The Cyprus economy – 2023 in review, forecasts for 2024

Economists Marios Christou and Marios Clerides gave their forecasts for the 2024 economy in an interview with InBusinessNews, where they also revealed the most significant events they believe it was marked by in 2023.

They refer to the challenges the country is expected to face and give an overview of what they expect the economic environment to be in the new year.

High inflation, aggressive interest rate policy, sanctions, the war in Gaza and the recovery of the tourism sector are just some of the events that had a crucial impact on the 2023 economy, with the effects expected to carry through to 2024.

University of Nicosia economist Marios Christou raises the alarm over what he foresees as a shrinkage of the middle class in 2024, what with the salary gap widening even further in 2023.

He also warns that public finances will come under pressure in the new year as the state payroll will increase disproportionately to the country’s GDP and capabilities. Inflation will also continue to have a significant impact, said Christou, as will the future of interest rates, as he believes the European Central Bank’s (ECB) policy has not brought the desired results.

Clerides, meanwhile, likened the war in Gaza to a “2nd Yom Kippur”, saying it has created uncertainty surrounding energy prices and exacerbated the already fragile relations between the oil producing countries.

However, he is also optimistic as he says the Cyprus economy is small and flexible, and as it has proved in the past, small and smart moves can go a very long way.

The "paradox" with inflation and the conundrum with interest rates

According to Clerides, from an economic point of view, 2023 was a relatively good year; however, there was a paradox. Inflation, which had long been below the Eurozone average, suddenly shot up and then declined just as fast.

And so he believes an important element in 2024 that will characterise the economic environment will be interest rates, as he said the ECB “is scratching its head” as to how to react.

“The ECB increased the interest rates to reduce inflation,” said Clerides. “It recently stopped the hikes, however it hasn’t proceeded to reduce them because it is afraid we will be led into a vicious circle.”

Christou, on the other hand, stresses that the ECB’s interest rate policy has made the banks highly profitable and they could be ending the year on €1 billion profits.

He further explained that it is important to increase deposit rates as a measure to counter inflation, as increasing lending rates alone has proven not to work.

“They need to give incentives to those who have excess cash, to deposit it instead of spend it. So, this policy of increasing lending rates alone is not effective,” said Christou.

Given how the banks now have these massive profits, Christou said these should be taxed with the money going to the special fund that was set up to deal with crises in the banking sector, to make sure they are dealt with effectively and “we don’t have what happened in 2013”.

Asked if there were any other measures the government could take to deal with inflation, beyond increasing interest rates, Clerides said there were but they weren’t popular and were rarely implemented.

“Tax increases are a means for fighting inflation, but this isn’t happening because prices are already inflated,” he explained. “This was generally the old logic. That is, in times of inflation, you reduce the consumers’ purchasing power with higher taxes. But we rarely ever see this anymore.”

Both Clerides and Christou say there is a big question mark over how the situation with interest rates will go in 2024.

Christou said: “In 2023, we had the ECB’s aggressive policy which has stopped now however, and this is a very important element. But inflation is still a challenge, as is how the ECB will deal with it. A conundrum is created because the ECB usually follows the (US) Fed’s interest rate policy. Right now, however, demand and in extent economic activity is strong in the USA, as opposed to Europe where it is problematic. The question is whether the ECB will reduce the interest rates before the Fed in 2024.”

Christou highlighted another issue that has been brought on by inflation and that is profiteering, which he said is strongly present. “This in itself is a challenge, how to deal with the many opportunists trying to make a quick buck from the current situation,” he said.

Israel, energy, tourism

For Clerides, the biggest problem facing the Cyprus economy in 2024 is the uncertainty surrounding the war in the Gaza strip.

“If it ends soon, we will return to some sort of normalcy. If it drags on, this could exacerbate relations between the oil producing countries. The last time we had a Yom Kippur war, oil prices skyrocketed. This is the big challenge created by this uncertainty,” said Clerides.

He added that the war also poses a threat to another vital sector of the economy; tourism.

Christou agrees. As he pointed out, the island’s tourism sector recovered to pre-pandemic levels in 2023 and wasn’t particularly affected by the war as it broke out towards the end of the season. It is anyone’s guess how the situation will unfold in 2024, however, he added.

But as Christou pointed out, Israel simply cannot take another dragged out war financially and it may put an end to it by the end of winter or early spring.

“It is extremely costly to go to war. Beyond the cost of the war material, the majority of those who have gone to fight in Israel are reservists, who have left the productive sector to fight. This creates problems in production and economic activity. They will try to end the war as soon as they can and I think this is what they are trying to do,” said Christou.

Widening of gap between rich and poor, CoLA, housing

According to Christou, a very important event for the economy in 2023 was that the wage gap started to increase and this will continue in 2024, further shrinking the middle income class.

Cyprus used to have a very strong middle class, he pointed out, which pushed consumption and economic growth up. But now it is being wiped out as it struggles to deal with the high cost of living and inflation, said Christou.

As such, he says the Cost of Living Allowance (CoLA) is both a blessing and a curse. A blessing in that those who receive it are not at risk of bankruptcy, and a curse in the sense that it drags out the divide between the rich and poor, as it is not implemented across the board.

“If someone receives CoLA they can manage to a certain degree and keep up with the increases. If they don’t however, they remain stagnant and their purchasing power drops. And this is because CoLA is not implemented across the board and particularly, it is not implemented in the broader working class and where there are no collective agreements in place,” Christou explained.

Furthermore, Christou said the real estate market recovered in 2023, which was a very important development. However, this created problems for Cypriots as acquiring a home, especially for the lower income earners, is out of the question.

State payroll and public finances

Public finances are another major challenge for the Cyprus economy in 2024, said Christou. This is because the state payroll is expected to increase by around €500 billion, which he believes is not sustainable.

“When you have an economy that grows at a rate of 3%, it can’t take a five-fold increase of the state payroll. We are going back to what we did before the crisis. We need to find the right balance to put an end to this situation. This ever-increasing inflexible spending needs to stop,” said Christou. “Multiplying the state payroll by five times the growth of the GDP is not sustainable. Therefore, public finances will be a challenge, even though they look healthy right now and are showing a primary surplus. Measures must be taken immediately.”

Other landmarks of the economy in 2023-2024

One major issue that will prove crucial for the 2024 economy is natural gas and the outcome of the negotiations over Cyprus’ maritime blocks, said Christou.

Another important element will be the recently-passed foreclosures framework, which he said will help resolve a number of issues. “This is something that happened in 2023 and will start paying off in 2024,” said Christou.

The economist also welcomed the 2023 court ruling that vindicated two depositors who suffered a haircut on their deposits in 2013 as a major landmark for the economy, as he said the court “basically said that the institutions have a responsibility over what happened”.

Another very important landmark was the arrival of numerous investment funds to Cyprus, creating a €10b market which is growing.

“Beyond the fact that all this capital is coming to Cyprus, it is also opening job opportunities for our own youth, who have studied economics and are given the opportunity to be employed with a respectable salary and decent job. This helps develop a particularly good services sector,” said Christou.

Cyprus’ resilience against geopolitical developments

Regarding the war in Ukraine, Christou said that beyond the tragic aspects of the situation, from an economic point of view, the international markets have more or less absorbed the problems that emerged.

The stock market indexes are not showing any problems because of the war, as was the case initially.

Cyprus’ economy was mostly impacted by the sanctions, as well as its tourism sector. On the other hand, many companies relocated to the island, which helped the economy.

Clerides highlighted Cyprus’ resilience. “Cyprus’ economy is quite resilient, as it is small and flexible. Due to its size, with some small moves it can survive; it has proved this many times before,” he said. “For example, when the first oil crises broke out, Cypriot businesspeople became active in the Middle East and we were not particularly hit by the Gulf crisis. Just when we think the Cyprus economy will collapse, with one small move, such as for example bringing more tourists from other markets, it gets back on its feet,” said Clerides