There should be no concerns over public finances, Finance Minister tells CNA

Finance Minister Makis Keravnos has said there should be no concerns over the state of public finances in Cyprus amid rising public spending, noting that fiscal discipline and primary surpluses “are the rule in the Finance Ministry.”

In an interview with CNA, Keravnos also highlighted the need for fiscal discipline for an outward-looking economy, such as Cyprus, noting that fiscal targets are on a four-year horizon.

Moreover, Keravnos said he awaits more actions by commercial banks in terms of absorbing the cost of rising interest rates, as well as steps concerning deposit rates. He acknowledged that banks may have excessive liquidity but noted that lending rates cannot constantly rise while deposit rates remain idle.

No concern over public finances

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Replying to a question whether, given the rise in public spending and the approval of two supplementary budgets so far, Cyprus will achieve its target over 2% fiscal surplus by the end of the year, Keravnos said fiscal planning is drafted on a four-year horizon as requested by the European Union and noted that supplementary budgets are provided for by law.

He said that the last supplementary budget amounting to €361 million includes a large amount of €60 million to cover increased Cost-of-Living Allowance (COLA) following the new agreement between the social partners, that €25 million was allocated by the previous government over the purchase of a new building that will house the Ministry of Labour, whereas €116 million was covered by inter-governmental transactions.

“Therefore, excluding COLA, we are roughly at the same levels of the previous budget,” he said, pointing out that government expenditure is accounted for on a continuous basis while weighing public revenue.

But the Minister stressed that “there should be no concern that the public finances may get out of control, besides, the government’s policy over fiscal discipline is long-standing while primary surpluses are the rule in the Finance Ministry.” Primary surpluses are the government balance excluding debt servicing expenditure.

According to Keravnos, the government plan provides for a reduction of public debt of close to 60% of GDP until 2026 and a primary surplus of just below 3%.

“This is the course so far,” he added, recalling that the EU Institutions, the IMF, and the European Stability Mechanism, which is Cyprus’ largest individual lender, have reviewed the economy deeming that “Cyprus can repay its €6.3 billion debt, has judged Cyprus as a reliable partner and that the Cypriot economy is on a very good path to respond to all its international and European obligations.”

Concerning economic growth, Keravnos said that the growth may have decelerated compared with the previous year but remains three times higher than the EU average estimated at 1%. The Finance Ministry projects a 2.8% growth rate this year.

“Therefore we are on a good course but this deceleration in growth is justified as economic growth in 2022 was driven by the opening of the economy after two years (due to Covid-19) with consumers wishing to satisfy their needs while a high inflation of 8.2% has been recorded,” he explained.

Keravnos noted that headline inflation is around 3.2% but core inflation remains high, at 4.9%, driven by the continued war in Ukraine, creating problems in price increases.

Responding to the disappointment expressed by the Fiscal Council because it was not briefed to express views on the supplementary budget, the Finance Minister said the Council will be briefed to express its views, noting that the Ministry was under pressure to conclude the budget swiftly and submit it to the Parliament before its summer recess.

Noting that expressions of disappointment were not necessary, Keravnos said he considers the Fiscal Council as a partner and an advisor and that there “is shared understanding of targets over the government’s fiscal policy.”

Furthermore, Keravnos said that it is encouraging that the rate of the ECB rate hikes is declining, noting that he has made “constructive interventions,” in the Cypriot banking system, banks, and the Association of Cyprus banks “to highlight their corporate social responsibility as large corporations to absorb part of the cost stemming from rising interest rates.”

“I have seen some positive moves by the banks which I certainly commend but I must say that these are not satisfactory and I expect all banks to continue this positive approach absorbing even more portion of rate hikes and at the same time to see some changes in deposit rates as well,” he added.

Commenting on data published by rating agency, DBRS Morningstar suggesting that Cypriot banks have registered the lower pass-through rate of ECB rate hikes to depositors in the EU, Keravnos acknowledged that Cypriot banks have excessive liquidity.

“I see a hesitancy (by the banks) to pay deposits rates, not to increase their deposits, but lending rates cannot increase constantly while deposit rates remain stable, I expect some actions soon before it would be necessary to have a discussion with our banks,” he went on to say.

Asked about the government’s target over the planned tax reform, Keravnos said we believe it is time to proceed with a new tax reform after twenty years, as “times have changed, the structure of the economy has changed and we should proceed to a reform which weighs the contemporary model of the economy and the development prospects.”

He said the state is looking forward to new sectors, such as the transition to a green economy, green taxation, and digitisation.

“The aim of the reform should be a transparent simplified system with the least possible red tape while the system should encourage doing business while being socially fair at the same time,” he said.

As he noted the reform should be “a type or domestic income distribution mechanism while targeting the reduction of tax evasion and tax avoidance,” being fiscally neutral.

He said that the reform will take years to conclude as the taxation legislation will be rationalised and overhauled but in the meantime, actions will be taken to facilitate the reform.

Keravnos recalled that the Ministry has assigned the University of Cyprus to prepare a study on the reform, utilising foreign experts, while the Institute of Certified Public Accounts of Cyprus (ICPAC) and other stakeholders will be engaged.

On the restoration of the EU fiscal rules by the end of the year after their suspension due to the Covid-19 pandemic, Keravnos said Cyprus is in favour of the restoration of the Maastricht criteria, namely the target of 60% in public debt and the 3% deficit rule but noted that Cyprus understands the position of some countries over a smoother approach to this normalisation.

“But we will not allow decisions that may lead us to deviate from strict fiscal discipline, our country is a small open economy and these rules cannot be violated and that is why we have prepared a four-year plan that by 2026 will lead as to this normalisation,” he said.

Measures should be temporary

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Furthermore, the Finance Minister said that the Council of Ministers will take a decision concerning the reduction of excised duties on fuel prices as well as a government subsidy on electricity prices, inflated due to the surging oil prices triggered by the war in Ukraine.

Recalling that these measures should be temporary, Keravnos said that fuel prices have declined to levels lower than March 2022.

Therefore, proceeding with the extension of these measures “is not justified in any way,” he said.

But he said the policy of the government is to examine the impact on vulnerable groups of the population “and this will be weighed in the discussion in the Cabinet tomorrow”

On the electricity prices, he said that the government “will evaluate a subsidy in electricity prices through the Electricity Authority of Cyprus for the vulnerable groups and how they are affected and this will determine our decisions.”

According to the Finance Minister, tomorrow the government will also approve a bill on the creation of a special jurisdiction in the District Courts to examine cases of non-performing loans collateralised by primary residences worth up to €350,000. The bill will be tabled to the parliament which is discussing a proposal that would allow non-performing borrowers to request from Courts a suspension of foreclosures on the grounds of disputing the volume of their loans.

Both the Finance Ministry and the Central Bank have warned about possible negative consequences to the Cypriot economy if the Parliament proposal is approved, pointing out the approval of the special jurisdiction law.

Keravnos said he absolutely agrees that approval of the parliament proposal “will create many problems without exonerating the borrowers from their obligations.”

Noting that the continued suspension of foreclosures during the years of the pandemic has not solved the problems of borrowers creating additional charges instead, Keravnos said a horizontal suspension of foreclosures will only inflate the problem.

“Everybody knows the problems that will be created from a horizontal suspension in foreclosures and when serious problems to the economy are created the average groups and average workers will foot the bill as happened in the past. Therefore, cautious moves are necessary to avoid any populism which offers absolutely nothing to the average groups and simple workers,” he concluded.

(Source: CNA)