Budget: Cyprus maintains control over the effects of Ukraine

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The Republic, and in particular the Ministry of Finance, with the current data, maintains control and does not seem to threaten fiscal stability or sustainability, despite macroeconomic pressures regarding the effects of the war in Ukraine, the Budget Council said in a statement./b>

In particular, the Fiscal Council considers that the Ministry of Finance maintains control and there are no concerns about fiscal stability and recognizes the need for action, but these must be specific and targeted, for vulnerable groups and small and medium-sized enterprises. only.

He notes that the reduction, and especially horizontally, of pollutant taxes would be contrary to the needs of the Republic and the economy and should not be an option. Moreover, the Russian invasion has once again highlighted the need to strengthen our energy security and there are no primary issues from a Cyprus report to the Russian Federation or the ruble & nbsp; Stresses that there is uncertainty and that close monitoring of developments must continue.

The view of the Financial Council

The Council will continue to monitor developments Ukraine, as current uncertainty does not justify complacency about its macroeconomic implications.

Russia's invasion of Ukraine has created new data in relation to the world economy and in particular to the economy of our country, which continue to be duly evaluated by the competent Ministries and Undersecretaries of the Republic. It is clear that, in addition to the effects on tourism and fuel prices, and despite the stabilization of the Euro exchange rate after the first pressures, a general strengthening of inflationary trends in the economy should be expected and structural inflation is expected to record new growth. Already, in addition to hydrocarbons, there are increases in several essential goods, as well as some pressure on fares.

At the same time, international stock markets are under pressure and government bonds tend to be a haven for investors, as evidenced by generalized returns on yields, including, in part, Cypriot bonds. Clear trends, however, have not yet been formed. In addition, credit risk has increased significantly, both due to the Russian invasion and due to environmental changes.

The state of war in Ukraine leads to an increase in structural inflation & nbsp; with obvious negative effects on the development of the economy. In the light of these data, the Financial Council recognizes the need for & nbsp; to take measures, with priority given to households, especially vulnerable groups. At the same time, the need for support for small and medium-sized enterprises, which are facing rising prices, ongoing disruptions in the supply chain and the production chain, as well as increases in fares, raw materials, intermediate goods and many services, is being understood.

Any support for households and small and medium-sized enterprises & nbsp; It could be done with specific recipients and through an item which is calculated as a percentage of the increase in state revenues resulting from fuel prices, namely VAT. Thus, the amount of support for selected and targeted beneficiaries can be increased, with an ex-donor and a specified budget cost.

The ongoing attack on Ukraine also affects the needs of the Republic to continue on the declared path of reducing its pollutants as it brings to the fore even more strongly the already serious need to ensure the energy security of the country. At the same time, reducing pollution is not only an obligation of the Republic, but also a necessity in view of the economic nature of the threats that continue to pose.

For several years now, great and costly efforts have been made for the reduction of pollutants within the Republic, the promotion of Renewable Energy Sources and the energy efficiency of the place. These efforts should be intensified in the near future. We must therefore & nbsp; to avoid any horizontal tax cuts directly or indirectly related to pollutants, as they are contrary to Best Practices, & nbsp; counterproductive to the desired outcome and contrary to a number of other state practices, policies and expenditures. In general, non-discriminatory horizontal measures should be treated as distorted, wasteful and ineffective. & Nbsp;

Any relief from larger companies should take into account that they have an obligation to reduce their environmental footprint in the near future anyway. This obligation is not only not postponed but instead intensifies after the start of the war in Ukraine and its impact on the economy. Thus, reductions in their taxes, for example those related to pollutants, would be disincentive to the behaviors they would have to adopt and would be a long-term cost approach. In addition, the support could take forms that are more effective and which will promote the green transition which is a significant challenge for Cyprus, e.g. by accelerating the depreciation for the import of RES (photovoltaic), or selected and specific tax exemptions for specific investments.

However, given the general uncertainty that prevails, it is considered correct the intention of the Ministry of Finance not to proceed with an increase in taxes on pollutants at this stage.

Regarding specific sectors of the economy, and especially in tourism, the situation & nbsp; in Ukraine should continue to be closely monitored as the impact is expected to be significant in an industry that has already been hit in the last two years by a decline in its activities.

An important element will be the mitigation of the effects from alternative tourism sources that are sought today, while the credit health of the tourist units should be closely monitored in the coming weeks.

Immediate report to the Russian Federation and the ruble

We note that the Republic of Cyprus is not exposed to the ruble or Russian government debt and that effects from this parameter are not expected.

Respectively, we note the decrease in the exposure of the banking system to Russian citizens in the last decade, both in terms of credit and deposits, and we expect that from this parameter no significant effects on the financial system are expected. As it is clear, however, the overall credit risk is now higher and the possibility of credit contraction is real.

The monitoring of government bond yields, where even opportunities arise, under certain conditions. The ECB 's decisions will also have a significant impact, especially in light of the Fed' s intention to raise interest rates in the US. However, it would not be wise to make any horizontal and hasty move, namely any move to the detriment of the Green Transition of Cyprus, which is becoming even more urgent after the developments related to the Russian invasion of Ukraine. >

Source: www.philenews.com

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