WHILE international lenders have praised the progress made by the Cyprus economy since its exit from the assistance programme a year ago, they have also expressed concern about ‘weakened’ reform momentum and ‘increased expenditure pressure’. The IMF, European Commission and ECB technocrats who were here last week on their second post-programme surveillance mission issued timely warnings in their reports about the complacency being displayed.
Once again, finance minister Harris Georgiades expressed his disagreement with the Commission’s findings, focusing on his favourite topic – the primary surplus. His dispute with the Commission over the primary surplus dates back to last year, when Georgiades insisted that the technocrats were arriving at different results because they were using another method for calculating it. On Monday, he pointed out that Cyprus had generated the highest primary surplus in the EU in the past two years, as if this disproved any of the observations and warnings made by the lenders.
The IMF highlighted the need to reduce public and private debt. The government acknowledges only the need to cut private debt, while ignoring the danger of its repayment capacity being weakened if fiscal discipline were to be eroded or we entered another boom-bust growth cycle. The Commission report noted the failure to “improve the growth potential and attract more productivity-enhancing investment”, in direct reference to the abandonment of the privatisation drive and liberalisation of the electricity market.
It also advised the government to resist increased expenditure pressure and introduce a permanent mechanism for wage moderation in the public sector. The government has failed on both counts, although in the case of the wage mechanism it was the opposition parties that were to blame, having failed to approve six reform bills for the public service. At the start of the year, public sector wages not only returned to pre-crisis levels, but there were also pay increases. As regards the expenditure pressure, the government put up no resistance to the nursing unions’ pay demands last month and has indicated it will also give hospital doctors big pay rises.
We should take seriously the warnings of the IMF and the Commission. Georgiades did a good job in stabilising the economy because he was following the advice of the Troika. Now he is obliged to follow the orders of a president who is seeking re-election and will show utter disregard for concepts such as fiscal discipline, productivity-enhancing investment and wage moderation. Mindless spending is one of the main campaign strategies used by a president seeking re-election and Nicos Anastasiades has given no indication that he is any different from his predecessors. Our only hope is for the Commission to apply more pressure to the government with regard to public finances, because Georgiades does not have the power to stop Anastasiades from going on public spending sprees.