Cyprus will receive € 2.7 billion from the EU Pandemic Recovery Fund and the 7-Year regular EU budget. The recovery fund allocation is approximately € 1.3 billion and includes a mix of loans and grants. The EU budget allocation is € 1.4 billion, to be disbursed between 2021-2027, and is entirely grants.
Brussels Belgium: 21 July 2020
The Next Generation EU Pandemic Recovery Fund
The European Union’s Next Generation EU fund has allocated € 750 billion to the EU Member States to support the recovery from the COVID-19 Pandemic. NGEU is based on borrowing: the European Commission will borrow up to € 750 bln on the markets over the coming years. These funds in turn will be distributed to each Member State.
Of the € 750 billion:
€ 390 bln will be distributed as grants
€ 360 bln will be distributed as loans.
Each Member State has the option to accept the loans, or to fund recovery activities using alternative resources. The amounts available under NGEU will be allocated to seven individual programmes:
Recovery and Resilience Facility (RFF): € 672.5 billion
ReactEU
Horizon Europe
Invest EU
Rural Development
Just Transition Fund
RescEU
The RRF is to be used for investments and reforms, including in the green and digital transition areas. It will be disbursed as loans and grants. For grants, 70% will be committed in the years 2021 and 2022 based on: unemployment 2015-2019; inverse GDP per capita; and population share.
The EU Multiannual Financial Framework 2021-2027
The EU Multiannual Financial Framework (MFF) is the EU’s 7-year budget between 2021 and 2027. The total budget agreed is € 1.0743 tln.
The MFF will cover the following spending areas:
single market, innovation and digital
cohesion, resilience and values
natural resources and the environment
migration and border management
security and defence
neighbourhood and the world
European public administration
It should be remembered that, as a relatively rich country within the EU, the share of Cyprus in the budget is limited. Additional resources are available, however, to companies and institutions from programmes such as Erasmus+, Horizon and more.
Our Assessment
The recovery of the Cyprus economy depends significantly on public sector spending in 2020-2021. The government of Cyprus has announced plans to allocate an additional € 2 billion in various forms (about 10% of GDP) to combat the COVID-19 crisis.
This commitment, together with the associated fall in government revenue and rise in expenditure, will expand public sector borrowing significantly in 2020 and possibly in 2021.
The challenge with the European Union funding agreed is that:
The European Commission has still not raised or distributed the capital envisioned from the Next Generation EU fund. This will be done in stages starting later this year and next year.
The disbursement timeline will take over 3 years, and probably more. So of the € 1.3 billion allocated to Cyprus, it is likely that the annual disbursements between 2021 and 2023 will not be more than € 250 – 400 million per year.
At least 50% of the NGEU fund most likely comprises development spending for digital transformation and green economy. This will not support the real economy of Cyprus, and will require long and complex public procurement procedures.
We believe that the economic situation in Cyprus is worsening rapidly (for more information, see our Second Wave Ready in Cyprus article) due to predictable factors.
These include the start of a second wave of COVID cases across Europe; the decline in tourist arrivals; the decline in international financial inflows and investments; the end of the unemployment furlough programme and the end of the loan moratorium.
We believe that the government is on the right track, but should seek to simplify and accelerate any fiscal stimulus packages for Cypriot companies and citizens, and bring forward expenditure as rapidly as possible.
Investors should exercise caution while exploring available investment opportunities in Cyprus.
For further information, please contact us.
Managing Director
Sources and Further Reading
European Commission. 21 July 2020
European Commission. 21 July 2020
GOLD News. 22 July 2020
30 July 2020
18 July 2020
29 May 2020