FinMin highlights need for fiscal prudence amidst energy crisis

The need for a prudent fiscal stance which would maintain the necessary buffers that would enable government support to the vulnerable amid the current energy crisis, was highlighted during the 18th Economist Summit, with Cyprus’ Finance Minister warning that markets may “punish us if we are not prudent.”

“In this new era we are living we should take the sustainability of public finances very seriously…because spending will be necessary to support the vulnerable who are hit by the energy crisis,” Petrides said addressing the Summit’s afternoon session.

He said that “wrong policies fueled by populism” were made in other countries, recalling market reactions to economic decisions in the UK.

“From now on, we should expect extreme reactions by the markets which would punish us if we don’t proceed with prudence and consistency,” Petrides added.

Highlighting the importance of fiscal sustainability, Petrides said the government increased development expenditure sharply, supported the vulnerable but at the same time it delivers fiscal surpluses, public debt below 90% of GDP while Cyprus is the only country to receive rating upgrades.

“A few months before the elections the easiest thing for a Finance Minister and the government would be to channel some hundreds of millions for the sake of populism and the election campaign. We didn’t do that, we provide support where is necessary, we deliver a robust economy and the main tool for the coming government will be fiscal (buffers) and we hope (the new government) will manage it with the same prudence.”

He also noted that the growth recorded in Cyprus was not by chance, noting that Cyprus has become what for years has been just rhetoric, a hub attracting foreign technology companies.

Petrides stressed that “policy should be characterized by consistency and a growth vision and prudence in fiscal management because the coming years will be very difficult.”

He furthermore said that the government will not be submitting a green taxation by the end of the year, and called for the revision of the EU’ green transition due to the challenges facing the economy.

“We decided not to submit a green taxation by the end of the year, and I believe that on a European level green transition should be revised to reduce the consequences to the citizens who rightly are protesting the high energy prices,” Pertrides added.

Wim van Aken, the European Stability Mechanism’s head of mission for Cyprus, also stressed the importance of maintaining fiscal buffers as the economy is slowing down due to the war in Ukraine.

He noted that in the current energy and cost-of-living crisis the government has extended support which was contained and cautious which has contributed to the significant improved of Cyprus’ fiscal position this year.

“And continuing on this path, focusing on tailored temporary support for more vulnerable groups of the society, will ensure sufficient fiscal buffers remain in place to mitigate the impact of expected economic slowdown and future economic shocks that we don’t know yet,” he stressed.

On her part, Celine Gauer, head of the European Commission’s Recovery and Resilience Task Force, said that in the current environment the implementation of the Recovery and Resilience Plans by EU member-states is key for the recovery in the EU.

“In this difficult context, the implementation is the best asset that we collectively have to weather that crisis,” she said.

Gauer said the Commission is in the final stages of approving the first disbursement under the Cypriot Recovery and Resilience Plan and noted that the plan “is very much of good quality and abled to tackle the challenge the Cypriot economy is facing.”

Furthermore, Philippos Soseilos, the CEO of audit firm PwC was optimistic that Cyprus, with its small and open economy would weather the crisis as it did in 2013 and during the pandemic.

“The realisation for us in Cyprus is that our small size as an economy actually is indeed a great strength in terms of resilience and our extrovert nature and ability to continue to be connected with the outside world provides us with that bounce back possibility,” he said.

He also referred to Cyprus Vision 2035 plan to diversify the island’s growth model, aiming to render the island as one of the best countries to live and to business in.  “We know that we can be that country,” he said.

Moreover, Andreas Assiotis, Head of Retail banking in Hellenic Bank and Vice Chairman of Cyprus Economy and Competitiveness Council said that risk for stagflation is rising “fiscal policies should strike the right balance between supporting the monetary stance and protecting vulnerable households.”

On the long-term, Assiotis said that “only nations with long-term planning orientation looking for ongoing reforms which ensures resilience to adapt to unexpected events can successfully navigate through such unprecedented times.”

Referring to the Council’s long-term strategy, called Vision 2035, Assiotis said the strategy seeks the implementation of necessary reforms aiming to enhance the economy’s resilience and competitiveness and pave the forwards for sustainable trajectory of growth.

He said that the “strategy is not a theoretical exercise,” as it is linked with the state budget, it is accompanied by an action plan with practical recommendation and timelines and has ownership.