Urgent reforms needed to meet euro zone targets

CYPRUS must make deep reforms to rectify its economic problems if it wants to meet a stated target of joining the euro zone by January 2007, the head of a government advisory body on the economy said yesterday.

The island is one of 10 countries joining the European Union next May, but must streamline its economy to meet single currency criteria before adopting the euro.

It faces a forecast budget deficit of 5.4 per cent of gross domestic product this year and public debt projected to hit 63.5 per cent of GDP, exceeding limits for euro zone nations.
“If it is not understood that it is a matter of priority (to cut the deficit) then it is an illusion to think that the issue will be solved in two years,” said Alexis Galanos, head of a panel of private economic advisers appointed by President Tassos Papadopoulos earlier this year. “Decisions must be taken.”
Authorities have prepared a 14 point gameplan which includes a clampdown on tax evasion, an increase in civil servants’ retirement age, outsourcing and an increase in tariffs at government departments to curb the deficits.

Cyprus hopes the measures, which it has not yet implemented, will trim the fiscal deficit to 2.2 per cent and public debt to 56.1 per cent of GDP in 2006, inside the limits of three per cent and 60 per cent respectively laid down in EU rules.

Galanos was speaking at the launch of a book on the economic implications of a gradual relaxation of currency controls and the abolition of interest rate ceilings on the island.

Before joining the euro zone, Cyprus must first enter the ERM2 mechanism to limit currency fluctuations against the euro, and that should happen sooner rather than later, said economists.
“The slower that is to occur the more pressure there may be on the Cyprus pound,” said Intercollege economics professor Andreas Theofanous, one of five researchers who compiled the book. “Joining ERM should be a primary target,” he said.

A recent worsening of the external environment and a downturn in tourism, a key source of revenue, has snipped at growth forecasts.

Cyprus has a forecast 2.0 per cent growth rate this year, higher than the EU average but well below its own accustomed expansion of 4.0-4.5 per cent. (R)

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