IMF predicts a return to fiscal surpluses for Cyprus following the pandemic

Cyprus’ public finances will return to surpluses in 2023 which will continue until 2027, the IMF said in its Fiscal Monitor 2022 issued on Wednesday.

The IMF projects that following the deficits recorded in the Covid-19 pandemic and the correction of 2021 and 2022, Cyprus' public balance will register a surplus of 0.9% of GDP next year. The budget surplus will increase at 1.3% in 2024 followed by a surplus of 1.6% in 2025 while the surplus will amount to 1.7% in 2026 and 2027.

According to the Fiscal Monitor, Cyprus' primary balance (excluding debt servicing expenditure) from a surplus of 0.1% of GDP in 2021 will continue its upward trajectory. In 2022 the primary surplus will reach 1.2% of GDP and accelerate to 2.3% in 2023, 2.6% in 2024, 2.8% in 2025 and 2.7% of GDP for the years 2026 and 2027.

The IMF also projects that following the high of 115% of GDP in 2020 due to large debt issuances during the Covid-19 pandemic and the reduction to 103.9% in 2021, Cyprus’ gross public debt will continue declining to 93.6% this year and will drop further to 87.5% in 2023. According to the Fiscal Monitor, Cyprus' gross debt will decline to 80.2% in 2024, and 76% in 2025 and will drop further to 71% and 66.2% in 2026 and 2027 respectively.

According to the IMF, Cyprus' revenue as a percentage of GDP will stabilize at around 42%. Following the rise to 42.4% of GDP in 2021 (from 39.3% in 2020) Cyprus' revenue will reach to 41.9% in 2022 and 2023. Public revenue will reach 42.2% of GDP in 2024 and will amount to 41.8%, 41.1% and 40.7% in 2025, 2026 and 2027 respectively.

Public expenditure as a percentage of GDP will reach 42.4% in 2022 (after 45% and 44.1% in 2020 and 2021 respectively) and will decline to 41% in 2023. Revenue as a percentage of GDP will continue to decline pushed by the GDP increase in the following years. Public revenue will amount to 40.9% of GDP in 2024 and 40.2% in 2025, 39.4% and 39% in 2026 and 2027 respectively, the IMF added.

This year’s Fiscal Monitor titled “Helping people bounce back” said that as evident during the pandemic and the global financial crisis, fiscal policy can be active and powerful, if resources are available.

“Building fiscal buffers in normal times is a prerequisite for policies to respond flexibly during crises without jeopardizing access to financing,” the IMF added.

The IMF notes that prioritizing policies and programs is increasingly vital as governments operate within tighter budgets, adding that top priorities are to ensure everyone has access to affordable food and to protect low-income households from rising inflation.

“Faced with long-lasting supply shocks and broad-based inflation, attempts to limit price increases through price controls, subsidies, or tax cuts will be costly to the budget and ultimately ineffective,” the IMF said pointing out that governments should allow prices to adjust and provide temporary targeted cash transfers to the most vulnerable. “Price signals are critical to promote energy conservation and encourage private investment in renewables,” the Fund.

Vitor Gaspar, Director of the IMF’s Fiscal Affairs Department, said in the context of high inflation, high debt, rising interest rates, and elevated uncertainty, consistency between the monetary and fiscal policy is paramount.

“In most countries, this means keeping the budget on its tightening course,” he added.