(Updates with additional reaction in 13th paragraph)
By Stelios Orphanides
A day after the fiscal watchdog warned of serious risks threatening the economy, the government on Thursday stunned business groups by agreeing in talks kept secret from the public with unions SEK and PEO the gradual reversal of pay cuts in the wider government introduced six years ago.
“Pay cuts affect(ed) workers and pensioners in the wider public sector,” Andreas Elia, secretary of OIO-SEK, a division of SEK representing workers at state-owned corporations such as the telecoms company Cyta said. “They were imposed in December 2012, and with a second bill in 2013, in response to the crisis and avert a further deterioration. After thirteen quarters of economic growth, it was necessary to discuss restoring salaries which was the labour movement’s declared policy”.
Elia, who was commenting in an interview to state radio CyBC said that the unions were in consultations with the finance ministry “for some weeks now” in order to reach an agreement before the May 31 deadline agreed in October expired.
“We are satisfied that there was a conclusion within the timetable,” Elia continued adding that the fact that the economy’s largest employer is sending a message to the society and labour institutions in both the private and public sector.
The agreement, expected to be signed within the coming days providing for a five-year implementation period, benefits workers in the local administration, state-owned companies, hourly paid workers and school committees, who saw their wages reduced up to 16 per cent as part of an attempt to curb the government’s inflated payroll. In December 2015, three months before Cyprus completed its adjustment programme agreed with international creditors in exchange for a bailout, the parliament rejected a government bill to overhaul human resource management in the public sector.
In January last year, the unions and the government signed an agreement introducing the economy’s nominal growth rate as a cap for pay rises in 2017 and 2018. Still, unions threatened to strike months before the presidential elections which compelled the government to consent to initiate a dialogue after the elections in exchange to labour peace.
On June 2, 2017, Finance Minister Harris Georgiades who reluctantly agreed to resume at the helm of the finance ministry after President Nicos Anastasiades won a second term, told delegates at an OIO-SEK conference that the economy urgently needed modernisation as it could not operate in the same framework as in the past after conditions had changed.
The government which temporarily reduced public debt last year to below the 100 per cent mark for the first time since 2012, was forced into issuing €2.4bn in bonds in favour of the state-owned Cyprus Cooperative Bank which in turn led to a new general government debt peak of €20.8bn. The government generated last year –when the economy expanded 3.9 per cent– a fiscal surplus of 1.8 per cent of gross domestic product (GDP) and is expecting to post a surplus of 1.7 per cent this year and in 2019, when the economy is forecast to grow 3.8 per cent.
Cyprus has a non-investment grade sovereign credit rating and its banks are struggling with a €22bn non-performing loans mountain. On Wednesday, the Fiscal Council warned that the government should stick to fiscal discipline and utilise the currently favourable economic environment to press on structural reforms in the areas of pensions, education public administration and justice and privatise state-owned companies. The economy’s competitiveness is still suffering and relies on investment inflows from the government’s Golden Visa scheme as the European Central Bank (ECB) is likely to phase out its accommodating monetary policy, the advisory body tasked with monitoring the drafting and execution of fiscal policy said.
A finance ministry source confirmed the deal but said the exact fiscal impact was unknown at this point as the agreement was still not finalised.
Also talking to CyBC, a representative of the Cyprus Chamber of Commerce and Industry (CCCI), said that the business group was surprised by the news of the agreement, which came days after it had expressed its satisfaction for the generation of a budget surplus of €425m in the first four months of the year on a cash basis.
“We disagree with this decision; it goes in the wrong direction and it will cause fiscal problems,” Marios Tsiakkis, secretary general of the CCCI said adding that the pay cuts were agreed with the troika to be permanent, which finance ministry officials also confirmed.
“These cuts were made because the state could not afford the unsustainable public payroll and this correction came to contain it within what the economy could afford,” Tsiakkis said and added that the annual fiscal impact of the agreement will be up to €45m resulting in a cumulative impact of €265m a year.
Combined with incremental pay increases earned by seniority and compensation for purchasing power lost to inflation, the public payroll is expected to increase by €400m a year.
“This alone sends the message that we enter again the vicious circle of fiscal deficits,” he said.
Another business group, the Industrialists and Employers Federation said that the public wage bill remained considerably higher compared to the euro area average even after the 2012 pay cuts, now reversed.
Fiscal surpluses should serve as a cushion to protect the economy in the case of unforeseen developments upsetting the government’s budget plans, the group known by its Greek acronym OEV said in a statement on Friday.