. Cyprus will be no exception to this and we should therefore stand ready to adopt any necessary social support measures in an appropriate and timely manner.