The government will continue supporting households and especially the vulnerable amid the rising inflation, Finance Minister Constantinos Petrides had told CNA, warning that tackling inflation is difficult due to its structural nature amid the Ukrainian crisis.
Cyprus is among those countries that have taken the most drastic measures due to rising prices, Minister of Finance Petrides also told journalists on Thursday after the Famagusta Business Forum entitled «Business in time of crisis».
The government will continue supporting households and especially the vulnerable amid the rising inflation, Finance Minister Constantinos Petrides had told CNA, warning that tackling inflation is difficult due to its structural nature amid the Ukrainian crisis.
In an interview with CNA, Petrides said the government’s intention is to extend the reduction of excise duty on fuel and the reduction of VAT on electricity bills possibly for another three months, depending on the evolving situation and the capabilities of public finances.
Petrides is pessimistic about tackling rising inflationist pressures which, he said are not only fuelled by the Russian invasion of Ukraine but also by the EU’s push towards the green transition as well as the sanctions imposed by the Union against Moscow. In that context, the Ministry will reconsider reprioritising public investments in infrastructure projects so that the state budget ceilings will not be breached due to the sizeable price increases in raw materials.
He cautioned that “things will be difficult in the coming years” and highlighted the importance of maintaining fiscal buffers.
“Economy is not a game. The economy warrants sincerity and prudent management and governments which engage in populism are dangerous, as we have seen in Cyprus in the past,” he said and went on to note that “I hope the next government will follow a prudent management both for us and our children with no populism and policies which may seem satisfying in the short-term but may prove destructive in the future.”
Furthermore, as Cyprus has so far failed to achieve any disbursements from the National Recovery and Resilience Plan, Petrides said that losing these grants which the economy and the future generations need “would be a crime.”
Responding to a question on the rising inflation in the current economic environment, Petrides acknowledged that tackling inflationist pressures is difficult due to its structural nature as energy prices will continue to rise fuelled by geopolitical tensions but also by the EU’s push towards the green growth.
“What we are trying to do is to alleviate the consequences as much as possible, especially for the vulnerable,” he said, recalling that so far the government has taken measures amounting to €150 to €160 million.
However, he cautioned that as inflationist pressures continue, fiscal buffers will be depleted, noting that economic support is a “painkiller and not the cure.”
The Finance Minister described tackling inflation with policy measures as “a curse” as “we have taken a series of measures which may refuel inflation.”
As he noted, despite EU guidelines for targeted measures for a limited time, the government has taken horizontal measures.
“We will continue to do so and will extend these measures for some months. I cannot say for how long, possibly for another three months, and we will see depending on our buffers and how the situation evolves because more difficulties will emerge for the vulnerable,” he said.
Furthermore, Petrides said we are close to seeing double digits in inflation rates, noting that the oil embargo on Russia, the ban on Russian oil supplies or the transportation of Russian energy, discussed on a European level will further create inflationist pressures.
Asked about the sixth sanctions package, Petrides said Cyprus supported the first EU sanctions packages, but it followed a more assertive stance “to protect the interests of the country and its economy.”
“Because the essence of the sanctions is above all to inflict more cost to those who the sanctions are imposed on and not to you. If the cost of sanctions is higher on you, then you are imposing sanctions on yourself. And unfortunately, some of the phenomena we’ve seen in the sixth package but also some things on the fifth package, have deviated from this principle,” he said.
Asked whether the government is considering changes in its development projects, amid the new conditions caused by the Ukraine crisis, Petrides said this could be necessary.
“Currently we are making this project internally and in the coming days I will ask the Ministries to reprioritise infrastructure projects on the basis of the new developments because when there are increases in raw materials and energy reaching up to 30%, then we could deviate from the budget ceilings significantly,” he said.
Furthermore, with regard to Cyprus’ national recovery and resilience plan, the Finance Minister said it would be a crime not to utilise the funds amounting to €1.2 billion.
The disbursements of funds from NextGeneration EU is linked with conditions set by the EU for reforms. So far Cyprus has lost the first disbursement target of €85 million, due to disagreements in the Parliament over the reform of the non-performing loans management framework.
Moreover, Petrides said that despite the crisis, the Ministry maintains the target of reforming the Cyprus tax regime, including increasing corporate tax, noting that the government upholds the 2023 timeline.
“Our intention is not to collect taxes, this reform will be (fiscally) neutral,” he said, adding due to the current situation the government may reassess the offsetting measures to be given to businesses to cover the rising costs due to the increase of corporate tax.
Responding to a question about whether the crisis provides any silver linings, Petrides said the current crisis may reverse globalisation, as the crisis creates the need for production points coming closer to the areas of demand.
“This crisis marks a new economic era and I would not say that it offers any opportunities, things will be rough,” he said. “But in a prudent way we need to adjust our economic policies,” he noted.
Cyprus, he added, should pursue private investments which could deal with inflation issues in the medium-term through rising income and output.
He said that the Recovery entails a large number of cofounded projects that would mobilise private investments amounting to €1.5 billion apart from the grants amounting to €1 billion.
The Minister also referred to the strategy aiming to attract talent and high earners from abroad and the relocation of enterprises in Cyprus.
“We see huge interest from high tech companies and other large companies to relocate in Cyprus, to pay taxes, to bring employees who will spend,” he pointed out.
“This should be our response in the medium term, if this is an opportunity, let’s see it as such, but we are entering a very difficult juncture which will last and businesses and foreign investments should operate in the best possible way and this should be our response as was the case in 2012,” Petrides concluded.
