FinMin revises 2023 growth rate slightly down to 2.8%

The Cypriot Stability Programme submitted to the European Commission, says that real GDP growth will decelerate to 2.8% followed by 3% and 3.1% in 2024 and reach 3.1%, 3.1% and 3.2% of GPD in 2023, 2025 and 2026 respectively.

The Finance Ministry noted that the growth forecast for 2023 has been revised slightly downwards, compared to the projected 3.0% for 2023 in the Draft Budget in October 2022, due to the highly uncertain external economic environment, as a result of the of the ongoing war between Russia and Ukraine, the interest rates increases and lastly the still high inflation expectations which are expected to moderate at a slower pace than anticipated.

But it pointed out that “Cyprus starts 2023 from a strong position and growth will be supported mainly by domestic demand, and to a lesser extent by external demand. Investment will be reinforced by the implementation of a significant number of projects included in the Cyprus Recovery and Resilience Plan (RRP) which will have an impact on growth in the period 2023- 2026, and mainly in 2024-2025.”

The Finance Ministry said that the Cypriot government’s strategy takes into account the deactivation of the general escape clause of the Stability and Growth Pact at the end of 2023 and is in line with the fiscal adjustment criteria set out in the Commission orientations to ensure medium-term fiscal sustainability.

“The overall objective of the fiscal policy strategy outlined in this Stability Programme is to support economic growth, in line with the Council recommendations of June 2022, while maintaining fiscal sustainability through a sound fiscal position in the medium term and reducing public debt as a percentage of GDP in a sustainable manner,” the Ministry said.

It however noted that the projection profile is marked by “a high degree of uncertainty due to the ongoing war between Russia and Ukraine with no signs of de-escalation.”

The Ministry also said that “interest rates and high prices will cause a significant slowdown in private consumption, which presented an extraordinary performance in 2022, and in gross fixed capital formation as well due to the construction cost.”

Concerning inflation, the Ministry projects a significant reduction, expressed in Consumer Price Index (CPI), to 3.2% this year from 8.4% in 2022, due to the lower oil and gas prices. It is then projected to decelerate at 2.5% in 2024 and then hover around 2.0% in 2025-2026.

The Ministry said that the government will continue taking measures to alleviate the impact of the increase in energy prices for households and companies, that in Cyprus are driven mainly by the developments in oil prices.

According to the Finance Ministry, in 2023 the budget balance is expected to remain in surplus driven mainly by the expected economic performance during the year, albeit decline marginally as a percent of GDP. More specifically, general government budget balance is forecast to reach 2% of GDP compared to 2.1% of GDP the year before, where primary balance is forecast to reach 3.2 as a percent of GDP compared to 3.6 in the year before.

Cyprus’ public debt by the end of 2023 is projected at €23.4 bn or as a percentage of GDP at 81.1%.

The expected reduction of general government debt by 5.4 percentage points is attributed to the expected increase of nominal GDP, as public debt in nominal terms, and in line with the Annual Funding Plan 2023, is forecast to remain broadly at the same levels as in the year before, the Ministry added.

Furthermore, during the programming period 2024-2026, debt-to-GDP ratio is projected to continue its downward trend declining to about 72.9%, 67.3% and 60.1% by year end 2024, 2025 and 2026 respectively.

On tourism, the Finance Ministry said that arrivals in 2023 are expected will increase and approach the pre-crisis levels but not reach them yet.

“The gap that was created by the Russian/Ukrainian markets, of about 800,000 tourists, is difficult to be covered in number of tourists this soon,” the Ministry said, noting however that “replacing part of the lost Russian market from new tourist markets via new air connectivity routes and also from enhancing existing routes, due to the efforts exerted by the Deputy Ministry of Tourism, will help close the gap. Furthermore, tourist arrivals are expected to be supported by higher per capita expenditure and thus in 2023 revenues will return to the pre-crisis levels and thus closing the gap created.”

(Source: CNA)