Abstract
The paper provides an overview of Cyprus economic performance. The country’s economic growth has faced many market challenges including effects of neighbor countries financial performance. Cyprus entered its depression under massive macroeconomic imbalances resulting from political instability. The economic crisis resulted in the shrinking of the economy, and the austerity measures adopted led to the deterioration of living standards and the rise of social inequalities.
Being a service market-oriented economy, Cyprus focus on economic growth involves the improvement of investment incentives through infrastructural development, government guarantees on loans, and enhancing of business licensing. Generally, the country’s EU membership has enhanced its international market advantages and consequently improved its focus on long-term growth strategy.
Introduction
Preliminary information shows that the Cypriot economy has experienced a continuous growth and expansion over the last three decades, it except for the period between 2013 and 2015, resulting in positive social transformation. The country’s geographical location acts as a bridge between Europe and Asia and Middle East countries, and strategically positions it as a business hub. The focus of the research paper is the analysis of the Cypriot economy with the objective of determining its current economic performance and stance. Specifically, this paper provides an overview of the country’s performance by evaluating its economic growth, unemployment, inflation, and fiscal factors that affect its performance.
Economic Growth
Cyprus is a service-based economy with a long record of successful economic performance. The economic assessment by the World Bank (2018) indicates that the country has maintained consistent growth in its GDP recording annual growth variation of 3.9% in 2017 up from 2013 recession low of -5.9%. Considerably, a healthy business environment, highly educated workforce, and favorable tax regime allowed the country to pass, within a short period, through the 2013 economic crisis (Featherstone, 2014; Michaelides, 2014).
Additionally, besides its EU and Eurozone memberships, excellent business-friendly environment continue to attract international investors promoting the country’s economic growth. The country’s leadership has put in place measures that accelerated initiatives to boost investment and ensure that its prosperity endures.
Cyprus, being a service economy, has its main economic activities comprising of the tourism sector, energy, shipping, and financial hub. The tourism sector has maintained a stable growth contributing to increased country’s GDP and employment opportunities. Similarly, Cyprus hosts the third largest fleet and major ship management center in the EU, which highlights its success as a business hub between EU countries and trade partners.
The natural gas exploitation following the discovery of significant reserves in Cyprus’ waters is one particular recent investment incentive of the country. Primary sectors such as agricultural and manufacturing have adopted value addition strategies contributing significantly to growth in GDP. All these sectors of the economy have placed a strong focus on innovation and diversification, which has supported increased productivity and the country’s financial performance.
Unemployment
The country has achieved a continuous drop in unemployment rate following its business diversification, stable political environment, and business partnerships. The decline in unemployment rate started in the first half of 2015, averaging 14.9% in the year, which further dropped from 11.4% in 2017 to 8.4% in mid-2018 (Heritage Foundation, 2018). Comparatively, given the European region adjusted the average unemployment rate of 9.2% in 2017 (Heritage Foundation, 2018), this is the most significant unemployment decrease in EU.
This achievement is essential in sustaining the country’s economic growth and sustainability. Given the country’s employment goal, the high rate of unemployment significantly shapes the conditions of the labor market (Featherstone, 2014). However, youth unemployment continues to be a severe challenge despite a registered drop from a peak of 38.7% in 2013 to 22.3% in March 2018 (Heritage Foundation, 2018). The effect of unemployment includes immense pressure on wages, expanded irregular employment opportunities, and increased job insecurity.
Inflation
Cyprus economic crisis began in 2009 initiating government response to boost service sectors of banking, construction, and tourism in an attempt to generate more income and counter the depression. However, this economic adjustment could not last as the European crisis critically affected the business environment. According to Becker and Ivashina (2017), the lack of political goodwill and the influence of Greek and Turkey economy are important factors that have contributed in part to the increased collapse of the country’s financial performance. Although the government sought Russian loan to refinance the national debt, the facility could not adequately service the economic damage leading to low grading by assessment agencies and subsequent exclusion of the state from the international financial markets.
Consequently, following the 2012-2013 depression, the government adopted a series of austerity measures under the pressure of mounting criticism of the economy. Pegasiou (2013) describes salary reduction among public employees, increased tax, and the introduction of levy incentive as Cyprus market adjustment strategies towards fiscal consolidation. Despite registering a growth and moderately stable economy, Cyprus recorded a deflation of -0.3, -1.6, and -1.2% in 2014, 2015, and 2016 respectively (World Bank, 2018).
Statistics show that consumer prices inflation rate of the positive estimate of +3.9% over the corresponding quarter of 2017 (World Bank, 2018). The government measures to address inflation involve support of private business expansion through the sponsored hiring of the unemployed population, securing loans with state guarantees, and investing in infrastructure.
Other Factors Affecting Productivity
The International Trade and Capital Flows
Cyprus major international trade involves business partnership in the EU. The strategic location links the country with major and important markets, which provides an opportunity for business relations, sufficient sources of external financing, and stabilized regional economy (Pegasiou, 2013). The economic report estimated the country’s service export at €9.9 billion in 2017 from €8.1 billion in 2014 and domestically produced goods at €1.25 billion in 2017 from €735 million in 2014 (Heritage Foundation, 2018).
This improved capital flow indicates the country’s success in countering the economic crisis and achievement in sustained growth. Some of the critical domestic export commodities are pharmaceutical products, raw and manufactured food products, and scrap products with Greece, the United Kingdom, and Israel being the leading exporters.
Government Budgets and Fiscal Policy
Currently, Cyprus maintains both a general government and a primary budget surplus of the national economic programs. The country’s debt-to-GDP ratio peaked in 2015 but registered a drop of GDP in 2017. The World Bank (2018) report indicates that the budget balance recorded a surplus of 1.7% of GDP in 2017, while the primary balance reached a substantial 4.4% proportion of GDP. The potential effect of this economic downturn on the country’s overall economic performance has led to the implementation of new financial regulations.
Conclusion
As the overall economic performance, Cyprus is on a positive trajectory because it maintains its regional status as one of the fastest growing Eurozone economies despite experiencing series of economic crises. Cyprus has an increasing GDP of 3.9%, a decreasing unemployement rate of 8.4%, and a stable inflation rate of +3.9%. Moreover, strong fiscal performance and new large-scale projects are the country’s critical success factors that sustain its objective of boosting economic performance. The implementation of stringent austerity measures to restructure and diversify its economy has enabled Cyprus to shift its priorities and maintain a strong growth momentum.
References
Becker, B., & Ivashina, V. (2017). Financial repression in the European sovereign debt crisis. Review of Finance, 22(1), 83-115. Web.
Featherstone, K. (2014). External conditionality and the debt crisis: the ‘Troika’ and public administration reform in Greece. Journal of European Public Policy, 22(3), 295-314. Web.
Heritage Foundation. (2018). Economic index of freedom: Cyprus. Web.
Michaelides, A. (2014). Cyprus: From boom to bail-in. Economic Policy, 29(80), 639-689. Web.
Pegasiou, A. (2013). The Cypriot economic collapse: More than a conventional south european failure. Mediterranean Politics, 18(3), 333-351. Web.
World Bank. (2018). Data: Cyprus. Web.