Cyprus: Dealing with Worsening Cost of Living Problems

With the rate of increase of consumer prices rising further to 8.8 per cent over the 12 months to May 2022 and costs for the Government and businesses at extremely high levels an increasing number of households and employers including the Cyprus government are facing increasing financial difficulties. In this respect there is concern on whether the Cyprus authorities really understand the gravity of the inflation situation which threatens livelihoods, worsens inequalities, and could undermine financial and social stability? Or they don’t really care and are just focused on policies to influence the outcome of the forthcoming Presidential election?

Developments and Prospects

As a result of their incomes rising at more modest rates of three to four per cent on average over the last year households have suffered large losses in real purchasing power. And coping with inflation is much more difficult for poorer families, who have less flexibility to adjust their spending in response to rising prices. This is especially true right now in Cyprus when inflation is concentrated in essential categories like basic foods, electricity and fuel. Indeed, it is estimated that poorer families spend higher proportions of their income on such items than the average consumer and are facing annual rates of inflation of at least 11 per cent.

Given the likelihood that consumer prices will continue to rise over the coming months, while employee incomes stagnate and payment of social benefits lag, even lower middle-income households are likely to experience financial problems as they deplete their meagre savings. Indeed, by mid-2022 an employee with a monthly wage of 1,500 euro probably lost around 1,500 euro in real purchasing power over the past 12 months. And as the heat of the Cyprus summer and electricity charges inevitably rise many households and businesses may be forced to cut back on air conditioning and other essentials.

Furthermore, a large number of businesses, particularly those in the construction, manufacturing and agricultural sectors, are experiencing higher costs of electricity, fuel and raw materials which they cannot pass on and are likely to curtail their operations and lay-off employees, threatening livelihoods in the process. And there is the question of whether many enterprises in the hospitality sector will survive after the tourist season unwinds in the absence of substantial government support.  

Policies

It is argued that surging inflation in Cyprus is caused mainly by higher import prices including skyrocketing freight charges and that little can be done, at least over the short-term, to reduce the historically high prices and costs hurting households and businesses. This may be true, but at least households and businesses most adversely affected by surging inflation should be assisted with targeted Government financial support, with the European Commission stating categorically that governments should provide assistance to vulnerable groups so as to provide a cushion against high energy costs.

Rather misleadingly the Minister of Finance Constantine Petrides argues that the government does not have the financial resources to provide substantial support to vulnerable groups and businesses. Yet the Government in part because of much higher VAT receipts is recording budget surpluses and had at end-April 2022 over 5.5 billion euro (24per cent of GDP) in deposits or reserves at the Central Bank and commercial banks. It appears that Government is just reserving these funds to use for political purposes. In addition, the government has collected sizable revenue under the emissions trading system (ETS), which should be used mostly to protect vulnerable households and ensure that energy poverty is not aggravated. Unfortunately, the ETS revenues in Cyprus are being used to finance other budget expenditures.

Thus, it is disturbing that the supplementary budget of May 27 only devoted a pitifully low 103 million euro or 0.4 per cent of GDP on measures for dealing with the cost of living crisis. The government must show more concern for the livelihoods of vulnerable households and businesses by using much more of its available resources in providing financial support to protect them from the ravages of inflation.

However, Government financial support will be hardly sufficient to protect households, especially those dependent on low private sector incomes, from being forced to lower their standards of living. Sizable wage increases should be given to most employees, particularly to lowly-paid workers in the private sector. Many private sector enterprises including large supermarkets, pharmacies, health clinics and petroleum companies have been able to protect their profits from inflation by passing on higher costs in price increases for their customers. Surely, these enterprises should help their employees to protect families against inflation by raising their wages!

But many employers argue that they cannot afford to raise the compensation of their employees because they cannot pass on their higher costs. In this situation businesses such as certain ones in the agricultural and livestock sectors should have their costs including wage expenses partly subsidized so that they can maintain the supply of essential products such as cowmilk at reasonable prices.  And in other areas of the economy such as in construction where there is an oversupply of apartments and commercial offices and where building contractors cannot pass on their huge increase in costs, and have not the capacity to pay higher wages, operations should be ceased temporarily and workers laid off and made eligible for unemployment benefits.

 Furthermore, it is contended that the provision of cost-of-living adjustments (COLA) to wages and salaries would allow incomes to keep pace with the rise in consumer prices. However, as only around 40 per cent of employees in Cyprus are eligible for COLA and cover mainly the broad public sector and banks its implementation in 2022 would serve to widen income inequalities and discriminate against the many lowly-paid workers in the private sector. It would be preferable to target the most vulnerable groups and employees in essential economic activities with financial support rather than deploying the limited government resources to pay COLA to the more highly-paid public sector employees.  

Moreover, the Government has an obligation according to Article 9 of the Cyprus Constitution to prevent as many of its citizens as possible from descending into poverty and in this connection needs to legalize and generalize a minimum, yet livable wage. This should comply with the recent deliberations of the European Council in setting rules for the payment of adequate minimum wages with the EU claiming that “a minimum wage of 1,000 euro will greatly help the groups at risk of poverty in Cyprus”.

Furthermore, serious efforts need to be made to bring more persons working exclusively in the very large informal economy into the formal sector so that they can obtain social benefits and hopefully secure at least minimum wages. Accordingly, forms and procedures for making applications for social benefits as well as for submitting tax returns and making social security payments should be simplified and be promptly processed by a more efficient public service.

Need for Greater Government Resources

All these recommendations and demands on the government that aim at dealing with the worsening cost of living crisis would place overwhelming pressure on the limited government resources.  This means that the Cyprus government will require much greater resources including competent employees to finance and efficiently  allocate sufficient social welfare assistance and real development expenditures compatible with that of an advanced European country. Accordingly, as repeatedly recommended there is an urgent need for reform of the increasingly regressive tax system and an overhaul of the grossly inefficient and corrupt tax administration so as to raise not only much greater tax revenues, but also to markedly reduce large wealth and income inequalities. Those persons and companies with the greater ability to pay taxes should be effectively financing  the increased assistance to vulnerable groups and lower income employees. Undeniably, it would be most inappropriate for the government to borrow large amounts in international markets to finance expenditures needed to cope with the worsening cost of living problems as this would just accentuate financial instability and widen intergenerational inequalities since younger persons would be burdened with future higher tax payments.