Macroeconomic situation in Cyprus

:Cyprus has been emerging from a severe economic recession compounded by the collapse of its financial system in 2013. Economic policy has focused mainly on the fiscal discipline, structural reforms, and privatization required by the bailout program. Following the banking sector’s recovery, Cyprus lifted all capital controls in April 2015.

Overview Of The Economy

Cyprus became an EU member in 2004 and adopted the euro as its national currency in 2008 and was listed by the IMF as one of the 31 advanced economies in the world in 2011. However during all its history the Cyprus economy has experienced external shocks that have generally been followed by astonishing revival. The Greek sponsored coup d’etat and subsequent Turkish invasion in 1974 of the northern part of the island led to a sharp real GDP contraction of 16.9% in 1974 and 19% in 1975. But the collective work of the society led to a rapid bounce back, with growth of 18.2% in 1976 and 15.8% in 1977[3], followed by an uninterrupted period of strong growth lasting more than 30 years. Since independence, the economy has gone through several transformations: from an exporter of minerals and agricultural products in 1961-73, an exporter of manufactured goods from the late 1970s to the early 1980s, to transforming into an international tourist, business and services centre in the 1980- 1990s. Classified by the World Bank as a high income country, today the economy is mainly built upon the services sector, including tourism, financial services and real estate, which accounts for over 80% of the island’s total GDP and around 75% of employment.[2]

The island went through yet another transformation in 2013, when at the height of the eurozone sovereign debt crisis Cyprus became the fifth EU member state to request a financial assistance package from the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF) – collectively known as the Troika. The Cyprus 2013 bailout captured the attention of the world, as it was the first and only bailout worldwide with a condition to impose a bail-in of bank deposits – a measure considered inconceivable until then. Following the country’s €10-billion bailout deal and the controversial bail-in decision by the Eurogroup, restructuring the economy and restoration of credibility in Cyprus’ banks has been a top priority – and true to form, the country’s economic recovery has been faster than many first projected.[2]
Tradable services sectors, which rely significantly on external demand, are leading the recovery, while activity in the construction and real estate sectors remains subdued. In the wake of the housing market bust, declining output in the financial, construction and real estate sectors contributed significantly to the contraction of GDP during the crisis. The recovery in 2015 was led mostly by tradable services sectors, including tourism and professional services, which rely significantly on foreign demand. In these sectors, cost-competitiveness was supported by low prices and the depreciation of the euro. Activity in the financial, construction and real estate sectors remained subdued well into 2015.[3]

[1]World Bank
[2]Cyprus Profile: http://www.cyprusprofile.com/en/economy/
[3]COMMISSION STAFF WORKING DOCUMENT Country Report Cyprus 2016

EXPORTS

FROM

CYPRUS

In 2014 Cyprus exported $3.64B, making it the 120th largest exporter in the world. During the last five years the exports of Cyprus have increased at an annualized rate of 5%, from $2.84B in 2009 to $3.64B in 2014. The most recent exports are led by Packaged Medicamentswhich represent 11.1% of the total exports of Cyprus, followed byRefined Petroleum, which account for 8.4%.

Economic Complexity of Cyprus

The economy of Cyprus has an Economic Complexity Index (ECI) of 0.61 making it the 42nd most complex country. Cyprus exports 222 products with revealed comparative advantage (meaning that its share of global exports is larger than what would be expected from the size of its export economy and from the size of a product’s global market).

Economic Growth

Growth resumed in Cyprus in 2015, following three consecutive years of contraction in real GDP, but is still far from buoyant. Real GDP was significantly hit by the crisis, declining by 2.4%, 5.9% and 2.5% in 2012, 2013 and 2014, respectively. Yet several consecutive quarters of expansion in 2015 confirmed that the deepest point of the recession was past, with real GDP growth for the year reaching 1.6%. Nominal GDP, however, remained flat, having fallen by about 7.2% in 2013 and a further 3.7% in 2014, following downward price adjustment.
This low inflation trend, accentuated in 2014 and 2015 by lower energy prices, supported real private consumption. The latter recovered relatively faster than output, growing by 0.6% in 2014 and rising further in 2015.
The other factor contributing to the resilience of private consumption was a lower debt-servicing ratio, explained by a decline in lending rates and an increase in the incidence of non-performing loans. Low inflation also supported tourism exports, but despite this, the contribution of net foreign trade to growth has remained subdued. In the course of macroeconomic adjustment public consumption was scaled down, while total investment fell significantly in both 2013 and 2014. Only in 2015 did investment begin a very mild recovery.[1]
Growth is expected to be stronger in 2016 and 2017, driven by both domestic and external sources. It is forecast to gain momentum gradually and reach 2.0 % in 2017(1 ). The support afforded by low energy prices is expected to begin to fade gradually in 2016, limiting the scope for acceleration in the growth of private consumption. At the same time, balance-sheet adjustments and increasing investment are expected to assist a return to more balanced growth. A shift towards external demand as a source of growth relative to domestic demand is also expected to facilitate a reversal of the economy’s savings-investment position and help unwind current imbalances.[1]
The unemployment and inflation projections have been adjusted downward. The unemployment rate for 2015 has been revised down slightly to 15.5 percent, in line with the outturn to date and the upward revision to the growth forecast, with continued gradual decline expected in subsequent years. Inflation was revised down to -1.6 percent for 2015, given the outturn to date. Inflation is still projected to turn positive in 2016, but to a slightly lower level than previously forecast due to the further downward revision in world oil prices.[2]

Main Economic Sectors:

Cyprus hosts the largest third-party ship management centre in the EU, underlining the success of the country’s formidable maritime sector. The Cyprus Registry is classified as the tenth largest merchant fleet in the world and the third largest fleet in the EU and flying its flag are some 1100 ocean-going vessels and 767 non-convention size vessels, totalling a gross tonnage of around 22 million.[2]
The tourism sector has shown solid growth in spite of the crisis and 2015 saw record numbers of tourist arrivals. Efforts to upgrade the product could lead to a renaissance of the industry, which currently contributes around 11% to GDP. Traditionally, tourism was the key driving force of Cyprus, however today professional and financial services have overtaken its position.[2]
Although traditionally strong, primary sectors such as agriculture and manufacturing – contributing around 1.9% and 5% respectively to GDP – have faced challenges which have led both to follow a similar strategy of creating value-added products targeting niche markets willing to pay a premium on quality. Both sectors of the economy have placed strong focus on innovation and diversification, which has supported the industries’ efforts to increase productivity.[2]
Energy will be a significant new source of growth, following the discovery of natural gas reserves in Cyprus’ EEZ. The island has ambitious plans to become a regional energy hub in the Eastern Mediterranean and the successful extraction of natural gas from its waters could allow the island to export to European and East-Asian markets. The already-established involvement of major oil and gas companies in Cyprus, such as French energy giant Total and the Italian Korean consortium Eni-Kogas, have strengthened the development of these plans coming to fruition.[3]

[3]https://www.theguardian.com/business/2014/nov/10/oil-gas-reserves-cyprus-greece-turkey