Petrides: 'Things will be difficult in the coming years'

The government will continue supporting households, especially the vulnerable, amid rising inflation, Finance Minister Constantinos Petrides said, warning that tackling inflation is difficult due to its structural nature amid the Ukrainian crisis.

In an interview with CNA, Petrides said the government's intention is to extend the reduction of excise duty on fuel and the reduction of VAT on electricity bills possibly for another three months depending on the evolving situation and the capacity of public finances.

Petrides is pessimistic about tackling rising inflationary pressures which, he said are not only fuelled by the Russian invasion of Ukraine but also by the EU’s push towards green transition as well as the sanctions imposed by the EU against Moscow. In that respect, the Ministry will reconsider reprioritizing public investments in infrastructure projects so that the state budget ceilings will not be breached due to the sizeable price increases in raw materials.

He cautioned that “things will be difficult in the coming years” and highlighted the importance of maintaining fiscal buffers.

“Economy is not a game. The economy warrants sincerity and prudent management and governments that engage in populism are dangerous as we have seen in the past in Cyprus,” he said and went on to note that “I hope the next government will follow a prudent way in  management both for us and our children with no populism and policies which may seem satisfying in the short-term but may prove destructive in the future.”

Furthermore, as Cyprus has so far failed to acquire any disbursements from the National Recovery and Resilience Plan, Petrides said that losing these grants, which the economy and future generations need, “would be a crime.”

Responding to a question on rising inflationary pressures in the current economic environment, Petrides acknowledged that tackling them is difficult due to their structural nature as energy prices will continue to rise fuelled by geopolitical tensions but also by the EU’s push towards growing green energy.

“What we are trying to do is to alleviate the consequences as much as possible, especially for the vulnerable,” he said, recalling that so far the government has taken measures amounting to €150 to €160 million.

However, he cautioned that as inflation continues, fiscal buffers will be depleted, noting that economic support is a “painkiller and not the cure.”

The Finance Minister described the tackling of inflation with policy measures as “a curse”, saying that “we have taken a series of measures which may refuel inflation.”

As he noted, despite EU guidelines for targeted measures for a limited time, the government has taken horizontal measures.

“We will continue to do so and will extend these measures for some months. I cannot say for how long, possibly for another three months, and we will see depending on our buffers and how the situation evolves because more difficulties will emerge for the vulnerable,” he said.

We should not sanction ourselves

Furthermore, Petrides said we are close to seeing double digits in inflation rates, noting that the oil embargo on Russia, the ban on Russian oil supplies or the transport of Russian energy, will create more inflationary pressures.

Asked about the sixth package of sanctions against Russia, Petrides said Cyprus supported the first package of EU sanctions, but the country later followed a more assertive stance “to protect the interests of the country and its economy.”

“Because the essence of the sanctions is above all to inflict more cost to those who the sanctions are imposed on and not to you. If the cost of sanctions is higher on you, then you are imposing sanctions on yourself. And unfortunately, some of the results we’ve seen in the sixth package but also some points in the fifth package, have deviated from this principle,” he said.

Cyprus considers reprioritizing infrastructure projects amid rising prices

Asked whether the government is considering changes in its development projects, amid the new conditions caused by the Ukraine crisis, Petrides said this could be necessary.

“Currently we are discussing this internally and in the coming days I will ask the Ministries to reprioritize infrastructure projects on the basis of new developments because when there are increases in raw materials and energy reaching up to 30%, it could result in a deviation from the budget ceilings significantly,” he said.

Furthermore, with regard to Cyprus’ national recovery and resilience plan, the Finance Minister said it would be a crime not to utilize the funds amounting to €1.2 billion.

The disbursement of funds from NextGeneration EU is linked with conditions set by the EU for reforms. So far Cyprus has lost the first disbursement target of €85 million, due to disagreements in Parliament over the reform of the management framework of non-performing loans.

Moreover, Petrides said that despite the crisis, the Ministry maintains the target of reforming Cyprus' tax administration, including increasing corporate tax, noting that the government will meet the 2023 deadline.

“Our intention is not to collect taxes, this reform will be (fiscally) neutral,” he said, adding that due to the current situation the government may reassess the offsetting measures to be given to businesses to cover the rising costs resulting from the increase of corporate tax.

Responding to a question about whether the crisis provides any silver linings, Petrides said the current crisis may reverse globalization, as the crisis creates the need for production points that are closer to areas of demand.

“This crisis marks a new economic era and I would not say that it offers any opportunities, things will be rough,” he said. “But in a prudent way we need to adjust our economic policies,” he noted.

Cyprus, he added, should pursue private investments which could deal with inflation issues in the medium-term through rising income and output.

He said that the Recovery entails a large number of cofounded projects that would mobilize private investments amounting to €1.5 billion apart from the grants amounting to €1 billion.

The Minister also referred to the strategy aiming to attract talent and high earners from abroad and the relocation of enterprises in Cyprus.  “We see huge interest from high tech companies and other large companies to relocate in Cyprus, to pay taxes, to bring employees who will spend,” he pointed out.

“This should be our response in the medium term, if this is an opportunity, let's see it as such, but we are entering a very difficult juncture that will last.  Businesses and foreign investments should operate in the best possible way and this should be our response as was the case in 2012,” Petrides concluded.