Cyprus: Public Finances

Ministry of Finance
January December 2013

Outline of presentation

Macroeconomic Adjustment Programme Major objectives

Main Developments in 2013

Nominal
Cyclical
Structural

Analysis of Developments in 2013 (ESA 95)

Analysis of Developments in 2013 (cash basis)

Revised estimate for 2014 comparison to MOU target

Prospects 2015-16 comparison to MOU target

2

Macroeconomic Adjustment
Programme - Major Objectives

Putting public finances on a sustainable path is of overriding importance in order to

stabilise the economy and to restore the confidence of companies, citizens and
foreign investors in the longer-term economic prospects of Cyprus.
In this context, the objectives are:
to continue the on-going process of fiscal consolidation in order to achieve a
3% of GDP primary surplus in 2017, 4% of GDP in 2018 and maintain at least
such a level thereafter;
to achieve the annual budgetary targets as set out in this Memorandum of
Understanding (MoU) through high-quality permanent measures, and
additional measures in the outer years, in particular to reduce the growth in
expenditure on the public sector wage bill, social benefits and discretionary
spending, while minimising the impact of consolidation on vulnerable groups;
to this end, to fully implement the fiscal consolidation measures for 2014;
to correct the excessive general government deficit by 2016; and
to maintain fiscal consolidation over the medium term, converging towards
Cyprus' medium-term budgetary objective of a balanced budget in structural
terms, by containing expenditure growth, improving the structure of taxation
and undertaking fiscal-structural measures, including the implementation of a
Medium-Term Budgetary Framework designed in accordance with EU
specifications.
3

Macroeconomic Adjustment
Programme - Major Objectives
To this end, introduce consolidation measures totalling 10 p.p. of GDP
during 2012-16 as follows: 2012-13: 6% of GDP; 2014: 2 % of GDP; and
2015-16: 1 % of GDP.

Consolidation measures for 2012-14 already specified and enacted

totalling 8 % of GDP.
Ambitious fiscal commitments primary balance:
2013 - (3.1)% of GDP
2014 - (3.1)% of GDP
2015 - (2.1)% of GDP
2016 - +1.2% of GDP

Place debt-to-GDP ratio on a downward path over the medium term.

Long term fiscal sustainability

Developments in 2013

Budget balance was

contained to 5.4% of GDP
in 2013 compared to 6.4%
the year before.
Primary balance fell to 2.0% of GDP compared to
3.2% the year before.
Debt to GDP rose
considerably to 111.5% in
2013 from 86.6% the year
before attributed among
other to the
recapitalisation of the
financial sector as well as
to the snow ball effect.

Developments in 2013

Output gap is estimated to

have turned negative
reaching 3.5% of potential
output.
Consequently the cyclical
adjusted balance exhibits
an improvement of the
order of 2 p.p. of GDP
falling to -4.1% in 2013
from -6.1% the year before.
The underlying fiscal stance
was positive reaching 2.5
p.p. of GDP in 2013.
The structural budget
balance was contained to a
deficit of 2.9% of GDP in
2013 compared to 5.2% the
year before, exhibiting an
improvement of 2 p.p. of
GDP in structural terms.
6

Developments in 2013
Overall, the outcome in 2013 is better than forecast.

General Government Budget Balance (GGBB) exhibited an

improvement with the deficit falling to 897 million in 2013
compared to a deficit of 1,135 million the year before. As a
percentage of GDP, the GGBB improved by about 1 p.p. of GDP
falling to -5.4% from -6.4% in 2012.

Revenue

Total revenue fell in absolute terms to 6,656 million in 2013

from 6,974 million the year before exhibiting a negative rate of
growth of 4.6% explained by the developments in the economy as
well as by the implementation of a series of measures on the
revenue side estimated at about 2 p.p. of GDP.

Developments in 2013 - Revenue

Total taxes exhibited a negative rate of growth of 6.2% falling to

4,313 million in 2013 from 4,597 million the year before
brought by lower receipts in Taxes on production and imports as
well as Current taxes on income and wealth.

Taxes on production and imports exhibited a negative rate of

growth of 9% falling to 2,396 million in 2013 from 2,633 million
the year before brought by a contraction in VAT receipts of about
9% as well as to a fall in revenues from land and survey fees,
stamp duties, registration of companies and social cohesion.
Overall excise duties stagnated as rate increases were offset
by a fall in consumption.

Current taxes on income and wealth exhibited a negative rate of

growth of 2.3% falling to 1,916 million in 2013 from 1,962
million the year before brought by a substantial contraction in
individuals income tax receipts of about 25% and capital gain tax
receipts offset somewhat from increased receipts in property
taxes and withholding taxes on interest. Corporate tax receipts
performed relatively well exhibiting a fall of about 2%.
8

Developments in 2013 - Revenue

Social Security Fund Contributions exhibited a negative rate of

growth of 2.4% falling to 1,475 million in 2013 from 1,510
million the year before brought by the developments in the
labour market, specifically by the reductions in the compensation
of employees (total economy) and in employment levels
estimated at around 5% and 5% respectively.

Other current resources stabilised at around last years level of

757 million in 2013 attributed to higher than anticipated
transfers from the EU budget offset by the non occurrence of oneoff events of 2012.

Developments in 2013 - Expenditure

Total expenditure exhibited a negative rate of growth of 6.9%

falling to 7,553 million in 2013 from 8,109 million the year
before brought by a series of measures introduced on the
expenditure side such as on wages and salaries, social schemes as
well as to a prudent implementation of the 2013 budget.

Compensation of employees exhibited a negative rate of growth

of 8.9% falling to 2,567 million in 2013 from 2,819 million the
year before brought by the reduction in wage and salary levels, as
well as by a wave off early retirements. By excluding pensions and
gratuities increase, this contraction rises to 16% out of which 7%
is attributed to a fall in the employment levels.

Intermediate consumption exhibited a negative rate of growth of

14.3% falling to 741 million in 2013 from 864 million the year
before brought by a reduction in defence outlays and lower
expenditure on desalinated water.

10

Developments in 2013
Expenditure

Social transfers other than in kind exhibited a negative rate of

growth of 0.3% falling to 2,589 million in 2013 from 2,598
million the year before brought by the savings from streamlining
or abolishing certain social schemes offset somewhat by an
acceleration in redundancy payments and higher unemployment
benefits.
Interest expenditure exhibited a negative rate of growth of 2.7%
falling to 549 million in 2013 from 564 million the year before
brought by the reduction in the cost of borrowing despite the
increasing debt stock.
Other expenditure a negative rate of growth of 0.5% falling to
560 million in 2013 from 563 million the year before brought by
the prudent implementation of the 2013 budget and the
methodological treatment of signature fees offset somewhat by
the compensation granted to provident funds which held deposits
at ex-Laiki Bank.
11

Developments in 2013
Expenditure

Gross fixed capital formation exhibited a negative rate of growth

of 21.5% falling to 347 million in 2013 from 442 million the year
before brought by the significant reduction in public investment
projects (base effect from the completion of various projects)
from the exceptional high levels of the years before.

12

Developments in 2013 (cash basis)

General Government Budget Balance on a cash basis (GGBB) was

in deficit reaching 846 million during the period JanuaryDecember compared to a deficit of 884m during 2012. As a
percentage of GDP, the GGBB during the period under review is
estimated at -5.1% compared to -4.9% the year before.
Preliminary headline figures show a slide deterioration in the
period January-December of around 0.2 p.p. of GDP compared
to the previous year.
This is attributed to a series of one-off factors.
One off factors both on the revenue and on the expenditure side
estimated at -190 million such as signature fees for the
exploration of hydrocarbon reserves (180 m.) as well as
increased outlays for gratuities (-39 m.), state aid provided to
Cyprus Airways (-40 m.), compensation to provident and
pension funds with deposits held at ex-Laiki Bank (-221 m.) and
dividend income from SOEs (-70 m.) impact negatively on the
budget balance.
Excluding one off factors budget balance shows an improvement
in the period January-December of about 1 p.p. of GDP
compared with the corresponding period of last year.
13

Developments: January December 2013

Jan. - Dec.
2012
mln

1. REVENUE AND GRANTS (2+14)

2. REVENUE (3+13)
3. CURRENT REVENUE (4+12)
4. TAX REVENUE (5+8+11)
5. DI RECT TAXES (6+7)
6. I NCOME TAX
7. OTHER DI RECT TAXES
8. I NDI RECT TAXES (9+10)
9. I MPORT DUTI ES
10. OTHER I NDI RECT TAXES
Excises
V.A.T.
Other
11. SOCI AL SECURI TY CON'TI ONS
12. NON TAX REVENUE
13. CAPI TAL REVENUE
14. GRANTS
1. EXPENDI TURE AND NET LENDI NG (2+16)
2. EXPENDI TURE (3+13)
3. CURRENT EXPENDI TURE (4-12)
4. WAGES AND SALARIES
5. OTHER GOODS AND SERVICES
7. INTEREST PAYMENTS
8. SOCIAL SECURITY PAYMENTS
9. PENSION AND GRATUITIES
11. OTHER CURRENT TRANSFERS
13. CAPI TAL EXPENDI TURE (14+15)
18. OVERALL BALANCE
as % of GDP
19. PRI MARY BALANCE

6,592.9
6,487.1
6,487.1
5,576.2
2,072.7
1,407.7
665.1
2,499.9
28.5
2,471.4
588.0
1,530.9
352.4
1,003.5
911.0
0.0
105.7
7,476.7
7,476.7
7,100.0
1,907.2
513.7
652.6
1,497.1
635.8
1,664.0
376.7
-883.8
-4.9
-231.2

Jan. - Dec.
2013
mln

6,451.9
6,290.5
6,290.5
5,338.1
2,144.8
1,207.0
937.8
2,297.6
16.8
2,280.8
590.6
1,391.4
298.8
895.7
952.4
0.0
161.4
7,297.7
7,297.7
7,033.2
1,774.5
478.2
573.5
1,568.0
685.7
1,719.8
264.4
-845.8
-5.1
-272.2

% change
2013/2012

-2.1
-3.0
-3.0
-4.3
3.5
-14.3
41.0
-8.1
-41.1
-7.7
0.4
-9.1
-15.2
-10.7
4.6
0.0
52.6
-2.4
-2.4
-0.9
-7.0
-6.9
-12.1
4.7
7.9
3.4
-29.8

14

Developments: December 2013

1. REVENUE AND GRANTS (2+14)
2. REVENUE (3+13)
3. CURRENT REVENUE (4+12)
4. TAX REVENUE (5+8+11)
5. DI RECT TAXES (6+7)
6. I NCOME TAX
7. OTHER DI RECT TAXES
8. I NDI RECT TAXES (9+10)
9. I MPORT DUTI ES
10. OTHER I NDI RECT TAXES
Excises
V.A.T.
Other
11. SOCI AL SECURI TY CON'TI ONS
12. NON TAX REVENUE
13. CAPI TAL REVENUE
14. GRANTS
1. EXPENDI TURE AND NET LENDI NG (2+16)
2. EXPENDI TURE (3+13)
3. CURRENT EXPENDI TURE (4-12)
4. WAGES AND SALARIES
5. OTHER GOODS AND SERVICES
7. INTEREST PAYMENTS
8. SOCIAL SECURITY PAYMENTS
9. PENSION AND GRATUITIES
11. OTHER CURRENT TRANSFERS
13. CAPI TAL EXPENDI TURE (14+15)
18. OVERALL BALANCE
as % of GDP
19. PRI MARY BALANCE

Dec.
2012
mln

Dec.
2013
mln

914.9
881.1
881.1
629.8
317.4
247.4
70.0
229.4
-1.4
230.8
29.0
175.8
26.1
83.0
251.3
0.0
33.8
1,054.4
1,054.4
957.6
261.3
81.7
63.6
211.8
84.9
232.6
96.8
-139.5
-0.8
-75.9

853.7
792.9
792.9
649.4
352.6
268.2
84.4
208.6
10.8
197.8
29.9
140.0
27.9
88.2
143.6
0.0
60.8
1,103.1
1,103.1
999.7
248.0
91.0
38.5
251.5
91.6
231.3
103.3
-249.3
-1.5
-210.9

% change
2013/2012

-6.7
-10.0
-10.0
3.1
11.1
8.4
20.5
-9.1
884.8
-14.3
3.1
-20.3
7.0
6.2
-42.9
0.0
79.9
4.6
4.6
4.4
-5.1
11.4
-39.5
18.8
7.8
-0.6
6.7

15

Developments: January-December 2013

Revenue
Income tax receipts fell to 1,207 m.
during the period under review,
exhibiting a decline of 14%
compared to the corresponding
period of last year (2012: 1,408 m.)

Negative rate of growth of corporate

tax revenues in the period under
review vis--vis the year before
exhibiting a decline of -4.9%,
attributed to falling profitability in
the corporate and financial sectors.
Capital gains tax receipts and land
and survey fees continue to exhibit
double digit negative growth rates,
reflecting the developments in the
property market. Cumulative decline
from peak 95% and 85% respectively.
Personal Income tax receipts
exhibited a negative growth rate of
20% during the period under review
compared with the corresponding
period the year before due to a
reduction in employment and wage
levels brought by the universal
reduction in wages and salaries in
the public and broader pubic sector.
16

Developments: January-December 2013

Revenue
Other Direct Tax receipts reached 938
m. during the period under review,
exhibiting an increase of 41% compared
to the year before (2012: 665 m.)

Reduction in wages and salaries introduced

in 2013 accounted for an increase in other
direct taxes of the order of 149 m.
Contribution for health care introduced in
mid 2013 accounted for an increase in other
direct taxes of the order of 8 m.
Defence fund levy exhibited a rate of growth
of 11.9% mainly due to increases in the tax
rates of withholding tax on interest and
deem dividend distribution.
More specifically withholding tax on interest
receipts accelerated increasing by about 27%
during the period under review as the tax
rate was increased in Q2 of 2013 from 15%
to 30%.
Deem dividend distribution exhibited a
decelerating growth rate falling to about 5%
during the period under review despite
sequential increases in the rate of tax. This is
attributed mainly to declining profitably of
the corporate sector and more specifically of
the financial sector as well as to the
anticipated decline in the rate in 2014.

17

Developments: January-December 2013

- Revenue
Indirect tax receipts reached
2,298 m. during the period
under review exhibiting a decline
of about 8% compared to the
year before (2012: 2,500 m.)
Excise duty rate increases in
tobacco, alcohol and petroleum
products contributed to a
restrained positive growth rate
of excise duty revenues
amounting to 0.4% fairing
better than a forecast decline of
4.4% due to an anticipated
bigger fall in consumption.
VAT receipts (net) exhibited a
negative growth rate of 9.1%
falling to 1.391 m. in 2013 from
1.531 m. the year before mainly
due to a substantial fall in
electricity consumption (-17%),
manufacturing (-23%) and
construction demand (-33%) as
well as higher refunds (2012:
170 m. vs 2013: 220 m.).
18

Developments: January-December 2013

- Revenue

19

Developments: January-December 2013

- Revenue

20

Developments: January-December 2013

- Revenue

Social security contributions

reached 896 m. during the
period under review, exhibiting
a decline of 11% compared to
the previous year (2012:
1,004 m.) attributed to
reduction in employment and
wage levels.
Overall negative rate of growth
(-4%) of tax revenues reaching
5,338 m. compared to 5,576
m. the year before.
Marginally negative growth of
total revenue, reaching 6,452
m. during the period under
review compared to 6,593 m.
in 2012.

21

Developments: January-December 2013

- Expenditure

Overall expenditure growth in the

negative exhibiting a decline of 2.4%
during the period under review vis-vis the year before, reaching
7.298 m. compared to 7.477 m.
the year before despite a series of
one off expenditure increasing
measures.
Wages and salaries exhibited a
negative growth rate 7% falling to
1.774 m. in 2013 compared to
1.907 m. the previous year. This is
mainly attributed to freezing of
emoluments in conjunction with a
wave of early retirements
manifested in growth of pensions
and gratuities as per slide 23.
Goods and services exhibited a fall
of 6.9% during the period under
review vis--vis the year before due
to lower expenditure on desalinated
water and operating and
maintenance expenditure falling to
about 478 m. in 2013 vis--vis
514 m. the year before.

22

Developments: January-December 2013

- Expenditure (employment in Central Government)

Employment level in the CG (excl. state owned enterprises) fell by 3.3% and 2% during
2013 and 2012, respectively. Therefore, employment in the CG was decreased by 1678
civil servants during 2013 and by 1046 during 2012.
23

Developments: January-December 2013

- Expenditure (employment in the broad public sector)

24

Developments: January-December 2013

- Expenditure
Current transfers exhibit a positive

growth rate attributed to the

compensation of provident funds
which held deposits at ex-Laiki Bank
(221 paid during Oct-Dec) partly
offset by lower transfers due to
targeting of social schemes and lower
transfers to other central government
bodies, as well as local authorities.
This expenditure category exhibits an
increase of 3.4% during the period
under review vis--vis the year before
Excluding this one off expenditure
item (compensation of provident
funds) the category exhibits a decline
of about 10%.
Capital expenditure continued to
exhibit negative growth rates above
forecast partly due to the significant
reduction in public investment
projects (base effect from the
completion of various projects) as
well as lower expenditure for land
annexation and on purchases of
defence equipment.

25

Developments: January-December 2013

- Expenditure

Positive rates of growth

were recorded in
pension and gratuities
and social security
payments reaching
7.9% and 4.7%
respectively, vis--vis
the year before due to:
Acceleration of
early retirements
(one-off effect)
Developments in
the labour market
redundancies
(12-18 months to
9-12 months) and
unemployment.

26

Developments: January-December 2013

- Expenditure (gratuities)

27

Forecast Revision for 2014

In accordance with the latest macroeconomic scenario, the

budget balance is estimated to rise to 5.8% of GDP in 2014
compared to 5.4% the year before.

Primary balance to remain at lest years level as a percent to

GDP at about -1.8%.

Debt to GDP ratio is anticipated to peak in 2014 rising to 122%

from 111.5% the year before attributed among other to a high
primary deficit and the snow ball effect.

One-off factors of about 0.2 p.p. of GDP deficit increasing have

been factored into the baseline projection.

28

Further Revisions

Further revisions of public finances have already been adopted

following the third review due to a sustained over performance
in public finances.

The estimated over performance from the initial target of 2013 is

about 2 p.p. of GDP.

This over performance was translated into tightening the target

for 2014 from a primary deficit of 4.1% of GDP (April 2013) to
1.8% (April 2014).

Flexibility to adjust to economic activity under performance in

the area of 3 p.p. of GDP.

Fiscal buffers incorporated in the programme in the area of 1

billion euro.

Size of fiscal gap in the outer years to be estimated.

29

Revised Forecast 2014-16 3rd review

in mn

q1
TOTAL REVENUE
Taxes on production and imports (1)
Current taxes on income and wealth, etc (2)
Social contributions (3)
Other current resources (4)
of which
a. Other current resources *
b. sales
Capital transfers received

TOTAL EXPENDITURE
Total current expenditure
of which
a. Intermediate consumption
b. Compensation of employees
c. Social transfers other than in kind
d. Social transfers in kind
e. Interest
f. Subsidies
g. Other current expenditure
Total Capital Expenditure
of which

2014 targets
Quarterly
q2
q3

2014

2015

2016

6,527.8
2,328.0
1,785.0
1,479.9
933.0

6,479.0
2,404.0
1,809.0
1,493.0
771.0

6,799.7
2,537.8
1,892.0
1,528.0
839.8

q4

1,482.1 1,595.9 1,728.4 1,721.7

532.3
574.3
593.4
628.0
411.6
303.5
555.4
514.5
394.9
381.3
373.4
330.3
142.5
336.0
205.9
248.6
48.8
93.6

228.9
107.1

72.5
133.4

70.8
177.9

421.0
512.0

400.9
370.1

436.7
403.1

0.8

0.7

0.2

0.2

1.9

2.0

2.0

1,625.0 1,747.4 1,906.2 2,164.5

7,443.0

7,456.8

7,270.4

1,544.7

1,649.9

1,808.9

1,997.7

7,001.0

7,057.2

6,859.3

168.1
547.5
577.4
3.6
137.8
32.1
78.1
80.3

181.0
554.5
693.1
3.0
109.0
14.0
95.3
97.6

190.1
579.0
636.4
1.8
326.8
17.8
57.0
97.3

260.7
724.5
772.9
1.7
64.8
26.2
146.8
166.8

799.9
2,405.5
2,679.8
10.1
638.4
90.1
377.2
442.0

809.0
2,357.0
2,726.0
10.0
638.8
90.0
426.4
399.6

785.5
2,323.0
2,613.1
10.0
671.2
90.0
366.4
411.1

63.4
16.9

76.9
20.6

84.9
12.3

135.1
31.8

360.3
81.6

374.8
24.8

389.8
21.3

General Government balance (ESA95)

-142.9

-151.6

-177.8

-442.9

-915.2

-977.8

-470.7

% GDP
General Government primary surplus
% GDP

-0.9
-5.0
0.0

-1.0
-42.6
-0.3

-1.1
148.9
0.9

-2.8
-378.1
-2.4

-5.8
-276.8
-1.7

-6.0
-339.0
-2.1

-2.8
200.5
1.2

a. Gross fixed capital formation

b. Other capital expenditure

30

Debt developments and prospects

Public Debt was 111.5% of

From 2015 onwards Debt is

estimated to follow a declining
trend, falling to 111% of GDP in
2016.

Primary balance was -2% of

In 2016 primary balance is

estimated to turn positive,
reaching 1.2% of GDP.

GDP in 2013 and its estimated

to reach 120.4% of GDP in 2014.

GDP in 2013 and its estimated

to decline at -1.8% in 2014 and
then reach -2.1%n of GDP in
2015.

31