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Our View: Prompt action can deal with slowdown of the economy

averof
File photo: Averof Neophytou (Photo: Christos Theodorides)

The latest economic data released by the statistical service on Wednesday were rather disappointing and although some negative trends were recorded, they did not justify the doom and gloom scenarios voiced by opposition politicians. The economy is not in irreversible decline yet and the negative trends shown in the first six months of the year can be fixed, or at least brought under control with timely measures.

For instance, the decrease in the rate of growth recorded in the second quarter – down to 2.3 per cent, compared to 3.2 per cent in the first quarter – should have been expected given the uncertainty affecting the world economy and the high interest rates aimed at tackling inflation. These are not conditions for a high growth rate, and it was inevitable the Cyprus economy would eventually record a slowdown of 0.4 per cent from the first to the second quarter of the year.

A contracting GDP affects public finances, a point made by both former finance minister Constantinos Petrides and Disy deputy Averof Neophytou who expressed concern about the latest indicators. When GDP contracts so does state revenue putting public finances under strain. In the second quarter of this year state revenue was €283 million less than expenditure; the deficit for the six months was €126.3m because of the surplus of the first quarter.

“The reduction of the GDP is always a precursor of a crisis,” said Neophytou on Thursday, echoing Petrides’ view, who explained that it would have a big impact on public finances, the public debt, and the evaluations by ratings agencies; this could also increase the cost of borrowing by the state. These dangers exist, but they can be tackled if the government brings its spending under control. Is it capable of doing so?

Since Nikos Christodoulides came to power, despite paying lip service to the need for fiscal discipline, state spending has been on the rise. There have been increases in state handouts, a higher CoLA was paid in the public sector and there are plans to hire another 2,000 public employees. This is inelastic spending which cannot be reduced when state revenue decreases and there is pressure to balance the books.

This is the predicament the government finds itself in and the big question is whether it will show the necessary political will to fix things now, before the situation becomes more difficult to manage. Its record so far, which consists of pleasing everyone, does not inspire much confidence, which is why political pressure must be applied.

But who will do this apart from a few isolated politicians like Neophytou and Petrides? When the government, quite rightly, decided to end the subsidy of all electricity bills and the tax reduction on fuel a couple of months ago, the biggest critics of the move were the two opposition parties – Disy and Akel. It would be unforgivable if the government allows the manageable economic problems to veer out of control, because no party dares to call it to account for its high spending.

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