Developments linked to the war in Iran are likely to place significant pressure on the Cypriot economy, the Fiscal Council has warned.
In a statement, the Council noted that while key parameters remain uncertain, immediate preparation is required to address potential impacts.
It highlighted the possibility of a prolonged conflict, as well as a shift towards asymmetric warfare, stressing that any policy response must take into account the high level of uncertainty surrounding current conditions.
Inflation pressures extend beyond energy
According to the Council, emerging risks are spreading across all sectors of the economy, with inflationary pressures expected to be broad-based rather than limited to fuel costs.
Prices for goods, intermediate products and fertilisers are already rising, while delays in supply chains are being recorded.
Despite these pressures, the Council stated that the situation remains manageable, with the government in a position to respond thanks to strengthened liquidity reserves and a reduction in public debt.
Warning against horizontal measures
The Fiscal Council urged the government to avoid horizontal support measures aimed at boosting disposable income across the board.
Instead, it called for targeted interventions focused on low-income households and small and medium-sized enterprises, with the aim of safeguarding employment and economic growth.
It stressed that lower-income households are expected to be disproportionately affected, while the income gap between lower and higher-income groups continues to widen.
Need for measurable and temporary policies
Any measures adopted, the Council said, should be accompanied by clear, predefined and measurable objectives to allow for proper evaluation of their effectiveness.
This would also enable authorities to adjust, upgrade or withdraw measures as the crisis evolves.
Support across different sectors should take into account each sector’s resilience, liquidity levels, past profitability and exposure to the banking system.
Sectors that experienced significant price increases due to strong demand, it noted, should be allowed to adjust naturally to lower demand without state intervention.
Fiscal stability remains key
The Council emphasised that all measures should be strictly temporary, targeted and clearly defined.
It also underlined that maintaining the positive trajectory of public finances is critical for strengthening the country’s economic resilience.
At the same time, it warned that fiscal stability must be preserved in light of expected pressures on both revenues and expenditures in the period leading up to 2028.