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First of all, I would like to thank you for your invitation to join you and to welcome this year's General Assembly of your Association.
With your invitation, you give me the opportunity to share with you my thoughts on the challenges and prospects of the Cypriot economy, including, of course, the banking sector.
I must say that the Association of Cyprus Banks, as the representative of the Banking Sector and its member banks, has over the years played a creative and productive role in financial and banking developments, especially in recent years where the challenges have been both great and continuous and are still ongoing. The Association's actions have always been and continue to be within the limits of the rational representation of its members' interests, but also within the limits of the general interest of the economy, developing fruitful collaborations with institutions, Ministries, Parliament, the media and especially with European banking institutions such as the European Banking Federation and other international banking associations.
Particularly for this role, I would be remiss if I did not mention the Association's Director General, Michael Kammas, for his important initiatives at the European level, who cannot be with us today.
Of course, I could not fail to mention also my recent contacts and discussions with both our banks and the Association of Banks regarding the continuous interest rate increases by the European Central Bank and their impact on households, businesses and the economy in general.
I take the opportunity of my presence here to express publicly, once again, my satisfaction with the first positive reactions of the banks, each of them, of course, with their own mechanisms and in their own way, always in cooperation with the Central Bank, regarding the absorption of the increased costs of the interest rate increase, but also regarding the setting of deposit rates.
Just recently we have seen another interest rate increase by the European Central Bank, albeit at a lower rate, as inflation continues to remain high at the European level.
I am sure that our banks will continue to closely monitor these developments and I expect more positive steps to follow, from all banks, because they are well aware that the continuous improvement of the financial sector is inextricably linked to economic stability, which in turn is based on the sound financial situation and adequate sustainability of our households and our businesses, the majority of which are small and medium-sized enterprises. A decisive prerequisite for economic stability is, of course, the development of a stable economic policy that ensures sustainable growth within a framework of fiscal discipline and financial stability. This is a constant policy of the Government of President Nicos Christodoulides.
Last week I attended the Eurogroup and Ecofin meetings, where, among other issues, the situation of the Cypriot economy and its future course were analysed and discussed in the context of the first semester assessment.
The conclusion of the European Union institutions is that our economy remains reliable and capable of meeting all its European and international obligations.
It is no coincidence that three days ago, Fitch's credit rating confirmed Cyprus' rating at BBB with a stable outlook, one notch above investment grade. We welcome the Fitch report and the confirmation that the Government's balance will remain in surplus for the next two years, but at the same time we note all the suggestions which we will study very carefully for any necessary adjustment.
Based on our baseline macroeconomic scenario, which is fully in line with the European Commission's spring forecasts, but also with the aforementioned post-programme assessment, GDP growth will continue at a positive rate of around 2.8%. A rate that is three times the Eurozone average set at 1%. The continued rise in interest rates as you know discourages investment and structural inflation remains high at around 4.9%, despite the fact that inflation is currently just above 3% and is expected to close at 3.2% in 2023, and 2.5% in 2024. Inflation, as you also know, reduces household disposable income. These facts are the main reason for the deceleration in GDP growth, but it remains comparatively strong, and is estimated to be around 3% in 2024.
The fiscal balance remains in surplus and is estimated to reach 2.3% of GDP, on average, in the period 2023-2026. Government debt is estimated to decline to 81.1% of GDP at the end of 2023 from 86.5% in 2022, and is expected to continue its downward trend towards 60% in 2026. Unemployment is expected to continue its gradual deceleration, approaching 5% in 2026.
The Government's main and stable economic policy remains to ensure macroeconomic stability, in the context of fiscal discipline and financial stability, in order to sustain economic growth and create additional jobs.
The Government will continue its policy of tackling inflation and inflationary pressures, in addition to the specific measures already taken and announced. The Government's goal is not only to continue economic growth, i.e. to increase GDP, but, recognizing growth as a prerequisite, it also aims to develop the real economy.
The given government policies and measures leading to the green and digital economy also point in this direction. The government's policy positions on reforms in local government, justice and public service remain in this direction.
Additional government policies that aim at real growth with qualitative elements, which have already started to be implemented, are the tax reform and the encouragement of foreign companies in the technology sectors to establish themselves in Cyprus, creating quality and remunerative jobs, but at the same time transferring experience and know-how.
Determination of the government's policies that aim at real growth with qualitative elements, which have already started to be implemented, are the tax reform and the encouragement of foreign companies in the technology sectors to establish themselves in Cyprus, creating quality and remunerative jobs, but at the same time transferring experience and know-how.
Determination of the government's policies that aim at real growth with qualitative elements, which have already started to be implemented. At the same time, however, challenges and risks remain visible. The recent banking shocks in the US and Switzerland remind us of them. The risks of inflationary pressures and the geopolitical risks from the Russian invasion of Ukraine and from tensions in US-China relations also remain.
Challenges for our banks remain the effective implementation of risk management, technological innovation directly related to cybersecurity and the obligations arising from the implementation and enforcement of the guidelines of the European Central Bank and its supervisory mechanisms.
An important development is the important issues that have begun to be discussed at the EU Finance Ministers' Councils, both at the Eurogroup and ECOFIN. I refer in particular to the completion of the Banking Union with the creation of the Third Pillar of a European Banking Deposit Insurance System, the integration of capital markets, and the Digital Euro. All three of these important issues cannot proceed without the participation of the banks.
Finally, I would like to close with the hope that the conditions will be created for our banks to restart their funding to the real economy at satisfactory levels, to the benefit of the economy and the banking institutions.
I wish your General Assembly every success.
(MB/SX)
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