Cyprus’s Fiscal Council has warned that the war in Iran will place significant pressure across the entire economy.
The Council’s core message is that government’s blanket income support measures would be the wrong response. Instead, it is calling for targeted intervention: support directed specifically at low-income households, which it expects to bear a disproportionate share of the impact, and at small and medium-sized enterprises, to protect employment and growth. The income gap between low and high earners, the Council noted, is already widening.
The scale of the challenge, the Council said, should not be underestimated. Developments in Iran “are quite likely to exert significant pressures on the Cypriot economy. Although significant parameters remain uncertain, immediate preparation to address the impact is required. Given the possibility that the conflict continues over time and transforms into an asymmetric war, the response to developments must take into account the high level of uncertainty that characterises the data available to date.”
Inflationary pressure, the Council warned, will not be confined to fuel. Commodities, intermediate goods and fertilisers are already recording significant price increases and delivery delays, and the broader price impact is expected to ripple across all sectors of the economy.
The Council was also pointed on which sectors should not expect help. Industries that recorded above-average price increases in recent years on the back of high demand should be left to adjust to lower demand without state intervention — and to bring their prices down accordingly. Any sector-specific support, the Council said, must take into account each industry’s capacity to withstand pressure, its existing liquidity, recent profit levels, and the banking sector’s exposure to it.
Whatever measures are adopted must come with pre-declared, specific and measurable targets — so that their effectiveness can be assessed and, where necessary, revised or withdrawn as the crisis develops. The Council was unambiguous on one point: “any measures must be strictly temporary, targeted, and have clear and pre-declared objectives.”
The government does, however, have room to act. The Council acknowledged that the risk “remains within the government’s capacity for tangible management,” pointing to the continued strengthening of liquid reserves and a reduction in the public debt stock as factors that create fiscal space. That space, it cautioned, must be used carefully. The positive trajectory of public finances is, the Council said, “key to the economic resilience of the country” — and fiscal stability must be preserved against the pressures expected to build on both revenues and expenditure through to 2028.
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