Georgiades sees expects almost 3% growth rate this year

18/10/2016
Finance minister Harris Georgiades said that Cyprus’s economy may expand at a rate of up to 3 per cent this year, after growing a revised 1.7 per cent in 2015, and may continue to grow at a rate ranging between 2.5 per cent and 3 per cent in the medium-term, the Cyprus News Agency reported on Monday.

 All individual and secondary indicators confirm that our economy is recording strong growth,” Georgiades, who addressed lawmakers of the finance and budget committee to present the government’s 2017 draft budget, the Cyprus News Agency reported. Cyprus’s economic growth rate this year is one of the highest growth rates in the European Union.

Growth is driven by primary productive sectors of the economy, tourism, services, shipping, retail trade, and construction, which was hit the hardest, he said, adding that “only growth can create opportunities and jobs, lead to a further reduction of unemployment and strengthen social cohesion. All our efforts and planning ultimately aim at strengthening, encouraging (economic) activity and establishing a sound growth rate”.

The current year will be the last in which inflation rate remains in the negative area, and in 2017 consumer prices will slightly increase, he said, and added that negative inflation helped the economy recover faster. The current account balance is expected to improve next year, he continued.

Georgiades said that the marginal deficit of the 2017 government budget, the first drafted following the completion of Cyprus’ three-year economic-adjustment programme, is caused mainly by the hiring of professional soldiers, partly offset by reduced borrowing cost.

Total government expenditure in the 2017 budget is increased to €7.1bn, which is 2.6 per cent above this year’s spending, he said. Revenue in 2017 is expected to rise 1.8 per cent to almost €7bn, more than offsetting the abolition of labour-related levies and immovable property tax.

The finance minister added that the proposed budget bill is the fourth consecutive which will be “essentially balanced”.

The government is projected to post a deficit of 0.4 per cent of economic output this year after generating a fiscal shortfall of 8.8 per cent in 2014 and 1 per cent in 2015, caused in both cases by support extended to the cooperative banking sector.

Following the fiscal derailment that preceded Cyprus’s bailout, the government’s aim is to maintain the budget balanced with a marginal fiscal gap in order to generate a primary surplus, which will help reduce debt to 105 per cent of the economy next year, from a current 108.3 per cent or €19.4bn. The finance minister’s 2017 debt expectation is more pessimistic relative to the 101.7 per cent forecast included in the finance ministry’s fiscal policy strategic framework prepared in May.

Georgiades said that public debt remains at a high level because of a cash cushion held by the government of currently 9 per cent of gross domestic product, which is expected to drop to 6 per cent. The cost of financing public debt fell to 2.7 per cent, he added.

The finance minister, who oversaw Cyprus’s market-access restoration after being shut out in 2011, fiscal consolidation following the derailment which ensued in 2009, and the return to growth after a prolonged recession, said that the unemployment rate will remain slightly over 12 per cent this year. Youth unemployment has dropped to 27 per cent, from a peak 40 per cent, while long-term unemployment rate is still at 5.6 per cent, down from 7.7 per cent.

In response to a deputy’s question on whether there is a cap in spending increase, Georgiades said that it is not the needs which determine the spending cap but the government’s ability to spend. “We need to maintain a structural public expenditure cap as a portion of gross domestic product,” he said, adding that the government spent 29 per cent of economic output in the 1980s, compared with 42.5 per cent in 2010.

“Spending cannot grow continuously and absorb an ever-increasing share of the GDP,” he said. While the government will maintain the general hiring freeze in the public sector with the exceptions passed by the parliament, when the freeze phases out in three-years’ time, the expected pick-up of the inflation rate combined with the inflation compensation granted to public sector workers may lead to an inflated public payroll, he said.

Georgiades repeatedly urged lawmakers to pass a bundle of proposed public sector reform bills submitted by the government 14 months ago to the parliament, which, inter alia, link public payroll to economic growth. Without that, Cyprus may face again the risk of fiscal derailment, he warned.

 

 


 

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