Filenews 7 June 2021
Uncertainty is contained in the estimates for the economy over the next two years due to the unpredictability of the possible development of the COVID-19 pandemic, according to the Spring Report, "June 2021" of the Financial Council.
At the same time, the Council stresses that on the basis of the data and assumptions to date, which are characterised by a high degree of uncertainty, Cyprus appears to be in a position to service public debt, while expressing the need to emphasise reforms aimed at improving the competitiveness of the economy.
While in relation to risks/challenges to public finances, the Council mentions the possible covid-19 mutations and the reintroduction of restrictive measures and measures to support the economy, as well as an increase in government spending.
More specifically, in the Report, which has been prepared with data available to the Financial Council by 25/5/2021, it states that 'the general estimates for the next two years involve a high degree of uncertainty due to the unpredictability of the possible development of the COVID-19 pandemic, as well as any permanent effects on consumer habits and the way in which the business is conducted', while it is noted that the macroeconomic forecasts relate to a wide range of values based on scenario assumptions about the evolution of the pandemic.
The Financial Council says the macroeconomic environment in 2020 remained uncertain with significant challenges, which continues into 2021, and adds that Cyprus and other EU Member States have activated the General Escape Clause which allows for a temporary deviation from the numerical budgetary rules with a view to more effectively addressing the crisis.
The Council notes that, 'the use of this Clause must take into account the level of public debt and the long-term sustainability of public finances and in particular the possibility of servicing public debt'.
It says forecasts and fiscal planning should be revised and adjusted at regular intervals depending on new data and data reflecting a clearer picture of the evolution of the pandemic and its impact on the economy.
It notes that in the mean time and until the scene is clear regarding the development of the COVID-19 pandemic and taking into account the situation in which economic activity will be located, budgetary resources should be provided sparingly.
Government support measures, according to the Financial Council, "should be given priority to sustainable activities facing temporary liquidity problems and to households in dire need. The State should maintain a reserve with a view to creating a new need for intervention at a later stage'.
In addition, it stresses that "consideration should always be given to the possibility that public debt will become unsustainable, either as a result of its further increase or because of a reduction in the possibility of sufficient budget surpluses".
"A possible reduction in Cyprus' production capacity or even a possible increase in interest rates will have a negative impact on the ability to service public debt, so it should be maintained at the lowest possible level," he stresses.
Citing the assumptions and forecasts of the Ministry of Finance, the European Commission and the International Monetary Fund, the Council states that it is expected that Cyprus' GDP will return to pre-crisis levels by 2023 and notes that "on the basis of the data and assumptions to date, which are repeated as being characterised by a high degree of uncertainty , Cyprus seems to remain able to service the public debt".
It notes that this forecast, recorded in the estimates of the European Commission and the International Monetary Fund, "is largely based on the assumption that Cyprus will achieve a nominal rate of economic growth above the average government debt rate".
As he says, given that monetary policy, which to date aims at quantitative easing and keeping interest rates low, is determined at euro area level by the European Central Bank and which can be differentiated when and when most of its members achieve high rates of economic growth with inflationary pressures, "Cyprus must soon return to a surplus budget and high rates of economic growth".
Reforms
The Council considers that the unexpected crisis once again highlights the importance of promoting the necessary reforms recorded over time in the reports and interventions of institutions and bodies, including the Financial Council.
It states that particular emphasis should be placed on reforms aimed at improving the competitiveness of the economy in order to make it more attractive to domestic and foreign investment but also at creating budget surpluses, both by curbing expenditure, in particular the state payroll, and by strengthening economic activity, policies that will drastically reduce its borrowing and servicing costs and strengthen the reserve. necessary to address risks such as the current pandemic.
In addition, the Council states that emphasis should also be placed on effectively tackling low private savings including the creation of an effective pension system that ensures pension adequacy for all citizens and the resolution of the problem of over-lending to the private sector, including the reduction of non-performing loans that still pose a threat to financial stability.
Pension
The Council notes in its Spring Report "the lack of progress in trying to promote the reforms necessary to create a pension framework that will create the conditions to ensure adequate pensions for all citizens".
It states that the absence of a strong supervisory framework and the maintenance of incorrect incentives and disincentives as recorded over time in the Council Reports discourage rather than favour savings in pension plans, adversely affect savings and maintain savings for retirement purposes in the plans of the second (occupational plans) and third (individual insurance plans) pillar.
"The existence of a modern pension institutional framework will create the conditions for ensuring adequate pensions for all citizens by limiting the possibility of burdening public finances resulting from the need to boost pensioners' incomes" and at the same time, the existence of strong pension funds operating in a rational and effectively supervised framework will be a source of sound investment funding and at the same time a tool improving corporate governance in the companies they invest in", underlines.
New technologies and infrastructure improvement
In addition, the Council considers it necessary to improve infrastructure for the exploitation of new technologies and to take measures for better strategic planning with a view to innovation and development.
It adds that "steps in the right direction that bring the academic and business community closer together and that assist medium-term strategic planning with a view to sustainable and sustainable development have been taken with the creation of the Cyprus Economic and Competitiveness Council and the Research and Innovation Foundation".
The Council also stresses the need to reduce unnecessary bureaucracy and improve transparency and institutions, which, in addition to improving entrepreneurship, will reduce corruption.
In its concluding comment, the Council states that vaccine development and progress in vaccination programmes both in Cyprus and globally appear to lead to an effective response to the COVID-19 pandemic and allow the economy to restart.
It states that the following period should mark the beginning of the gradual lifting of measures to support the economy and adds that on the one hand the measures should not be withdrawn in haste depriving sustainable enterprises of necessary liquidity and causing problems in the supply chain of the economy and the labour market, and on the other hand the level of public debt and the need to maintain it in levels that will allow your service.
"For these reasons public funds should only support sustainable activities that face temporary liquidity problems and households in absolute need," he notes.
"A return to a surplus budget, the creation and maintenance of reserves, the reduction of over-government and the development of a reliable and competitive environment should return to the heart of financial planning as soon as possible," it concludes.
Source: Eyenews/CYP
