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Fiscal watchdog warns of macroeconomic imbalances

Cyprus’s Fiscal Council, an advisory body tasked with monitoring budget policies, said that the island’s economy continues to have significant imbalances  threatening macroeconomic and fiscal stability, even after it entered a recovery phase

“Despite the improvement reflected in certain macroeconomic indicators some of them –such as the current account deficit, international investment position, private sector debt level—remain outside indicative tolerance levels,” the fiscal watchdog said in its 2017 spring report on its website on Wednesday.“The Fiscal Council considers it advisable to repeat the necessity of reducing (public) debt as long as the external environment remains favourable”.

The council said that it considers the government target of reducing public debt of 107.8 per cent of the economy last year to below 89 per cent by 2020 as “achievable”.

“The Council expresses its strong concern following the recent upgrade or the intention to upgrade earnings in the public sector,” the Fiscal Council said in an obvious reference to the government’s decision to give in to the demands of the nurses’ union Pasyno three months ago which prompted other groups to raise similar demands. “We repeat the imperative of establishing a proper mechanism of setting pay levels in the public sector”.

While the government’s operational cost, the difference between total government spending excluding social welfare, is in Cyprus comparable to that of the rest of the euro area average as a percentage of economic output, slightly above 28 per cent in both cases, the share of wages is considerably higher, figures compiled by the council show. While in the euro area, the average spending on salaries as a percentage of overall operational cost of government is below 21 per cent, in Cyprus it exceeds 31 per cent.

The proposed mechanism should take into account qualification, experience required, degree of responsibility and duties, productivity, comparable earnings in the private sector, in the European Union and the euro area and what the economy can afford, the council said.

On the other hand, the Fiscal Council welcomed the government’s decision to have the effectiveness of public expenditure evaluated. “Already, a number of EU member states applies these procedures which complement and contribute towards containing public spending,” the council said.

The council added that Cypriot society is expected to face significant challenges as a result of aging population over the next decades putting pressure on healthcare and the pension system. “The ratio of potentially gainfully employed to dependent persons will dramatically drop,” it said. “Without corrective action, contributions will have to increase”.

While currently every person over 80 is supported by 21.7 potentially gainful employed, the number of the latter is expected to drop to below one third by 2060, it said.

The Fiscal Council also expressed its concern about “very high saving rates” in the economy, as well as about loss of market share by the state telecom Cyta whose privatisation was put on hold last year.

The Fiscal Council welcomed the effort to introduce “an effective framework” to manage revenue from natural resources such as hydrocarbons, as well as of the state investment fund. It also warned of risks related to increasing spending funded from hydrocarbon revenue.

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