Almost all of the productivity growth in Cyprus' economy over the past three years can be attributed to the Information and Communication Technology (ICT) sector, according to the third Competitiveness Report of the Cypriot Economy released by the Council of Economy and Competitiveness Council (CEC).

Professor Sofronis Clerides from the University of Cyprus, representing the research team, highlighted the study's focus on productivity.

"The ICT sector has emerged as a vital component of the Cypriot economy in the last three years," Clerides said, "thanks to various circumstances such as the closure of the investment program, the pandemic, the war in Ukraine, and government incentives."

The report connects current findings with sustainable development goals for the first time. It also notes improvements in economic activity and the innovation system, with new companies and professionals relocating to Cyprus and providing various services. Key challenges identified include the administration of justice, digital and environmental transitions, and aligning education with the labor market.

CEC President Takis Clerides emphasized that these results stem from government incentives. He stressed the need for proactive measures to attract the best talent to Cyprus, suggesting that the country could adopt and enhance ideas implemented abroad.

Impact of highly skilled foreign workers

CEC Vice President Andreas Assiotis presented a section of the report examining the impact of highly skilled and high-income foreign workers on the Cypriot economy. In 2022, 1,640 foreign interest companies (FICs) were registered in Cyprus, with a slight decrease of 232 in 2023. External factors like the war in Ukraine contributed to this growth, with third-country nationals holding the majority of shares in 86% of these companies.

In 2022, 37% of registered FICs focused on "Software and Video Game Development," 17% on "Investment and Finance," and 13% on "Business and Legal Consulting." Although the proportion of FICs involved in software and game development fell in 2023, there was a rise in investment and finance companies.

The Digital Nomad Visa program, allowing non-EU and non-EEA nationals to live in Cyprus while working remotely for foreign companies, has resulted in 1,000-2,000 new residents, mainly during the pandemic years 2020-2021. The ICT sector showed remarkable growth, with 37% of new FICs in 2022 being part of this sector. Between 70,000 and 80,000 high-income individuals have relocated to Cyprus recently, bringing their families and significantly impacting the local economy by increasing demand for goods and services.

However, this influx also poses challenges, such as the rising demand for real estate, leading to sharply increased property prices, particularly in Limassol.

Economic resilience amid adversity

The report outlines how Cyprus navigated several adverse events post-economic crisis, including Brexit, the collapse of its investment program, the COVID-19 pandemic, the war in Ukraine, and imported inflation. The 2022 Russian invasion of Ukraine spiked energy and food prices and threatened Cyprus' tourism industry. Nevertheless, Cyprus managed to offset much of the lost tourism by attracting visitors from other countries and possibly benefiting from the relocation of Russian and Ukrainian businesses.

Reforms enhancing competitiveness, improving the business environment, attracting new investments, and diversifying the economy are in progress but need effective implementation. Cyprus performs well in international competitiveness rankings, though it is not among the top. While the institutional and regulatory framework and market conditions are generally favorable, several sectors face challenges impacting the country's overall competitiveness.

Recommendations to boost Cyprus' competitiveness

CEC has outlined seven key recommendations to enhance the competitiveness of the Cypriot economy.

The first recommendation involves promoting entrepreneurship and business growth by providing incentives for very small businesses to merge. This consolidation aims to increase productivity and achieve economies of scale, addressing the substantial number of very small enterprises in Cyprus that employ fewer than ten people.

Strengthening business connections and synergies is another priority. The CEC suggests supporting the integration of Cypriot businesses into the supply chains of large international companies and enhancing collaboration between the business community, higher education institutions, and research entities.

Enhancing the adoption of digital technologies across various sectors is crucial for improving efficiency and innovation.

The CEC also emphasizes the importance of facilitating better access to funding for businesses, enabling them to invest in growth and development.

Optimizing human capital utilization involves attracting high-quality foreign direct investment (FDI) and making better use of the existing workforce by aligning skills with market needs. This requires robust monitoring and forecasting of future needs, increasing graduates in technical and physical sciences, and enhancing digital skills training.

Additionally, fostering entrepreneurship and boosting the digital competencies of educators are essential steps to prepare the workforce for the demands of the modern economy.

Finally the report points out that continuously diversifying the economy into new sectors such as agritech, education, healthcare, and the green economy is vital for sustainable growth.