Cyprus: 2023 Article IV Consultation-Press Release; and Staff Report

This 2023 Article IV Consultation discusses that Cyprus’s economy has been resilient to the fallout from Russia’s invasion of Ukraine. The outlook is uncertain with risks from an escalation of the war and a possible recession in Europe. Should inflation expectations rise further and the pass-through to wages intensify, inflation could be stickier than expected. Adverse macroeconomic developments could amplify financial risks given high private debt. The recent shocks have demonstrated that fiscal policy can be a powerful tool to foster resilience, and buffers should be rebuilt over the medium term. Fiscal policy should aim at sustaining primary surpluses to reduce public debt over time, supported by a risk-based fiscal framework. As buffers are rebuilt, available fiscal space should be directed to productive investments for the green and digital transitions. A greener growth model is an important element of reforms. Cyprus aims to become emissions neutral by 2050. Integration into the regional electric grid and the expansion of renewables—together with a liberalization of the domestic electricity market—are key elements of this strategy and will also improve energy security, but require large public and private investments.