The economic outlook for Cyprus is positive despite a challenging context, according to a report published as part of the European Commission’s European Semester Spring Package, presented in Brussels on Wednesday. However, the country’s competitiveness faces significant challenges due to a mismatch between skills and labor market needs, insufficient access to finance for companies, and an inadequate rollout of renewable energy.

The package provides policy guidance to Member States to build a robust and future-proof economy that secures competitiveness, resilience, and long-term prosperity for all while maintaining sound public finances amid a challenging geopolitical environment.

The European Semester approach, presented by Commission Vice President Valdis Dombrovskis, Economy Commissioner Paolo Gentiloni, and Jobs Commissioner Nicolas Schmit, aims to enhance the competitiveness of the EU’s economies through an integrated approach across all policy areas: macroeconomic stability, environmental sustainability, productivity, and fairness.

Regarding Cyprus, the report notes that the economic outlook remains positive despite the challenging context. Nonetheless, labor market and social cohesion challenges persist, and the country faces significant hurdles in transitioning to a more sustainable economy.

In assessing macroeconomic imbalances in EU member states, the Commission found that Cyprus continues to experience imbalances. Vulnerabilities related to private, government, and external debt have generally receded but remain relevant, while the large current account deficit has widened further.

According to the report on Cyprus, the Commission finds that Cyprus shows mixed performance on competitiveness, with no significant progress since 2022 and the pre-pandemic years.

The country performs well in exporting professional, ICT, and tourism services and in attracting foreign investment. It is well integrated into the single market and is taking further action to boost its performance, the report states.

Cyprus' recovery and resilience plan "comprehensively tackles several challenges related to improving the business environment," the report notes. The measures include reducing red tape in the public sector, streamlining permitting procedures, improving the efficiency of public administration, boosting the effectiveness of the tax system, promoting a robust anti-corruption framework, addressing non-performing loans, and creating incentives for innovation.

However, the report highlights several ongoing competitiveness challenges for Cyprus:

• Skills mismatches, a decline in basic skills, and a low level of digital skills hinder productivity, knowledge valorization, labor supply, and the green and digital transitions.

• Insufficient access to finance for companies, especially outside the monetary and financial institution sector, and limited private investment in manufacturing and innovative businesses are restricting growth potential.

• The insufficient rollout of renewable energy and the delayed transition to a circular economy pose risks to energy autonomy and efficiency and could undermine the long-term competitiveness of the country.