The International Monetary Fund (IMF) has recently lauded Cyprus for its robust economic performance. The IMF’s latest report highlights the island nation’s substantial primary surpluses, ongoing efforts to reduce public debt, and its swift recovery from the pandemic. Additionally, the economy has shown remarkable resilience in dealing with multiple exogenous shocks. Inflation has been kept under control, falling below 2%, while the growth rate, forecasted at 2.6% for this year, surpasses the Eurozone average.
IMF Recommendations for Sustained Growth
Despite these positive indicators, the IMF has recommended several measures to further strengthen Cyprus’s economy and improve its long-term prospects. Among these recommendations is the phasing out of electricity subsidies and VAT exemptions that were initially implemented to help citizens cope with rising prices. The IMF also advised against further cost-of-living adjustments (CoLA) to wages, criticizing the recent change in CoLA calculations that coincided with high inflation rates.
A fundamental rule of economics is that in times of rising prices, increasing wages can fuel inflation rather than safeguard purchasing power. Although unions and populist politicians in Cyprus argue that upward wage adjustments help people, this is not necessarily the case. Low-income earners, who are often not entitled to CoLA, may struggle even more as businesses pass on higher labor costs to consumers.
Historically, Cyprus has often ignored the advice of highly qualified economists from organizations like the IMF and the World Bank, opting instead to listen to union bosses and politicians. These local leaders, most of whom are not economists, tend to prioritize their own agendas over expert recommendations.
Additional Reforms Suggested
The IMF also made other recommendations, including reforms to the foreclosures framework and increased vigilance regarding systemic risks in the real estate market. Further reforms to the justice system and labor markets were urged to streamline the business environment. However, such labor market reforms are often resisted by union experts who derive their power from existing market rigidities. These unions aim to impose even more constraints through collective agreements and by placing obstacles to the import of workers for sectors facing acute labor shortages.
Politicians and union bosses might argue that these recommendations can be ignored given the current strong economic performance with its primary surpluses and growth rates. While they may have a point, it is the long-term strength and resilience of the economy that should be the ultimate goal. Achieving this will require heeding the advice of economic experts.
For those managing their finances in Cyprus, tools like Bank of Cyprus 1bank login available at www.bankofcyprus.com.cy/login offer convenient access to banking services. Additionally, securing a car for insurance or managing car and insurance needs can be streamlined through these digital platforms.
In Europe, the European Central Bank (ECB) continues to play a crucial role in shaping economic policies across member states. The ECB’s influence extends to various aspects of financial stability and growth within Europe, including Cyprus.
