COVID19: Pandemic causes budget deficit until 2023

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Cyprus’ Finance Ministry forecasts a budget deficit until 2023, due to crisis support measures and a spike in public debt from borrowing to soften the impact of coronavirus.

The cabinet on Wednesday approved a state budget for 2021 that includes €600 mln in ‘emergency’ funds due to the pandemic.

Finance Minister Constantinos Petrides told reporters the €7.6 bln budget is based on the ministry’s latest scenario which sees the economy shrinking by just 5.5% GDP, compared to previous estimates of a 13% to 7% contraction.

The GDP growth rate in 2021 is expected to be 4.5%.

The budget has increased by €609 mln or 8.7% from last year, to €7.6 bln, due to measures to help workers and businesses through COVID-19.

“Measures will target vulnerable groups, employees and businesses, while at the same time strengthening their development,” said Petrides.

He said the budget is centred on sustainable recovery and job creation in the aftermath of the coronavirus outbreak.

“It is not an exaggeration to say the budget is an emergency budget, which needs to support the community and the economy during this difficult period while having an eye on the future”.

The Finance Minister added that the 2021 budget includes some projects aiming to boost green development, digital reform and research and innovation.

There are also funds in the budget for the health and defence sectors.

According to Petrides, the budget will have a marginal deficit, “but it will not endanger the sustainability of public finances”.

Regarding fiscal figures, a deficit of 4.5% is expected for this year (€929 mln), down from a surplus of 1.7% in 2019 (€389 mln) while smaller deficits are expected in the coming years, at 0.7% of GDP in 2021 and 0.6% in 2022.

The fiscal shock of the pandemic will trigger public debt to 115% of GDP in 2020 before falling to 111% in 2021, due to GDP growth despite the small deficit that will be created.

The Finance Minister said that growth in 2022 is projected at 3.5% GDP, while public debt is to drop to 102.3%.

Petrides said the unemployment rate will rise to 8% by the end of the year, up from 7.1% in 2019, it will drop to 7% in 2021 and 6% in 2022.

Government revenues are projected to rise to €8.86 bln in 2021 from €8.35 bln in 2020 while in 2022 they are expected to further increase to €8.96 bln.

Total expenditures will increase to €7.6 bln in 2021 from €7 bln in 2020.

Development expenditures are expected to increase to € 1.03 bln in 2021 from €950.3 mln in 2020.

During the next three years, some €3.2 bln is earmarked for development projects, another €4.9 bln for social benefits and €240 mln for e-government.

According to the Finance Ministry, the main budgetary risks are the possibility of another outbreak of the coronavirus in Cyprus, resulting in deteriorating economic activity.

Challenges are facing the banking sector due to the very high percentage of non-performing loans, and excessive costs that may arise from the General Health Scheme, if not properly managed and operated within its means.