The post-pandemic economy

The Cypriot economy is no stranger to economic downturns. Less than a decade ago, it faced an almost existential threat. Two of its biggest banks went down. Money became so scarce it made business activities nearly impossible to pursue, at least for some time.

Expansion plans were shelved, and foreign investment disappeared altogether. Construction came to a halt, and many companies in the sector simply disappeared.

Unemployment skyrocketed, businesses suffered from weakening demand and government revenue took a plunge.

The economy was placed on life support by the ‘troika’ of the European Union, the ECB, and the IMF. But it survived.

Though not all businesses had the same fortune, most managed to rebound, and some new ones emerged from the ashes.

Within three years, the Cypriot economy was a frontrunner enjoying growth rates of more than 4%. True, some of it came from the controversial citizenship-forinvestment scheme, but many other sectors saw a strong comeback.

History offers plenty of cases of how economies and businesses emerge from severe economic downturns, wars, and uncertainty.

Last year’s pandemic offered a similar challenge.

Repeated lockdowns and numerous restrictions that came and went affected nearly every sector of the economy.

The hotel industry was the hardest hit—nearly a 90% drop in revenue last year alone.

With many fixed expenses running, loan payment freeze offered little but essential liquidity respite. However, their balance sheet grew but on the wrong side.

This year prospects don’t look as bleak. Flights from abroad will start bringing tourists and much-needed cash.

The hotel industry has been a traditional seasonal employer in the economy, particularly for the newcomers in the job market.

At its peak, the hotel industry can’t find enough local recruits, so they bring legions of young people from EU member states to work over the summer, mostly as waiters.

During the pandemic, banks have not been so fortunate, either.

Non-performing loans are expected to jump as much as ?5 bln this year, according to estimates by top bank officials.

Part of it might be reversed with the fortunes of the economy, but some of it will be here to stay, and banks will need to find ways to get rid of it together with what’s still left in their balance sheets from the previous disaster.

Overall, banks will do well this year, especially if they keep operating costs down and improve their meagre net interest income, the difference between the cost of the deposit and the revenue of interest income.

However, banks need to find other ways to supplement their income and cover the cost of the services they still provide to customers. Although they still face a lot of resistance, it’s a matter of survival in the end.

Public finances

The economy took a plunge during the pandemic after repeated lockdowns.

State support programmes for businesses and low-income people only exacerbated the fiscal situation.

But other European countries did not fare much better. Cyprus had a 5.7% deficit due to the pandemic, but what’s really worrying is the debt.

In 2020 public debt rose to 118.2% of GDP.

When the economy came under life support in 2013, the so-called Troika ensured that public debt did not exceed more than 100% relative to GDP, or it would not be sustainable.

Somehow the current debt level materialised before the pandemic.

Though necessary for political and other reasons, the abrupt end of the citizenship-for-investment programme did not help much. Still, its impact is expected to be limited and perhaps not as material as some people suggest.

Consumer spending

This is the time for the government to step in with an expansionary fiscal policy to drive growth and state revenue. By providing incentives, for example, to businesses to invest in solar energy and more cost-efficient technology will help many more on the way.

Similarly, incentives for young couples to get affordable housing will help boost demand, not just for construction but also for everything connected to it.

Although such measures may temporarily raise debt, the expected growth will offset most of it, and tax revenues will receive a much-needed boost.

Despite the negative effects the pandemic had on the economy, history suggests that a rebound is imminent.

But it needs careful management to create the conditions that will reverse them.