The shadow economy continues to thrive in Cyprus, with 23.7% of the country’s Gross Domestic Product (GDP) linked to undeclared economic activity, according to data presented by the University of Cyprus’ Economics Research Center.

As Brief reports, the findings were revealed by economist and ERC advisor Dr. Giorgos Syrichas during a presentation on tax reform at the Presidential Palace.

Much of the data originates from the European Parliament, with 2021 as the reference year. The study confirms that Cyprus ranks among the highest in shadow economy activity compared to 30 other European countries.

Cyprus' shadow economy is comparable to that of Hungary (25%), Romania (28.9%), Croatia (29%), and Turkey (32%). In contrast, the countries with the lowest levels of informal economy include Switzerland (5.8%), Austria (6.9%), the Netherlands (7.8%), Luxembourg (8.4%), Ireland (9.4%), Denmark (9.6%), and Germany (10%).

According to the European Parliament’s 2022 report on the informal economy, countries in Eastern, Central, and Southern Europe—such as Bulgaria, Cyprus, the Czech Republic, Latvia, Lithuania, and Poland—tend to have larger shadow economies than older EU member states in Western and Central Europe, including Austria, Germany, France, and the Netherlands.

The report highlights a significant increase in the shadow economy, rising from 14.98% in 2019 to 16.48% in 2020—a 1.5 percentage point increase, or a 10% year-on-year growth.

Researchers attribute the high levels of informal economy activity to the COVID-19 pandemic and the subsequent global economic downturn. However, projections from early 2022 indicate a slight decline in the shadow economy by 0.52 percentage points.

“This is a direct consequence of the rising cost of living and severe energy shortages, which could lead to a 5%-7% increase in the shadow economy across nearly all EU countries,” the study notes.

A previous ERC study published in 2021 estimated that Cyprus’ informal economy amounts to approximately €4 billion—excluding revenue from illegal activities. The study emphasized that the impact of unreported income extends beyond fiscal losses to affect households and the broader economy.

Applying the energy consumption approach to estimate the shadow economy, the ERC concluded that informal economic activity in Cyprus ranges between 11% and 28% of GDP, while another estimate places it between 26% and 34% of GDP.

The research also employed the monetary approach (cash demand method) and the energy consumption method, producing similar findings. The study was conducted by Christoforos Andreou, Elena Andreou, Stephani Michael, and Giorgos Syrichas and analyzed data spanning 1995-2018.

Using the monetary approach, the researchers estimated the shadow economy in Cyprus at 11%-18% of GDP, while the energy consumption method suggested a range of 26%-34% of GDP.