IMF Weighs in on Cyprus Economic Measures
In a recent visit to Cyprus, the International Monetary Fund (IMF) has provided a nuanced perspective on the country’s economic health and policy decisions. While acknowledging the resilience of the Cypriot economy, with an inflation rate hovering around 2 percent, healthy growth prospects, and a robust banking system, the IMF has expressed concerns over the government’s approach to economic support measures.
Finance Minister Makis Keravnos conceded that there was pressure from both the IMF and the European Commission to discontinue broad-based, or ‘horizontal’, financial measures. Despite this, the government has extended certain subsidies, such as the zero VAT on basic goods and the electricity bill subsidy, which now runs until the end of June. These extensions have come under fire from opposition parties and have been met with criticism from the IMF.
The IMF’s critique centers on the potential negative impacts of prolonged tax cuts and subsidies on public finances and inflation control efforts. The Fund specifically advised against extending zero VAT measures and recommended ending the electricity bill subsidy. Furthermore, the IMF has taken a firm stance against the Cost of Living Allowance (CoLA), particularly in the public sector, arguing that wage indexing adjustments could exacerbate inflation and strain public finances.
Despite these recommendations, Keravnos has suggested that the government’s measures are now targeted, a claim that seems at odds with the reality that 400,000 households and 100,000 businesses benefit from the electricity subsidy. The zero VAT policy also remains a general measure, despite assertions that it is aimed at assisting low earners.
The IMF insists that public sector wages should align with macroeconomic developments and productivity gains. This longstanding advice has historically been overlooked by successive governments. Keravnos mentioned that consultants might be engaged to help manage the public payroll, but whether this will lead to any substantive change is uncertain.
As Cyprus navigates these economic challenges, the government’s response to both internal and external advice will be critical in shaping the country’s fiscal stability and growth trajectory. The balancing act between supporting citizens through inflationary periods and maintaining sound public finances continues to be a delicate endeavor for policymakers.
