Growth, not taxes, best weapon to beat inflation

Finance Minister Constantinos Petrides argues the best way to address rising inflation is not by imposing additional taxes but investing in growth.

He also assured Cyprus is not overexposed to Russia, so its banking sector is not affected.

Commenting on a Financial Times article that Cyprus is largely affected by the war in Ukraine, the minister disagreed there is overexposure to the Russian factor.

In 2012, the year before the financial crisis forced the island to seek an international bailout, bank deposits held by non-eurozone residents amounted to EUR 21.9 bln.

They have shrunk but still amounted to EUR 6.4bn at the end of February, most Russian money.

On inflation, he said the government has to protect the vulnerable groups and focus on attracting more investments, which will create and increase income and protect purchasing power whittled away by high inflation.

He pointed out the government will make efforts to protect the economy through development without imposing additional taxes, as is the case in other countries.

The main concern at the international level is that with soaring inflation, there may be an increase in interest rates, which will create difficulties in repaying high debts, public or private.

For this reason, he added, many countries may increase taxes to protect their public finances, noting that Cyprus does not share this strategy.

“The Cyprus economy is affected, of course through the loss of tourist revenue about 20% of the tourist product was made up of tourists from Russia.

“Nevertheless, we are trying to close the difference by establishing new routes. We have already established about 35 new routes from European countries, thus mitigating the impact largely”.

He added that the provision of professional and consulting services to businesses of Russian origin might also be affected by reduced turnover and profits.

“In the banking sector, we don’t expect a significant impact, given the minimal exposure of Cypriot banks to Russian entities and Russian deposits in Cyprus have been significantly decreasing.

“They just account for about 3.8% of the total deposits.

“Furthermore, our banks are very well capitalized with ample liquidity, while Cyprus does not hold reserves of the Russian Central Bank”.

Inflation risk

He said that the most important risk is inflation and what comes with it.

“Managing inflationary pressures without putting at risk the viability of public debt, especially for countries with relatively high debt levels, like Cyprus, is a real challenge.

“Many countries are following the path of increasing taxation to safeguard public finances due to the future risks and the future vulnerabilities.

“This is not what we did in 2013, and this is not what we will do now. Our answer is Growth, Growth, Growth.

“Higher growth rates to increase incomes, more growth to increase the purchasing power, higher growth rates to create or sustain jobs.

“We came out of the crisis without raising taxes, and now with the pandemic, we did manage to fully recover. We were one of the few countries that covered the lost ground in one year.

“The answer lies with our new growth model and economic philosophy.

“Open economy, entrepreneurship, ease of doing business, facilitating productive investments, more foreign direct investments, private investments”.

The government has emphasized transforming Cyprus into a regional Business Hub, particularly for the High-Tech Industry.

“An industry whose value-added can increase more than any other industry in a relatively short period.”

“We introduced new tax incentives, opened up the labour market to thirdcountry nationals and their families, with addressing immigration issues, facilitated the establishment of the new companies and their families in Cyprus.

“And this is one of the reasons that due to the war in Ukraine, we have seen even more companies coming to Cyprus,” said Petrides.

Eastern Europe—and the sanctions aimed at pressuring Russia to end hostilities.”

It said the new crisis unfolds when the global economy was on a mending path but had not yet fully recovered from the COVID19 pandemic.

There was a significant divergence between the economic recoveries of advanced economies and emerging market and developing ones, while frequent and wider-ranging lockdowns in China— including key manufacturing hubs—have also slowed activity there and could cause new bottlenecks in global supply chains.

“The economic effects of the war are spreading far and wide—like seismic waves that emanate from the epicentre of an earthquake—mainly through commodity markets, trade, and financial linkages,” the Fund said.

It noted that Russia is a major supplier of oil, gas, and metals, and together with Ukraine of wheat and corn, the current and anticipated decline in the supply of these commodities has already driven their prices up sharply.

On the global economy, the IMF said that beyond the immediate humanitarian impacts, the war would severely set back the global recovery, slowing growth and increasing inflation even further.

The April WEO projects global growth at 3.6% in 2022 and 2023—0.8 and 0.2 percentage points lower than the January forecast.

“The downgrade largely reflects the war’s direct impacts on Russia and Ukraine and global spillovers.”

Concerning Cyprus, the IMF said real GDP growth would amount to 2.1% in 2022 and accelerate to 3.5% the following year.