Fiscal Council sees destabilization risks as Cyprus outperforms economic targets

Cyprus’ Fiscal Council believes that despite the positive image of the country’s economy with improvement in fiscal performance and important indicators, there are significant imbalances which are likely to become destabilizing factors and lead to negative economic developments.

Presenting on Wednesday the Council’s Spring Report, its President Demetris Georgiades noted that although fiscal rules in the current two years seem to be fulfilled, there are other risks, which could lead to destabilization in the years to come and the only way to resolve that is reforms.

According to the Report, the most serious risks are Cyprus’ low competitiveness, the very low saving rate of households and the demographic changes that will come with the aging of the population.

Georgiades pointed out that these problems will arise in the coming decades, and that in the next couple of years there would not be any serious problems if nothing important changes in todays favorable external environment. He noted however that there are dangers and if if we do not deal with them – we do not know when – but they will be realized.”

At the same time, he welcomed the Governments effort to establish an EU-wide value for money review and noted that it should be extended throughout the public service and alongside with other reforms.

Speaking about the low competitiveness of Cyprus’ economy, he said that it is mainly reflected by the current account deficit, which is rising and will continue to grow as the economy and consumption grow. He pointed out the need for reforms, in order for Cyprus to become more business-friendly and overcome bureaucratic and time-consuming procedures preventing major companies to register and operate in Cyprus.

At the same time, Georgiades expressed the Councils deep concern about claims by trade unions, noting that a mechanism should be set up in order to assess and define in a scientific and transparent manner how each position in the public sector should be remunerated.

In relation to low levels of household savings, Georgiades said that even in the good times for the economy, Cyprus was one of the troubled countries with very low savings rates, amounting to half the average of the Eurozone and one third of Germany.

Regarding the sustainability of the Social Insurance Fund, the President of the Council stressed the risk for inadequate pensions despite the positive results of relevant studies and measures taken.

On public debt, the Fiscal Council’s member Damianos Damianou said that although public debt remains at the high level of 108% of GDP, the figure is projected to fall below 60% of GDP in 2028. Damianou said that based on the planning of the Ministry of Finance and due to the primary surpluses and liquidity achieved, the objective of reducing public debt is feasible.

Regarding fiscal targets, Damianou said that on the basis of the estimates for 2017 and the macroeconomic and fiscal projections, the targets are expected to be achieved.

Regarding the general health scheme, the President said that there are no safeguards and mechanisms to control this cost. He said that the first bill had a three-year transition period, during which the state would cover deficits in self-managed hospitals with a reduced rate for three years. He added that in the latest bill that has been extended to five years without any restrictions.

Georgiades also said that Cyprus public spending on education is among the three highest in the EU and the highest in the Eurozone as a percentage of GDP. As he said the average household in Cyprus spends 50% more on education than the average Eurozone household.

The President of the Council invoked a study by a professor at the University of Cyprus, according to which Greece and Cyprus are at the top of the Southern European group of countries where the “shadow education” flourishes.

Source: Cyprus News Agency