Risks could derail Cyprus economy, says Fiscal Council
The Fiscal Council warns of dangers and risks still posing a threat to the economy, despite the favourable macroeconomic environment it urges the government not to reverse its reform agenda.
Presenting its Spring Report, the council stressed that the government should take advantage of the environment which allowed the economy to expand 3.9% last year and the government to generate a fiscal surplus of 1.8% of the economy, and reform pensions, education, the legal system and the civil service.
Demetris Georgiades, the Council’s president, said that the economy’s poor competitiveness and lack of diversification, coupled with its vulnerability to unexpected turbulences and changes in the economic environment may pose serious threats in the future.
“The high public debt will restrict the government’s ability to react”, warned Georgiades adding that the government should take preemptive measures.
He warned that the positive external environment, the European Central Bank’s loose monetary policy and the political approach towards investments through plans like the citizenship-by-investment scheme cannot be relied upon.
Georgiades said that the economy’s dependency on these factors will inevitably lead the country to experience symptoms of the ‘Dutch Disease’.
“Meaning the transfer of resources away from productive sectors of the economy which will temporarily become comparatively less profitable and mediumlong-term less competitive due to increased operating and investment costs,” explained Georgiades. His remedy is the continuation and implementation of reforms planned.
Georgiades argued that reforms can be implemented with better planning and with substantially less unpleasant consequences in times of economic growth.
He said that in 2017 the objective of the Financial Position was reached, with a 0% cyclically adjusted primary balance, while the fiscal policy objectives for 2018 and 2019 are considered feasible, given that the government’s fiscal policy and the general environment will not change significantly.
With the Public Debt to GDP ratio expected to rise to 103% in 2018 from 97.6%, due to the EUR 2.5 billion injected into the Cooperative Bank, Cyprus could achieve the goal of dropping the ratio under 60% by 2029, said Georgiades.
“This is achievable only if the whole of the primary surplus is channeled solely to serve the public debt and there will be no substantial differentiation in fiscal policy and in the expected macroeconomic environment.”
Referring to the challenges and reforms needed to take place for Cyprus state to stay on track with the improvements made so far, Georgiades stressed the need for reforms in areas such as the juridical system, education and the issuance of title deeds.
Cyprus is currently occupying the last place on “The 2017 EU justice scoreboard”, a European Commission report concerning time needed for the resolution of civil, commercial and other cases.
Georgiades noted that whereas other European states with similar issues, were able to reduce the problem via reforms in the juridical system, Cyprus has seen a worsening of its position.
“Malta took advantage of the crisis, went ahead with reforms, and within three years was able to cut the time needed for the resolution of the above-mentioned cases, in half,” said the Fiscal Council president.
He said the European Commission in one its latest recommendations to Cyprus said: “Cumbersome civil procedures and weakness in the implementation of decisions adversely affect the use of the divestment framework by banks to reduce non-performing loans”.
Finance Minister Harris Georgiades said the government seeks to improve the legislative framework on divestments and insolvency.
He said the government is ready to present its suggestions to the political parties and the European Commission in the coming days.
Another pressing matter is speeding up the process of issuing title deeds.
“Serious delays in the issuance of title deeds means that immovable property loses part of its value…whereas the Memorandum foresees that a minimum of 3,000 titles should be issued monthly, only 4,215 were issued in the first six months of 2017,” said Georgiades.
The council also expressed concern “over the inability to overturn the trend of loss of market share and revenue from CYTA and the simultaneous pressure on additional salary increases, which will significantly exacerbate its position”.
According to Georgiades, the abandonment of efforts to privatise the stateowned telecommunications authority or finding a strategic investor, may worsen its position and reduce its value.