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Watchdog says negative fiscal dynamic, uncertainty likely again (Update)

(Adds more comment and background in sixth paragraph and corrects second paragraph)

By Stelios Orphanides

The fiscal council said that the government should be more conservative when it comes to budget drafting over the medium term, given the amount of public debt, on fear of “negative dynamic” risks amid a stalled reformed process.

“Given the inelasticity of public spending and external uncertainties,” a return of uncertainty and a negative dynamic for public finances cannot be ruled out the fiscal watchdog said in its autumn report on Wednesday.

A more conservative approach to budget drafting over the medium term could “create a more positive picture, would considerably contain risks and could be easily revised whenever deemed necessary,” the body said.

The Fiscal Council, established in 2014 to promote fiscal responsibility and avoid a repetition of the fiscal derailment that contributed to Cyprus’s financial disaster in 2013, is tasked with monitoring the drafting and execution of the budget.

The council said that while public debt, seen at 108.3 per cent of gross domestic product this year, is expected to continue following a downward trend, because of an improved macroeconomic environment and despite its upward revision, a combination of “fiscal complacency” and the impasse in privatisations “has prolonged its reduction period by seven years”.

The favourable external factors which helped Cyprus exit recession earlier than initially forecast could deteriorate, the council said. As the external environment is “unpredictable, it should be a priority for everybody to minimise the likelihood of Cyprus being again exposed a new shock as its debt remains high,” the council continued. “This can only be achieved via its reduction. Debt reduction the earliest possible remains a necessity, which could help reduce both the risks the economy is facing and the cost of servicing public debt”.

Cyprus’s government debt peaked at 108.9 per cent of economic output last year which is more than double compared with 2008. The public debt to gross domestic product ratio is projected to decline to 105.3 per cent next year, according to the finance ministry’s September figures, which revised an initial 101.5 per cent April forecast. In 2018 and 2019 public debt is expected to subside to 101.7 per cent and 95.8 per cent respectively, relative to earlier projections of 97.7 per cent and 88.6 per cent. The cost of servicing public debt is expected to drop from €465m this year to €461m in 2017, which is 2.6 per cent and 2.5 per cent of GDP respectively.

Finance minister Harris Georgiades said on Monday that the economy is expected to expand at a rate close to 3 per cent this year, the highest if materialised since 2008, after growing 1.7 per cent last year. According to the ministry’s revised forecasts, the economy is expected to grow 2.8 per cent next year and continue growing at the same pace over 2018 and 2019.

The fiscal council reiterated its position on the necessity of structural reforms, saying that they can help address distortions and the gradual elimination of imbalances that corrode or reflect on Cyprus’s competitiveness. It said that reforms should be founded upon principles that as much as possible limit the discretionary powers of the executive, reduce financial ties between autonomous organisations and the government, and ensure transparency with “timely, valid and sufficient information flow with unobstructed public access where public interest is not affected”.

In addition, the council said that the government should introduce mechanisms preventing the creation of deficits and the assumption of risks which could burden the budget, allow more effective audit and supervision, and introduce penalties deterring public officials from abusing their power.

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Source: Cyprus News Agency