Current conditions for investments

As a Small, Open, Island Economy, Cyprus is in perpetual need for imports and FDI (Foreign Direct Investment) while also demonstrating high flexibility and adaptability among businesses, especially among SMEs and the service sector. Although the small size of the economy has historically hampered economies of scale and expedited saturation, the outward looking, service-based businesses of all sizes, have been able to grow.

Although Cyprus still exhibits high bureaucratic burden, driven by some public sector stiffness and high unionization, the increased speed of digitization and the pressure put on the economy by the pandemic, are eroding red tape. Some reforms have been implemented, including the formation of a dedicated Deputy Ministry of Innovation, Research and Digital Policy, which is now pursuing significant-size programs and initiatives.

The digital economy, in parallel with sustainability and environmental policies are all growing, but from a very small base as Cyprus is effectively a slow starter in these areas. On the other hand, these concerns are very high on the agenda of both the government and of the private sector, with large corporations, such as banks, telecoms and major quangos, taking strides in these areas, partly under the influence of the ESG (Environmental, Social and Governance) agenda promoted by both regulators and investors.

The gap between the infancy at which sustainability, the Digital Economy and the New Economy find themselves, and the elevated level of attention paid to these concerns in recent years, creates significant business opportunities for greening, sustainability, digital and ESG projects.

As with ESG-related business opportunities, digitization and innovation are also at a point of flux. On the one hand, the need for more and better digital services and innovative business propositions is supported by existing capabilities, including skillsets available in the job market and infrastructure which is satisfactory. On the other, the current state of affairs is at an infancy and the country has not entirely overcome its low starting point.

The startup community exhibits a similar set of characteristics, with increased interest and some important progress, coupled with an ecosystem which is still to mature. Government attention has translated to a number of funding opportunities and collaboration projects are growing. Larger businesses are increasingly noting the trend. Although faced with a steep learning curve in these areas, they have adopted policies and strategies to pursue a more active role in the New Economy. In the case of banks, this pursuit is driven both by investors and by regulators, which suggests that the pressure to deliver tangible outcomes, including active funding, is expected to increase.

More generally, in areas of innovation, environmental performance, digitization -the New Economy more generally- Cyprus is at a point of tension where all the ingredients, including infrastructure, know-how and level of attention, are in place, but the economy is still to mature in these areas and the low starting point leaves a great deal to desire.

It is precisely this tension that creates opportunities in Cyprus at this juncture.

 

Economic Performance

Although the pandemic broke the pattern of growth of the economy in 2020, analyst consensus and ongoing analyses point towards a V-shaped recession, with recovery noted in 2021 and improving in 2022. The careful management of the Pandemic, with extensive measures, wide testing and an expansive three-dose jab program, have placed the country on a solid footing to manage the continued uncertainty.

Some of the official estimates, including HICP (Harmonised Index of Consumer Prices) and unemployment projections may be slightly optimistic, but the overall trend of the economy points to material and speedy recovery, partly thanks to an extensive and rapid policy response by the government. Supported by a variety of EU programs, including NextGenerationEU, Europe’s recovery plan following the pandemic, and national-financed programs, the government extended assistance that kept viable businesses alive through the Covid-19 turbulence. This assistance has supported both employment and overall consumption in the economy. This is reflected in the budget balance and the public debt figures.

Supply chain shocks along with rising inflation may slow down the recovery, but do not appear to be “reshaping” the V-shaped recovery.

On the upside, the renewed pressures, especially on agriculture where supply chain disruptions have been most intense, and on transport and energy, where the price hikes are the steepest, are being met with appropriate policy responses. The focus remains on innovation, on supporting the New Economy and smart SMEs and on improving the absorption capacity for external programs, especially those driven by the EU budget. The latter remains a national weakpoint, but the pressure put on the economy by global inflation and supply chain disruptions, is likely to engender positive responses if the policy response continues to focus on these policy areas.

The current account deficit widened during the pandemic (to 11.9%). Given that Cyprus usually shows a widening current account deficit during periods of growth (inputs are mostly imported), supply-chain disruptions, increased energy prices and suppressed exports (especially tourism), the current account deficit is likely to widen further.

Cyprus is therefore in need of FDI to finance its position. With the infamous passport scheme now terminated, the government has announced a plan to encourage more material FDI in the real economy rather than focus on real estate and on “import of cash” as in the original program which was largely intended to import deposits for the then-ailing banking system.

The new FDI program will focus, according to preliminary government announcements, on innovation, greening and the digital economy. This translates to a further boost of opportunities for new businesses, innovative SMEs and startups.