During the presentation of the 2025 state budget to the House finance committee on Monday, Finance Minister Makis Keravnos highlighted several significant internal and external risks impacting the Cypriot economy.
While the economic outlook remains positive, Keravnos emphasized that the level of uncertainty is still high, primarily due to global challenges such as the ongoing war in Ukraine and the growing conflict in the Middle East. Despite these issues, Cyprus is expected to close out the year with a GDP growth rate of 3.7%.
Looking ahead, the ministry’s baseline forecast predicts GDP growth of 3.1% for 2025. Inflation is expected to decline to 2%, and unemployment is projected to decrease to 4.8%.
For the fiscal year 2025, the government has outlined plans to allocate €6.32 billion to welfare, which includes €2.7 billion for healthcare, €749 million for social benefits, €611 million for the Guaranteed Minimum Income, €396 million for child benefits, and €277 million for housing assistance.
Keravnos stressed the importance of maintaining a fiscal surplus, with a projected surplus of 2.7% of GDP by 2025. Another key priority is reducing public debt from 68.9% in 2024 to 60% of GDP by 2025.
The budget also focuses on essential areas such as the green transition, digital reforms, and structural adjustments.
However, the minister also flagged several critical risks, including non-performing loans from previous years, which continue to burden public finances. Additionally, there are significant deficits in the pension funds of semi-governmental organizations (SGOs) and local authorities, with 32 pension funds collectively showing a shortfall of €500 million. The most significant concern comes from the Cyprus Broadcasting Corporation, whose pension fund has a deficit of €123 million.
Keravnos also warned of possible compensation claims from court rulings that could cost the state tens of millions of euros. Moreover, potential fines from the European Union for non-compliance with environmental directives—such as urban wastewater management—are also a concern.
Another risk is related to the Vasiliko gas terminal, where the Republic of Cyprus could face compensation claims amounting to €529 million from a former contractor. However, the minister noted that recent discussions with the European Investment Bank (EIB), the European Bank for Reconstruction and Development, and the European Commission were positive. If the Vasiliko projects proceed, Cyprus would not be required to repay the €68 million in EU funds already disbursed for the LNG project. The total EU grant pledged for the project is €101 million.
Keravnos also addressed the ongoing funding needs for the state health services, or Okypy, which is projected to run a deficit of €95 million in 2024. He mentioned that the annual wage burden for the organization stands at €300 million, and the situation is under close monitoring.
In addition, the minister expressed concerns about the public sector payroll, particularly with regard to the Cost of Living Allowance (CoLA). He said the government plans to initiate discussions on how to “rationalize” CoLA.
Geopolitical risks from regional instability, higher shipping costs, and increased migrant flows were also highlighted. Migration-related spending is expected to reach €204.5 million in 2024.
Other external risks include climate change, natural disasters, compensation to farmers, and the need to purchase water due to ongoing droughts.
Meanwhile, opposition MPs pointed out that despite the seemingly stable macroeconomic figures, citizens continue to struggle with the high cost of living. Akel MP Aristos Damianou criticized the government for not adequately supporting those in need, even though it has the financial resources available.
Source: www.stockwatch.com.cy