Hellenic Bank: Cyprus should exploit growth momentum to carry out structural reforms

Cyprus should exploit the current favourable growth momentum to implement structural reforms that would boost the competitiveness of the economy, Hellenic Bank’s Department of Economic Research said in its bi-annual economic review for the first half of 2019.

The department’s baseline scenario forecasts a growth rate of 3.4% in 2019 and 3.2% in 2020 with unemployment rate declining to 6.6% this year and inflation in the region of 1%.

Hellenic notes that the economy “recovery phase has passed and the economy is settling into its growth phase,” describing as encouraging the fact “that the recent economic performance has not been driven by government public spending and the related multiplicative role, nor is it funded from unsustainable credit-fueled consumption as observed in the pre-crisis period helping to avoid the repeat of the boom-bust cycle experienced in the economy.”

Hellenic’s research department, highlights that “better than expected macroeconomic performance, does not justify complacency and does not signal a relaxation of efforts in further economic reform.”

The department calls for the implementation of important structural reforms will help to strengthen the competitiveness of the Cypriot economy, such as privatizations, along with reforms in key areas such as the Public Administration and local government, the justice system and education and the further improvement of Cyprus’ digital public services (e-government) including the promotion of electronic payments, which in turn will help develop a sustainable economy.

“It is essential to use the current growth momentum for the implementation of the abovementioned reforms. Such reforms are easier to implement when economies are growing, since fiscal buffers can absorb the required transitional costs,” the bank’s research department says.

Furthermore, the department notes that despite the important steps taken towards restoring the positive economic climate, some degree of uncertainty remains, as the country still has certain issues to resolve, such as the high level of non-performing exposures (NPEs), high unemployment and the high private and public debt, which are however on a steady declining trend.

“The high level of NPEs, continue to pose significant risks to the stability of the domestic banking system and to the outlook for the economy,” the report writes, noting that the improved macroeconomic environment is expected to support banks’ efforts to tackle the high level of delinquent loans.

The report also highlights that the economic outlook could be negatively influenced due to slower than expected growth in Europe and the global economy due to rising trade tensions between USA and China and uncertainty effects of Brexit and a weaker pound, while, increased geopolitical tensions in the Middle East and Eastern Mediterranean, could trigger adverse spillovers to economic confidence, tourism and consequently to the aggregate economic activity.

However, the report notes that “geopolitical tensions in neighbouring countries render Cyprus a safer tourist destination and could therefore counterbalance, to some extent, any potential reduction in tourist traffic from the UK.”