Imported energy driving Cyprus inflation surge, says economist

Cyprus’ latest rise in inflation is being driven by imported energy costs rather than excessive domestic demand or looser fiscal policy, economist Tassos Yiasemides said, warning that the pressure is gradually spreading through the wider economy. Speaking to the Cyprus News Agenccy (CNA) after the Consumer Price Index reached 3.5 per cent in August, Yiasemides said the increase was concentrated almost entirely in energy, with petroleum product prices rising by 20.3 per cent year on year. He argued that the figures clearly showed industrial products remaining largely unchanged, while “petroleum products and electricity alone are driving the index higher”. The increase, therefore, was not the result of an overheating economy but an imported change in costs, which was now beginning to reach other areas. Geopolitical upheaval and uncertainty surrounding developments in the Middle East were keeping international energy prices high, Yiasemides explained, while trade tensions between the world’s largest economies were adding another layer of risk. For a country that remains almost entirely dependent on fossil fuels, he said, every such disturbance is felt immediately at petrol stations and, after a delay, in electricity bills, transport costs, insurance premiums and freight rates before eventually reaching shop shelves. However, the real problem was not the international disruption itself but “our exposure to it”, Yiasemides stressed. While global prices are outside Cyprus’ control, he said the extent to which they affect the country was something that could be addressed domestically. “We remain a purely import-dependent economic system, with a widening trade deficit, no substantial connection to other energy networks, an electricity market that has yet to operate competitively and a primary sector that has been allowed to wither,” he said. As a result, Cyprus continued to buy goods from abroad that could potentially be produced locally. “We import products we could produce ourselves and, with them, we import the higher production costs of other countries,” he added. Yiasemides also criticised the slow progress made on renewable energy and storage, saying that discussions had continued for more than a decade without a corresponding level of implementation. Turning to government support, he said the temporary reduction in VAT on energy could provide short-term relief but did not address the source of the problem. Moreover, “when it is extended indefinitely, it becomes a permanent fiscal commitment in response to a supposedly temporary phenomenon”, he warned. Any such assistance should instead be directed towards vulnerable households and energy-intensive small and medium-sized businesses, according to Yiasemides. Measures should also be time-limited and accompanied by a clear exit mechanism. Blanket support may carry political appeal when public finances are in surplus, he continued, but it also strengthens demand at a time when the problem lies on the supply side of the economy. At the same time, Yiasemides called for closer and more systematic supervision of the fuel market to ensure that falling international prices are passed on to consumers as quickly as increases. The more substantial response, however, would need to be delivered over the medium term. This should include accelerating the development of renewable energy sources, with particular emphasis on storage and improvements to the electricity grid, as well as completing the competitive electricity market and efforts to bring natural gas to Cyprus. The country should also examine which goods could realistically be produced domestically, he said, with particular attention given to the primary sector, while recognising that Cyprus is not an industrial economy. Improving the energy efficiency of buildings and transport would offer another relatively inexpensive way to reduce consumption and the country’s exposure to external price shocks, he added. Still, Yiasemides cautioned that complete energy independence was not a realistic objective for an island. Instead, Cyprus should pursue “a gradual and measurable strategy for reducing its dependence”, warning that without such a plan, “during the next crisis, we will be making exactly the same observations”. Meanwhile, he said renewed inflationary pressure could prompt central banks to reconsider monetary policy, potentially opening the door to higher interest rates. This would place additional pressure on borrowers at a time when mortgage lending is increasing, with Yiasemides warning that households could consequently be “burdened twice”. Finally, he said the automatic cost-of-living allowance (CoLA) would transfer part of the energy shock to the state wage bill, reopening the same budget debate seen in previous years.