URGENT measures must be taken quickly to reduce the island’s deficit, its national debt and its inflation rate, an International Monetary Fund (IMF) official warned yesterday.
"We see an economy which is clearly having some problems," IMF mission leader Demetris Demekas said. "Although they are not very serious, the context in which they are taking place is."
The interim report by the IMF team urged Cyprus to restore economic stability by increasing revenue through indirect taxes.
The report also advised tighter controls on expenditure and avoidance of further subsidies, as these would only further burden the state’s budget.
The IMF report said the island’s fiscal deficit should be brought down to four per cent of Gross Domestic Product (GDP) this year, and three per cent in 2001, adding that this year’s unusually high inflation rate should be curbed.
The Maastricht Treaty guidelines set a maximum annual fiscal deficit of three per cent of GDP, a public debt no more than 60 per cent of GDP, and a three per cent inflation rate.
An IMF-projected inflation for Cyprus of five per cent this year (it was actually 4.8 per cent in April) is about three times the current EU average. The island’s fiscal deficit, pegged by the IMF at 4.5 per cent of GDP (the government budget in February pegged it at £660 million — £60 million higher than in 1999), also strays 50 per cent above EU criteria.
The island’s widening fiscal deficit has haunted the government for years, while revenue-gathering attempts by the government have been scuttled by parliamentary concerns that such measures might be economically too harsh on low income earners.
The IMF report’s criticism of the deficit and inflation was the only cloud in an otherwise bright IMF assessment of the island’s economy, especially crucial in view of Cyprus’ effort to shore up its service-oriented economy as it seeks EU membership.
Demekas conceded, that"Cyprus is under unprecedented scrutiny as a result of the (EU) negotiations… This means that every delay, every back-tracking of promise would have an effect on the negotiations and a negative impact on the credibility of Cyprus."
"As far as the fiscal policy is concerned," he said, "we have recommended to the government and the House of Representatives to try to contain the deficit at no more than four per cent of GDP this year."
Demekas said approval of new Value Added Tax (VAT) increases — still stalled in months of House political bickering — combined with keeping a budgetary lid on government spending would help bring the deficit down to the magic four per cent mark.
He also said the government and the House had especially to resist the temptation to dole out further subsidies and handouts as a prelude to parliamentary elections set for 2001.
A House vote on a bill to increase VAT from eight to 10 per cent has been postponed four times. It is set to be decided on this week.
In order to offset the VAT rise, the government has pledged a series of measures giving £47.2 million back to the taxpayers.
Demekas frowned at this, declaring: "It is disappointing to see that all the extra (VAT) revenue will be spent this year because of the offsetting measures," demanded by political parties.
He also cautioned that credit expansion should slow down, as this was fuelling inflation, which was running at 4.8 per cent year-on-year in April.
Demekas also said wage growth should be controlled, and the automatic indexing of wages, whereby increases in the cost of living index are incorporated in wages on a six-monthly basis, should be modified.
