By Angelos Anastasiou
While the economy has fared better than expected and the country is well on its way to full recovery, negative developments both outside and within Cyprus could derail public finances yet again, the Fiscal Council warned on Wednesday.
In its Spring Report, released on Wednesday, the independent advisory body said that, while fiscal targets for 2014 have been met and the government’s fiscal planning are in line with the Economic Adjustment Programme (EAP) and fiscal rules included in the legislative framework, various factors may adversely affect public finances and the economy’s path to growth.
Such factors, it added, may include external ones like currency exchange shocks, problems in Greece and Russia, and a possible slowdown of the global economy, or internal ones, like delays in implementing the EAP, implementation of a poorly-planned National Health Scheme, restoring unreasonably expansionary fiscal policies, and delays in the overhaul of the pension framework and the civil service.
According to the report, Cyprus posted a primary surplus of €488 million in 2014, and a fiscal deficit – meaning after debt repayments – of €7.2 million. These results turned out better than estimated projections, mainly owing to better-than-budgeted performance of revenues and expenditures.
The 2014 public debt target of 120 per cent relative to GDP was also met comfortably, as the general government’s public debt for 2014 was measured at 107.2 per cent.
The Fiscal Council said that 2015 will see modest economic growth of 0.2 to 0.4 per cent, which will increase in 2016 by 1.4 to 1.6 per cent.
In terms of challenges facing the economy in the medium- and long-run, the council recommended that reform of benefits and entitlements in the civil service, linking wages to productivity, should be carried out while the country remains in the EAP – which expires in 2016 – so that the risk of derailment of public finances, which could impact the country’s cost of borrowing, is averted.
The report also noted that in order to bring the public debt down to 60 per cent of GDP, while fully in compliance with fiscal rules, Cyprus must maintain primary surpluses of 4 per cent for 20 years.
Meanwhile, the council warned, the non-investment grading status of Cyprus long-term sovereign debt – currently six grades under investment-grade ranking – could mean that, were Cyprus to exit its EAP in 2016 as scheduled, its banks would be banned from drawing liquidity from the European Central Bank. At present, Euro countries whose sovereign is rated non-investment grade but are under a viable economic-adjustment programme are exempt from ECB bans on using sovereign debt as collateral.
“It is too early to decide at this point whether we should stay remain under an EAP after next year – it will all come down to the cost of staying versus the cost of exiting,” council chairman Demetris Georgiades said in a news conference.
The council also noted that long-term fiscal stability may only come about through improving competitiveness.
“In this context, it is imperative that efforts to reform the public, broader public, and private sector, including the financial sector, must continue,” the report said.
