21 Nov Interview with Dr. Chris Patsalides, Economic Adviser to the President of Cyprus
BF: How has Cyprus managed to navigate the challenges posed by the pandemic, war in Ukraine, sanctions against Russia and soaring inflation and energy prices?
Chris Patsalides: Cyprus is a small and open economy and absorbs shocks easily. Its size, flexibility and agility mean it can exit recession at great speed. This is what happened with the pandemic and then with the energy crisis. The economy took a hit in 2020 with a GDP drop of 4.4% year-on-year, but it recovered quickly in 2021 and GDP growth reached 6.6% year-on-year, while in 2022 it achieved almost 6% year-on-year growth. The economy recovers quickly because it adjusts quickly. The business sector takes corrective action and navigates swiftly in the right direction, guided by the comparative-advantage principle. A good example is the diversification of the tourist product, resulting in a 32% year-on-year hike in tourist arrivals in the first half of this year. Another example is the active pursuit of new markets and products, following the sanctions against Russia owing to the annexation of Crimea in 2014 and the invasion of Ukraine in 2022. It is worth pointing out that Russian deposits in the banking system currently account for only 1% of total deposits.
The Cypriot economy is further supported by a healthy public sector maintaining strict fiscal discipline and by a sound banking sector that provides the necessary credit to support recovery and growth, given its strong surplus liquidity. The dynamics of debt and equity are leading to the further strengthening of the economy through a reduction of public and private debt to GDP. This is achieved by maintaining fiscal surplus and through the injection of EU funds (such as the Recovery and Resilience Fund), in conjunction with a strong increase in foreign direct investment in the post-COVID-19 era.
On the inflation front, Cyprus is currently performing quite well. Following the sharp price increases of 2022, the harmonized inflation rate (HCIP) recorded in June 2023 is 2.8%, compared to a Eurozone average of 5,5%. As one would expect, the ECB interest rate hikes and the recent drop in energy prices are reducing inflation. Furthermore, in the case of Cyprus, fiscal policy is very much aligned with the ECB’s monetary policy, as both policies are restrictive and re-enforce each other in the combat against inflation. Moreover, wage increases do not seem to have placed price stability under jeopardy.
The economic progress achieved during recent years has been acknowledged by the rating agencies. The country has crossed over into investment-credit ratings, apart from Moody’s, which nevertheless has a positive outlook – its recent report names Cyprus a “potential rising star”.
BF: What have been some of the key drivers for growth within the Cyprioteconomy?
Chris Patsalides: Cyprus is mostly a tertiary sector economy with services generating about 84% of GDP. Tourism and the business sector have been behind most of the recent growth, though key investments have taken place in the health and education industries.
Cyprus is a regional business center, as it attracts companies from various countries because of its attractive offering: high quality of life, talent (ranked third in the EU in terms of university graduates per capita), highly qualified business professionals, competitive tax regime, comparatively low labor costs and a supportive, pro-business government. As a result, a new feature of the economy is the strong growth of the technology sector. About 13,000 work permits have been given to people from abroad currently working in the technology sector. This is something like 3% of the total workforce. ICT professionals moving to Cyprus bring their families, which means more schools and houses and more benefits for the economy. Some studies show the contribution of ICT to GDP has matched, and even surpassed, that of tourism, which is estimated at 10-15%.
BF: What type of investor or tax incentives are being pursued to remain attractive for investors at a time when you are implementing the highest standards of compliance and transparency?
Chris Patsalides: Cyprus has a competitive tax system and as the economy moves into the digital and green era, the government aims to further modernize the tax system to enhance transparency, fairness, simplification, efficiency and competitiveness. However, the tax element is one many attractions. What really matters is the underlying strength and overall competitiveness of the economy in terms of the quality and cost of services provided.
The government’s vision is to make Cyprus one of the best places in the world to live, work and do business. Vision 2035 is the new, long-term strategy for the sustainable development of the Cypriot economy. The strategy consists of over 240 actions, aligned with EU-driven initiatives such as the Recovery and Resilience Fun. It encompasses structural reforms and initiatives to enhance the added value of existing sectors and promotion of new ones. It is the projected return arising out of the implementation of this strategy, that provides the strongest incentive to invest in Cyprus.
A necessary condition to achieve our vision and goal is the pursuit of the highest compliance standards. The President is advocating zero tolerance. The combat against financial crime is an on-going struggle and further steps are being taken.
In the past, Cyprus was slow to react to increased financial crime and high-risk transactions. This has had a negative impact on its reputation. As of 2014, however, the situation changed dramatically and the battle against money laundering gathered force and gained momentum. Cyprus introduced one of the strictest regulatory frameworks in Europe and important steps were taken to ensure implementation. As a result, Cyprus is included in the OECD White List of “largely compliant” jurisdictions, it is fully compliant with FATCA as well as DAC6, and has been cited as an Early Adopter of CRS (common reporting standards of OECD). Perhaps more importantly, the 2020 MONEYVAL report recognized the country’s progress in combating money laundering and terrorism financing. Cyprus received a score of compliant, or largely compliant, on 37 of the 40 technical aspects of the assessment, while just three were rated as partially compliant. MONEYVAl is a permanent body of the Council of Europe and is entrusted with the evaluation of AML/CTF standards across member states.
Recently, the government has announced plans to take further action to enhance its sanctions-related capability and to further strengthen and expand AML/CTF supervision across a wider spectrum of financial activity. On sanctions, Cyprus is working very closely with the competent US and UK authorities to maximize effectiveness and to ensure best practice.
BF: Within the context of EU rules concerning debt adherence and other countries struggling with public debt, how can Cyprus’ efforts act as an example? Can you share some of your learnings?
Chris Patsalides: Clearly during times of crisis and deep recession, governments are required to step in to restore growth and to pursue social policies, as appropriate. In such instances, governments may be running budget deficits, leading to additional borrowing. This was the case for Cyprus, among others, during the COVID-19 era. However, when the economy picks up, it’s only prudent to return to fiscal discipline with a view to reducing excessive government borrowing (which is a cost on future generations). In recent years, Cyprus has been maintaining a fiscal surplus (except for the COVID-19 era). As a result, in 2022 general government debt dropped to 86.5% of GDP – the second largest drop in the EU – and is expected to reach circa 60% by 2026. A key policy contributing to the reduction of debt, is the continued progress on reform aiming to boost free-market economic activity and growth, thus leading to a higher tax revenue.
BF: What is your final message to the readers of USA Today about doing business in Cyprus and choosing Cyprus as an investment destination?
Chris Patsalides: Cyprus is the EU’s Eastern Mediterranean gateway, lying at the crossroads of major global markets. The country is growing and diversifying into a successful broad-based economy backed by prudent finances and healthy economic indicators. Cyprus is well on its way to achieving sustainable growth and fulfiling its vision and aspirations.