Open letter to the Minister of Finance Measures against rising prices and inflation, which has reached 9.6%

Honourable Minister,

As part of the ongoing dialogue to tackle soaring prices, I would like, on my part, to contribute the following ideas:

1. Inflation is the result of a series of global (and domestic) developments and it cannot be easily contained since, to a certain extent, it is the natural reaction to economic events . We are all aware of the increase in consumption following the pandemic, resulting from the expansionary fiscal and monetary measures. Moreover, the war in Ukraine and the fallout on the price of oil and natural gas have added to the problems restricting supply chains thus putting pressure on prices.
Back in November 2021, I had in fact pointed out the dangers
( when I warned that we should be particularly careful. Unfortunately, today we are in an awkward position as we are faced with a 9.6% inflation.

2. The main institutions responsible for curbing inflation are the Central Banks, which are desperately trying to decide on an increase in interest rates, that will be decisive as far as the course of the global economy is concerned. Rising interest rates influence inflation through reducing consumption demand. Unfortunately, our government has been caught unawares in November when it approved 450 m. euro in government guarantees for new loans, which increased demand and consequently contributed to soaring inflation.

If the hike in prices is unavoidable, then what can and should the government do?
a. Protect vulnerable groups. Inflation hits disproportionately the low income classes and this is why it is imperative to take measures immediately, including the following:

– implement the minimum wage as soon as possible.

– allowances to vulnerable groups. The government has already made some moves in this direction. Nonetheless, the above-mentioned aid should be linked to the increased revenue which the state gets from rising fuel prices and pollutants.

– Review electricity charges so that big consumers pay more. Reducing VAT on electricity could be targeted to avoid overconsumption.

b. Containing prices by introducing a ceiling is not the appropriate financial solution since it postpones and prolongs the problem. What, however, is the Commission for the Protection of Competition doing in order to ensure healthy competition? Stephanos Stephanou is right in saying that the State (Kathimerini 5/6/2022) has not put in place the right framework. Prices determined through the market presuppose the smooth functioning of a competitive market. Cyprus is lagging behind in this.

c. Contain demand as much as possible through targeted measures. The approved government guarantees scheme should be reviewed so that these are directed in a targeted manner to projects which promote renewable energy sources (which will help towards disengaging from oil and natural gas) and not consumption which drive prices higher.

d. An effort must be made, on a European level, to reduce the VAT rate on a number of products. However, the VAT on the penalty cost on pollutant emissions must stop immediately.

3. The risk of an economic recession is visible and officials should undertake now the necessary plans for possible measures they will have to take to deal with an anticipated increase in problematic loans. Delayed action and badly-timed measures always cause problems. This is evident in the government’s erratic energy policy all these years, which we are paying now in the form of costly fuel.

I remain at your disposal for a discussion and an exchange of views, if you consider it useful.

Achilleas Demetriades
12 July, 2022

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