Geopolitics most likely to threaten implementation of 2017 budget

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By Stelios Orphanides

The implementation of next year’s government budget is threatened mainly by external risks related to uncertainty in European Union’s economy, including the euro area, geopolitics and the decision of British voters to leave the UK, the finance ministry said.

“The economic environment in the EU and the euro area continues to remain relatively unstable, which includes uncertainty related to Greece, with probable consequences for the Cypriot economy,” the finance ministry said in its strategic budgetary policy framework 2017-2019. “Geopolitical developments in the surrounding eastern Mediterranean region, including the refugee crisis and developments in the conflict between Russia and Ukraine, remain fluid causing uncertainty about the course of EU member states’ economies, including that of Cyprus as well as that of Russia. On top, a probable exit of the UK from the EU is expected to unfavourably affect the both the UK and EU economy with ramifications for the Cypriot economy”.

Still, the finance ministry which aims at generating a fiscal deficit of 0.6 per cent of economic output next year compared to 0.4 per cent in 2016, does not rule out that risks related to banks could again threaten economic recovery and ultimately the successful implementation of the budget.

“Ongoing challenges to the banking sector as a result of the still high ratio of non-performing loans” plus “contingent liability which may arise from litigation pending at courts both at home and abroad concerning decisions of the financial institutions resolution authority as well as government decisions as part of fiscal consolidation measures” may also threaten the implementation of the budget.

Still, the framework created to encourage borrowers and lenders to engage in loan restructuring talks in order to help reduce non-performing loans which roughly make out half of the Cypriot banks’ portfolio, “offers appropriate incentives,” the finance ministry said. “The effective implementation of the restructurings code of the central bank and the creation of units tasked with the management and recovery of loans in arrears at banks, the implementation of legislation on the sale of loans and the existence of an insolvency and foreclosure framework among others, are positive developments expected to support towards resolving the problem”.

The finance ministry also said that “a slowdown of the reform effort or a relaxation of fiscal policy” could also threaten the implementation of the budget.

The government which gave up in 2015 its plans to privatise power producer Electricity Authority of Cyprus before being forced by political opposition to ditch a draft bill that would allow the creation of Cyta Ltd which would take over the state-owned telecom’s operations as part of a commitment to privatise it, currently concentrates its reform effort on a bundle of bills to overhaul the public sector.

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