Cyprus

Cyprus: getting out of crisis

The Cypriot economy shows signs of a gradual recovery after a deep crisis and the EPI grades its current economic performance at C level, with the EPI score projected to be close to 85.7% in 2015, up from 74%, or a D level, in 2013.

After the large banking crisis and the government bail-out of major banks, the debt-to-GDP ratio is likely to peak at about 108% of GDP and decline gradually in the medium term, driven by fiscal surpluses and gradual improvement in GDP growth rates.

GDP growth is projected to turn into positive territory this year after a cumulative drop by 10% since 2012.The main growth driver remains the tourism industry, which accounts for around 7% of gross value added. Despite the trend reversal, unemployment of 16% remains high, especially compared to the pre-crisis average of 4.4% in the period 2000-09. Fiscal adjustment is expected to resume after a pause in 2015, with a budget deficit increase to 1.3% of GDP in 2015, still small by international standards. Inflation remains negative, driven by the lower demand in the economy and disinflationary environment in Europe.

The 5-Minute Economist projects Cyprus’ EPI score to continue improving in the medium term from almost 82%, or a C- level, currently to 91.5%, or a solid B level, by 2020. The major drivers for improvement in the EPI score in the medium term are projected to be continued turn of fiscal deficit into surplus, decrease in the level of unemployment, and the resumption of economic growth. Inflation is likely to start picking up in this environment and reach almost 2% by 2020.