The Cypriot economy is in danger of derailment because of the continuing growth of the construction sector, the low level of household savings and the ongoing problem of non-performing facilities, a watchdog body warned here on Thursday.
The Fiscal Council, an independent body appointed to keep watch on public finances and warn about dangers to economic stability, also said that increased demands by sections of employees and what it called “low resistance ability” by the state may dangerously increase public spending.
Demetris Georgiades, president of the Fiscal Council, singled out the blow-up of the construction sector as the primary long-term danger to the economy, less than five years after it helped the economy of the eastern Mediterranean island recover from its worst ever crisis in 2013.
In this sense, said Georgiades, the Cypriot Investment Program which allows foreign nationals to get a Cypriot passport or a permanent residence permit is a factor that may affect the economy.
The purchase of properties by a few thousand foreign nationals has contributed towards the recovery of the Cypriot economy.
Georgiades said that if the program is abruptly terminated it will upset growth, while if allowed to expand unchecked it will cause problems for other sectors, which will lose their competitiveness and will not be able to fill the vacuum by a crunch in the construction sector.
He also warned about the danger of a property price bubble.
“Construction cannot grow indefinitely and in the best-case scenario the country’s infrastructure will not be able to offer land any more. The question is what will happen to many other sectors of professionals — builders, general workers, electricians and other people — directly related to the construction sector,” Georgiades said.
He also said that permanent expenditure based on the assumption that direct and indirect income from this sector will also be permanent is the second big danger of fiscal derailment because of the construction sector.
Georgiades explained that about 10 percent of the cumulative growth of the country’s gross domestic product between 2016 and 2018 came from the Cypriot Investment Program.
The ratio of investment in the property sector through the Cypriot Investment Program rose to 37.7 percent of total investment in the construction sector in 2018, compared to 19.5 percent in 2015, he noted.