The Commission will not initiate an excessive deficit procedure against Cyprus

The Commission will not initiate an excessive deficit procedure against Cyprus

The steady recovery of the country’s economy, and the risks highlighted by the IMF

By Michalis Michael

The Commission will not open an excessive deficit procedure for Cyprus, despite the temporary increase in the deficit in 2018, announced today Commissioner Pierre Moscovici. In particular, with the presentation of the report on macroeconomic imbalances and country-specific recommendations, the Commissioner clarified, according to reports of CNA, that “with regard to Cyprus, our report records that the nominal deficit reached 4.8% of GDP in 2018. However, this was entirely due to the bank support measures, which were necessary for the maintenance of financial stability. In addition, both for the current year and for 2020, we forecast a significant fiscal surplus and a reduction in public debt. We therefore decided not to open an EDP, as there is no need for further adjustment and a process would add little value – and it would appear to be contrary to the citizens.”

In detail, the report on Cyprus states that general government gross debt exceeds the 60% of GDP reference value from 2011 and was reported at 102.5% of GDP in 2018. The Commission’s forecasts show a steady decline in debt in 2019, below 100% of GDP. Cyprus complied with the transitional debt rule in 2018 and it is expected that it will comply with the benchmark for debt reduction in 2019 and 2020. This means that the Treaty’s debt criterion is fulfilled.

According to the general government surpluses of 0.3% of GDP in 2016 and 1.8% of GDP in 2017, the general government balance in Cyprus reached the deficit of 4.8% of GDP in 2018, well above the Treaty reference value of 3%. In the absence of the extraordinary impact of the bank support measures by 8.3% of GDP, the general government balance would amount to a surplus of 3.5% of GDP in 2018. According to the Commission’s spring forecast for 2019 and the stability program, the general government balance is expected to return to a surplus of about 3% of GDP in 2019 and above 2.5% of GDP in 2020, in agreement and well below the reference value (by more than 5.5 percentage points of GDP).

The IMF report

IMF made their own presentation of the Cypriot economy, with a related report released yesterday. It stresses that the recovery remains strong, but the country needs to implement reforms and simultaneously handle the SICs.

In particular, the IMF refers to increased public spending and fiscal contingent liabilities which will result from the re-establishment of parts of wages that were cut during the crisis and from the higher-than-expected budgetary cost of implementing the National Health System (NHS). The combination of the two, it comments, could reduce the primary surplus and increase borrowing costs in Cyprus.

According to the IMF, the transfer from the banking system of the SICs of the Co-op bank and the securitisation of a large SIC portfolio (the transfer of the Co-op SICs to KEDIPES, amounting to 34% of the Cypriot GDP, and to the “Helix Plan” of the Bank of Cyprus, amounting to 13% of GDP or EUR 2.7 billion) has led to a significant reduction in SICs, leading to an upgrading of Cyprus’s credit standing in the investment grade.

The risks, it adds, stem mainly from contingent liabilities that may emerge from the still weak banking sector and from increased pressures on fiscal spending, that could undermine investor confidence, increase borrowing costs and reduce medium-term economic growth./ibna