Finance Minister points to external and internal risks for economy

Finance Minister Makis Keravnos has presented the 2025 state budget and the 2025-2027 medium-term fiscal framework before the parliamentary committee on financial and budgetary affairs, pointing to various important external and internal risks for the economy.

He also briefed the parliamentarians on the priorities to maintain a surplus fiscal balance, projecting that the surplus will reach 2.7% of GDP in 2025, and the public debt will drop to 60% of GDP, compared to the forecast 68.9% in 2024.

Other priorities include green transition, digital reform and necessary structural reforms and upholding a sound financial system and the conditions for sustainable development in key sectors.

He said that this is a development budget with significant social benefits, which is balanced and weighs the uncertainties of the geopolitical environment and creates security for the continued good course of the economy.

The Finance Minister said that the main risks include non-performing loans (NPLs) of previous years, as well as the serious deficits in the pension funds of semi-governmental and local government authorities.

According to figures, 32 funds record a total deficit of €500 million. Situation in 5 semi-state organizations with a deficit of 275 million euros is particularly worrying and the biggest problem is recorded at state broadcast corporation, CyBC, which has a deficit of 123 million euros.

Assets of municipalities and community councils record deficits that exceed 199 million euros, putting significant burdens. Keravnos expressed particular concern about the progress of the reform in the local governments. Finance Minister also expressed concern over potential tens of millions in damages that could result from court rulings, as well as EU sanctions for non-compliance with environmental directives i.e on urban sewage management.

The developments in Vasiliko terminal were also underlined by the Minister with possible compensations that the Republic of Cyprus will be asked to pay, amounting to up to 529 million euros.

Keravnos however noted that the Republic received a positive response in the contacts it had with the European Investment Bank and the European Bank for Reconstruction and Development, as well as by the European Commission.

We were told that if we go ahead with the projects at Vasiliko, there will be no demand for repayment of the funding amounts for the project, he said.

The Finance Minister also told the MPs that we need to continue financing the State Health Services Organization, whose deficit for 2024 is predicted at 95 million euros, while the total annual burden for salaries reaches 300 million euros. He emphasized the need to rationalize and implement the relevant strategic plan that was drawn up.

Geopolitical risks from the crisis in the region and burdens from increased migrant flows were also mentioned, with costs estimated at €204.5 million in 2024. External risks such as climate change and natural disasters and farmers' compensation, as well as the need to purchase water due to water scarcity are also among major challenges.

Keravnos said that the outlook of the Cypriot economy are positive. In 2024, a growth rate of 3.7% is expected, while for 2025 growth is forecast at 3.1%.

In the social sector, the budget foresees a significant strengthening of social benefits, with expenditures of 6.32 billion euros for the three years 2025-2027, with the main sectors being health, education and social welfare. Unemployment is on the decline, forecast to fall below 5% in 2025, which will create conditions for full employment.

The Minister noted that the assessment of the economy is at the investment level by all rating agencies, adding that the banking sector is robust, showing a capital adequacy of 26.8%.

Budget revenues excluding borrowing revenues are estimated at 10.3 billion euros in 2025 and expenditures including loan repayments and interest at 12.9 billion. euro.

The Minister also noted the continuation of the effort to contain the state payroll in the 2025 budget by utilizing a study by the International Monetary Fund and other individual studies and actions to shape a new employment set-up in the public sector.

He noted that employment in the public sector increased in the education sector, as well as in Ministries and Deputy Ministries dealing with critical issues, while he emphasized that the Government's strategy is to cover the needs by filling permanent positions.

Despite the increase in previous years in public sector positions with a peak in 2024, when the increase reached 705 people, the Minister said that in the 2025 budget there is a reduction of 8 positions.

He noted, however, that downsizing the public service is difficult when the European Commission is constantly deciding on new institutions and new obligations, which, especially for small countries, are unaffordable to respond to.

He added that the issue will be discussed in the EU Trio Presidency and a better response from the EU is expected.

The total social benefits in the budget amount to 6.32 billion euros. These include health benefits of €2.7 billion and various social welfare benefits, namely Guaranteed Minimum Income (GIE) of €611 million, education benefits of €600.2 million, child benefits of €396 million, social pensions 320.2 million, grants to pensioners 287.4 million euros and housing benefits at 277.6 million euros.

The most important projects planned are mainly in the field of infrastructure, health, culture and green development. Particular emphasis is placed on digital transformation, with e-government projects and the development of smart cities.

In the energy sector priorities include the liberalization of the electricity market. The Ministry is also promoting the implementation of interest rate subsidy plans for young people and families with income criteria. At the same time, the strengthening of funding for treatments abroad and the installation of air conditioners in schools, is being promoted.

Cyprus is also preparing for the presidency of the European Union in 2026, with the preparation being intensified in 2025 with an expenditure of €1.7 billion.

With regard to the tax reform, Keravnos said that the development is expected to be completed in 2024 and a meeting is set for next week to evaluate progress.

Regarding measures to tackle peak in prices and the high electricity cost the Minister said that situation is under evaluation and monitoring and measures are being decided and announced.

About COLA, the Finance Minister said that changes need to be made in the way it is allocated. He added that they are in cooperation and collaboration with social partners to find a way to contribute to the equal distribution of income and improve the position of the underprivileged groups.

(Source: CNA)