CYPRUS’ admission into the ERM-2 euro waiting room in April creates conditions for cheaper borrowing, the finance minister said yesterday, implying a cut in domestic interest rates.
“Admission creates the right conditions for the convergence of interest rates… which would benefit consumers,” Finance Minister Makis Keravnos said.
Speaking to a parliamentary committee, Keravnos also said his government aimed for a budget surplus in 2008 and that pension reform was a priority to maintain the viability of the social security fund past 2011.
Cyprus’ admission to the European Exchange Rate Mechanism on April 29 along with Malta and Latvia heralds its countdown to adoption of the euro as its national currency either in 2007 or 2008.
Cyprus’ minimum bid rate is 4.25 per cent compared with the European Central Bank’s key rate of 2.0 per cent.
The Central Bank’s rate-setting monetary policy committee meets on May 20 for its regular assessment of the economy. It will be the first meeting since Cyprus joined ERM-2.
The Central Bank has been non-committal when asked whether admission into the mechanism could result in an imminent fall in rates.
It does, however, concede that a gradual narrowing of the gap in rates is the natural progression during the period that the Cyprus pound is in the euro proving ground, which is a minimum of two years.
Cyprus’ large budget deficit, a consequence of a badly-timed tax reform in 2002 and larger outlays in preparation for European Union membership, cost it about a year’s delay in joining the mechanism. It fell to 4.2 per cent of GDP in 2004, and is forecast to fall to 2.9 per cent in 2005.
“It is essential that our reform plans stay on track and that all the euro convergence criteria are met,” the minister said.
A tax amnesty which brought a cash windfall and better tax collection methods helped compress the deficit in 2004, but authorities are now to tackle deeper reforms, starting with the state payroll.
The finance ministry is still negotiating with trade unions on ways to raise the retirement age to 63 from 60, a measure which is now likely to miss its target of being gradually phased in over a three-year period from July 2005.
Cyprus has an ageing population. An EU convergence report prepared in January highlighted the risks to its social security fund by the year 2020 without reforms, but Keravnos said that the situation was deteriorating rapidly.
“We must move very swiftly on pension funds. Reports by the actuary suggest we could have serious problems by 2011, and each new assessment is worse,” Keravnos said.
