Cyprus Mail

Foreign creditors demanding the state pay up

By Elias Hazou
OVER €900m in tax arrears were owed to the state at the end of 2012, while foreign creditors – other than the troika – are breathing down the government’s neck demanding repayment of loans given to municipalities.
Those were the key highlights of a presentation yesterday of the Auditor-general’s report for the year 2012 at the House watchdog committee.
According to the report, the Inland Revenue Department (IRD) estimated €968m in back payments on 31 December 2012, of which €366m were considered ‘uncollectible’ due to various reasons, including bankruptcy.
Of the total taxes owed to the state, €392m were in the form of income tax. And unexecuted warrants were valued at €150m.
Auditor-general Chrystalla Yiorkadji noted that at the end of 2012 municipalities had collectively taken out loans worth €588m, with outstanding liabilities at €342m. The government’s outstanding liabilities to municipalities (the state underwrites many of their loans) came to €245m.
Of pressing concern, the official informed MPs, is the demand by an Austrian bank for the immediate repayment of around €100m in loans issued to municipalities and sewerage boards.
Repayment of this amount was due in December 2013. The creditor, ΚΑ Finanz AG of Austria, asked the government here – which underwrote the loan – to repay it.
KA Finanz, a municipal lender, is the so-called bad bank of Kommunalkredit Austria AG, which was nationalised in 2008.
The official noted moreover that her department had never been briefed about this specific liability, which puts the already cash-strapped state in an even tighter spot.
Listening MPs seemed to grasp the gravity of the issue.
“The creditors will be forced to collect the money by other means, which are well known,” remarked Giorgos Georgiou, chairman of the watchdog committee, hinting that state assets may have to be sold off to pay down the loan.
However, Yiorkadji followed up by saying that the finance minister has since contacted his Austrian counterpart asking for a six-month extension for repayment of the €100m loan.
As a condition for the loan, the Austrian bank had said that municipalities and sewerage boards must submit audited accounts.
But as Yiorkadji pointed out, more often than not the accounts prepared by municipalities are rife with errors and omissions, and lack supporting data.
The majority of municipal boards do not have internal audit systems in place ensuring proper bookkeeping from which reliable financial accounts can be compiled, she said.
According to the official, her department is grossly understaffed, currently operating with 80 auditors with around 30 per cent of positions left vacant as a result of the blanket freeze on hiring in the broader public sector.
Her concerns were echoed by Georgiou, who described the department’s circumstances as “dramatic”.
The DISY deputy said parliament has repeatedly asked the government to find a way around the hiring freeze to beef up the auditor-general’s office.
One way would be to second civil servants from other departments. Another – apparently agreed to by the government – is to transfer auditors from the cooperative central bank after the latter’s restructuring.
In her report, the Auditor-general also drew attention to the pricing of imported medicines. From a small sample of pharmaceuticals examined, her office determined that their prices should have dropped by around 18 per cent.
Under the current pricing system, the maximum wholesale prices are determined by calculating the average prices of medicines in four ‘reference’ countries – Sweden, Austria, France and Greece. Although Greece is categorised to be the ‘inexpensive’ reference value in that group, since 2009 medicine prices there have shot up. Despite this, Greece continues to be classed as an ‘inexpensive’ market.

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