Economists have warned that a debt ratio of 50 per cent is difficult to achieve and entails other risks

The Finance Ministry is aiming to reduce public debt to below 60 per cent of GDP by 2026, according to Finance Minister Makis Keravnos.

Commenting on the latest International Monetary Fund (IMF) report on the European economy, which includes references to Cyprus’ public debt, Keravnos credited the continued reduction in debt to the government’s fiscal discipline and the accumulated budget surpluses.

“We ensure that we create these surpluses through prudent economic policies,” he stated.

Speaking to local TV station Sigma, Keravnos highlighted that in 2020, Cyprus’ public debt stood at 77.4 per cent of GDP, whereas it currently stands at 72 per cent.

“Our goal is to reduce it even further, aiming for it to fall below 60 per cent by the end of 2026,” he said.

Moreover, Keravnos emphasised the significance of this reduction, noting that it would create room for development-oriented expenditures as interest payments and loan instalments would decrease, thereby reducing public debt.

When asked if this would enable the government to implement social policies, Keravnos said that “we are already implementing social policies”.

“We are able to do so precisely because of the fiscal discipline that exists,” he added.

He also pointed out that as of May 2024, the government had spent €730 million on social policies.

He also mentioned that various cost-of-living measures would remain in effect until the end of October.

It should be noted that the IMF’s latest report forecasts that Cyprus’ public debt will decrease by 27.4 per cent by 2029, reaching 50 per cent of GDP, compared to 77.4 per cent in 2023.

This projected reduction in debt during the 2023-2029 period is the third largest among 26 developed economies.

The IMF also estimates that Cyprus will have a primary surplus of 4 per cent in 2024, which is expected to decrease to 2.4 per cent by 2029.

This reduction is expected to lead to a downward trajectory in debt, as well as economic growth.

The report also stated that if the goal were merely to stabilise debt at the 2029 level rather than continue reducing it, this could be achieved with a small primary deficit of 0.9 per cent of GDP.

However, economists are sceptical about the IMF’s forecast of reducing public debt to 50 per cent by 2029.

This is due to the challenge of maintaining growth rates of 3 to 4 per cent over an extended period.

Speaking to Philenews, economist Tassos Yasemides said that the IMF’s forecast assumes continuous economic growth, ongoing surpluses, and no unforeseen events that could impact development.

Yasemides noted that the Cypriot economy has seen impressive growth rates over the past two years, largely due to the arrival and operation of technology companies on the island.

However, he cautioned that this growth is not expected to continue indefinitely, and growth rates are likely to slow down.

“It is difficult for an economy like Cyprus’ to continue growing at 3 to 4 per cent annually,” Yasemides said.

He added that achieving a reduction in debt to 60 per cent, as the Finance Ministry predicts, would still be a positive outcome.

“If we push to reach 50 per cent, we may need to significantly reduce social spending, which could lead to other problems,” he stated.

Regarding the 2025 budget, Keravnos noted that it would be based on the same foundations as the government’s previous budget.

“It will continue to be developmental, people-centred, and balanced,” he said.

The budget is expected to be presented to the Cabinet in mid-September before being submitted to the House for approval.

The Finance Minister also said that the priority is to maintain developmental expenditures, incorporate new projects, and curb medium-term inflexible spending to achieve an overall rationalisation of the budget.

“The goal is to ensure we can meet the new economic governance framework decided by the European Commission, which we are obliged to follow from this year,” he concluded.