The government’s economic staff is de facto on alert, since the war in Israel may also create a chain of economic repercussions, which will affect the economy.
This is because so far the big thorn was inflation but now, after the turbulent picture in the Middle East, the situation is complicated on many levels and no one at this time can determine either how long it will last or how much it will affect Cypriot economy. The situation seems to be extremely volatile at a time when the economy is in good shape and has a fiscal surplus.
The debate on the 2024 state budget in Parliament will take place on 11, 12, and 13 December and was drawn up before the developments of the military conflict in the Middle East, which has created new risks for energy prices, even before the crisis opened by the war in Ukraine is over. In the external fiscal risks, published before the developments, the Treasury, as expected, does not refer to the war in Israel that started on 7 October, but notes as a general concern the deterioration of geopolitical developments.
The external risks, as mentioned in the Treasury report, are the continuation of inflationary pressures due to the ongoing conflict between Ukraine and Russia, other negative developments in the economies of other countries affecting key productive sectors of the Cypriot economy, which will lead to lower (than projected) growth rates and a deterioration in fiscal indicators (e.g. fiscal balance, public debt, current account balance), as well as the unemployment level.
Continued or new sanctions on Russia and Belarus, a strain on public expenditure due to climate change effects, and deteriorating geopolitical developments will hurt economic activity.
The first has to do with developments, which may be affected if the tension in the Middle East is prolonged and intense. The government forecasts that growth in 2024 will be 2.9% compared to 1.3% estimated for the Eurozone and 1.3% for the EU countries.
The second fear has to do with inflation. At a time when the ECB’s monetary policy is aimed at limiting precision, at a time when food inflation is soaring, the deterioration of the situation in the Middle East is coming to ring a bell, with oil being the primary focus.
This means that a rise will also drag down electricity prices. By extension, this will have the effect of increasing food prices even more and putting even more pressure on household incomes, as there will be no end to the price increases on basic commodities. The situation does not look good and this was evident from the way oil was performing last Friday. With a statement that implied a sense of threat from Iran to Israel, the price of ‘black gold’ shot up to $90 a barrel… In the Cypriot market, the average price of diesel is €1.72, and the average price of 95-octane unleaded petrol is €1.61.
Losses are also expected in tourism. For the immediate future, the losses of Israeli tourists must be considered certain. In August, tourist arrivals from Israel accounted for 14.9% (76,130) of total arrivals.