Diversifying for Growth

The economy of Cyprus is renowned for its agility and diversity in the face of the multiple challenges it has tackled in the past few decades, underscoring the strength of the small island nation. Both within traditional sectors and across new ones it is diversifying markets and attracting new investment, building a solid base for growth long into the future. 

Following a decade of frequent economic shocks, Cyprus has shown consistent ability to rebound. The economy recovered swiftly after the banking crisis in 2013, returning to investment grade rating in 2018 and recording annual average real GDP growth of 4.6% in 2018-22. The economy also rebounded quickly after the global pandemic in 2020. Figures revised in late 2023 tell a remarkable story with real GDP dropping by only 3.4% in 2020 and rocketing back to 9.9% growth in 2021. It has also quickly diversified into new markets following Russian sanctions after the war in Ukraine. During the past decade, the banks have consolidated, boosted and diversified their capital base and cut non-performing loans by over 90%. At the same time, the government has brought debt below 90% of GDP and paid off its debt to the IMF five years early. These achievements give the government the fiscal space to invest for a sustainable future.

Substantial financial support for the EU’s green and digital transition agenda has given renewed impetus to digitisation, liberalisation and green investments, while new incentives continue to be launched to attract a broad array of quality foreign investment. This fresh focus is set to raise the economy’s competitiveness further and leverage the eurozone economy’s highly educated population.

Key Sectors

The Cyprus economy is dominated by services, which accounted for 84.4% of gross value added in 2022, while industry accounted for 8.3%, construction 5.4% and agriculture, forestry and fishing 1.8%. Over the past two decades the economy has diversified. While tourism remains one of the most significant sectors – especially because of its wider impact on retail, transport, construction and employment – its value-added contribution, when narrowly defined as accommodation and food services, has now been overtaken by professional services, communications, financial services and real estate.

Diversification has been made possible by the longstanding importance of Cyprus as an international business centre and a growing innovation hub. Cyprus has more than 850 start-ups and is home to seven of the 38 of the EU’s evolving Centres of Excellence, helping the information and communication services sector to expand rapidly from a low base, as the country takes advantage of its geostrategic location at the intersection of three continents. As in many advanced countries, the largest single sector is wholesale and retail trade, serving the general population as well as incoming tourists.

Challenges and Opportunities

Important structural support in Cyprus’ efforts to stay on its robust growth path is coming from the Deputy Ministry of Research, Innovation and Digital Policy, which was established in March 2020. The government has also launched a raft of initiatives to support competitiveness and the green transition. These include incentives for renewables, public and private non-car transport, film production and the island’s budding wine sector.

Key prospects lie in energy, innovation, interconnectivity, tourism and headquartering. Energy prospects arise from heavy investment in renewables and offshore natural gas finds, while opportunities for interconnectivity will come from the submarine data and electricity cables that will link Cyprus to other continents. Investment opportunities from start-ups and research centres are expanding, upgrading the island’s tourism offering will continue, while prospects for headquartering have been boosted by the country’s reputation as a safe eurozone location in which to do business.

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December 2023

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