By Stelios Orphanides and George Psyllides
OVERLY optimistic long-term budget forecasts could lead to a new bailout, the fiscal watchdog said on Wednesday, warning that with Cyprus’ high public debt, the effects of a new economic crisis would be tantamount to a meteorite crashing into Earth.
Speaking at the presentation of the Fiscal Council’s autumn report, its chief called for more conservative forecasts to avoid additional austerity measures later on.
“If we build our budget on excessively optimistic forecasts that don’t’ materialise, the damage we incur would be worse than the benefit we would lose if we did the opposite, that is, structure our budget on more conservative forecasts,” Demetris Georgiades said.
Established in 2014, the Fiscal Council is tasked with monitoring the drafting and execution of the budget.
The finance minister said on Monday that the economy was expected to expand at a rate close to 3 per cent this year, the highest since 2008.
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.
“We cannot rule out needing spending cuts or even entering a new bailout programme,” Georgiades said. “That is why we call on the government not to rush into readjusting the spending ceiling or cut taxes or introduce additional tax exemptions.”
The government recently cut the immovable property tax by 75 per cent without however, any measures to offset the loss in revenue.
“We are worried that certain fiscal measures are put in place, which show laxity without compensation,” Georgiades said.
He also struck a note of caution over the country’s debt, noting that it should be reduced when the economy records positive growth rates.
The council said that while the public debt — 108.3 per cent of gross domestic product this year — is expected to continue on a downward trend because of an improved macroeconomic environment, a combination of “fiscal complacency” and the impasse in privatisations “has prolonged its reduction period by seven years”.
“One would have expected that since the finance ministry indicated it expects higher growth rates, there would have been an acceleration of the reduction of public debt,” Georgiades said. “Unfortunately we are not seeing this.”
With such a high public debt, a new downturn would have similar effects to a meteorite crashing into Earth.
“Sooner or later you know that Earth – Cyprus in this case – will be hit by a meteorite in the form of a new economic crisis,” he said. “The only thing you can do to tackle it is to introduce reforms and keep public debt as low as possible to be able to absorb the damage caused by the meteorite.”
The council also emphasised the need of swift and decisive action to address the high ratio of non-performing loans (NPLs) in the banking system.
“Non-performing loans remain a threat for the economy and public finances, and an obstacle to both economic growth prospects and further sovereign credit rating upgrades,” the council said in its report.
Future losses for Cypriot banks caused by NPLs are estimated at €15bn if no further reforms were made, and half as much if reforms were put in place, the council said, citing a report of the International Monetary Fund.
NPLs make up roughly half of the banks’ loan portfolio. In August, they amounted to €25.6bn, down from €27.3bn in December 2014, according to the Central Bank. Overall provisions for loan impairments are estimated at €9.3bn.