Almost every time the council of ministers takes decisions on Covid measures it also sanctions more state spending on support measures, perhaps as a way of sugaring the pill of the restrictions placed on businesses and individuals. We witnessed this again on Wednesday when the government allowed the re-opening of gymnasiums as well as gyms and afternoon education centres with restricted numbers.
Finance Minister Constantinos Petrides informed us that cabinet had approved a supplementary budget of €250 million to cover expenses related to the pandemic. More than half of this, €140 million, would go to the schemes for supporting workers, businesses and unemployed that will last until the end of May, Petrides said. Some €60 million would go on vaccines, rapid tests, medicines and for the health ministry’s pandemic management needs. The remaining €50 million would be held in reserve to cover extraordinary needs caused by the pandemic.
This spending is never questioned or criticised because in Cyprus state spending, even when we cannot afford it, is considered a blessing. In fact, the only criticism levelled at the government by the opposition parties was that it was not spending enough to support businesses affected by the lockdowns. Nobody questioned the mindless spending of the Christofias government until state coffers had run dry because the money was supposedly going to deserving groups and boosting social coherence.
Now, there is some rational justification for the excess spending as it is protecting jobs and businesses adversely affected by the government’s measures to control the pandemic, which have wreaked havoc in the economy. The spending is also encouraged by the European Union, which has decided it is the only way out of the economic crisis caused by the pandemic and has made available billions in recovery funds. It has also suspended its fiscal rules until 2022, giving countries licence to spend to support households and businesses.
While the government is playing by the rules and has done quite well in restricting the impact of its measures, a little more caution would be advisable if only because Cyprus is starting from a more precarious position than most other EU countries. The public debt has shot up to 118%, well above its 2014 peak of 109%, and is the fourth highest in the EU, the average for which is 89.8%. Although the cost of public borrowing is very low, and the government has no trouble refinancing its loans, it should still be a cause for concern given the uncertainty of the times.
In last month’s report on Cyprus, Fitch credit rating agency kept Cyprus at investment grade (BBB-) with a stable outlook but pointed out that public debt to GDP ratio was well above the ‘BBB’ median of 53%. The report, which, on balance was positive, crediting the strong, pre-pandemic fiscal position of Cyprus (budget surplus of 1.5% in 2019) forecast the public debt to GDP ratio to fall below 100% in 2025.
An IMF mission, which also carried out consultations with the Cyprus government last month, found that Cyprus managed the Covid-19 pandemic shock relatively well. Despite the 85% decline in tourist arrivals, high unemployment and bankruptcies were avoided, the IMF noted, and although it forecast a 3% growth rate this year, it also highlighted that “high uncertainties overshadow the near-term economic outlook.” It also said that termination of the Cyprus Investment Programme could lead to a larger than expected drop in direct investment that would have a negative effect on economic recovery.
The government needs to take these warnings, however mild, on board and err on the side of caution because the uncertainties will remain as long as the pandemic is with us. In this environment of uncertainty, the other measure announced by Petrides on Wednesday – state guaranteed bank loans to businesses and the self-employed of up to one billion euro – might not be such a good idea because it has the potential of backfiring and adding to government debt.
In any other country this method of giving liquidity to cash-strapped businesses may have worked but given the Cyprus culture of not repaying bank loans it could develop into a big problem for the government. When the self-employed and very small businesses (for which €300 million is allocated in state-guaranteed loans) decline to repay these loans because they supposedly cannot afford to would the banks take measures or will the government pick up the bill, increasing the public debt? The banks will certainly not be in a position to take the hit while the parties will demand that no action is taken against the non-payers.
This is why the government should re-consider this measure. State finances have been stretched enough supporting businesses and households during the pandemic but some caution needs to be shown now because nobody can predict how the situation will develop. The last thing we need is for the government to end up with a debt to the banks of a few hundred million (some will repay the guaranteed loans), when the suspension of the EU fiscal rules ends.