Fiscal Council notes delays in implementing RRP commitments

Cyprus' Fiscal Council has noted significant and wide delays in the implementation of commitments related to the Recovery and Resilience Plan (RRP), in its interim report published this week.

The Council also emphasises that a "reformative mood with political courage" cannot be found in any of the strategic plans, describing this as a "significant omission", which should be addressed without further delay "and with more political will than has been demonstrated to date, both by the executive and the legislative branch", noting that failure to realise the seriousness of the issue is considered a medium-term risk that threatens public finances and reduces maximum growth potential.

The Fiscal Council notes that Cyprus' economy continues to record significant resilience despite ongoing uncertainty, with growth expected to remain close to 2.5%, with the Council's estimation at 2.4%, the Central Bank of Cyprus’ (CBC) at 2.6% and the Finance Ministry's at 2.8%.

In addition, it says that the data shows that the picture of the labour market will remain broadly stable, with a marginal increase in unemployment rates, but with a simultaneous increase in total employment, with the economy creating new jobs.

Credit risk remains high, partly due to increased interest rates but also due to continued uncertainty in the economy. The Council says that the slowdown in credit expansion is not currently a cause for concern but is putting pressure on growth. Furthermore, it notes that conditions of high interest rates and inflation lead to a redistribution of wealth in the economy.

Private consumption and forecasts of a recovery in tourism revenue are driving growth, while the technology sector will also be a significant contributor to growth.

Inflation is expected to decelerate significantly and move below 4% for the year, with justified hopes that it will be held close to 3.5%. The decline in fuel prices (-14.1% through May and -20% in June) has normalized the specific factor on inflation and a significant reduction in price volatility is expected by the end of the year, according to the Council. Furthermore, it notes that the reestablishment of fuel taxation to their normal levels, is expected to have a significant but transitory effect on inflation, which is not expected to continue after the beginning of autumn.

The fiscal picture currently remains stable, the Council adds, despite significant increases in spending. It notes that the assumption of power by a new government naturally and expectedly entails an increase in expenditure. "This phenomenon is common, but it does not cease to exert significant pressure on public finances, despite the continued increase in revenues," the Fiscal Council reports.

Fiscal Council's Recommendations

Regarding the RRP, the Fiscal Council notes that there are significant and wide delays in the implementation of the relevant commitments, noting that it is extremely important to speed up, both the government departments and agencies, as well as the House of Representatives, to fulfil the commitments received. The whole matter should be treated with a greater sense of urgency, the Council underlines.

Other recommendations of the Council refer to the introduction of the accruals-based accounting standard in the preparation and monitoring of the implementation of the state budget and the Medium-term Fiscal Plan, noting that this must be treated as urgent.

In addition, it notes that fiscal space should be maintained through a substantial reserve and continued year-end surplus to allow for social, developmental, and other important measures that may be deemed politically imperative within the year. It adds that the medium-term planning should consider the significant costs that will arise from 2024 onwards for the costs related to physical security as well as to the green and digital transition.

It also records the shift of government spending towards inelastic spending, which has a long-term and cumulative nature. "Thus, the fiscal space to finance flexible spending, including discretionary government spending, will erode over the coming years", it says, noting that the growth of inflexible spending as a percentage of total spending will need to be addressed before it comes to a degree that will force the political leadership to make difficult political and social decisions.

Finally, the Council states that it is considered very important to introduce measures for the digitisation of the Public Service in terms of its internal operation and procedures.