EU: Cyprus growth model ‘unsustainable’

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The European Commission has underlined the need for Cyprus to reduce its reliance on fossil fuels and accelerate the development of renewables.

Its European Semester for 2022 called on Nicosia to develop a more diverse and environmentally sustainable model for economic growth.

The Commission also urged Cyprus to improve the governance of state-owned entities in line with international standards, to strengthen the supervision of the financial sector and the legal framework to enforce court decisions.

Also, in an assessment of the 2022 Alert Mechanism, the Commission noted the country is facing excessive macroeconomic imbalances.

It said that public and private debt rates were reduced due to the economic recovery achieved in 2021, with non-performing loans declining but remaining high.

However, the Commission said the Russian invasion of Ukraine causes uncertainty due to the country’s exposure to Russia through the sale of services.

  • The Commission assesses the goals of the country’s Recovery and Resilience Plan and adds that the economy would benefit from improving the governance of state-owned entities in line with international standards
  • reducing overall reliance on fossil fuels and further diversifying energy supply by accelerating the deployment of renewables,  further streamlining permitting procedures and expanding
  • Develop energy interconnections with neighbours while extending and accelerating energy efficiency measures, including in the transport sector
  • strengthening the legal framework for the enforcement of court decisions and contractual claims
  • strengthening the supervision of the financial sector
  • making the country’s economic growth model more diverse and environmentally sustainable, building on the support of the national recovery and resilience plan and implementing a long-term strategy

Cyprus’ Recovery and Resilience Plan includes measures on “strengthening financial and fiscal stability to achieve a sounder banking sector, reducing risks related to private debt, improving supervision of the non-banking sector, and creating a more effective, efficient and fairer tax system.”

The report also points out that the national plan works towards “increasing the efficiency and digitalisation of the public sector, including the justice system, and improving digital connectivity and introducing further anti-corruption measures”.

Also, the plan works toward improving access to quality healthcare and enabling the digital health transition, increasing the quality of education and training, including digital skills, and fostering youth employment.

Decline in NPLs

Executive vice president Valdis Dombrovskis said the Commission analysed the macroeconomic imbalances for 12 member states and that Greece, Italy and Cyprus were experiencing excessive imbalances.

In the case of Cyprus, the Commission notes that vulnerabilities in the country’s economy “relate to high government and private debt, large current account deficits and a still high stock of non-performing loans”.

“The government and private debt-to-GDP ratios declined thanks to a strong economic rebound in 2021 again.

“Non-performing loans of the banking sector declined substantially thanks to large sales of such loans to credit acquiring companies but remain high”, the Commission notes in its analysis.

“The current account deficit is large despite an improvement in 2021, and moreover is projected to widen in 2022 and only slowly narrow thereafter, thereby not ensuring a prudent net international investment position over the medium term.

“Government and private debt-to-GDP ratios are expected to further improve, in part on the back of economic growth.

“The economic outlook for 2022 is surrounded by heightened uncertainty related to the impact of Russia’s invasion of Ukraine in view of particularly sizeable trade of services exposures.

“If implemented timely and effectively, the RRP has the potential to contribute to a significant reduction of vulnerabilities, but additional policy action is warranted”.