The size of the informal economy or shadow economy in Cyprus ranges between 11% – 18% of GDP, using the monetary approach method and between 26% – 34% of GDP, using the energy consumption method. A study by the Center for Economic Research of the University of Cyprus, signed by Christoforos Andreou, Elena Andreou, Stefani Michael and George Syrichas, states that the pandemic with its catastrophic consequences on economic activity has rekindled interest in overestimating its size.
“Public finances are under stifling pressure and governments are trying to raise additional revenue to support declining economic activity and to finance their budget deficits. “As a result, governments have every reason to discover the size of the informal economy and the additional revenue that could be raised.” The researchers point out that “Alm and Embaye (2013) estimate the informal economy for 111 countries using the monetary method and find even higher estimates for Cyprus, of the order of 27% – 37% of GDP, for a shorter period of time, 1985- 2006. The same can be noted when comparing the estimates of Cyprus with the method of energy, with estimates for other Mediterranean countries. In particular, Missiou and Psychoyios (2017) apply the method of electricity consumption for Mediterranean countries of the European Union for the period 2008-2013 and find the size of the informal economy to be 20% -30% for Greece, 18% -21% for Portugal and 12% -18% for Spain “.
“Assessing the size of the informal economy, given its invisible nature, is not an easy task. “Many methods have been used in the literature to try to measure the informal economy and which can be divided into two broad categories, microeconomic (direct) and macroeconomic (indirect) approaches,” the study said.
The researchers report in their study: “As far as we know, this is the first study to apply the energy consumption approach to assessing the informal economy and focusing exclusively on the Cypriot economy. In addition, the empirical analysis covers a recent period for Cyprus, using quarterly data for the period 1995-2018, during which the Cypriot economy has undergone significant structural changes, such as financial liberalization, the abolition of capital restrictions, in the European Union, the adoption of the euro, as well as the recent banking crisis “.
The study also deals with the indicators of economic uncertainty in Cyprus at the level of sectors (manufacturing, construction, retail, services) and economy. Indicators are calculated by scattering optimistic and pessimistic answers to expectations questions. In contrast to previous crises that unfolded at a relatively slow pace, the COVID-19 pandemic crisis was exogenous and manifested at a rapid global pace, but was accompanied by employee and business support policies. Therefore, the index based on the disagreement of expectations between companies, in relation to the course of employment and prices, did not increase significantly, although there was an increased disagreement in the expectations for the selling prices of services between March – May 2020.