THE GOVERNOR of the Central Bank yesterday warned the fiscal deficit would rise beyond government forecasts this year unless state income could be increased and spending controlled.
Christodoulos Christodoulou ruled out devaluing the pound, but hinted at higher interest rates in the new year and urged the government to crack down on tax evasion to boost state coffers.
Called before the House Finance Committee, discussing the 2004 budget, Christodoulou underlined the need for a collective effort to bring the economy into line with European economies and the euro zone’s Maastricht criteria.
The Central Bank governor ruled out any devaluation of the Cyprus pound, although he did hint at a possible “slight increase” in interest rates at the beginning of next year.
He added he was optimistic that, despite the obstacles, joining the eurozone was still attainable.
Experts say Cyprus must make deep reforms to rectify its economic problems if it wants to meet a stated target of adopting the euro by January 2007.
Cyprus joins the EU in May but faces a forecast budget deficit of 5.4 per cent of gross domestic product this year, far exceeding the 3.0 per cent limit for euro zone nations.
Christodoulou warned yesterday that, unless spending was controlled and state revenue increased, the fiscal deficit would be even higher than expected for 2003.
However, he forecast that in 2004 the fiscal deficit would be cut back to 3.7 per cent, while in 2005 it would drop further to 2.8 per cent, reaching an acceptable 2.2 per cent by 2006.
“These are optimistic forecasts, but these targets will not be realistic or attainable unless there exists a greater effort to reduce the fiscal deficit, and this should be seen as not only a government effort but a collective effort,” Christodoulou said.
“You can’t achieve a target of reducing the deficit to 3.7 per cent just with a reduction in public expenditure, most of which is inflexible,” the governor added.
Christodoulou suggested the government increase its income by clamping down on tax evasion rather than increasing taxes, specifically mentioning possible legislation for taxing secret accounts.
He also said local authorities could generate more income through operating a wider tax collection net in their areas.
“Improving public finances will need understanding, discipline, programming and a joint effort,” Christodoulou said, adding that barring external factors, the outlook was generally good.
He said the balance of payments deficit for 2004 was estimated at between 4.5 per cent and 4.7 per cent but would decline. Inflation, according to the Central Bank estimates, is expected to reach 4.0 per cent to 4.2 per cent this year, but is expected to drop in 2004 and 2005.
Christodoulou forecast a growth rate of 4.0 to 4.6 per cent over the next two or three years, saying this was an attainable target because a turnaround was expected in the global economy.
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.
