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Quarterly Issue 2

Cyprus’ financial response to COVID-19

Author: ICAEW Insights

Published: 17 Jul 2020

Cyprus skyline

With the IMF projecting average debt-to-GDP ratios exceeding 120% in 2021, we examine the measures taken by five countries to the economic impacts of the coronavirus pandemic. Here, we explore Cyprus’ response.

Cyprus is one of the EU’s smallest and most isolated countries, but it hasn’t remained untouched. Travel and tourism were abruptly curtailed.

In mid-April the Central Bank of Cyprus urged banks to focus on the provision of short-term liquidity facilities for up to 12 months at preferential interest rates. This was designed to help viable businesses facing financial difficulties as a result of the pandemic, which in Cypriot terms is generally defined as a reduction of at least 25% in turnover.

For individuals, Cyprus adopted many of the standard measures seen across Europe and beyond: tax payment holidays, national insurance suspension and other easing measures aimed at keeping households afloat and consumer confidence from completely cratering.

In macro terms, Cyprus has followed other EU nations and turned to the debt markets. The country’s treasury issued two new benchmark-sized Euro Medium-Term Notes for a total amount of €1.75bn, followed by a further draw of another €1.25bn from Cyprus banks by issuing local bonds with a maturity of 12 months.

Looking ahead

Cyprus’s debt-to-GDP ratio reached 95% in 2019. That is expected to reach 105% by the end of 2020, according to Trading Economics, against a backdrop of a 7.4% decline in GDP growth.

The European Commission (EC)Spring Economic Forecast reported that “the COVID-19 crisis is set to push the economy into a severe recession in 2020, with real GDP forecast to contract by 7.5% in 2020 before bouncing back with growth of around 6% in 2021”.

However, the EC report also stated that Cyprus’s unemployment rate “is projected to increase, albeit modestly. The fiscal measures adopted are expected to support employment and households’ incomes”.

Case study: Eleni Kaloyirou from Hermes Airports

The government of Cyprus imposed strict lockdown measures on 24 March. For Eleni Kaloyirou, Chief Executive Officer of Hermes Airports, which operates out of Larnaca and Paphos, the no-fly ban imposed has had a huge impact. Despite the flight ban, a skeleton staff continued to oversee the only flight exceptions, which were cargo and special repatriation flights for Cypriots.

“We lost all traffic to our airports. At the same time, we have to maintain the airports as operational as they are a critical part of the country’s infrastructure,” Kaloyirou says.

But what that meant for the business was that, despite continuing to incur costs, the company has had little or no revenue. 

“There is a lot of uncertainty as to how soon flights will be allowed again and to what extent traffic will return. We foresee that it will be a long time until we return to last year’s traffic levels.” Cyprus announced in May that passenger flights would resume from 9 June but initially only from 19 countries and with certain conditions applying.

The outlook for the aviation industry is more uncertain than most given that travel restrictions are likely to remain in place longer than other lockdown measures, so liquidity is vital to Hermes’s survival. 

“We don’t really know when traffic will return or how slow the recovery will be. This makes planning very difficult. We are looking at how to restart our business by considering industry-wide measures to generate confidence so that people can start travelling again,” she says.

In Cyprus, Hermes Airports employ directly or indirectly close to 18,000 people and contribute 4% to the country’s GDP. The government has introduced a number of schemes to support companies. Hermes has signed up to a scheme for the partial cessation of operations, offered to companies that have suffered falls of over 25% in turnover, which allows Hermes to claim some relief against staffing costs.

“Relationships and communication are very important. If we can’t see people face to face we maintain regular contact online,” says Kaloyirou. But, she says: “Communication can be maintained in lockdown periods through available electronic means but it is not a permanent substitute for in-person meetings. 

“Working from home has advantages, but I still feel an office environment is more conducive to carrying on a business. Airport staff and others working in the service industry can’t really work from home, they need to be at their place of business to serve people.”