The performance of the Cypriot economy is currently rather noteworthy: satisfactory growth, low unemployment, modest inflation and surpluses in public finances. However, over time, it has also illustrated excessive deficits in the current account of its balance of payments.

The current account balance is important, since it records the variance between exports and imports, thereby reflecting important aspects of the long-term competitiveness of an economy. Nevertheless, it does not attract much interest in the public debate, presumably because the related effects are not immediately noticeable and only observable in the long term.

In the case of Cyprus, the persistent current accounts deficits reflect its over-dependence on imports of capital goods and raw materials to support the development of key sectors of the economy.

Despite the remarkable performance in tourism and professional services exports, the excessive degree of reliance on imports leads to imbalances, while it also demonstrates the serious lag in the green and digital transitions and the country’s continued dependence on oil imports for its energy needs.

Viewed from another angle, the persistently high deficits in external transactions reflect the gap between domestic savings and investments. This is particularly problematic considering the low level of investments, in relation to the future capital needs of the economy, including for the transition towards the digital and green economy.

It is emphasised that, contrary to the declarations of the Trump administration, a deficit in foreign trade is not, in itself, unquestionably, a problematic element. In fact, it is less of an issue if imports are directed to support long term growth and if deficits are financed by stable long-term capital flows.

For Cyprus, the external trade deficit does not pose any immediate or pressing challenges, as it is mainly covered by an inflow of foreign capital, related to the acquisition of real estate by overseas buyers. If this inflow remains within reasonable limits, it would not be expected to exacerbate the challenges.

Should this inflow take an unsustainable path, however, it would expand the reliance of the economy on the construction sector, lead to higher property prices and rents, forcing Cypriots to channel a larger proportion of their already low savings into funding their housing needs while, clearly, it could not act as a permanent solution to the long-standing challenges of the Cypriot economy.

Addressing long-term challenges should involve a strategy, including the following.

Cyprus’ comparative advantages in the services sector should be further exploited by building on the positive developments in recent years, which have led to increased establishment and investments in the country by foreign companies that are active in advanced technologies, higher education, health and so on.

In this context, the impact of the necessary adaptation to the international agreement of imposing a minimum tax rate of 15 per cent on large enterprises should be taken into account. This development would, unavoidably, burden such enterprises and could be offset by benefits in other key areas, such as facilitating the employment of qualified personnel and offering access to state-of-the-art technology and communications.

The green transition should be accelerated, through the promotion of policies, aiming at safeguarding low and affordable energy prices for the long run.

Incentives should be created to increase savings, through such measures as the expansion of the framework governing provident funds, which would also deliver an ancillary, but important, benefit of effectively addressing the problem of pension adequacy on a long-term basis.

Andreas Charalambous and Omiros Pissarides are economists and the opinions they express are personal