FinMin: We are proud to deliver this economy

Through a responsible stance and with a prudent fiscal policy, we hand over to the next government an economy that has the reserves to address the great challenges we are living in, Finance Minister Constantinos Petrides stressed Friday at the 13th Limassol Economic Forum.

In his speech, Petrides analyzed the factors that have led Europe and the whole world to inflation and rising prices, such as the cost of the green transition and the war in Ukraine, and said that there are "tectonic changes in the economic field" and  a new era that has come to change everything we have known until now and that has led to "uncharted waters".

He said that the phenomenon of high inflation with possibility of that turning into stagflation has its roots to a variety of parameters. First of all, he said, it was the over accommodating and for many years, monetary policy with very low and even negative interest rates that even before the inflation had started creating the possibility of a bubble in the real estate. That is why the housing market is one of the biggest social problems faced in Europe right now, he went on to say.

The second reason, Petrides said, is the fiscal and accommodating policies followed during the pandemic. Savings were increased at the end in relation to the start, incomes were sustained by government intervention. Referring to Cyprus, he said that the intervention totaled to 2.3 billion euros.  

Another element that is creating inflation is the Green Transition and the taxes imposed on energy, while the fourth one is the invasion of Russia to Ukraine and the sanctions.

"Putting all these together has created this phenomenon that nobody actually anticipated. This new era that nobody had forecast. So these developments have created tectonic changes in the economic landscape".

The challenges, he said, are inflation and geopolitical instability.

"Nobody thought a few years ago that it was possible to have such a big scale war in Europe. And not just in Russia. We see the aggression on Turkey. We see countries that they have a history of neutrality wanting to join NATO. We see a huge increase in the military expenditure in many countries neighboring Russia or even Greece and Cyprus. And this has an economic effect".  

The third phenomenon, he said, are high energy prices that are there to stay no matter what happens with inflation and a new monetary era with more tight monetary policy.  

Petrides pointed out that the future depends actually on policy decisions adding that we should expect more extreme reactions from the markets from now on.

We should avoid the possibility of a recession he said, adding that this is why we do target on growth, we should accept the idea to have a tighter monetary policy and never the less the fiscal policy has to be coordinated and aligned with the monetary policy.

Populist voices about substituting the tight monetary policy with loose fiscal policy will have a catastrophic effect, he went on to say.

Referring to the Green Transition he said that Cyprus has increased expenditure on renewables from the national budget.

The year 2023, Petrides said, will be a more difficult year and "we do not know what 2024 holds. We cannot stand to have a downgrade of the economy. We have to convince the markets of our credibility".

An other issue, he said, is whether and what kind of more sanctions will be imposed on Russia and the course of war, adding that he believes that sanctions should always have an economic rational and not punish the one who imposes more that the one upon which is imposed. Finally, he said that the fifth policy is whether we have a policy on growth.

Regarding Cyprus and where the country stands, he said that Cyprus has one of the highest growth rates in the EU right now in the 1st semester of 2022, a growth rate of 6% that nobody had expected.

"Why? Was it coincidental?  No. It is because we have a new growth model that we had implemented for some years. It’s because the economy of Cyprus has diversified to new sectors, to renewables, to university education, to a rapidly growing sector into turning Cyprus to a regional business hub, IT sector. If you see the innovation scoreboard of EU we made a huge progress. We have a new tourist strategy. So it is not coincidental that unemployment is still very low and we have achieved high growth rates".

The Minister said that Cyprus has a targeted strategy and the past years, for the first time, the annual budget is drafted along the lines of the overall economic strategy and the growth model, a "model that we have designed carefully with the Council of Competitiveness and growth and with help from the University of Cyprus".  

"I am very proud that we deliver these economic fundamentals. I am very proud that despite that we supported the economy during the pandemic with 3.5 billion euros, despite the fact that after the pandemic we have supported the population and the enterprises, especially the socially vulnerable groups with another 390 million euros, we still deliver surpluses, still we deliver debt below 90%. And for this we and I personally take a political cost".

Petrides pointed out that "it would be the easier thing in the world for a Minister of Finance and a Government right now to take advantage of the escape clause of the EU and a few months before the elections to give billions of outlays. Will that be responsible knowing the challenges we have in the future and how the markets are behaving right now and knowing that we need to give to the next government the fiscal buffers to manage the economy? No, it would not be responsible".  

There are some who do not respect this position, he said, but stressed that "the future will show how correct the economic policy of this Government is."   

"We have proved the resilience of the Cypriot economy. We are the only country that received an upgrade in the past months from a credit rating agency at the time that most of them were receiving downgrades. We deliver a public debt at a sustainable rate because there is a big risk in the future with all the green expenditure needed, with social expenditure needed in order to help the vulnerable population".  

In addition, he said that there is a risk that many countries will be led to a sovereign debt crisis and this is something that worries many economies at European and global level adding that "personally I say it is coming."

He said that he is also very proud to see that "we are also delivering a social network, a welfare state much stronger than before with these economic fundamentals."

As far as the European economy is concerned, the Minister said that its course depends on the policy decisions and the rationality that will be followed within the next few years.

"We are in uncharted waters. We need to be rational, we need to be prudent and we should avoid populism and short term measures that we politicians like but in the end of the day they will be detrimental for the society. Basically the future depends on national and European policies and I do believe we should also reassess certain of the policies at EU level" he concluded.