Urgent Call for Reduced State Borrowing from Cyprus Fiscal Council
The Fiscal Council, which serves as an economic advisor to the Cyprus government, has issued a stark warning about the state’s borrowing habits. According to the Council, the government’s reliance on the Social Insurance Fund (SIF) has escalated to a point where it now owes in excess of €10 billion, a situation that could potentially destabilize public finances without prompt and decisive action.
An actuarial study presented earlier in the week has prompted the Council to press the government to heed its recommendations. The study’s findings suggest that while the SIF can remain sustainable until 2062, thanks to employee contributions, and potentially until 2080 through its investment policy, the government’s debt levels are alarmingly high and could face pressure under adverse economic conditions.
“We agree with the findings of the actuarial study that should scenarios of adverse economic conditions prevail, the government and the Fund are very likely to face pressures simultaneously,” the Council stated, emphasizing the urgency of the matter.
Michalis Persianis, Chairman of the Fiscal Council, quoted by Kathimerini, highlighted that the concern is not so much with the sustainability of the Fund itself but with the costs associated with maintaining this sustainability. Persianis pointed out that to pay off its debt, the government will need to borrow more, thereby increasing public debt and exerting pressure on the state budget.
The Council suggests a gradual reduction of the state’s debt to the SIF and a review of the investment policy to achieve higher returns. This approach is supported by the new Sustainability Assessment Study for the Social Insurance Fund.
Economist Fiona Mullen of Sapienta Economics commented on the potential strain on public finances due to debt repayment obligations. She noted that from 2024, the government is scheduled to start paying 4.5% interest on its €10.7 billion inter-governmental debt to the SIF, with principal repayments commencing once the debt-to-GDP ratio falls below 60%.
Regarding SIF investment policy, Persianis mentioned that a strategic plan is recommended to revise current policies and achieve higher returns. The study suggests diversifying investments beyond government securities to enhance portfolio diversification and returns.
Discussions on these recommendations are anticipated soon at the Labour Advisory Body. However, issues such as the 12% penalty on early pensions and low pensions are still under consultation and were not addressed in this announcement.
Lena Panayiotou from Cyprus Employers & Industrialists Federation (OEB) expressed employers’ concerns over pension reform rather than immediate SIF sustainability. She emphasized the importance of developing an effective investment strategy for the SIF aimed at increasing reserves and boosting pensions.
The Fiscal Council’s announcement underscores the critical need for a strategic approach to managing state borrowing and investment policies to ensure long-term financial stability for Cyprus’s public finances and social security system.
