The economic context of Cyprus

Economic Indicators

For the latest updates on the key economic responses from governments to address the economic impact of the COVID-19 pandemic, please consult the IMF's policy tracking platform Policy Responses to COVID-19.

Cyprus is an open, free-market economy, mainly based on services. After being severely hit by the global financial crisis and the exposure of the national banking system, the country's economy had recovered in recent years, thanks to domestic demand and tourism. Nevertheless, the outbreak of the COVID-19 pandemic and the restrictive measures that followed prompted a drastic reduction of GDP in 2020 (-5.1). Underpinned by both private and public consumption, the economy rebounded in 2021, marking a 4.8% growth (IMF). The tourism sector also recorded a relatively good performance (tourism revenues more than doubled in January-July 2021 compared to the same period of 2020, but remained at around 35% of the pre-pandemic levels), as well as the construction sector. Over the forecast horizon, government spending is expected to decelerate, whereas internal demand should continue expanding, contributing to forecast growth of 3.6% this year and 3.2% in 2023 according to the IMF.

After reaching a surplus in 2019, the fiscal measures adopted to fight the pandemic (including increased social payments related to the roll-out of the second phase of the National Health System reform, wage subsidisation and liquidity support to businesses), partially offset by an increase in revenues (+9.9%), led to a budget deficit of 3.6% in 2021. The deficit is forecast to decline to 1% of GDP in 2022 and 0.4% in 2023, helped by the continuing economic expansion and the withdrawal of COVID-19 measures. The public debt-to-GDP ratio is expected to follow a similar trend: after reaching 111% in 2021 (from a pre-pandemic level of 94%), it should gradually decrease to 103.7% this year and 99.3% in 2023 (IMF). After experiencing deflation following the outbreak of the crisis, headline inflation returned positive in 2021 (+1.7%), driven by higher prices for energy, services and non-energy industrial goods. The rate is expected to slightly decelerate to 1.1% in 2022 amid the normalization of energy prices.

The impact of the COVID-19-led crisis on the labour market has been mitigated by temporary income support measures, which targeted especially employees in the tourism sector. As a result, unemployment stood at 7.5% in 2021 (from 7.1% before the pandemic), and is expected to gradually decrease this year and in 2023 on the back of the economic expansion and the implementation of the EU’s RRP (to 6.9% and 6.4%, respectively - IMF). In recent years, a strong focus on the service and skilled industry, along with industrial and agricultural growth, has allowed the country to improve its already high standard of living; however, 17.6% of the population is at risk of poverty or social exclusion (below the EU average of 21.9% - Eurostat).

Main Sectors of Industry

In the past two decades, the basis of the Cypriot economy has shifted from agriculture to light manufacturing and, most importantly, services. The agricultural sector contributes around 1.9% of the GDP and employs 2.4% of the active population (World Bank, latest data available). The traditional agricultural sector suffers from a very dry climate, whereas only 9% of the land is arable. The main crops are wine grapes, potatoes and fruits. Mineral resources are limited and include mostly copper, pyrites, chrome, asbestos and gypsum. According to the latest data from Eurostat, overall agricultural output grew by 2.8% in 2020.

The manufacturing industry (mainly industrial food-processing, paper, chemical products, textiles, metal products and petroleum refining) accounts for 12.7% of GDP (including construction) and employs 18.4% of the active population. The government aims to double the industry's share of GDP by 2030. The manufacturing sector is not very developed and is estimated to account for only 5.5% of GDP (World Bank, latest data available). The annual average variation of industrial production in the period January-November 2020 stood at an estimated minus 7.6%.

Cyprus’ economy is mostly based on the tertiary sector, which contributes 74.1% of the GDP and employs 79.2% of the active population. Tourism and maritime transportation are considered to be the two pillars of the Cypriot economy. After recording an all-time record for the number of tourists in 2019 (almost 4 million), the number of arrivals was almost halved in 2021 amid the COVID-19 pandemic crisis (Cystat). Cyprus has the eleventh-largest shipping fleet in the world and the third-largest in the European Union. However, offshore activities are often led by foreign-capital companies based in Cyprus, whose commercial activities are executed exclusively outside the country. This system enables them to enjoy substantial tax benefits. Finance and real estate have traditionally been among the most important services. As per the banking sector, there are 30 authorised credit institutions in Cyprus, consisting of seven local institutions, three subsidiaries of EU banks, one subsidiary of a foreign bank from a non-EU country, five branches of banks from EU Member States, 13 branches of banks from non-EU Member States and one representative office (EBF).

 

Breakdown of Economic Activity By Sector	Agriculture	Industry	Services
Employment By Sector (in % of Total Employment)	2.4	18.4	79.2
Value Added (in % of GDP)	1.9	12.5	74.1
Value Added (Annual % Change)	-0.4	-6.7	-4.5

Source: World Bank, Latest Available Data. Because of rounding, the sum of the percentages may be smaller/greater than 100%.

 

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Indicator of Economic Freedom

Definition

Definition:

The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.}}

Score:

71,4/100

World Rank:

33

Regional Rank:

19

Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation

 

Business environment ranking

Definition

Definition:

The business rankings model measures the quality or attractiveness of the business environment in the 82 countries covered by The Economist Intelligence Unit’s Country Forecast reports. It examines ten separate criteria or categories, covering the political environment, the macroeconomic environment, market opportunities, policy towards free enterprise and competition, policy towards foreign investment, foreign trade and exchange controls, taxes, financing, the labour market and infrastructure.

Score:

7.01/10

World Rank:

32/82

Source: The Economist Intelligence Unit - Business Environment Rankings 2021-2025

 

Sources of General Economic Information

Ministries

Ministry of Finance

Statistical Office

Statistical Service

Central Bank

Central Bank of Cyprus

Stock Exchange

Cyprus Stock Exchange

Economic Portals

Cypruseconomy