Fiscal Council: Construction sector growth will not continue indefinitely

Fiscal Council President Demetris Georgiades has said that there has been an improvement on public finances and the stabilisation of the banking sector, adding however that there is still a long way to go in regards to reforms.

At the same time, he warned that one of the most significant risks the economy is faced with is the “very low or even negative savings which we have in Cyprus throughout the years.”

Georgiades who was presenting on Thursday the Autumn Report of the Fiscal Council said that in 2018 and 2019 the risk of diverging from fiscal rules is “limited” while stressing the need for establishing a mechanism for future debt repayments, despite projecting that the public debt will have a satisfactory downward trend.

“There is a small possibility, if revenue is mainly derived from the construction sector, if it does not prove to be permanent and if we create certain permanent expenditures in the government that in future – not now – an issue arises as regards the expenditure benchmark,” he said, adding however that this will be looked into at a later stage.

Referring to the construction industry, Georgiades sent a message that one should not believe that its rapid growth will continue indefinitely, because in the end there will either be no more land left to build on or our cities will no longer have the capacity to maintain the extra population, or even that foreign organisations will intervene “who believe that incentive schemes for the sector should either be modified or stop.”

“We should not consider revenue from this sector as permanent and start to create permanent expenditures. This is a mistake we made in the past, from the end of the 1980s,” he pointed out.

The Fiscal Council’s President also noted that on the basis of primary surpluses Cyprus has and given that there will be no differentiation to its fiscal policy or any significant shocks from abroad, “it is projected that Cyprus’ public debt will follow a satisfactory downward course.”

He expressed the Council’s estimate, which is also based on IMF projections, that by 2029 public debt may drop below 60% of GDP.

Georgiades also stressed however the need to establish a mechanism which will commit either part of current reserves or part of primary surpluses towards public debt repayments.

He further announced that the Fiscal Council together with professors Andrea Consiglio of University of Palermo and Stavros Zenios of University of Cyprus will cooperate to develop a model which will spot dangers in public debt in time to take the necessary steps.

Georgiades also presented World Bank, EU and International Transparency data which as he said show that Cyprus has problems with its education sector,  health sector, bureaucracy, delays in issuing titles, a slow justice system.  He added that improvements have been made on public finances and the stabilisation of the financial sector. 

There is still a long way to go on reforms, he underlined.