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Fiscal Council: ‘public finances stable, no immediate risks’

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The Cyprus Fiscal Council on Friday said that it expects increased pressures on the macro economy for 2023, with forecasts slightly more unfavourable than those of the Ministry of Finance, in its report for 2022, published on Friday.

The council did note, however, that the restraint of expenditure and the management of the public debt so far, has put Cyprus on a satisfactory footing, for the time being, assuming there will be no policy change.

Specifically, the council made note of the inherent resilience that the Cypriot economy continues to demonstrate, with real GDP growth, despite its relative stabilisation at a lower level, continuing to be positive.

Based on the council’s favourable scenario for 2023, it expects a GDP growth of 2.4 per cent, compared to the 3 per cent expected by the Ministry of Finance.

Moreover, the council noted that the Cypriot economy has, to a large extent, absorbed the challenges created by inflationary trends and disruption in supply chains.

However, the council explained that growth is forecast to slow down, mainly due to external factors, for the next 18 months, mainly in the construction and non-tradable services sectors, despite all the significant increases in economic activity, which managed to hold down employment in the first quarter of 2022.

The council also noted that inflation has reduced household disposable incomes but boosted spending, particularly in retail.

For 2023, according to the council, inflation is expected to be limited to 3.8 per cent, compared to the estimates of the Ministry of Finance, which are at 3 per cent.

“With the stabilisation of prices in key costs for the economy, including energy, a de-escalation of price increases is expected,” the council said.

However, contractionary monetary policy, with interest rate hikes, translates into increased costs and increased credit risk, which implies a reduction in aggregate domestic demand at a time when it is also expected to decrease.

“Public finances continue to radiate stability and in the scenario of the continuation of the current policy mix, no immediate risks are apparent in the near term,” the council stated.

“However, in the medium term, it will be necessary to reverse the trends in government spending, otherwise the only alternative will be to increase productivity so that the benefit of society and the economy corresponds to the costs they bear for the maintenance of the government machine,” it added.

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