By Stelios Orphanides
The reunification of Cyprus should ensure fiscal stability both at central government and constituent state level to avoid a new bailout, the fiscal council said.
“The recent crisis in the European Union has highlighted how easy and to which extent risks can spread from one member state to another,” and also from one financially autonomous entity to another within one country, the fiscal council said in its autumn report, published on Wednesday.
The Fiscal Council, tasked with advising the government on budget matters to help avoid a fiscal derailment, said that the two communities will need to agree fiscal rules ahead of the solution by adopting the European Union’s budgetary rules.
“The Council believes that in the context of ensuring the correct and normal fiscal course, the two sides need to go ahead with the maximum possible fiscal adjustment ahead of a settlement.”
In this context, contingent fiscal liabilities stemming from the financial or pension systems need to be addressed, the council said, a day after it expressed concern about the (Greek) Cypriot banking sector which is plagued by a high level of non-performing loans, and has a high stock of illiquid assets in its balance sheet alongside short-term liabilities.
The council also expressed concerns over the adequacy of the pension system in the government controlled areas, which came under further pressure following the crisis which prompted policyholders to cancel personal insurance schemes.
In March, Finance Minister Harris Georgiades called international organisations to audit Turkish Cypriot banks. Such an audit, sources with knowledge of the situation said, has not taken place yet.
“In addition, the institutional framework that will be in place must ensure fiscal stability and compliance with the European budgetary framework,” the council said. “Given the high public debt levels on both sides, ensuring fiscal sustainability and sufficiency should be a fundamental priority”.
While the Republic of Cyprus, which is effectively run by the Greek Cypriot community since 1964, has accumulated debt that exceeds the economic output of one year — €17.6bn in 2015 — there is still little information about the public debt levels of the Turkish Cypriot economy, which generated a gross domestic product of 10.2bn Turkish lira in 2015, or around €3bn.
Georgiades said on Monday that while the Turkish Cypriot public debt to Turkey “will be one of the aspects” of talks to ensure the economic parameters of the settlement would support financial activity, “the so-called Turkish Cypriot debt is not real debt by anyone”.
“It has none of the characteristics of public debt, there has never been a repayment, nor interest nor capital (payment), it has no maturity,” he told lawmakers of the finance committee.
“It is an accounting record of the sum of funds which Turkey has made available since 1974 to support the breakaway state’s economy and structures,” he said. He added that the preparation of reports requested from the International Monetary Fund and the World Bank on the reunification of the economy is still in progress.
Between 1977 and 2013, Turkey injected a total of $4.3bn (€3.9bn) in the Turkish Cypriot economy in the form of “foreign aid and loans,” according to a statement on the website of the Turkish Cypriot planning organisation.
The Fiscal Council, which said on Wednesday that the Republic of Cyprus’s high debt level makes its economy vulnerable to external shocks, said that in the case of a settlement, the reunified economy could also face similar challenges.
“The realisation of risks, or any adverse effects on public finances and the economy in general, caused by a worsening external environment, may again exclude the economy from the markets, raise the public debt and cost of financing further, and possibly raise the need of a new bailout,” the fiscal council said.