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Our View: Reassuring that finance minister is aware of the looming dangers to public finances

Finance Minister Constantinos Petrides

Although inflationary pressures have been evident in the last couple of months, they were largely ignored. When the 38 per cent increase in the electricity rates hit the news, the government announced a 10 per cent discount for four months, funded by EAC reserves, and everyone seemed to think that rising prices would be under control.

In the last week, when livestock farmers started complaining about soaring grain prices as well as shortages and started having meetings to decide what should be done, it was realised that rising prices were a much broader problem. Grain prices had increased by about 50 per cent and would inevitably push up prices of milk and dairy products, bread and all wheat products as well as meat. The higher electricity and car fuel costs would add to the inflationary pressure.

Akel tried to blame the grain shortages and higher prices on the closing down of the Cyprus Grains Commission by the Anastasiades government, which was simplistic and wrong. It also argued that if the Commission’s silos had not been closed there would be reserves that would help keep prices under control. But grain reserves, which should be kept under an EU sanctioned law passed last March, would have postponed the price rise for four or five weeks at most. What would happen after that?

EU agriculture ministers proposed this week that livestock farmers should be given state assistance to help them through this difficult period, until the higher production costs could be passed on to consumers. In short, higher prices for consumers are a given, making the assurances by Finance Minister Constantinos Petrides that the inflation was ‘transitory’, rather difficult to comprehend. Would the disruption of the supply chain that has led to higher food prices and freight costs be overcome soon?

It could be argued that the global inflationary pressures do not only stem from the disruption of supply chain, but were sparked by the quantitative easing by central banks in their effort to protect jobs and limit the downturn in economies caused by the pandemic. In the last few months high consumer demand has driven growth and while this was beneficial to the economy it also helped push prices up.

In short, we will have to adapt to the higher prices of essential goods, changing our spending patterns to make ends meet. We have had many continuous years of relative price stability – deflation at times – but it was not going to last forever, and certainly not after 19 months of pandemic-inspired deficit spending by governments. Living standards will probably decline but we hope unions will resist the urge to demand pay rises in order to ‘maintain workers’ purchasing power’ because this would make a bad situation worse.

Ten days ago, the Sek union federation declared that one of its main objectives was the re-introduction of the Cost of Living Allowance, which fuels inflation and erodes competitiveness through the automatic indexing of wages. Such calls could become louder in the coming weeks and months and could also be embraced by the political parties, which have already started talking about measures to support low-income households, ignoring the fact that public finances are at their limits after 19 months of support schemes for individuals and businesses.

Petrides is aware of the dangers posed to public finances by an extended period of inflation, which could lead to a rise in interest rates and would increase the cost of servicing an already high public debt. Even if interest rates are kept at relatively low levels by the ECB – unlikely given Germany’s fear of inflation – this does not mean the Cyprus government would be able to carry on borrowing at the low rates of the last couple of years.

“In order to stay a step ahead of these risks we must have a policy that leads to a reduction of public debt because you never know how things will be tomorrow,” Petrides warned on Thursday, explaining that things changed from day to day and nothing could be taken for granted. It is reassuring that the finance minister is aware of the looming dangers to public finances and by extension the economy.

We hope there is a government plan for reducing the public debt and for keeping in check wage demands because we are entering a period of uncertainty in which the primary objective must be to keep inflation at manageable levels and prevent it from eroding the country’s competitiveness.

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