Turkish Cypriot Economy: TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY A Macroeconomic Monitoring Note Special Issue: Evidence-based Policy making for Shared Prosperity May 2024 TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY M croeconomics, Tr de & Investment Turkish Cypriot Economy: TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY A Macroeconomic Monitoring Note Special Issue: Evidence-based Policymaking for Shared Prosperity May 2024 Document of the World Bank This report is part of the Supporting Economic Convergence and Integration in Cyprus Programme which is funded through the European Union Aid Programme for the Turkish Cypriot community. The opinions expressed in this study do not reflect any official opinion by the European Commission and the World Bank’s Board of Executive Directors, nor do they in any way constitute recognition of boundaries or territories. l i TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY © 2024 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 +1 202-473-1000 www.worldbank.org Disclaimer The opinions expressed in this study are those of its authors and do not reflect any official opinion by the European Commission, the World Bank Group, its Board of Directors, or the governments they represent, nor do they in any way constitute recognition of boundaries or territories. The term ‘Turkish Cypriot community’ refers, solely for the purposes of this study, to the areas in which the government of the Republic of Cyprus does not exercise effective control. If reference is made in the report to any ‘ministries’, ‘departments’, ‘services’, ‘bodies’, ‘organizations’, ‘institutions’, and ‘authorities’ in the areas not under the effective control of the government of the Republic of Cyprus, or respective acronyms or abbreviations are used, it is to allow a clear factual understanding of the administrative structures in the Turkish Cypriot community and shall not imply recognition of any public authority in the areas other than the Government of the Republic of Cyprus. Similarly, comparisons between the areas where the government of Republic of Cyprus exercises effective control and those areas where it does not are factual only. ii l TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY TABLE OF CONTENTS Acknowledgements............................................................................................................................v Abbreviations and Acronyms............................................................................................................ vii Executive Summary........................................................................................................................... ix Chapter 1: Recent Economic Developments and the Short-term Outlook............................................1 1.1 Growth in 2023 was stronger than expected......................................................................... 1 1.2 .....................5 More than 9,600 jobs were created in 2023, of which 44 percent for women. 1.3 Price pressures remain high, as well as households’ vulnerabilities to further shocks..........9 1.4 Fiscal consolidation continued, amid persisting pressures from current expenditures.......11 1.5 ............................................ 14 The TC banking sector proved resilient, but risks remain high. 1.6 The outlook hinges on the normalization of price pressures and the pace of reforms.......15 1.7 Reforms are needed to translate opportunities into shared prosperity..............................16 Chapter 2: Special Issue: Evidence-based Policymaking for Shared Prosperity...................................20 2.1 Input-Output Tables: Vulnerabilities and Opportunities for the Private Sector...................20 2.2 Household Budget Survey: Sources of Income and Wellbeing for Households...................25 2.3 How to Strengthen Evidence-based Policymaking...............................................................30 l iii TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY iv l TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY ACKNOWLEDGEMENTS T his report was prepared by Natasha Rovo (Senior Economist, World Bank), with contributions from Metin Nebiler (Economist, World Bank), Matija Laco (Senior Economist, World Bank), Mertkan Hamit (Consultant, World Bank), and İzge Arısal (Local Technical Coordinator, World Bank). The IOT Analysis in the Special Issue was prepared by Thi Thanh Thanh Bui (Economist, World Bank), Eric Roland Metreu (Senior Economist, World Bank), Jose Pablo Valdes Martinez (Senior Economist, World Bank). The HBS Analysis in the Special Issue was prepared by Metin Nebiler (Economist, World Bank) and Mertkan Hamit (Consultant, World Bank). The team is grateful to Jasmin Chakeri (Practice Manager, World Bank), Ambar Narayan (Practice Manager, World Bank) and Goran Tinjic (Program Manager for Southern Europe, World Bank) for their guidance in the preparation of this report. The team is also thankful to the peer reviewers Zurab Sajaia (Senior Economist, World Bank) and Claire Honore Hollweg (Senior Economist, World Bank) as well as to Fiseha Haile (Senior Economist, World Bank) for helpful comments. The team is also grateful to Suay Anıl and İlke Erdal, who supported the team to gather necessary data and information, and to Peter Kjaer Milne for editorial support. The team would also like to thank Oya Koçak Barçın (Programme Manager, European Commission) for useful comments and feedback, and Betül Atasayan Gülseven and Tuğyan Atıfsoy from the European Union Coordination Centre for their support to the preparation of this report. The team is also grateful for the strong collaboration with the local administration in the Turkish Cypriot community and business chambers in the preparation of this report, including the Turkish Cypriot Chamber of Commerce, the Turkish Cypriot Chamber of Industry, the Turkish Cypriot Chamber of Shopkeepers and Artisans, and the Turkish Cypriot Union of Banks. l v TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY vi l TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY ABBREVIATIONS and ACRONYMS BOP Balance of Payments CAR Capital Adequacy Ratio CPI Consumer Price Index COICOP Classification of Individual Consumption by Purpose COVID-19 Coronavirus Disease 2019 EFT-POS Electronic Funds Transfer at Point of Sale EMDEs Emerging Markets and Developing Economies EU European Union EUR Euro FX Foreign Exchange GC Greek Cypriot GDP Gross Domestic Product GL Green Line GLR Green Line Regulation GLT Green Line Trade HBS Household Budget Survey IMF International Monetary Fund IOT Input-Output Tables MTBF Medium-Term Budget Framework NPL Nonperforming Loan RE Renewable Energy ROAA Return on Average Assets ROAE Return on Average Equity RoC Republic of Cyprus RoC GCA Republic of Cyprus Government-Controlled Area SA Social Assistance SSC Social Security Contribution SDG Sustainable Development Goal TC Turkish Cypriot TCc Turkish Cypriot community TL Turkish lira VAT Value-Added Tax WDI World Development Indicators yoy year-on-year l vii TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY viii l TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY EXECUTIVE SUMMARY T he recovery of the Turkish Cypriot (TC) economy in 2023 was stronger than expected, and GDP is estimated to have rebounded to its pre-pandemic level. Women’s employment increased significantly in 2023, reaching an historical high. Forty-four percent, or 4,177, of the new jobs, went to women, with most jobs created in the services Following a deep recession in 2020—the sector. The significant rebound in female deepest in Europe and in the history of the employment since 2021 was a consequence of TC economy—and after a modest recovery the disproportionately adverse impact of the in 2021, the TC economy rebounded more pandemic on female employment. While the vigorously in 2022, with GDP growth reaching Turkish Cypriot community (TCc) has still one 13.3 percent, and it is estimated to have of the lowest female labor force participation grown at above 5 percent in 2023. Real GDP rates, it is encouraging to observe more is estimated to have finally recovered to, and women joining the labor force in 2023. slightly surpassed, the pre-pandemic level. The cost-of-living crisis has persisted, due to In 2023, Green Line (GL) crossings reached continued depreciation of the TL, the currency new record highs, as well as GL trade.1 The used in the TC economy, and high inflation. increase in GL trade reflects both structural The Turkish lira depreciated further during the progress and short-term opportunities but, second half of 2023. Inflation in Türkiye hit despite this significant progress, it remains almost 70 percent in March 2024, its highest well below potential both in terms of level since November 2022, reflecting the volume and composition—with the top five pass-through of steep currency depreciation, products accounting for the 88 percent of higher labor costs and government tax hikes. total GL trade. The agriculture sector in 2023 The new economic team in Türkiye has is estimated to have contributed positively been implementing an ambitious package to growth, benefiting from the Turkish lira of measures aimed at correcting previous (TL) depreciation, reduced input prices, and macroeconomic imbalances. In this context, favorable weather. Robust ‘imports’ reflect inflation remained high in the TC economy resilient domestic demand, despite persisting throughout the post-pandemic period. After high inflation that is reducing purchasing reaching its peak at 120.7 percent in October power. 2022, the inflation rate fell to 32.6 percent in May 2023, but then increased again, reaching Labor market indicators have exceeded 94.5 percent in March 2024. Food inflation is the pre-pandemic levels, and over 9,600 jobs most elevated among European economies, were created, 44 percent of which were for at 79 percent—substantially higher than food women. In 2023, over 9,200 jobs were created inflation recorded in the Republic of Cyprus - in the private sector, while about 400 jobs government - controlled areas (RoC GCA) at 2 were created in the ‘public sector’, where percent and the average for the euro area, at 3 employment remained at around 36,000 percent—posing continuous risks for poor and after reaching its peak during the pandemic. vulnerable households in the TCc. Furthermore, the labor force reached its highest level in 2023, at 156,000 people. The The fiscal consolidation, which started in services and construction sectors contributed 2021, has continued since, with the fiscal most to the creation of new jobs in 2023. deficit returning to the pre-pandemic levels. 1 The Green Line Regulation was adopted in April 2004. It sets out special rules for goods, services, and persons crossing the Green Line from the Turkish Cypriot community, which is outside the effective control of the government of the Republic of Cyprus and where the EU acquis is suspended, to the areas which are under the effective control of the government and where the acquis applies. l ix TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY While spending reached almost TL 40 billion surrounding future economic developments in 2023 (in nominal terms, equivalent to EUR that could impact the services sector. 1.5bn), double the 2022 volume, it remained stable compared with 2022, in terms of Against the backdrop of persisting high percentage of GDP, at about 29 percent. inflation and weak external environment, After the peak in 2020 at about 40 percent of economic growth in the TC economy is GDP, the post-pandemic spending ratio (as a expected to moderate to 2.7 percent in 2024. percentage of GDP) has been declining, to well Risks to this outlook remain tilted to the below the pre-pandemic average of 39 percent downside. On the external side, a slower-than- in the period 2010–2019. More than 40 expected recovery in key trading partners, percent of total expenditures in 2023 remain especially in the euro area and Türkiye, could destined to transfers, followed by wages dampen growth for the TC economy, also and compensation at just above 40 percent. given its high reliance on external funds. Capital expenditures declined further to about On the domestic side, inflationary risks to 7 percent of total expenditures in 2023, from the outlook appear to remain high, affected 9 percent in 2022. Meanwhile, local revenues, mostly by exchange rate developments and excluding grants, reached almost TL 35 billion macroeconomic policies in Türkiye, as well as by ‘import’ prices. Longer-than-expected (in nominal terms, equivalent to EUR 1.3bn), higher interest rates could also elevate risks to from TL 17 billion in 2022, (EUR 0.964bn) and financial stability. Rising price pressures could slightly increased as a percentage of GDP from create further fiscal pressures, slowing the 22.6 percent in 2022 to 25.6 percent in 2023. rebuilding of fiscal buffers. Already the local This was mostly driven by indirect taxes, which administration in the TCc has rather limited make up about 40 percent of local revenues, policy buffers to counter new shocks and scale due to rising prices, and direct taxes, at 34 up investment to tackle climate change. percent of local revenues. While recovering in terms of percentage of GDP with respect to But opportunities lie ahead to consolidate 2021 and 2022, revenues remain well below short-term gains into sustainable growth. the pre-pandemic average of 30 percent in the First, GL trade and crossings are expected to period 2010-2019. The fiscal deficit has been continue increasing and supporting the TC also reducing to the pre-pandemic levels, economy, representing a key opportunity for after the record deficit reached in 2020. The growth and economic integration. Secondly, fiscal consolidation also reflects a general with labor force participation expanding, as contraction of financial support received more women and workers in general join the from Türkiye as the government in Türkiye labor force, economic capabilities of the TC faces rising expenditures and post-earthquake economy are also expected to expand further. investment needs. The approval of the first In addition, labor mobility across the TC ever Medium-Term Budget Framework (MTBF) economy and RoC GCA is expected to increase, 2024-2026 in the TCc is an important first step hence contributing not only to income growth toward building a rules-based and sustainable but also to knowledge spillovers. Finally, as public finances framework. funds and investment are directed to sustain the green and digital transitions, these also The banking sector proved resilient, but risks constitute opportunities for economic growth, remain high. Banking sector lending in the TC if adequately supported by re-skilling and economy further intensified in 2023. While social protection to shield those impacted the the 2023 bank loan portfolio quality improved most. slightly compared with 2022, the end-2023 outcome marks an increase in non-performing Addressing structural challenges holds loans (NPLs) toward the end of the year. The the potential to boost resilience and overall banking system shows solid levels of competitiveness in the TC economy, by stability, capitalization, and profitability, but consolidating opportunities and reducing differences remain stark between different vulnerabilities for shared prosperity. The banking groups. Risks remain high due to period 2020–24 makes the weakest start to interest rate dynamics and uncertainties a decade in terms of economic growth since x l TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY the 1990s. This applies not only to the TC the course of 2022 and 2023, with the technical economy, but also more broadly to the euro assistance provided by the World Bank and area and global economies. Given that the TC funded by the European Union (EU), two economy has benefited from trade expansion important new datasets for the TC economy and travel re-opening to rebound from the were made available: the Input-Output Tables pandemic-inflicted recession, it is important to (IOT) and the Household-Budget Survey (HBS). make use of this window to tackle longer-term challenges in order to consolidate the short- The IOT analysis concludes three main term opportunities and gains to sustainable findings, unveiling vulnerabilities and growth. Moreover, addressing longer-term opportunities for the private sector. These challenges is key to building resilience to findings are: (i) a strong reliance on services, and a small domestic industrial production; future shocks. While setting an adequate (ii) a high dependence on imported vs macroeconomic policy framework to anchor domestically produced inputs for the TC the reform agenda, in the aftermath of economy, and relative to its size; and (iii) a multiple crises five reform priorities emerge: high dependence on imported inputs in the (i) maintain the focus on providing agriculture and industry sectors, although less emergency support to the poor and most so in the services sector. A high dependence vulnerable, i.e., those most impacted by on imports at a given point in time for an the cost-of-living crisis; economy is a sign both of vulnerabilities and (ii) strengthen energy security, by boosting opportunities. For a small open economy like the TC economy, access to world-class imports investment in renewable energy (RE) is extremely important for export and domestic sources, promoting energy efficiency, and competitiveness of downstream production reforming energy tariffs; and participation in value chains and creates (iii) strengthen resilience to natural disaster opportunities for small economies beyond and climate change-related risks; just increasing external trade. It can lead to a (iv) strengthen resilience in the broader deepening of industrial linkages that promotes sense, through competitiveness- technological change. The contrast in import enhancing reforms, thereby building a dependencies between the Greek Cypriot (GC) more competitive private sector; and and Turkish Cypriot economies also reveals opportunities for intra-island trade. Those (v) enhance human capital and the recovery sectors in the TC economy that are heavily from pandemic-induced losses. dependent on imported inputs can benefit from increased trade with the RoC GCA, hence While limited data were available to assess the also reducing time and cost of transport and socio-economic impact of the multiple crises, production. Moreover, intra-island trade can the Special Issue of this report discusses how spur knowledge and technology transfers, and the newly available datasets can help policy synergies, for the benefit of both TC and Greek makers to make better informed decisions. Cypriot (GC) companies. Key economic and social data—crucial for evidence-based policymaking, successful The HBS analysis reveals instead three public service delivery and transparency—are important vulnerabilities affecting still scarce in the TCc, but significant progress households in the TCc: (i) increased has been made since 2019. To increase the inequality; (ii) reduced human capital efficiency of data collection, an independent accumulation; and (iii) large differences ‘Statistics Office’ (‘SO’) in the TCc is established between poor and non-poor households. in 2019, replacing the ‘State Planning Between 2015 and 2022, inequality increased Organization’ under the ‘Prime Minister’s while the relative poverty rate declined only Office’ as the main agency responsible for slightly.; human capital accumulation in the data collection. While the establishment of TCc, namely health, education, and job market the ‘SO’ was an important first step, the ‘SO’ outcomes, lags the levels seen in the EU; and still requires extensive support to increase the consumption patterns have changed over scope and efficiency of data collection. Over time, with significant differences among poor l xi TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY and non-poor households. Further analysis is The TC economy has witnessed multiple needed to assess the socio-economic impact crises over the past decade, but policy makers of the ongoing cost-of-living crisis, and to at that time had only limited tools to assess design targeted policies to help the poor and their impact on the economy, households and most vulnerable. A similar assessment should firms, and to design the right policy responses. accompany fiscal policy documents, such Going forward, three important actions are as the recent MTBF 2024-2026, to provide a needed to strengthen overall evidence-based comprehensive and sound assessment of the policymaking: impact of proposed policies. (i) enhancing data collection practices; A three-pronged approach is needed to (ii) promoting the use of data for strengthen evidence-based policymaking policymaking, including also in support in the TCc. The use of data is particularly of initiatives for economic integration important for the TCc to allocate scarce between the TC and GC communities; and resources more efficiently and monitor key economic and social indicators, thereby (iii) investing in data literacy. mitigating vulnerabilities among households. xii l TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY Chapter 1: Recent Economic Developments and the Short-term Outlook 1.1 Growth in 2023 was stronger level (Figures 1.1 and 1.2). Following a deep recession in 2020—the deepest in Europe and than expected in the history of the TC economy—and a very Growth in the euro area weakened sharply modest rebound in 2021, the TC economy in 2023 to an estimated 0.4 percent, amid recovered more strongly than expected in macroeconomic headwinds (Figure 1.1). 2022—a year characterized by multiple crises. High energy prices weighed on household While the TC economy was already dealing with spending and firm activity, particularly in high inflation, triggered by the post-COVID-19 manufacturing. Exports softened further recovery and Turkish lira depreciation at the reflecting tepid external demand. In Türkiye, end of 2021, Russia’s invasion of Ukraine the region’s second largest economy, growth added further pressure through supply chain slowed to an estimated 4.5 percent in 2023 disruption, increased prices, and higher from 5.5 percent in 2022, as a shift towards uncertainty. GDP growth is estimated to have more restrictive monetary and fiscal policies reached 13.3 percent in 2022, and above led to slower growth of private consumption. 5 percent in 2023—a year characterized In the Republic of Cyprus, GDP growth in by persisting challenges, including also the 2023 is estimated at 2.4 percent (European consequences of the earthquakes in Türkiye Commission, Winter 2024 Forecast), where in February, 2023, and persisting cost-of-living demand for tourism services continued its crisis. Only in 2023, real GDP is estimated to rebound in 2023, with arrivals increasing by have finally recovered, and slightly surpassed, 20.1 percent, almost reaching pre-pandemic the pre-pandemic level, mostly supported levels. by the services sector, as discussed in the following paragraphs. Against this background, the economic recovery of the TC economy in 2023 was In 2023, Green Line (GL) crossings reached stronger than expected, and GDP is estimated new record highs (Figures 1.3 and 1.4). After to have rebounded to its pre-pandemic having fallen by almost 80 percent in 2020 Figure 1.1 Real GDP annual growth, Figure 1.2 Real GDP, 2010-2023e 2020-2024f 17 13,3 11,4 12 9,9 7 5,3 5,5 5,9 5,1 4,5 3,9 3,4 3,1 2,7 2,4 2,8 1,9 2 0,4 0,7 Percent -3 -3,4 -8 -6,1 2020 2021 2022 2023e 2024f -13 -18 -16,2 TCe RoC GCA Türkiye Euro Area Source: World Bank staff estimates, TCc ‘statistics office’ (‘SO’); World Development Indicators (WDI); EC Winter Forecast, 2024 l 1 TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY Figure 1.3 GL crossings, excluding Turkish Figure 1.4 GL crossings, excluding Greek Cypriots Cypriots Source: TCc ‘tourism department’. year-on-year (yoy), GL crossings have been facilities increased by 20 and 8.5 percent since in an increasing trend ever since, in 2023 2013 and 2019, respectively. The distribution surpassing by almost 10 percent the 2019 of the facilities has also changed significantly, levels, reaching 7.7 million crossings. Forty spreading across the different regions (Figure percent of crossings are by Greek Cypriots, 32 1.5). Two important factors, however, should percent by Turkish Cypriots, and the remaining be considered, namely the large difference in 28 percent by others, displaying a significant the type of structures available across different recovery from the COVID-19 period, when regions, as well as the predominant informality almost 50 percent of crossings were by Turkish in the sector, as captured by the increasing Cypriots only. share of informal employment (see Section GL crossings are an important indicator of the 1.2) and potentially due to the expansion of economic performance of key sectors of the short-term rental activities, as seen in other TC economy, in particular the services sector. similar economies.These two aspects not only Services were the main drivers of the 2023 affect how income generated is distributed growth performance, including retail trade across regions and businesses, but also the and ‘tourism’. When looking at other tourism- extent of the contribution of the sector to related indicators, the capacity of the sector, overall economic growth. Among services, expressed in number of beds, increased by the construction sector is also estimated to 33 and 6 percent in 2023 compared with have contributed significantly to the economic 2013 and 2019, respectively. The number of recovery in 2023. The construction boom has Figure 1.5 ‘Tourism’ facilities, by region in selected years Source: TCc ‘tourism department’. 2 l TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY been contributing to a general increase in The increase in GL trade reflects both house prices and rents, making it difficult for structural progress and short-term households to purchase or rent housing. opportunities. Recent changes to the GL regulation (GLR) contributed to increasing Figure 1.6 GL trade, annual value and GL trade, by expanding the list of products monthly average values in euros, 2004–2023 allowed to cross since 2022.2,3As shown in Table 1.1, while manufacturing products have the largest shares in GL trade, new products witnessed a significant increase, including fruits and vegetables. GL trade for one product, and the only one traded in 2022 through GL, namely cherry tomatoes, increased from EUR 2,345 in 2022 to EUR 32,716 in 2023. In general, GL trade for fruits and vegetables increased from EUR 2,345 in 2022 to over EUR 80,000 in 2023. The strong performance of GL trade in 2023 also reflects the improved performance of the two sectors of the TC economy—manufacturing and agriculture— Source: World Bank staff, TC Chamber of Commerce benefiting from short-term opportunities, such as the Turkish lira (TL) depreciation and, more recently, the commodity price GL trade also reached a new record high, stabilization. Between mid-2022 and mid- increasing by almost three times since 2019 2023, global commodity prices plummeted by (Figure 1.6). GL trade reached EUR 15.5 nearly 40 percent. This helped to drive most million in 2023, almost three times higher of the roughly 2-percentage-point reduction in than in 2019, when GL trade stood at only global inflation between 2022 and 2023. Since EUR 5.4 million. On average, monthly GL trade mid-2023, however, the World Bank’s index transactions amounted to EUR 1.4 million in of commodity prices has remained essentially 2023, up from EUR 0.4 million in 2019. unchanged.4 Table 1.1 Top 10 GLT products: share in 2023 GLT and growth rate 2023 vs 2022 Top 10 GLT Products Share Growth Prefabricated container 25% -1.9% Construction Materials 24% 2.4% Wooden furniture 19% -2.4% Plastic products 15% 26.0% Waste / Scrap products 5% 31.4% Fresh fish 5% -3.4% Mattress 4% 12.3% Paper and cardboard 1% 228.8% Fruit and vegetable 1% 3375.9% Potatoes 0% 238.6% Source: World Bank staff, TC Chamber of Commerce. 2 https://commission.europa.eu/publications/annual-report-2022-implementation-green-line-regulation_en 3 Sales of hellim/halloumi, which was awarded the Protected Designation of Origin (PDO), have not yet started and are expected to start in 2024. As of February 2024, four producers from the TC economy had received PDO certification and another 15 farms had received certifications for PDO and being free of disease. Source: https://kibrisgazetesi.com/hellim- ihracatinin-2024-hazirana-kadar-baslamasi-amaclaniyor/ 4 See more at https://www.worldbank.org/en/news/press-release/2024/04/25/commodity-markets-outlook-april-2024- press-release l 3 TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY Despite this significant progress, GL trade droughts, the suboptimal use of production remains well below its potential. The factors, outdated technologies and deficient performance of GL trade was spectacular in farming practices. Low agricultural growth the post-pandemic years, and the trade value has also resulted in stagnation of most farmer has been increasing at an annual average rate incomes in previous years, which in turn affects of 60 percent since 2019, doubling the average the capacity of farmers to invest, for example, annual growth rate of 30 percent since 2004. in health, education, and more critically in the However, despite this significant progress, GL modernization and technological upgrading trade remains well below its potential, both of their farms. Moreover, the ‘public’ support in terms of volumes traded and in terms of program has resulted in a high dependency on types of products traded with the top five direct income support, while providing little products accounting for 88 percent of total GL incentive to invest in agricultural productivity. trade.5 More action is needed to address long- Finally, weak compliance with food safety standing constraints to its expansion, mainly and quality standards prevents the TCc from related to three areas: payment, logistics, and accessing the higher-value EU market (World quality standards. Bank, 2021). 6 The agriculture sector in 2023 is estimated Robust ‘imports’, for example from Türkiye, to have contributed positively to growth, reflect a resilient domestic demand, while benefiting from the TL depreciation, reduced the trade deficit keeps widening. Private input prices, and favorable weather. While consumption remains the key growth driver the strong economic performance may reflect in the TC economy, from the demand side, the short-term benefits of the TL depreciation, as proxied by robust ‘imports’ of goods. sales have also been strong toward other ‘Imports’ from Türkiye increased by 72 and 13 countries, for example, Türkiye (Table 1.2). This percent, in 2022 and 2023, respectively (yoy). suggests that the sector has been benefiting Key products include machinery, plastic, iron from other factors, such as reduced input prices and steel products, pharmaceutical products, and favorable weather. Despite this, numerous furniture, and food and beverages, beyond constraints have been holding back growth in fuel. While goods ‘exports’ have expanded, the agriculture. Average yields for most crops the TC economy remains extremely reliant on lag behind yields in the EU-27 countries. These ‘imports’. The trade deficit keeps widening, low yields are primarily due to the challenging reaching its highest value in the past decade agro-climatic conditions, including frequent in 2023.7 Table 1.2 Top 10 ‘Export’ to Türkiye 2022-2023 (as a share of total ‘export’ to Türkiye) Product Group 2022 2023 Growth 4 Dairy products, birds eggs, natural honey ext. 17.4 20.1 13% 7 Edible vegetables and certain roots and tubers 0.6 0.9 37% 8 Edible fruits and nuts, peel of melons or citrus fruits 24.7 45.3 79% 21 Miscellaneous edible preparations 3.0 3.9 25% 48 Paper and paperboard 1.4 1.3 -11% 72 Iron and steel 5.3 2.8 -49% 73 Articles of iron and steel 14.0 10.7 -26% 78 Lead and articles thereof 4.2 4.0 -7% 85 Electrical machinery and equipment, parts thereof 6.7 0.2 -97% 95 Toys, games and sports requisites, parts thereof 11.9 4.3 -65% 89.3 93.3 Source: World Bank staff, Turkstat. 5 World Bank. 2022. Testing the Resilience of the Turkish Cypriot Economy: A Macroeconomic Monitoring Note. Available at: https://documents.worldbank.org/en/publication/documents-reports/documentdetail/099161502282335982/ p1550440e68ffb09709c630c8cf40f3dcc8 6 World Bank. 2021. Turkish Cypriot Economy. Impact of the COVID-19 Pandemic – A Path to Building Back Better. A Macroeconomic Monitoring Note. Available at: https://documents.worldbank.org/en/publication/documents-reports/ documentdetail/774861620796239281/turkish-cypriot-economy-impact-of-the-covid-19-pandemic-a-path-to-building back-better-special-issue-improving-the-effectiveness-of-public-funds-in-agriculture 7 BOP data for 2023 are not available. 4 l TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY 1.2 More than 9,600 jobs were sector (a 9 percent increase in private sector jobs), while employment in the ‘public’ sector created in 2023, of which 44 remained around 36,000 after reaching its percent for women peak during the pandemic (Figure 1.7, Panel b). Furthermore, the labor force reached Labor market indicators have exceeded its highest level in 2023, at 156,000 people. the pre-pandemic levels. Unemployment Unlike the trends in the TCc, employment decreased significantly by 14.5 percent and the labor force in the RoC GCA rose between October 2022 and October 2023, significantly between 2018 and 2023, without from 9,340 to 7,988. Similarly, employment any contraction in employment during the also increased in 2023, with job gains reaching pandemic (Figure 1.7, Panel c). Similarly, 7 percent of total employment in the TCc in employment in the public sector remained 2022 (Figure 1.7, Panel a). Moreover, job stable over time, while job gains were driven gains in the private sector were much higher; by the employment opportunities in the over 9,200 jobs were created in the private private sector (Figure 1.7, Panel d). Figure 1.7 Employment in the TC economy and in the Roc GCA, October 2018–October 2023 Panel a. Labor market outcomes in the TCc Panel b. Public vs Private employment in the TCc Panel c. Labor market outcomes in the RoC GCA Panel d. Public vs Private employment in the RoC GCA Source: TCc ‘SO’; CYSTAT. l 5 TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY The unemployment rate in the TCc declined they depend on external factors, such as to 5.1 percent in 2023, the lowest rate external demand. The agriculture sector has achieved since 2018 (Figure 1.8). The youth experienced employment cuts unlike other unemployment rate continued its decline sectors, with 1,300 workers losing their jobs, in 2023 (14.9 percent) after reaching 29.3 or equivalent to 24 percent of employment percent during the COVID-19 pandemic. in the sector. Furthermore, the employment The employment rate increased to its pre- increase in 2023 was mainly driven by wage pandemic levels at 48.3 percent only in and temporary workers among all forms of 2023, while the labor force participation rate employment. Wage and temporary workers increased to 50.9 percent after a significant rose by 23 and 7 percent compared with 2021 decline in 2021. and 2022, respectively (Figure 1.10, Panel a). Figure 1.8 Employment, unemployment and labor force participation rates, October 2018-October 2023 Source: TCc ‘SO’. The services and construction sectors Women’s employment increased significantly contributed most to the creation of new jobs in 2023 reaching an historical high. Overall, in 2023 (Figure 1.9). The services sector is the 9,602 net jobs were added in 2023, of which 44 largest employer in the TCc, with around 76 percent, or 4,177, went to women, although percent of total employment. Around 3,000 women make up 35 percent of employment in jobs were created in the services sector over the TCc (Figure 1.10, Panel b). The significant the past year, namely 56 percent of total new rebound in female employment since 2021 jobs. The construction sector has become the was a consequence of the disproportionately second–largest employer, with a 70 percent adverse impact of the pandemic on female employment increase since 2020. However, employment. While the TCc has one of the jobs created in sectors such as tourism lowest labor force participation rates for and construction may be highly volatile, as women, more women joined the labor force Figure 1.9 Employment by sector in TCc, October 2018-October 2023 Source: TCc ‘SO’. 6 l TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY Figure 1.10 Employment by type and by gender in the TCc, October 2018-October 2023 Panel a. Employment by type Panel b. Employment by gender Source: TCc ‘SO’. in 2023, with the labor force participation rate working in services jobs is also growing. These increasing from 36.9 percent in 2022 to 38.3 jobs, which offer scope for higher productivity percent in 2023. Similarly, the employment and earnings relative to agriculture and rate of women rose from 33.7 percent in industry, represent an important source of 2022 to 36.1 percent in 2023, while the female empowerment and promote shared unemployment rate of women declined prosperity.9 sharply from 8.6 percent in 2022 to 5.8 percent in 2023. The services sector remains the main Informal employment rose significantly employer for female workers, and where most in 2023. Around 4,700 informal jobs were new jobs are created. added to the labor market over the past year, corresponding to 49 percent of total new jobs Services empower women (Figure 1.11). In the TC economy, similarly to the RoC GCA, in 2023 (Figure 1.12, Panel a). As a result, the around 90 percent of women with jobs informality rate reached its peak at 7.6 percent worked in the services sector.8 This compares in 2023. A significant share of informal jobs with a worldwide average of 57 percent, originated from the services and construction and with the EU average of 84 percent as sectors (Figure 1.12, Panel b). Agriculture of 2022. Services make up a growing share remains the sector with the highest share of the world’s economies, including among of informal jobs, mostly composed of small low-income economies. The share of women farmers. 8 See women statistics at https://stat.gov.ct.tr/HABERLER/2024-kad%c4%b1n-%c4%b0statistikleri 9 Read more at: https://www.wto.org/english/res_e/booksp_e/trade_in_services_and_development_e.pdf l 7 TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY Figure 1.11 Employment by gender and sector (2022) 100 90 80 70 57,18 60 84,28 91,91 89,4 50 40 17,21 30 20 10 25,61 12,91 6,2 7,22 4,4 0 2,81 0,87 World EU27 RoC GCA TCC Agriculture Industry Services Source: WDI; TCc ‘SO’. Figure 1.12 Employment by formality in the TCc, October 2018-October 2023 Panel a. Employment by formality Panel b. Informal employment Source: TCc ‘SO’. 8 l TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY Figure 1.13 TL, yoy change, 2018.01–2024.03 Figure 1.14 Inflation in the TCc, 2022.02–2024.03 Source: World Bank staff calculations, Central Bank of Türkiye. Source: World Bank staff calculations, TCc ‘SO’. 1.3 Price pressures remain High inflation, particularly high food price inflation, poses further risks for poor and high, as well as households’ vulnerable households in the TCc (Figure vulnerabilities to further 1.15). In particular, inflation was higher for shocks education, communication, restaurants, housing and health expenditures where prices The cost-of-living crisis has persisted, due to doubled compared with 12 months ago. The continued depreciation of the TL and high rates of price inflation for food (79.4 percent) inflation (Figure 1.13 and 1.14). The Turkish and housing (113.5 percent) are especially lira depreciated further in the course of the affecting poor households, since these second half of 2023. Inflation in Türkiye hit expenditure items comprise a larger share of almost 70 percent in March 2024, its highest their budgets. Poor households spent around level since November 2022, reflecting the two thirds of their consumption expenditure pass-through of steep currency depreciation, on food and housing in the TCc, while this higher labor costs and government tax hikes. share was only 41 percent among non-poor The new economic team in Türkiye has households (Figure 1.16). Food inflation is the been implementing an ambitious package most elevated among European economies, at of measures aimed at correcting previous 79.4 percent, substantially higher than food macroeconomic imbalances. The Central Bank inflation recorded in the RoC GCA at 2 percent of the Republic of Türkiye (CBRT) increased and the average for the Euro area, at 3 percent the policy rate by 4,150 bps from May 2023 (Figure 1.17). to 50 percent in March 2024, while also adjusting reserve requirements, rolling back While year-on-year price levels are high the FX-protected deposit scheme, lessening in the TCc, a closer look into the Consumer FX interventions, and providing targeted Price Index over time signals important credit to exporters. In this context, inflation vulnerabilities for households. The overall remained significantly high in the TC economy Consumer Price Index (CPI) rose by 7 times throughout the post-pandemic period. After between January 2019 and January 2024. The reaching its peak at 120.7 percent in October drivers of the CPI in the past five years were 2022, the inflation rate fell to 32.6 percent in mainly restaurants, goods, recreation, health, May 2023, but then increased again, reaching transport and food prices. The pace of inflation 94.5 percent in March 2024. has accelerated particularly in the past two l 9 TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY Figure 1.15 Inflation by product group, Figure 1.16 Expenditure shares, poor and March 2024 non-poor households Source: TCc ‘SO’. Source: HBS 2022 Figure 1.17 Food inflation, March2024 Food inflation in Europe, March 2024 80% 70% 60% 50% 40% 30% 20% 10% 0% Finland Slovenia Estonia Slovakia Sweden Belgium Moldova Luxembourg Romania Belarus United Kingdom RoC GCA Switzerland France Ukraine Poland Spain TCc European Union Lithuania Montenegro Bosnia and Herzegovina Greece Malta Turkey Hungary Macedonia Bulgaria Austria Croatia Portugal Kosovo Latvia Serbia Czech Republic Denmark Germany Albania Norway Russia Italy Ireland Netherlands Iceland -10% Source: TCc ‘SO’; Eurostat. years. The overall CPI doubled between among the poor, while 37 percent of overall January 2019 and January 2022 while the CPI income depends on social transfers from the increased by 3.5 times in the past two years. To local administration in the TCc (Figure 1.19). mitigate the risk for low-income households, Between 2019 and 2024, retirement pensions the authorities increased the minimum annual and social assistance payments increased by wage from TL 2,740 in 2019 to TL 24,000 in 2024, only 4.6 and 6.2 times, respectively. an 8.8-fold increase. However, wage income constitutes only 53 percent of overall income 10 l TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY Figure 1.18 CPI by component, January Figure 1.19 Sources of income, poor and 2019-2024 non-poor households Source: World Bank staff calculations based on the HBS, 2022; TCc ‘SO’. The poverty is calculated as the share of people having an equivalized disposable income. 1.4 Fiscal consolidation bn), and slightly increased as percentage of GDP from 22.6 percent in 2022 to 25.6 percent continued, amid persisting in 2023. This was mostly driven by indirect pressures from current taxes, which make up about 40 percent of expenditures local revenues, due to rising prices, and direct taxes, at 34 percent of local revenues. While The fiscal consolidation, which started in 2021, recovering in terms of percentage of GDP with has continued since, with both spending and respect to 2021 and 2022, revenues remain revenues below their pre-pandemic averages, well below the pre-pandemic average of 30 as a percentage of GDP (Figure 1.20). While percent in the period 2010–2019. The fiscal spending reached almost TL 40 billion in 2023 deficit has been also reducing, reaching the (in nominal terms; equivalent to EUR 1.5bn), pre-pandemic levels, after the record deficit double the 2022 volume, it remained stable hit in 2020. compared with 2022, in terms of percentage of GDP, at about 29 percent. After the peak The fiscal consolidation also reflects a general in 2020 at about 40 percent of GDP, the post- contraction of financial support received pandemic spending ratio (as a percentage of from Türkiye as the Türkiye government faces GDP) has been declining, to well below the rising expenditures and earthquake-related pre-pandemic average of 39 percent in the investment needs. Financial Support received period 2010–2019. More than 40 percent of from Türkiye in the form of grants constitutes total expenditures in 2023 remain destined to the most important source of funding in transfers, followed by wages and compensation alleviating the financing gap between revenues at just above 40 percent. Capital expenditures and budget expenditures, amounting to TL 4.2 declined further to about 7 percent of total billion (EUR 0.165 bn), of which more than half expenditures from 9 percent in 2022. The was in the form of defense grants (Figure 1.21). share of defense spending instead increased Loans from Türkiye amounted to TL 0.991 slightly to 7 percent of total expenditures in billion (EUR 38 million). The decline in financial 2023 from 6 percent in 2022. Meanwhile, local suupport from Türkiye has also an impact on revenues, excluding grants, reached almost TL external balance and external financing, hence 35 billion (in nominal terms, equivalent to EUR aggravating the twin deficits. Debt is expected 1.3 bn), from TL 17 billion in 2022 (EUR 0.964 to remain high, but the debt-to-GDP ratio l 11 TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY Figure 1.20 Fiscal accounts: revenues, expenditures and balance (% of GDP) Figure 1.21 External financing from Türkiye Source: World Bank staff calculations, TCc ‘department of finance’. should remain below the historical average is an important first step toward building a due to high inflation. However, while in the rules-based and sustainable public finance short run this may benefit ‘public’ finances, in framework (see Box 1.1). First of all, the the context of high inflation, a negative impact MTBF could be further strengthened by also on economic activity from an adverse supply considering the direct and indirect impact of shock may end up outweighing the positive the proposed policy measures on households. impact of higher inflation on debt ratios. This will also allow the local administration in the TCc to design targeted support to protect The approval by the local administration the poor and most vulnerable.10 Second, in the TCc of the (first ever) medium-term the MTBF could be further strengthened by budget framework (MTBF) at the end of 2023 introducing indicators to track the resilience 10 World Bank. 2023. Turkish Cypriot Economy: Navigating through Challenging Times. Macroeconomic Monitoring Report. Available at: https://www.abbilgi.eu/sites/default/files/2023-06/tccmacromonitoring_2023_en.pdf 12 l TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY of the budget, for example, by assessing councils, and other standing requirements to whether investment and budget expenditures commit to, and report against, and be held contribute to the adaptation and mitigation accountable for medium-term aggregate fiscal agenda through climate-budget tagging. More objectives, such as debt limits, surplus targets generally, MTBFs typically constitute part of a or deficit ceilings, or broad expenditure limits wider set of frameworks for medium-term fiscal (see also World Bank, 2022).11 policy planning, including fiscal rules, fiscal Box 1.1: The first ever medium-term budget framework for the TC economy In 2023, the local administration in the TCc approved the first ever MTBF. An MTBF is a set of institutional arrangements for prioritizing, presenting, and managing revenue and expenditure in a multiyear perspective. Such a framework enables policy makers to demonstrate the impact of current and proposed policies over the course of several years, signal or set future budget priorities, and ultimately achieve better control of public expenditure. An MTBF comprises all the systems, rules, and procedures that ensure fiscal plans are drawn up with a view to their impact over several years. Usually, MTBFs are adopted with different, but mutually reinforcing, objectives: (i) strengthening the sustainability of public finances and multi-year fiscal discipline; (ii) promoting a more effective allocation of expenditure between sectors and priorities; and (iii) encouraging the more efficient use of resources by budget managers. The MTBF 2024-2026 for the local administration in the TCc seeks to maximize the impact of public investments on growth, bolster private sector investments, and improve employment and welfare. Furthermore, the plan emphasizes fostering inclusive growth within a framework of macroeconomic stability. This involves gradually reducing the current account deficit and inflation. During this period, the focus will also be on promoting growth through increasing savings, promoting investment, and boosting the economy’s competitiveness and productivity. These elements are identified as the primary priorities for achieving a more robust and equitable economic landscape. The MTBF 2024–2026 includes key policies both from expenditure and revenue side. For example, among expenditure-related policies, the MTBF includes budget expenditure and investment-related policies, with a focus on improving efficiency and accountability for budget allocation. Among the revenue-related policies, tax reforms—for example, related to gambling, financial assets, and leveraged transactions (forex), income tax—are expected to increase tax revenues. Reforms related to the property tax and luxury consumption taxes are expected to reflect current values and trends in the property market, and contribute toward raising tax revenues. The introduction of the mandatory use of new generation fiscal devices with EFT-POS features, initiated in April 2024, aims at reducing informality and increasing value-added tax (VAT) revenues. Finally, the MTBF includes tax administration measures, such as seasonal and regional inspection programs, which are expected to increase revenues through better compliance and enforcement. 11 World Bank. 2022. Testing the Resilience of the Turkish Cypriot Economy: A Macroeconomic Monitoring Note. Available at: https://documents.worldbank.org/en/publication/documents-reports/documentdetail/099161502282335982/ p1550440e68ffb09709c630c8cf40f3dcc8 l 13 TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY 1.5 The TC banking sector (as a share of NPLs) partially deteriorated, declining to 47.1 percent at the end of 2023. In proved resilient, but risks this context, risks stemming from the financial remain high sector should be closely monitored and acted upon. Banking sector lending in the TC economy further intensified in 2023. Gross loans The overall banking system shows solid levels increased by 62.7 percent in 2023. The of stability, capitalization, and profitability, acceleration was driven by corporates’ working but the differences remain stark between capital loans and households’ consumer loans. different banking groups (Figure 1.23). The Compared with 2022, TL loans increased bulk of liquid funds is in the form of cash and by 47.9 percent, while forex loans grew by deposits, which further upholds the banks’ 72.5 percent. Higher production costs for resilience to sudden shocks. The overall capital businesses translated into stronger demand adequacy ratio (CAR) reached 16 percent at the for working capital. Demand for consumer end of 2023, albeit with significant differences loans was spurred by the robust labor market between the different banking groups. paired with improvement in consumer Although the CAR is low and close to the legal optimism. With almost 84 percent of deposits limit among private banks, the improvement in denominated in foreign currency, and a large 2023 by around 2 percentage points compared share of loans still denominated (but on a with 2022 has resulted in better capitalization declining path) in TL, currency mismatch may of the overall system, despite deteriorating expose the TC banking system to indirect trends among some banking groups (public systemic risk. and branches). The capital position seems to be affected by the unfavorable impact on financial asset valuations, with a significant Figure 1.22 Asset quality of the TC banking sector increase in assets carrying a high risk weighting. Profitability reached record highs. The key returns indicators grew substantially as well: return on average assets (ROAA) from 2.7 percent at the end of 2022 to 3.9 percent in 2023 and return on average equity (ROAE) from 34.7 percent to a staggering 54.4 percent in 2023. The greatest contribution to profitability growth came from income from highly liquid assets and net interest income. Risks remain high due to interest rate dynamics and uncertainties surrounding future economic developments that could Source: World Bank staff, TCc ‘central bank’. impact the services sector. Interest rates have continued to increase. For example, the maximum interest rate reported by private While the 2023 banks’ loan portfolio quality sector banks to be applied on deposits in TL improved slightly compared with 2022, the reached 47 percent in March 2024 from 37 end-2023 outcome marks an increase of NPLs percent in March 2023. For loans, interest toward the end of the year (Figure 1.22). The rates on consumer loans in TL reached 55 NPL ratio stood at 4.5 percent at end-2023 and percent and 12 percent for loans in foreign improved compared with end-2022 results, currency. While real interest rates remain still when it stood at 4.7 percent. This masks negative, rising rates pose a risk for highly the results throughout 2023, where initial indebted firms and households, also due good results in a reduction of the NPL ratio to the elevated, and increasing, currency by mid-2023 were later reversed as a result mismatch between loans and deposits. On the of the higher recognition of non-performing one hand, the better debt servicing capacity exposures at end-2023. Provisions for NPLs of corporations makes it possible for credit 14 l TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY Figure 1.23 Profitability and capitalization of the TC banking sector Source: World Bank staff, TCc ‘central bank’. institutions to absorb the initial shock of 1.6 The outlook hinges on interest rate hikes and enables the servicing the normalization of price of a greater amount of debt undertaken by corporations, mitigating significant increases pressures and the pace of in risks in the services sector. On the other reforms hand, rising costs of production/delivery Against the backdrop of persisting high process financing paired with difficulties in the inflation and a weak external environment, refinancing of due liabilities may give rise to economic growth for the TC economy is credit risk in the non-financial corporate sector, expected to moderate to 2.7 percent in 2024 and this could have an adverse effect on the (Figure 1.1 and Table 1.1). Growth for the euro quality of banks’ credit portfolios. Prolonged area is forecast to improve modestly to 0.7 geopolitical instabilities and volatility of prices percent in 2024, supported by an easing of have an unfavorable impact on the business price pressures and a recovery in real wages, performance of the corporate sector, while due to a base effect especially given the the effects on the services sector, in particular subdued contribution of external trade in the ‘tourism’, could be more pronounced. past year. Euro area trade in 2023 was in fact the worst on record outside recession years. Supervisors should continue to monitor Nonetheless, restrictive credit conditions, proactively any risks and require banks to be as well as low export growth, are expected fully prepared for potential declines in asset to restrain domestic demand, particularly quality. Progress has been made, with the investment. For the Republic of Cyprus, growth introduction of the Interbank Money Transfer in 2024 is forecast at 2.8 percent, slightly System and the introduction and strengthening higher than previously expected, sustained by of anti-money laundering regulations. consumer and business economic sentiment. Domestic demand is expected to continue However, it remains crucial to ensure that being the main driver, as automatic wage banks have robust credit risk monitoring and indexation for around half of the employees management, appropriate loan classification, holds up their purchasing power. Large accurate loan staging, and adequate loan investment projects in real estate, healthcare, loss provisioning. Regulators and supervisors transport and tourism, partly supported by the should maintain vigilance and closely monitor Recovery and Resilience Facility, are also set to real-estate lending (particularly commercial), boost growth. By contrast, the contribution unsecured consumer lending, highly leveraged of net exports is expected to remain weak borrowers, and sectors particularly vulnerable due to ongoing economic uncertainties and to rising inflation. to the strong demand for imports induced l 15 TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY by investments. Growth in Türkiye is instead But opportunities lie ahead to consolidate expected to weaken to 3.1 percent in 2024, short-term gains into sustainable growth. its lowest reading since 2009 outside of the First, GL trade and crossings are expected to pandemic-affected years, as tighter policies continue increasing and supporting the TC continue to restrain domestic demand. In this economy, representing a key opportunity for context, while growth for the TC economy is growth and economic integration. Secondly, expected to remain positive, it is expected to as more women and workers in general join moderate to 2.7 percent in 2024, affected both the labor force, there is potential to expand by subdued external and domestic demand, the economic capabilities of the TC economy. while still strongly impacted by a lingering In addition, labor mobility is expected to cost-of-living crisis. increase across the TC economy and RoC GCA, hence contributing not only to income growth Risks to the outlook for the TC economy but also knowledge spillovers. Finally, as remain tilted to the downside. On the external funds and investment are directed to sustain side, a slower-than-expected recovery in key the green and digital transitions, these also trading partners, especially in the euro area constitute opportunities for economic growth, and Türkiye, could dampen growth for the TC if adequately supported by re-skilling and economy, also given its high reliance on external social protection to protect those impacted funds. This risk could intensify substantially if the most (see Box 1.2). the global and regional geo-economic and trade fragmentation continues to deepen. 1.7 Reforms are needed to On the domestic side, inflationary risks to translate opportunities into the outlook appear to be still high, affected mostly by exchange rate developments and shared prosperity macroeconomic policies in Türkiye, as well The period 2020–24, including the forecast, as by import prices. The latter could also rise marks the weakest start to a decade for sharply if global commodity markets were to growth since the 1990s. This applies to the TC tighten again in response to the escalation economy, but also more broadly to the euro of violence in major commodity producing area and global economies (Figure 1.24). This countries and regions. Risks of a further TL is mostly due to another period characterized depreciation would have repercussions for by geopolitical strains and a global recession, the TC economy and its banking sector. Higher but also to persisting structural inefficiencies. interest rates for longer-than-expected could With the post-recession rebound vanishing, also elevate risks to financial stability. Rising the TC economy is in fact stabilizing below price pressures could create further fiscal historical average growth rates, which have pressures, slowing the rebuilding of fiscal been low and declining. This translated into buffers. Already the local administration in the an extended period during which per capita TCc has rather limited policy buffers to counter incomes declined, making little progress new shocks and scale up investment to tackle toward convergence with the EU economy. As climate change. Climate change represents some of the most vulnerable EMDEs, the TC another major risk for the TC economy and economy is also falling further behind, with the island of Cyprus, affecting key economic per capita income forecast to remain below sectors such as agriculture and tourism.12 its 2019 level still in 2024 (Figure 1.25)– this Finally, risks to the economic outlook stem is the case in over a third of low-income from demographic challenges, such as ageing economies and more than half of economies and brain drain, and from labor markets facing facing fragile and conflict-affected situations.13 labor shortage and skills mismatch, especially High prices for essential goods remain a major in the face of the green and digital transitions. challenge to living standards and to human 12 World Bank. 2023. Turkish Cypriot Economy: Navigating through Challenging Times. Macroeconomic Monitoring Report. Available at: https://www.abbilgi.eu/sites/default/files/2023-06/tccmacromonitoring_2023_en.pdf 13 World Bank 2024. Global Economic Prospects, January 2024. 16 l TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY Figure 1.24 Real GDP annual growth, Figure 1.25 Real GDP per capita, 2005=100 1990-2024f 6,00 5,00 4,00 1990-94 3,00 1995-99 2,00 2000-04 1,00 2005-09 2010-14 0,00 2015-19 -1,00 2020-24 -2,00 -3,00 TCe RoC GCA Euro Area Source: World Bank staff calculations based on TCc ‘SO’, WDI. capital development. Moderate declines in to rebound from the pandemic-inflicted commodity prices since their 2022 peaks have recession, it is important to tackle longer-term not been fully reflected in consumer prices for challenges so as to consolidate those short- food and fuel, and wage rises have generally term opportunities and gains to sustainable failed to compensate for earlier runups in growth. Moreover, addressing longer-term these costs. challenges is key to building resilience to future shocks. In a context of extremely high The large shocks of the past few years, have hit imbalances, prudent fiscal policies should be low-income households disproportionately pursued aimed at ensuring medium-term debt and exacerbated poverty; new data made sustainability, while raising potential growth in available can help understand their impact a sustainable manner. In this context, risks also and inform the policy response design. stemming from the financial sector should be Shocks such as the pandemic and Russia’s closely monitored and acted upon. Only an invasion of Ukraine have had an amplified adequate macroeconomic policy framework effect on the low-income household due to can help the TC economy build resilience and factors as the unequal labor market impacts should be used to anchor any reform agenda. of the pandemic and low-income households’ high share of spending on food. The impact In the context of persistently high inflation, has been different also across different firms it is important to improve the quality of and sectors. While so far limited data were ‘public’ spending as the local administration available to the local administration in the TCc in the TCc face rising spending pressures. to assess the socio-economic impact of the High spending needs mostly come from the multiple crises, the Special Issue of this report need to expand social protection to deal discusses how the newly available datasets, with the cost-of-living crisis. In the short such as the Household Budget Survey and term, the social protection system should the Input-Output Tables, are instead meant to in fact aim to protect the real value of the help policy makers take informed decisions. social assistance (SA) transfers. Moreover, the system should aim to provide SA transfers to Addressing structural challenges holds poor and vulnerable households, by improving the potential of boosting resilience and its targeting mechanisms, especially given competitiveness in the TC economy by limited resources. For example, the eligibility consolidating opportunities and reducing criteria for the “Poor in Need” program could vulnerabilities for shared prosperity. Given be adjusted to improve the coverage of the that the TC economy has benefited from program. Other spending needs arise from the trade expansion and travel re-opening much-needed investment to tackle climate l 17 TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY and natural disaster adaptation. With little • Strengthen energy security, by boosting fiscal space available, the local administration investment in renewable energy (RE) in the TCc should improve the quality of sources, promoting energy efficiency, and current spending and reorienting it toward reforming energy tariffs. productive items, by making overall spending more efficient and performance-oriented • Strengthen resilience to natural disaster and by reducing untargeted and distortive and climate change-related risks. This can subsidies. be achieved by strengthening financial protection, investing in risk reduction, and Moreover, in the aftermath of multiple crises, improving preparedness. five reform areas remain the priority for the TC economy to get back on track to achieve • Strengthen resilience in the broader shared prosperity: sense, through competitiveness-enhancing reforms, thereby building a more • Maintain the focus on providing emergency competitive private sector. support to the poor and most vulnerable, i.e., those most impacted by the cost-of- • Enhance human capital and the recovery living crisis. from pandemic-induced losses. Box 1.2 The green transition as an opportunity for intergration and convergence The local administration in the TCc ratified the Paris Treaty on February 27, 2023, and the first Climate Summit took place in October 2023—significant first steps in acknowledging the increasing relevance of climate change. However, sectoral policies related to agricul- ture, tourism, and the environment lack a comprehensive approach to climate agenda. The MTBF 2024–2026 does not include any provisions on tackling the climate concerns. Some of the key challenges for the TC economy include the lack of a water master plan, energy secu- rity, the lack of any sustainable tourism policies, and the lack of comprehensive data in line with the Sustainable Development Goals (SDG) indicators. Adopting an island-wide approach to tackle climate change can help achieve greater suc- cess. The ratification by the TCc of the Paris Treaty and the RoC’s adherence to EU policies lay a foundational agreement on the importance of addressing climate change. Collaborative efforts could focus on shared challenges, including like water management, renewable ener- gy development, and sustainable tourism. Aligning green fiscal policy tools can help support the green transition. Both communities could benefit from implementing or enhancing green fiscal measures. For the TCc, introduc- ing environmental taxes, subsidies for green technologies, and investments in renewable en- ergy could align domestic policies with international commitments. Also, the banking sector needs to develop a climate-friendly strategy. For the RoC, further integration of green fiscal policies, such as incentives for emission reductions in transport and industry, could help im- prove its climate performance index ranking. Finally, the active involvement of civil society and international support can bridge the gap between policy commitment and implementation. Encouraging investments in green infrastructure that can enhance interdependence, facilitating green finance and promoting sustainable practices across communities can help in accelerating the transition toward a sustainable economy. 18 l TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY Policy inaction and delays in implementing and transfers to reduce the burden on the urgently needed structural reforms in the poor and address inequality.15 As previously TC economy have also contributed to its mentioned, the approval of the MTBF 2024- vulnerability. Over the years, recurrence to 2026, and commitment to it, are a crucial procyclical fiscal policy, sustained also by step in the right direction toward building a procyclical financial support from Türkiye, has rules-based macroeconomic framework. The reflected into high budget rigidity and highly recurrence to non-competitive practices such procyclical fiscal policy, hence aggravating as ‘import’ licenses has reflected into higher the impact of the inflationary episodes, mostly triggered by TL depreciations.14 The prices at the cost both of the private sector and tax framework, and in particular indirect households.16 Similarly, the delayed reform of taxes, have had a significant negative impact the agriculture subsidy system has translated on household budgets and contribute to into productivity losses for the sector, and into increased poverty, hence suggesting the an inefficient use of a relatively high share of need of a more effective system of taxes ‘public’ spending.17 Table 1.3 Key economic indicators of the TC economy   2019 2020 2021 2022 2023e 2024f Real economy Real GDP, % change 0.2 -16.2 3.9 13.3 5.3 2.7 Agriculture, % volume change 2.7 1.8 -1.5 -5.3 2.0 0.2 Industry, % volume change -14.6 -15 16.8 7.0 4.0 1.5 Services, % volume change 1.4 -18.4 7.9 4.7 6.3 3.2   CPI, period average, % change 19.5 11.7 21.4 99.7 73.8 85.0   Fiscal accounts Revenues, % GDP 34.6 35.5 29.7 26.2 28.0 26.0 Expenditures, % GDP 35.9 40.6 34.5 28.1 29.5 28.2 Fiscal Balance, % GDP -1.3 -5.2 -4.8 -2.0 -1.5 -2.3 excluding aid from Türkiye, % GDP -4.0 -10.1 -9.2 -5.5 -4.7 -5.7 Local Balancea % GDP -0.5 -3.5 -2.5 -1.4 -0.8 -1.7 Balance of Paymentsb Current Account Balance, % GDP 11.8 -9.7 -2.4 2.3 -5.4 -2.7 Excl. foreign grants, % GDP 9.1 -14.7 --6.9 0.5 -7.0 -4.4         Source: ‘SPO’, ‘statistics office’ and World Bank staff. Note: e=estimate; f=forecast. a Local Balance is computed as the difference between local revenues (total revenues, excluding grants from Türkiye) and local expenditures (total expenditures, excluding the ones financed by Türkiye). b BOP data has been revised starting 2019, according to IMF VI Handbook. 14 World Bank. 2022 15 World Bank. 2023 16 World Bank. 2021b. Policy Note on the Impact of Import Restrictions on Goods Accessing the Turkish Cypriot Market. mimeo. 17 World Bank. 2021 l 19 TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY Chapter 2: Special Issue: Evidence-Based Policymaking for Shared Prosperity Data possess significant potential to with a proposed three-pronged action plan to enhance development by facilitating the strengthen evidence-based policymaking. design, implementation, evaluation of public programs and policies. The World 2.1 Input-Output Tables: Development Report 2021, titled “Data for Better Lives”, presents a conceptual framework Vulnerabilities and Opportunities describing the role of data in achieving for the Private Sector development objectives. In particular, there Input-Output Tables (IOTs) describe the are three principal pathways through which sale and purchase relationships between data can be leveraged: producers and consumers, allowing analysis 1. The use of data for evidence-based of sectoral interdependencies within an policymaking and improved service economy. They also allow analysis related delivery; to the impact on output of changing relative 2. Engagement of civil society and individuals prices, labor and capital requirements, or with data to monitor government policies the impact on GDP and its components of and access to services; and changes on final demand, etc. In addition, IOTs also allow the estimation of employment 3. Application of data by private firms in the and emission multipliers. IOTs are a statistical production process. tool of economic analysis that allow the Key economic and social data—crucial for measurement and description of productive evidence-based policymaking, successful relationships in one or several economies in public service delivery and transparency—are a particular year, including linkages arising still scarce in the TCc, but significant progress from trade. IOTs are a double-entry matrix has been made since 2019. To increase the where total input (row totals) and total efficiency of data collection, an independent output (column totals) are equal and provides ‘Statistics Office’ (‘SO’) in the TCc is established measures of GDP from the production and in 2019, replacing the ‘State Planning expenditure approaches. Understanding how Organization’ under the ‘Prime Minister’s the linkages between economies and sectors Office’ as the main agency responsible for are structured is useful, not only to analyze an data collection. While the establishment of economy’s dependence on the world, the role the ‘SO’ was an important first step, the ‘SO’ of key sectors, or how economies contribute still requires extensive support to increase the to generating the value added of traded goods scope and efficiency of data collection. Over and services in global production networks, the course of 2022 and 2023, two important but also for policy makers to understand the new datasets for the TC economy were made vulnerabilities and opportunities of the private available: the Input-Output Tables (IOT) and sector. the Household-Budget Survey (HBS).18 This analysis focuses on the TC economy This Special Issue builds on the findings and RoC GCA, building on newly developed of the two new surveys for the TCc and, IOTs for the TC economy, compared with the more broadly, focuses on the importance of 2017 IOTs for the RoC GCA.19 The analysis of evidence-based policymaking for the TCc and this Special Issue looks at three main aspects: how to strengthen it. In particular, this Special (i) sectoral composition of value added; Issue addresses the following four questions (ii) dependence on imported inputs over related to the IOT and HBS: (i) what are they? domestically produced ones; and (iii) size of (ii) why are they important? (iii) what do they imported inputs over the overall economy’s say? (iv) how can they be used? It concludes size. The analysis is both at the aggregate 18 Both the IOT and HBS were conducted by the ‘SO’, with the methodological support of the World Bank and financial support of the European Commission. 19 Available at: https://www.cystat.gov.cy/en/ 20 l TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY Box 2.1 The Input-Output Tables for TCc The supply-use table for the TCc was compiled by the ‘statistics office’, with the technical assistance provided by the World Bank and funded by the EU, using a comprehensive set of data sources from key sectors, including: • Local administration: agriculture (agricultural prices, quantities, livestock data), including ‘departments’ of commerce, forestry, livestock; geology and mining; environmental protection; transport; tourism; finance (local revenue and expenses, corporations’ turnover); trade (‘import’/’export’ data); • ‘Statistics office’ (CPI HBS 2014-15 (with price/volume extrapolators); ‘State Planning Organization’ (Gross Fixed Capital Formation - GFCF) • ‘KIBTEK’ (Energy data) • Local community bodies • Financial institutions (balance of payments from ‘central bank’; financial indicators including financial statements of ‘central bank’ and commercial banks; data turnover from corporations; insurance data from TC Union of Insurance and Reassurance Companies) The choice of 2017 as the new base year was based on the results of a standard tool prepared by the World Bank’s team to measure the amount of information available in GDP terms in a series of years and rank them accordingly. Industry by industry and product by product IOTs were prepared after transforming the use table from purchaser to basic prices and applying the product technology and fixed industry sales assumptions, respectively. The quantity and price models with input and output coefficients (Leontief and Gosh models, respectively) were formulated and used in simple impact analysis examples. economy level, at the three aggregated Strong reliance on services, and a small sectoral level (agriculture, industry, and domestic industrial production services) and at the 48-subsectors level. The The TC economy and RoC GCA share a analysis provides the first insights into the common characteristic, namely a high level newly compiled IOT for the TC economy and of reliance on services (Figure 2.1). Value vis-a-vis RoC GCA. Going forward, further added of the services sector accounts for dimensions could be explored, in support of 79.8 and 84.8 percent of GDP, respectively, in policy-making, such as the estimate of the the TC economy and RoC GCA. Value added employment multiplier of different sectors from industry represents a more significant in the TC economy and of those specifically portion for the TC economy compared with involved in Green Line trade; the analysis of the RoC GCA, at 15.0 and 13.1 percent of GDP, the contribution to emissions of each sector, respectively. Value added from agriculture and their role toward the green transition; the for the TC economy accounts, instead, for quantification of the competitiveness gains in more than double the share in the RoC GCA, downstream industrial sectors coming from at 5.1 compared with 2.1 percent of GDP, improvements in services sectors, given the respectively. reliance on services inputs; the exposure of different sectors to different shocks, such as increased input prices. l 21 TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY Figure 2.1 Sectors (value added as a share of GDP), 2017 90% 84,8% 80% 80% 70% 65% 60% 56% 50% 37% 40% 30% 23% 20% 15% 13,1% 10% 5% 3% 2,1% 2% 0% TCe RoC GCA EU27 Small economies Agriculture Industry Services Source: World Bank staff calculations, WDI. Compared with the EU, as well as other Services-related subsectors feature small economies, the TC economy and RoC predominantly among the top ten sectors in GCA display a stronger predominance of both economies, but with clear differences the services sector and a significantly less- (Figure 2.2). For the TC economy, the role of developed industry sector. Services account the ‘public’ administration, real estate and for between 56 and 65 percent of GDP (in education is particularly large. In contrast, the RoC GCA is characterized by a larger role of ITC terms of value added) for small economies and and professional services. Sectors related to at the EU level, respectively. This is much lower accommodation and food services, financial than theirs share in the TC economy and in services, and construction are instead almost the RoC GCA. Industry, instead, appears to be equally important. Finally, in the TC economy, significantly less important, while accounting health-related services are also important. for 23 percent of GDP at the EU level and up In addition to services, agriculture features to 37 percent of GDP among small economies. among the top ten sectors for the TC economy. Figure 2.2 Top ten sectors in the economy, as a share of GDP Top 10 sectors by GDP shares Wholesale trade services, except of motor vehicles and motorcycles 4,3% Other information and communication services 4,4% Retail trade services, except of motor vehicles and motorcycles 5,2% 3,2% Human health services 3,6% Professional, scientific and technical services 9,5% 3,9% Products of agriculture, hunting and related services 4,9% Constructions and construction works 4,7% 5,6% Accommodation and food services 7,1% 7,7% Financial services, except insurance and pension funding 7,5% 8,1% Education services 5,6% 11,9% Real estate services 10,2% 12,4% Public administration and defence services; compulsory social 7,8% security services 13,5% 0,0% 2,0% 4,0% 6,0% 8,0% 10,0% 12,0% 14,0% RoC GCA TCe Source: World Bank staff calculations. 22 l TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY Figure 2.3 Import dependency and imported inputs as a share of GDP: TC economy vs Roc GCA 0,80 0,70 0,70 0,66 0,59 0,60 0,50 0,40 0,40 0,30 0,20 0,10 0,00 Import/Domestic Input Ratio Imported Inputs/GDP Ratio TCc TCe GCcGCA Roc Source: World Bank staff calculations. High dependence on ‘imported’ vs When looking at the size of ‘imported’ domestically produced inputs for the TC inputs as a share of an economy’s size, the economy, and relative to its size TC economy exhibits a higher dependence or, conversely, a lower economic power. The Overall, the TC economy and Roc GCA do ‘imported’ inputs-to-GDP ratio reaches 0.70 not heavily depend on imports (ratios <1 for the TC economy, highlighting that the in Figure 2.3), as both economies are more value of imported inputs constitutes a larger services-oriented. Understanding the import share of GDP. For the RoC GCA, the ratio is dependencies of an economy is crucial in much lower, at 0.40, indicating that imported assessing its vulnerability to external shocks, inputs account for a smaller proportion of the such as global market fluctuations and economy’s overall output. The lower value of international trade dynamics. Figure 2.3 the indicator also reflects a denominator effect. shows the import-to-domestic inputs ratio, The higher the value added (or intermediate namely the value of imported and domestic consumption) that a country generates, the intermediate inputs used in the production lower the ratio of inputs to GDP. These findings of an economy. The inputs, both imported suggest not only potential vulnerabilities in the and domestic, are the direct requirements TC economy to external economic shocks, but of a given economy, namely they do not also underline the importance of mitigating take into account the indirect requirements. these risks and expanding the economic bases This indicator can also be used to measure by using intermediate inputs efficiently. dependence at the sectoral level, understood as the ratio of imported inputs over domestic Agriculture and industry in the TC economy inputs used by each sector. are highly dependent on ‘imported’ inputs, but less so on the services sector The TC economy is slightly more ‘import’- dependent for intermediate inputs than the The industry sector for the TC economy is far Roc GCA. The TC economy exhibits a higher more reliant on ‘imports’ (ratios >1 in Figure ‘import’-to-domestic input ratio (0.66), 2.4) than other sectors in the TC economy, indicating that a significant portion of the and also than in the RoC GCA. Figures 2.4 and inputs used in production processes is sourced 2.5 show the share in imports of intermediate from ‘imports’. The Roc GCA shows a lower inputs over the use of domestic inputs for ratio (0.59), suggesting a lower dependence each sector of the two economies, as well on imported inputs relative to its domestic as the share of imported inputs over GDP. production. The sector that requires the most ‘imported’ l 23 TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY Figure 2.4 ‘Import’ dependency and Figure 2.5 Import dependency and imported ‘imported’ inputs as a share of GDP inputs as a share of GDP by sector: by sector: TC economy RoC GCA Source: World Bank staff calculations. inputs is industry in the TC economy, with a open economy like the TC economy, access to ratio well above 1. Each unit of GDP produced world-class ‘imports’ is extremely important in the industry sector in the TC economy for ‘export’ and domestic competitiveness requires almost 4 units of ‘imported’ inputs. of downstream production and participation This indicates a limited expansion of the in value chains and creates opportunities for domestic supply chains in the TC economy. small economies like the TC economy beyond While the information in the IOT does not just increasing external trade. It can translate give information on the origin of these inputs, into a transfer of technology incorporated in it definitely indicates a large opportunity for ‘imported’ inputs to, in the next stage, expand intra-island trade. the ‘export’ of manufactured products of greater complexity, which require advanced Vulnerabilities, and opportunities production technologies and high-quality A high dependence on imports at a given inputs. point in time for an economy is a sign both The contrast in import dependencies of vulnerabilities and opportunities. On the between the two economies also reveals one hand, the higher ‘import’ dependency opportunities for intra-island trade. Those ratios for the TC economy point to a potential sectors in the TC economy that are heavily vulnerability to international price changes, dependent on imported inputs can benefit exchange rate fluctuations, and supply chain from increased trade with the RoC GCA, hence disruptions. This dependency underscores also reducing time and cost of transport and the need for economic policies aimed at production. Moreover, intra-island trade can diversifying the economy and enhancing spur knowledge and technology transfers, and domestic production capabilities and synergies, for the benefits of both TC and GC efficiency. companies (see World Bank, 2022).20 On the other hand, a high dependency ratio can lead to a deepening of industrial linkages that promotes technological change. For a small 20 World Bank. 2022. Testing the Resilience of the Turkish Cypriot Economy: A Macroeconomic Monitoring Note. Available at: https://documents.worldbank.org/en/publication/documents-reports/documentdetail/099161502282335982/ p1550440e68ffb09709c630c8cf40f3dcc8 24 l TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY 2.2 Household Budget Survey: closely, and the social protection programs of the local administration in the TCc cannot be Sources of Income and assessed as often as they should be, thereby Wellbeing for Households increasing the risk of investing resources in The Household Budget Survey (HBS) is inefficient tools. the only data source that monitors socio- The HBS collects data on expenditure, economic statistics in the TC economy. consumption, living conditions, measures of However, the frequency at which it is wellbeing, and various indicators related to conducted is only every 6–7 years, while in the standard of living. The most recent survey the EU such surveys are typically carried out was conducted between June 2021 and July annually. This low frequency limits the ability 2022 with a cross-section design in the TCc. of the ‘SO’ to provide an accurate and timely In total, 1,391 households were interviewed assessment of the changes occurring in the with 3,819 individuals. The sample units are TC economy, thereby constraining the ability households. Consumption, expenditure, and of policy makers to devise effective policy information on living conditions were collected responses. Poverty and vulnerability figures at the household level, while information on are updated too sporadically, potentially demographic indicators, employment, and leaving families exposed to risks. Prices and educational details related to household household consumption cannot be monitored members are collected at the individual level. Box 2.2 The 2022 Household Budget Survey data collection process The 2022 Household Budget Survey collection, realized with the technical assistance provided by the World Bank and funded by the EU, was divided into three stages. The first stage was the preparatory work for survey conduction which included creating enumeration areas for the TCc, sample selection, listing operation and questionnaire update. The preparatory work started in September 2020 with the creation of enumeration areas by using satellite images. The second stage begun with the fieldwork where 1,389 household face-to-face surveys were completed over 12 months. The sample was evenly distributed into a twelve-month period, from July 2021 through June 2022 to account for the seasonality of consumption and expenditure patterns in the TCc. The last stage included post survey controls, data cleaning and delivery of final raw dataset. Figure 2.6 Inequality in selected economies, 2022 45, 43 38,4 36,9 40, 36,2 34,3 32,7 32,0 32,0 32,0 32,0 31,9 31,5 31,4 33 35, 31,1 31,1 29,8 29,4 29,1 29,0 28,5 27,9 27,8 27,7 27,6 27,5 27,4 26,6 30, 26,3 26,3 24,9 24,8 23,1 25, 21,2 20, 15, 10, 5, 0, Romania Czechia Netherlands Spain Portugal Serbia Latvia Greece Slovakia Slovenia Norway Montenegro Albania Lithuania Türkiye Belgium Hungary Sweden Ireland Luxembourg Italy Bulgaria RoC GCA Switzerland Poland France TCc Finland Denmark Germany Malta Estonia Austria Croatia Source: World Bank staff calculations based on TCc Household Budget Survey 2022, Eurostat l 25 TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY Figure 2.7 Relative poverty rate in selected economies, 2022 18,0% 15,8% 15,5% 15,3% 15,3% 15,0% 14,8% 14,5% 14,4% 16,0% 13,7% 13,1% 13,0% 12,8% 12,2% 14,0% 11,9% 12,0% 10,0% 9,5% 9,4% 9,4% 9,1% 8,9% 8,5% 10,0% 8,4% 8,1% 7,8% 7,3% 7,2% 7,2% 6,9% 6,8% 6,6% 8,0% 6,4% 6,2% 5,6% 5,4% 6,0% 4,0% 2,0% 0,0% Source: World Bank staff calculations based on TCc Household Budget Survey, Eurostat. Poverty is calculated as the share of people having less than 50 percent of the median equivalized disposable income The HBS 2022 collection had five key Between 2015 and 2022, inequality objectives and also introduces two significant increased while the relative poverty rate improvements with respect to the previous declined only slightly wave (HBS 2015). The objectives were to: (i) provide information on private consumption The HBS 2022 reveals important insights for economic accounts; (ii) estimate weights for the TC economy, in particular relating for calculating the consumer price index; to a worsening of the indicators related to (iii) monitor the changes of household inequality, between two periods (Figure consumption patterns over time; (iv) obtain 2.6). The Gini coefficient—an indicator to a comprehensive system of indicators that measure inequality—increased from 0.34 to reflect development trends and regional 0.37 between 2015 and 2022. Inequality in characteristics in the standard of living of the the TCc remains well above the levels seen in population; and (v) provide information for both the RoC GCA and the EU. While the share the determination of the poverty line and of income received by the richest 20 percent other socio-economic analysis. In addition, the was at 40.6 percent of the overall income in HBS 2022 introduced two new improvements 2015, this increased to 43.1 percent in 2022. compared with the previous wave of the HBS Similarly, the share of income received by the in 2015. bottom 20 percent declined from 7.1 to 6.6 • Expenditure reporting methodology. percent, indicating worsening inequalities in The previous round of the HBS asked household incomes in the TCc. households to record each of their purchases on a diary for a month, coding Relative poverty in the TCc decreased only each purchase with 10-digit according to slightly between 2015 and 2022, and remains the Classification of Individual Consumption almost double the level seen in the RoC GCA by Purpose (COICOP). For the 2022 round, (Figure 2.7). Relative poverty is measured as food expenditures and consumption were the share of population living below 50 percent collected by recall and coded with seven of the median equivalized household income. digits of the COICOP. Between 2015 and 2022, relative poverty • Survey mode. The HBS 2022 was the first decreased slightly from 15.4 to 14.4 percent. survey in the TCc to utilize Computer- Despite this improvement, poverty rates in the Assisted Personal Interviewing (CAPI). TCc remain significantly higher than the EU Previous rounds of the HBS and the Labor average and the rate seen in the RoC. Force survey were implemented with paper questionnaires that had to be digitized later. 26 l TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY Figure 2.8 Health indicators of the population in the TCc, 2022 a. Access to health insurance b. Prevalence of chronic diseases Source: World Bank staff calculations based on TCc Household Budget Survey 2022. Human capital accumulation in the TCc, diseases, which affect the ability to work and namely health, education, and job market the level of productivity. outcomes, lags the levels seen in the EU Adults in the TCc have lower tertiary education rates than both the RoC GCA A significant share of the population has no and the EU (Figure 2.9). According to the health insurance in the TCc, despite of the high results of the HBS 2022, the share of the prevalence of health chronic diseases (Figure population aged 25–34 that has successfully 2.8). Human capital—good health, knowledge, completed tertiary studies (e.g., university, and skills—is key to enable people to achieve higher technical institution, etc.) was only their full potential and drives economic 33.1 percent in the TCc, well below the EU growth. Around 18 percent of the population average at 42 percent and the share seen in the RoC, which reached 59 percent (Figure does not have any health insurance. This 2.9, panel a). Moreover, around 30 percent poses serious risks for individuals with regard of adults have five years of education or less, to protecting themselves against any health while around 11 percent of adults completed shocks. Moreover, around 28 percent of only middle school, accounting for 41 percent adults reported that they suffer from chronic of the adults having at most eight years of Figure 2.9 Human capital accumulation in the TCc, 2022 a. Share of university graduates for adults aged 25-34 b. Completed levels of education for adults 25+ 35% 31% 29% 28% 70% 30% 26% 59,2% 24% 25% 22% 60% 19% 19% 18% 20% 50% 42,0% 15% 12% 11% 40% 10% 33,1% 10% 5%5%4% 4%4%5% 30% 5% 3%2%4% 3%3%2% 2%3%2% 20% 0% Literate with diplom a education institution Masters/Doctorate University Middle school Vocational school High school Primary school Illeterate 2-3 year higher 10% 0% European Union RoC GCA TCc Total Men Women Source: World Bank staff calculations based on TCc Household Budget Survey 2022, Eurostat. l 27 TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY Figure 2.10 Sector of employment of workers in the TCc, poor and non-poor households, 2022 Source: World Bank staff calculations based on TCc Household Budget Survey, Eurostat. Poverty is calculated as the share of people having less than 50 percent of the median equivalized disposable income completed education (Figure 2.9, panel b). constituted the highest share of consumption However, gender differences are significant in expenditure (21.6 percent), followed by food educational attainment in the TCc. (20.5 percent) and transportation (18.50 Heads of poor households tended to percent). Groups that had the lowest shares work in low-skilled private sector jobs. In in total expenditures were entertainment (2.6 particular, low-income workers are more percent), alcoholic beverages (2.8 percent), likely to be employed in the construction, and communication (3.3 percent). A significant accommodation, wholesale, industry and change in consumption pattern is observed agriculture sectors. Among the poor, one- since 2015, due to an overall increase in quarter of people worked in the construction the aggregate consumption share going to sector, while only 13 percent of workers from housing, food, and transportation, as well as non-poor households were employed in due to a change in the relative importance of construction. The construction sector, together these three categories. In particular, in 2015, with agriculture and accommodation, is also households spent 55 percent of consumption characterized by higher shares of informal employment, which may further increase the on housing and rent, consumption, and vulnerabilities among those workers. On the transportation, with only 16 percent on food, other hand, the highest shares of workers 25.1 percent on housing and rent, and 13.7 from non-poor families are employed in the percent on transportation. public sector, together with the education, The consumption patterns of low-income health services and finance sectors. households differ significantly from those Consumption patterns have changed of non-poor households (Figure 2.12). over time, with significant differences Households in the bottom quintile spent a little among poor and non-poor households over half of their consumption expenditure on food and housing, while this share was only Households spent around 60 percent of their 36 percent among households in the richest consumption on housing and rent, food quintile. High-income households were more and transportation in 2022, making them likely to spend more on education and leisure particularly vulnerable to the ongoing cost- activities, while low-income households had of-living crisis (Figure 2.11). Housing and rent very little income left for such activities. 28 l TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY Figure 2.11 Consumption patterns of households in the TCc, 2015 and 2022 Source: World Bank staff calculations based on TCc Household Budget Survey 2022. Access to sanitation is almost universal, but a car and 36 percent a computer versus 83 the same does not apply for other household and 59 percent for non-poor households, equipment, and cars and computers (Table respectively. Access to the internet was similar 2.1). Both poor and non-poor families report among poor and non-poor households. having decent sanitation and washing facilities in the TCc, reaching almost universal access. Poor households held fewer assets compared However, stark differences appear when with non-poor households (Table 2.1). The looking at ownership of other equipment, poor were significantly less likely to hold assets such as air conditioners and dishwashers, as and access to services than non-poor families. well as cars and computers. Car and computer Only 30 percent of the poor owned the houses ownership was much lower among poor in which they lived, while this share was 67 families, with 67 percent of the poor owning percent among on-poor households. Figure 2.12 Consumption patterns of households in the TCc in 2022 Source: World Bank staff calculations based on TCc Household Budget Survey 2022. Delicies are constructed by using the consumption expenditure. l 29 TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY Table 2.1 Access to services and asset ownership in the TCc, 2022   Total Poor Non-poor House ownership Owner 59% 30% 67% Tenant 38% 68% 30% Lodging 3% 2% 3% Goods and services Indoor toilet 99% 98% 100% Indoor shower 100% 100% 100% Computer 54% 36% 59% Internet 92% 92% 92% Car 79% 67% 83% Dishwasher 72% 55% 75% Washing machine 99% 99% 99% Air conditioner 80% 66% 83% Source: World Bank staff calculations based on TCc Household Budget Survey, Eurostat. Poverty is calculated as the share of people having less than 50 percent of the median equivalized disposable income 2.3 How to Strengthen Evidence-based Policymaking A three-pronged approach is needed to b. Investments in statistical and technical strengthen evidence-based policymaking proficiency – Strengthening the in the TCc. The use of data is particularly infrastructure and capabilities necessary important for the TCc to allocate scarce for the comprehensive collection, analysis, resources more efficiently and monitor key and dissemination of data. economic and social indicators, thereby mitigating vulnerabilities among households. c. Enacting legislation to safeguard data The TC economy has witnessed multiple integrity – Ensuring that public data crises over the past decade, but policy makers collection is confidential and safeguarded at that time had only limited tools to assess by policies to guarantee data security and their impact on the economy, households and ethical usage. firms, and to design the right policy responses. 2. Promoting the use of data for policymaking Going forward, enhancing data collection practices, promoting the use of data for a. Incentivizing collaboration for data policymaking, and investing in data literacy are sharing and data collection – Establishing three important actions needed to strengthen mechanisms for data sharing and data overall evidence-based policymaking. collection among different departments 1. Enhancing data collection practices and agencies in the TCc. a. Allocating sustained and stable funding for b. Incentivizing the use of data by the local data collection – Establishing a statistical administration in the TCc in the policymaking program and securing continuous funding process – Enhancing accountability and for data collections are crucial for the enabling individuals to make informed development of a stable data production decisions through increased access to system. information and knowledge. 30 l TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY c. Incentivizing the use of data in support of b. Establishing trust in public data quality – initiatives for economic integration between Ensuring data are accessible to, and clear the TC and GC communities - Establishing for, all stakeholders while ensuring the mechanisms for data collection, and the accuracy of data. monitoring and evaluation of progress toward deepening economic integration c. Increasing awareness of benefits for between the two communities. economic integration building on data and evidence – Utilizing reliable data enhances 3. Investing in data literacy transparency and credibility, fostering a. Enhancing public engagement with data trust among the parties involved in the – Encouraging and enabling individuals, reunification process. firms, civil society and organizations to understand and use data effectively. l 31 TRANSLATING OPPORTUNITIES INTO SHARED PROSPERITY Notes 32 l Contact Person: Goran Tinjic, Program Manager for Southern Europe, gtinjic@worldbank.org