Minister of Finance Constantinos Petrides said Tuesday that the best way to address inflation is not by imposing additional taxes but investing in growth.
The Minister, who was replying to questions from the press on the sidelines of the IMH conference entitled "Europe in crisis: Dynamics and Implications for the Cyprus Economy", also said that Cyprus is not over-exposed to Russia and thus its banking sector is not affected.
Invited to comment on a Financial Times article that Cyprus is largely affected by the war in Ukraine, the Minister expressed disagreement with the view that Cyprus is over-exposed to the Russian factor saying that Cyprus’ banking sector is not as dependent as some abroad might think therefore the sector is not affected.
He pointed out that Cyprus' tourism sector will be affected to a degree, but said that there are a lot of efforts underway to include more and new markets, expressing conviction that the loss in the tourist sector will be covered to a large extent.
As regards inflation, he said that first of all we have to protect the vulnerable groups of the population and focus on attracting more investments, which will create and increase income and protect the purchasing power of the population in the medium and long term.
He recalled that Cyprus has a new growth model, which includes more than 200 actions, as well as a plan to turn Cyprus into an international business center.
"This program works and even in this very difficult time several companies have moved to Cyprus", the Minister said. He pointed out that the government will make efforts to protect the economy through development without imposing additional taxes, as is the case in other countries.
The Minister said that the main concern at the moment at international level is that with inflation there may be an increase in interest rates, which will create difficulties in repaying high debts, public or private.
For this reason, he added, many countries may increase taxes to protect their public finances, noting that Cyprus does not share this strategy.
Concluding the said that the government will act as it did in 2013 and instead of raising taxes will aim to growth.
Meanwhile, in his speech at the conference, the Minister said that "the Cyprus economy is affected of course through the loss of tourist revenue. As you already know about 20% of the tourist product was made up of tourists from Russia. Nevertheless, we are trying to gap the difference by establishing new routes. We have already achieved to establish about 35 new routes from European countries, thus mitigating the impact to a large extent".
He added that the provision of professional and consulting services to businesses of Russian origin may also be affected to some extent, through the reduction of turnover and profits.
In the banking sector, "we don’t expect a significant impact, given the minimal exposure of Cypriot banks to Russian entities and also to the fact that Russian deposits in Cyprus have been significantly decreasing in the past years. They just account about 3,8% of the total deposits. Furthermore, our banks are very well capitalized with ample liquidity, while Cyprus does not hold reserves of the Russian Central Bank".
He said that the most important risk is inflation and what comes with it. It is inflation and the future debt vulnerabilities, both in the private and the public sector.
"So, a challenge for managing inflationary pressures without putting at risk the viability of public debt, especially for countries with relatively high debt levels, like Cyprus, is a real challenge".
He recalled that during the pandemic Cyprus did increase its public debt. "Nevertheless, we were very careful not to overdo it. We are the country who in 2021 had repaid the highest amount of debt, equal to 20%. And we did manage to lower the public debt from its peak at 115.4% in 2021 to 103% right now. Because we were anticipating that things will not be in the future so easy for fiscal expansion".
"So, what is the government policy response to these challenges? Many countries are following the path of increasing taxation in order to safeguard the public finances due to the future risks and the future vulnerabilities. This is not what we did in 2013 and this is not what we will do now. Our answer is Growth, Growth, Growth. As high Growth rates as we can. Higher growth rates to increase incomes, more growth to increase the purchasing power, higher growth rates to create or sustain jobs," he stressed.
He said that we are well aware of the demonstrated flexibility and resilience of the Cypriot economy. "We came out of the crisis without raising taxes and now with the pandemic, we did manage to fully recover. We were one of the few countries that covered the lost ground in one year. The answer lies with our new growth model and economic philosophy. Open economy, entrepreneurship, ease of doing business, facilitating productive investments, more foreign direct investments, private investments".
He explained that this is the philosophy of our strategy named "Vision 2035" which includes more than 200 specific and targeted measures and reforms in all sectors of the economy, for attracting investment funds, in renewable energy sources, in health and education, even the primary sector and with a particular emphasis in transforming Cyprus into a regional Business Hub, particularly for the High-Tech Industry. "An industry whose value added can increase more than any other industry in relatively short period of time", he added.
In fact, he said, in recent years, a significant number of companies have established their base in Cyprus, having a real substance and thus contributing to the economy.
"We talked with many of them. We consulted them, we continuously heard them, we did try to work with them and we did work with them in establishing a new program. The most competitive program in the European Union. With introducing new tax incentives, with opening up the labor market to third country nationals and their families, with addressing immigration issues, with facilitating the establishment of both the new companies and their families to Cyprus," Petrides noted.
And this is one of the reasons, he continued, that recently, due to the war in Ukraine, we have seen even more companies coming to Cyprus.
"We do welcome them. And we do assure them that we will get rid of the remaining rigidities. We do have things to cover, there are still rigidities, we do still need some reforms but on behalf of the government I assure them that we will keep working with them in order to get rid of the distortions and the rigidities, in order to keep facilitating their operation and their productive presence in Cyprus" he concluded.