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The passage of the government’s first austerity plan last Friday hiking the pension contributions of civil servants and implementation of other measures that are supposed to achieve some cost savings was a step in the right direction, but the outlook remains bleak.
The first matter of concern is the comment by the Attorney General that the unions have the right to challenge the bill because it violates terms of employment. If this is really the case and unions in fact decide to overturn the vote at the Supreme Court, then the whole effort will be for nothing.
All eyes are now turned to the government’s second austerity plan, which is scheduled to be tabled before parliament on September 15. Perhaps the opposition parties may agree to hike the VAT rate from 15% to 17% if the government manages to include more broad based cost cutting measures, but the revenue targets are not guaranteed since VAT generates income when consumption is high.
Cost cutting is certainly the correct decision on tackling the problems with the fiscal situation which unfortunately has gone out of control, but without growth, the country risks following the path of Greece, which is in constant need of additional austerity measures and cost cutting plans.
The prospects for rejuvenating the economy however are bleak following the belt tightening undertaken by the government and all businesses, which combined with the tragic accident at Mari and the destruction of the Vassiliko power plant, means that Cyprus is most likely to record a recession in the third quarter which started in July and ends in September.
With more belt tightening under way and increases in taxes as well as contributions, consumer spending is also likely to edge lower as a result of lower disposable personal income, which does not bode well for the crucial Christmas shopping season and hence for the final quarter of the year.
The newly appointed Finance Minister, Kikis Kazamias has won the respect of both government supporters and opposition parties for his resolute action in shoring up public finances, which may still be successful, but he should give as much attention to kick-starting the economy, otherwise he will need to come up with more austerity plans to cover the deficit.
The major problem facing Kazamias is the dismal situation of the banks, which together with the government are the root cause of the economy’s problems. While the Christofias government is to blame for doing nothing and for missing countless opportunities to shore up state finances, the banks are to blame for first screwing up their own balance sheets with reckless lending and bad investments and now for taking the major blame for the constant rating downgrades, very high borrowing costs and lack of liquidity to lend to the broader economy.
Kazamias has got to find a way to inject money into the economy. The best way is to lure foreign investors by offering them major concessions to come and invest in projects. The other alternative is to proceed with a second tax amnesty in the hope that some money still not declared may go legitimate and put to use. Let’s hope Kazamias acts as fast to boost the growth rate as he did with coming up with the austerity plans.
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(Shavasb Bohdjalian is an approved Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10. The views expressed above are personal and do not bind the company and are subject to change without notice. Investing in markets and trading on leverage is highly risky and it may not be suitable to all investors since it carries a high degree of risk and you can lose more than your initial investment)
