By Hamza Hendawi
THE GOVERNMENT, bound by an election pledge not to raise taxes, will announce its plans to narrow the fiscal deficit next month, Finance Minister Christodoulos Christodoulou said yesterday.
He said the economy has been on a “course of stable recovery” since last July, but pointed out that the fiscal deficit was increasing as a result of what he called a policy of expansive public spending.
He also warned of the negative impact on the economy of persistent local media speculation about a possible “military incident” if the Russian-made S-300 missiles are deployed this summer.
Speaking to reporters after a meeting of the House’s Education Committee, Christodoulou said: “It is our duty and responsibility to rationalise our spending and to see how we can increase our income.
“We are still thinking and studying the issue and we shall come to a decision at the start of June.”
Christodoulou gave no hint of where or how the government planned to cut expenditure, but economists have said that introducing or raising charges on some government services and better tax collection were among the measures being considered.
A freeze on hiring for the public sector, wage curbs and an increase in the defence levy were also being looked at, they said.
Christodoulou said a rise in the defence levy was necessary to help plug a three per cent deficit caused by arms purchases.
He added that revenues lost as a result of Cyprus’s compliance with the EU customs union agreement would cost the treasury £127 million in 1998.
Cyprus registered a fiscal shortfall of 3.4 per cent of GDP in 1996. This rose to 5.1 per cent last year and is expected to remain unchanged in 1998. Christodoulou, however, warned last month that the deficit might exceed seven per cent.
Turning to the much-publicised issue of the Russian missiles, the minister said: “I regret to make this observation, but if we continue to make an issue of the missiles… there will be consequences on how the economy behaves.”
Urging the media to exercise caution in its coverage of the issue, he said: “We should not create unnecessary tension that will have an impact on our economy — the base of our struggle.”
In a separate development, share prices were sharply down yesterday for the second successive day. The official all-share index closed down 1.98 per cent. The fall did not spare the blue-chips of the banking sector, where Bank of Cyprus closed down six cents and Popular Bank by as much as 10 cents.
The index closed down 1.27 per cent on Monday, but on a thin volume of just over £600,000. Yesterday’s volume was £1.33 million.
Share prices have shed more than six per cent of their value since the start of May, ending a four-month bull run which saw them rise by as much as 20 per cent.
