THE STRONG performance of the economy, in the last couple of years, with budget surpluses and high growth rates has caused complacency in the government, which has loosened the public purse strings, in the unjustified belief that everything will remain the same. It never does and the economy cannot be insulated from external developments. A slowing down of the world economy is expected this year and forecasts for Europe have not been very good. Sadly, our politicians, regardless of ideological background, have never been champions of prudent economic policies, especially when the economy is doing well.
The report on the sixth post-programme surveillance mission by the European Commission, ECB and IMF issued several warnings about the Cyprus economy, saying that “external headwinds are increasing and important national vulnerabilities remain.” Key vulnerabilities were the “still very high levels of NPLs, private, public and external debt in a context of low productivity growth and high dependency on foreign capital flows.” The report was referring to the citizenship by investment scheme, which could be stopped either by European Commission decision or by world economic conditions causing havoc in our economy, which has come to depend too much on the inflow of funds for passports.
While noting that a sizeable budget surplus is forecasted for this year and 2020, the report also warned that a sharper than expected slowdown would affect fiscal revenues. It highlighted two other risks to fiscal planning – the introduction of Gesy which would certainly put a strain on public finances and the expected court rulings on the pay cuts, imposed in public service during the crisis, that could leave the state owing many hundreds of millions in back-pay to public employees. These are real risks for which some contingency plans should have been made as they would seriously jeopardise efforts to lower the public debt. Instead of offering compensation to bank bondholders and Laiki depositors as well as state assistance to people not repaying their house loans through Estia scheme the government could have saved funds to protect the economy in the event of conditions changing.
The government response to the report, predictably, ignored the warnings apart from those about the still high level of NPLs. It conceded that reforms for the modernisation of the civil service and local government were necessary, but also pointed out that the reform of the justice system, highlighted by the report, was already under way. It would do well, however, to heed the following advice of the report. “The high public debt underlines the importance of a continued prudent expenditure management to firmly anchor the downward path of public debt, in line with the requirements of the Stability and Growth Pact.”
The government could do much better in this respect.