Council calls for targeted support rather than blanket measures

The Cyprus Fiscal Council on Friday warned that developments related to the war in Iran are likely to exert significant pressure on the Cypriot economy, urging the government to prepare immediately for potential fallout.

“The developments in Iran are quite likely to exert significant pressures on the Cypriot economy,” the council stated.

“Although important parameters remain uncertain, immediate preparation is required to address the consequences,” it added.

“With the possibility of the conflict continuing over time, and even evolving into an asymmetric war, the response to developments should take into account the high degree of uncertainty that characterises current data,” the Fiscal Council continued.

Moreover, the council stressed that uncertainty remains exceptionally high, particularly given the risk of a prolonged conflict and its unpredictable trajectory.

“The risks that are forming are spreading across all aspects and industries of the economy,” it stated.

In addition, it explained that “inflationary pressures are very likely to be broad-based and not limited to fuel costs, with commodities, intermediate goods and fertilisers already recording significant increases, as well as delays in arrivals”.

The warning highlights the risk of widespread inflationary pressures, extending beyond energy into supply chains and essential goods.

At the same time, the council underlined that the government retains the capacity to respond effectively, citing the country’s improved fiscal position.

“However, the risk remains within the government’s capacity for tangible management, while the current fiscal position allows for the potential adoption of measures, thanks to the continued strengthening of liquidity reserves, and mainly due to the reduction of public debt,” the Fiscal Council said.

Despite the potential severity of the situation, the council called on the government to avoid blanket support measures, instead recommending targeted interventions.

It emphasised that support should focus on low-income households and small and medium-sized enterprises, in order to protect employment and sustain economic growth.

“Support for households should not be horizontal in nature, particularly when considering that low-income households are expected to be more affected than higher-income households, and that the income gap between the two categories continues to show a widening trend,” the Fiscal Council said.

The council also highlighted the importance of designing measures with clear and measurable objectives, allowing authorities to assess their effectiveness and adjust them if necessary.

“Measures should be accompanied by pre-declared, specific and measurable targets, so that not only their effectiveness can be evaluated, but also any need for revision, upgrading or abolition during the evolution of the crisis,” the Fiscal Council said.

It also stressed that sectoral support must reflect the specific conditions of each part of the economy, including resilience, liquidity levels, past profitability, and banking sector exposure.

“Support per sector of the economy should take into account the existing situation, the ability of each sector to withstand pressures, its liquidity, profit levels of previous years, as well as the exposure of the banking sector to each sector,” the council said.

“For example, sectors that had much higher rates of price increases compared to average inflation due to increased demand should now be left to adjust to the expected lower demand without state intervention, so that they can readjust their prices downwards,” it added.

The council also made clear that any measures adopted must be strictly temporary and targeted, with clearly defined objectives from the outset.

“In any case, any measures should have a strictly temporary character, be targeted and have clear and pre-declared objectives,” the council pointed out.

What is more, it underlined the importance of maintaining fiscal stability, despite the expected pressures ahead.

“The positive course of public finances is key to the economic resilience of the country,” the council stated.

“However, fiscal stability must be safeguarded in view of the significant pressures expected to arise, both in revenues and expenditures during the period up to 2028,” it concluded.