Cyprus Aims to Reduce Public Debt Below 60% of GDP by 2026 Amid Economic Challenges

Economists have raised concerns about the feasibility of achieving a debt ratio of 50% of GDP, warning that this target is difficult to attain and could bring additional risks. Despite these concerns, Cyprus’ Finance Ministry is determined to reduce the country’s public debt to below 60% of GDP by 2026, as stated by Finance Minister Makis Keravnos.

Commenting on the recent International Monetary Fund (IMF) report on the European economy, which includes references to Cyprus’ public debt, Keravnos attributed the ongoing reduction in debt to the government’s strong fiscal discipline and accumulated budget surpluses. “We ensure that we create these surpluses through prudent economic policies,” Keravnos said.

In an interview with local TV station Sigma, Keravnos highlighted the progress made in reducing public debt, noting that in 2020, Cyprus’ public debt stood at 77.4% of GDP, while it has since declined to 72%. “Our goal is to reduce it even further, aiming for it to fall below 60% by the end of 2026,” he added.

Keravnos emphasized the importance of this reduction, explaining that it would free up resources for development-oriented expenditures as interest payments and loan instalments decrease, leading to a further reduction in public debt. When asked if this would allow the government to implement social policies, Keravnos responded, “We are already implementing social policies. We are able to do so precisely because of the fiscal discipline that exists.” He also noted that as of May 2024, the government had allocated €730 million to social policies and mentioned that various cost-of-living measures would remain in effect until the end of October.

The IMF’s latest report projects that Cyprus’ public debt will decrease by 27.4% by 2029, reaching 50% of GDP, compared to 77.4% in 2023. This forecasted reduction is the third largest among 26 developed economies. The IMF also anticipates that Cyprus will achieve a primary surplus of 4% in 2024, which is expected to decline to 2.4% by 2029, contributing to a downward trend in debt and supporting economic growth. The report also suggested that stabilizing debt at the 2029 level, rather than continuing to reduce it, could be achieved with a small primary deficit of 0.9% of GDP.

However, economists are skeptical about the IMF’s projection of reducing public debt to 50% by 2029, citing the challenge of maintaining consistent growth rates of 3 to 4% over a prolonged period. Economist Tassos Yasemides, speaking to Philenews, pointed out that the IMF’s forecast relies on continuous economic growth, sustained surpluses, and the absence of unforeseen events that could hinder development. Yasemides acknowledged the impressive growth rates the Cypriot economy has experienced over the past two years, largely due to the influx and operation of technology companies on the island, but cautioned that this growth is unlikely to persist indefinitely. “It is difficult for an economy like Cyprus’ to continue growing at 3 to 4% annually,” he stated, adding that achieving a reduction in debt to 60%, as predicted by the Finance Ministry, would still be a positive outcome. “If we push to reach 50%, we may need to significantly reduce social spending, which could lead to other problems,” Yasemides warned.

Regarding the 2025 budget, Keravnos indicated that it would be based on the same principles as the government’s previous budget, emphasizing that it would remain “developmental, people-centred, and balanced.” The budget is expected to be presented to the Cabinet in mid-September before being submitted to the House for approval. Keravnos also noted that the priority is to maintain developmental expenditures, incorporate new projects, and curb medium-term inflexible spending to achieve an overall rationalization of the budget. “The goal is to ensure we can meet the new economic governance framework decided by the European Commission, which we are obliged to follow from this year,” Keravnos concluded.

By fLEXI tEAM