Commission issues recommendations for sustainable economy, finds excessive macroeconomic imbalances in latest European Semester

The European Commission has underlined the need for Cyprus to reduce its reliance on fossil fuels and to accelerate the development of renewables, in the context of the European Semester for 2022, while also calling on the country to develop a more diverse and environmentally sustainable model for economic growth.

The Commission also calls on Cyprus to improve the governance of state-owned entities in line with international standards, to strengthen the supervision of the financial sector and to strengthen the legal framework for the enforcement of court decisions.

Also, in an assessment in the context of the 2022 Alert Mechanism, the Commission noted that the country is facing excessive macroeconomic imbalances. Also, it is pointed out, public and private debt rates were reduced due to the economic recovery achieved in 2021, with non-performing loans declining, but remaining high.

However, the Commission notes, the Russian invasion of Ukraine causes uncertainty due the country’s exposure to Russia through the sale of services.

The Commission assesses the goals of the country’s Recovery and Resilience Plan and and adds that the economy would benefit from:

– “improving the governance of state-owned entities in line with international standards”,

– reducing “overall reliance on fossil fuel and further diversify energy supply by accelerating the deployment of renewables, in particular by further streamlining permitting procedures and expanding

photovoltaics. Develop energy interconnections with neighbours, while extending and accelerating energy efficiency measures, including in the transport sector”,

– “strengthening the legal framework for the enforcement of court decisions and contractual claims”,

– “strengthening the supervision of the financial sector” and

– “making the country’s economic growth model more diverse and environmentally sustainable, building on the support of the national recovery and resilience plan and by implementing a long-term strategy”.

In the Commission’s assessment on the country’s national reform and stability programmes, it is noted that the county’s Recovery and Resilience Plan includes measures on “strengthening financial and fiscal stability to achieve a sounder banking sector, reducing risks related to private debt, improving supervision of the non-banking sector, and creating a more effective, efficient and fairer tax system”

The report also points out that the national plan works towards “increasing the efficiency and digitalisation of the public sector, including the justice system, and improving digital connectivity as well as introducing further anticorruption measures”. Also, the plan works towards “improving access to quality healthcare as well as enabling the digital health transition”, “increasing the quality of education and training at all levels, including digital skills, and fostering youth employment”, as well as “enabling and increasing recycling, building new and upgrading existing infrastructure to deal with inefficient waste and water management”.

Excessive imbalances, decline in NPLs, uncertainty due to Ukraine war

Executive vice president Dombrovskis said that the Commission analysed the macroeconomic imbalances for 12 member states in the 2022 Alert Mechanism report, and that Greece, Italy and Cyprus were found to be experiencing excessive imbalances.

In the case of Cyprus, the Commission notes in a communication that vulnerabilities in the country’s economy “relate to high government and private debt, large current account deficits and a still high stock of non-performing loans”.

“The government and private debt-to-GDP ratios declined again thanks to a strong economic rebound in 2021. Non-performing loans of the banking sector declined substantially thanks to large sales of such loans to credit acquiring companies but remain high” the Commission notes in its analysis.

Meanwhile, “the current account deficit is large despite an improvement in 2021, and moreover is projected to widen in 2022 and only slowly narrow thereafter, thereby not ensuring a prudent net international investment position over the medium term”.

“Government and private debt-to-GDP ratios are expected to further improve, in part on the back of economic growth” the Commission predicts.

However, it is pointed out, “the economic outlook for 2022 is surrounded by heightened uncertainty related to the impact of Russia’s invasion of Ukraine in view of particularly sizeable trade of services exposures”.

“If implemented timely and effectively, the RRP has the potential to contribute to a significant reduction of vulnerabilities, but additional policy action is warranted” the report underlines.

Source: Cyprus News Agency