Cyprus Economy

Cyprus Economy


  • Basic data
  • Public finances and the state budget
  • Banking system
  • Tax system

Basic data

Between 2016 and 2019, the Cypriot economy experienced a four-year period of very dynamic development, with GDP growing by an average of 4% per year. However, the positive development was fundamentally changed by the COVID-19 epidemic, which also hit the country at a time when the economy was expected to cool down. In general, the Cypriot economy is very open, heavily dependent on tourism, so-called financial services, commercial higher education and some other services whose external demand Cyprus cannot influence. At the same time, it is highly indebted, the national debt reached 104% of GDP in 2021, making Cyprus one of the most indebted countries in the European Union. The problem of the Cypriot economy is also the still relatively high proportion of defaulted loans, which, however, fell from 28% (2019) to 17.7% in 2020, and December 2021 data showed 11.1% of defaulted loans. Specific Cyprus risks include that sectors, on which local prosperity depends, will recover slowly and that they will be dampened in the long term by the crisis in foreign demand. In a situation where the demand for loans on international markets will also increase, Cyprus will be at a disadvantage due to its high level of indebtedness. After the drop in GDP from 2020 to -5% in 2021, there was a subsequent growth of 5.5% and forecasts for 2022 show growth of 2.1%. According to the IMF, inflation will be around 6% in 2022 (May 2022 – 8.8% CyStat CyStat). In 2021, unemployment reached 7.5%, and in 2022 unemployment is expected to rise to 8.5% (the 3rd highest in the EU after Spain and Greece). Services account for 87% of GDP, industry for 11% and agriculture for 2%. Due to its unique island character, the Cypriot economy cannot be compared with countries in the region. Check ebizdir for economical facts of Cyprus.

The most important sectors of the economy are tourism, financial services, real estate, shipbuilding and industry. The largest export items are processed industrial products (42% – coffee, pharmaceuticals, gold, telecommunications equipment), industrially processed foods, especially meat, cheese, fruit, vegetables, olive oil (26%) and oil-based products (24%). The largest percentage of imports are consumer goods (30%), transport equipment and parts (29%), agricultural products (26%) and petroleum-based products (8%). The largest trading partners are Greece, Great Britain, Germany, Italy, Israel, France and China.

Table from MOP + additionally balance of payments, indebtedness/GDP.

Pointer 2019 2020 2021 2022 2023
GDP growth (%) 3.1 -6.2 5 4.1 3.5
GDP/population (USD/PPP) 42,182.90 40,829.40 44,060.00 46,880.00 49,520.0
Inflation (%) 0.3 -0.7 2.3 1.8 1.4
Unemployment (%) 7 7.7 7.5 6.9 6.4
Export of goods (billion USD) 3.5 2.8 3.4 3.6 3.6
Import of goods (billion USD) 9.2 7,8 10.4 10.9 11.4
Trade Balance (Billion USD) -5.2 -4.8 -6 -6.4 -6.7
Industrial production (% change) 4 -11 9.9 4 4.1
Population (millions) 0.9 0.9 0.9 0.9 0.9
Competitiveness 41/63 30/63 ON ON ON
OECD export risk ON ON ON ON ON

Source: EIU, OECD, IMD

Public finance and state budget

Public finance 2021
State budget balance (% of GDP) -4.4
Public debt (% of GDP) 112
Current account balance (billion USD) -2.5
Taxes 2022

Public finances strengthened in CY 2021, with the fiscal deficit narrowing to an estimated 1.7% of GDP from 5.7% of GDP in 2020, driven mainly by strong revenue growth. The budget deficit is expected to gradually decrease in 2022-23 as funds from the EU Economic Recovery Fund (€157 million) begin to be disbursed and the government reduces the share of spending in GDP. A budget surplus is expected in 2024-26. an average of 0.7% of GDP per year. The public debt-to-GDP ratio is falling after peaking at 115% in 2020. It is expected to gradually decrease to a level of around 81% of GDP at the end of 2026.

Real GDP decreased in 2021. However, this decline was not as pronounced as the Eurozone average, despite Cyprus’ heavy reliance on tourism. In CY, tourism contributed 13.8% to GDP in 2019 (incl. indirect effects) and 13.2% to employment. The impact of the pandemic on economic activity was mitigated by government support to businesses and households. In 2021, the economy recovered and grew by 5.5%. The invasion of Ukraine and the associated Russian sanctions also have a significant impact on the Cypriot economy, as 30% of all foreign visitors to the island were from Russia. Total State Expenditure. budget increased by 11.5% to €9.9 billion in 2020. Total revenue fell by 3.8% (€8.9 billion). CY tries to partially compensate for this situation by favoring taxes for individuals and legal entities and the possibility of late payment of taxes. Government debt servicing costs have fallen significantly, which was supported by the ECB’s ultra-accommodative monetary policy stance. In 2020, interest payments fell by 3.1% to € 495 m, despite public debt rising to 118.2% of GDP. It is expected that the budget deficit will gradually decrease during the years 2021-2022. In the years 2023-2025, a budget surplus of 1.3% of GDP per year is expected on average. As for foreign exchange reserves, on CY they are foreign assets held or controlled by the national central bank. Reserves are either gold or a specific currency. They can also be special rights to trade in securities denominated in foreign currencies, such as government and corporate bonds, shares and foreign currency loans. Foreign exchange reserves were higher in 2020 than in previous years. Cyprus foreign exchange reserves were reported at 0.635% in December 2021.

Banking system

The crisis of the Cypriot economy and subsequent reforms in 2013-2015 significantly reduced the size of the country’s banking sector from 550% of GDP to the current 235% of GDP. Thanks to private direct foreign investments and the use of funds from the bail-out program, the Cypriot banking system was stabilized. During 2018, the state-owned Cyprus Cooperative Bank (CCB), the second largest bank in the country, fell into a liquidity crisis. The bank was split into a healthy part sold to Hellenic Bank and a state consolidation agency with most of the NPLs. The liquidation of CCB created a de facto duopoly of Bank of Cyprus (less than 60%) and Hellenic Bank (30% share) in the Cypriot retail banking sector. The third largest in the country was RCB Russian Commercial Bank, whose shares were bought by Cypriot entities this year. This bank is laying off its employees and it should be completely closed. Other large banking institutions are Eurobank Cyprus and Alpha Bank. In 2021, a total of 42 credit (banking) institutions were operating in the Republic of Cyprus, incl. Arab, Russian or Ukrainian. In the medium term, Cypriot banks remain threatened by a high level of NPLs, the volume of which they manage to reduce, in most cases by divestment rather than debt restructuring. At the end of 2019, NPLs represented €9.6 billion or 28% of all loans in the banking system and at the end of 2021 it was 11.1%. According to the latest data from December 2021, non-performing loans were around 11.1%, but even so, Cyprus remains at the top of the EU in non-performing loans. Cypriot banks entered the crisis caused by the COVID-19 epidemic highly liquid. As of March 2020, deposits amounted to €47.9 billion and loans to € 3 billion.

Tax system

The Cyprus tax model is sophisticated and is a key part of the local economic model – the country as an international center for tax and corporate services. It is relatively stable but not completely transparent with a large number of exceptions.

For income taxation in Cyprus, it is decisive whether you are a Cypriot tax resident or a non-resident. A resident is a natural person who stays in Cyprus for more than 183 days a year. In the case of a legal entity, a company that has management and control in Cyprus is considered resident. For residents, all income is taxed, i.e. income from sources both in Cyprus and abroad, while for non-residents, only income earned in Cyprus, for a legal entity through its permanent establishment located in Cyprus, is taxed. Income taxes: personal income tax (graduated according to income), corporate income tax is 12.5%. Dividends, profit from the sale of securities, profits of permanent establishments abroad and interest that did not arise from the company’s ordinary activities or activities that are connected with ordinary activities are exempt from tax. Tax residents in Cyprus are required to pay the country’s defense contribution. Taxation of capital gains from the transfer of real estate, as well as from the profit from the sale of shares of companies that own real estate, with the exception of companies traded on the stock exchange, a 20% tax is paid. Value added tax – the basic VAT rate is 19%, reduced rates apply to a wide selection of goods and services. Excise duty is imposed on fuel, alcohol, tobacco products and some types of luxury goods. General health system – contributions to the general health system are paid from pensions, benefits, per diems and interest income in addition to wages.

The Cyprus tax system is not expected to change in the near future.

Cyprus Economy