Finance Minister Constantinos Petrides sought to strike an upbeat note on Monday, saying that economic output is forecast to shrink by about 7 per cent this year, while the public debt – though inflated – can be managed.
He was speaking to MPs at the House finance committee, where he and the labour minister were summoned to give an overview on the state of play in the economy amid the downturn linked to the coronavirus situation.
Based on data to date, the government projects a drop in GDP of just under 7 per cent by the end of the year.
But in 2021 the economy is expected to rebound by 5.6 per cent; this, however, will depend on external demand.
Unemployment meanwhile will range around 9 per cent at year’s end. According to July data, joblessness in the eurozone was at 7.9 per cent (6.9 per cent in Cyprus), and 7.2 per cent in non-eurozone EU member states.
On the public debt, Petrides said it currently stands at 120 per cent of GDP, but is likewise expected to fall next year for two reasons: first, an increase in GDP itself and, secondly, more recent government borrowing on low interest rates will be used to pay off previous borrowing secured at higher prices.
Debt forecasts are within the parameters set by the government, the minister asserted. Despite being high, Cyprus’ public debt is manageable – it is currently the seventh highest in the EU for 2020, from the sixth highest that it had been in 2019.
The fiscal deficit is set to come to 4.3 per cent of GDP in 2020, although over the past 15 years there have been six during which that number was higher, Petrides noted.
He explained that the government is working on a four-stage economic recovery plan, designed to gradually return to fiscal surpluses.
The first stage runs from March until the end of the year, during which period the government implemented 85 support and relief schemes related to the coronavirus.
The second stage will involve a “stabilisation and readjustment of expenditures” during 2021.
In the third stage, Cyprus will tap some €1bn from the EU recovery fund, aimed at restarting the economy.
But the EU cash comes with strings attached. Cyprus must first implement a series of reforms, including in the public service, local government, legislation governing development projects, and the justice system.
Over the past few years, Petrides observed, Cyprus has suffered from “reform fatigue” due to the political cost involved.
“There need to be reforms, and the government and parliament must be the drivers behind this,” he said.
Going into more specifics, the minister left open the possibility of extending a current guarantee against evictions.
But he all but ruled out further extending a moratorium on property repossessions – which resumed this month.
“We must safeguard the banking sector so as to avoid the slippery slope.”
The government is also not in favour of extending the suspension on loan installments scheme, even though banks can opt to do so on their own initiative.
The suspension on loan installments scheme – designed to give debtors some relief – expires at the end of the year.
Weighing in on the home repossessions issue, central bank governor Constantinos Herodotou said he was against granting a further grace period, since most of these loans concern debtors who’ve been uncooperative for too long.
Currently 45 per cent of non-performing loans (NPLs) are five years or more in arrears, and a further 32 per cent are over seven years behind. This metric is the worst in Europe.
Herodotou said EU authorities have indicated they are wary of the “debt delinquency culture” in Cyprus.
And given that an economic rebound is forecast for next year, extending the moratorium on repos does not make for sound policy.
“We will only give [credit rating] agencies the excuse to consider that a part of these loans will also turn non-performing in 2021,” the central banker said, warning that this would adversely impact Cyprus’ sovereign credit score.
For her part, Labour Minister Zeta Emilianidou said the various government support schemes have been taken up by 190,000 employees, 25,000 self-employed persons, and 54,000 businesses.
The total cost of the schemes comes to €460 million.
Emilianidou fired a warning shot, hinting at sanctions against employers who benefited from the support schemes but who are found to fire workers.
She recalled that beneficiary businesses are bound to not issue termination of employment notices until the end of December.
“After December, they will be able to do so.”
Support schemes for workers would continue until October. Between October and March 2021, hotels and other businesses associated with tourism will enroll in government schemes concerning the full suspension of operations.