Risks could de­rail Cyprus econ­omy, says Fis­cal Coun­cil

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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