CENTRAL Bank Governor Christodoulos Christodoulou said yesterday there was no chance of devaluation of the Cyprus pound prior to eurozone entry.
The Governor’s comment came on the day that Cyprus announced it would today or tomorrow be making its formal application to join the eurozone on January 1, 2008.
In an interview with the Cyprus News Agency (CNA), Christodoulou said fears of devaluation were unjustified and unfounded.
“The Cyprus pound remains strong and sound, and there is no question of devaluation prior to the changeover,” he said.
“I would like to remind people that similar unfounded claims were particularly intense on the eve of Cyprus’ accession to the EU.”
Not only was the pound underestimated back then, but it went on barely a year later to join ERM-2 with the same equivalence against the euro at which it had stood in 1992, Christodoulou said.
After joining ERM-2, the precursor to full eurozone entry, the pound strengthened further and remains on the high side of its 2.5 per cent fluctuation band.
Christodoulou referred to the “minor headache” involved in restraining the pound within the 2.5 per cent limit, but said today it stood at 1.1 per cent over the central rate. Last October, the pound was 1.5 per cent stronger than the parity rate.
The Economist Intelligence Unit (EIU) has also predicted there will be no devaluation.
In its latest report on Cyprus, the EIU says the reason why many Britons feel the Cyprus pound is overvalued is because of their own currency’s swings against the euro.
“We expect Cyprus to adopt the euro on schedule on January 1st 2008 at its central parity rate within the EU’s revised exchange-rate mechanism (ERM-2) of CYP0.585:EUR1,” it said.
It also noted that the Cyprus pound had consistently traded close to its central parity rate for around 14 years, without recession or other crisis.
“This suggests that the parity rate is appropriate, and therefore no devaluation is expected,” the report says.
The Cyprus pound is expected to be irrevocably fixed to the euro by July, opening the way for dual pricing by September.
Christodoulou said he believed the economy was meeting the terms for euro adoption as scheduled, and expected prospects within the eurozone to be healthy.
He said he was concerned over public fears that they would fall prey to profiteering on changeover.
The Central Bank governor said this was a “subjective, negative prejudice due to erroneous experiences”.
He said the reality in some other countries was that prices appeared to increase between 0.1 per cent and 0.3 per cent.
“Available statistics from the EU and the European Central Bank indicate that the adoption of the euro does not lead to a substantive or significant increase in prices,” he said.
Central Bank officials point out that the fact the pound is worth more than the euro will make it harder for businesses to profiteer. “A fridge costing £100 will cost 170 euros, which already feels more expensive to the consumer, making it harder for the business to slip in an extra profit,” one official explained.
He pointed out the problem across the rest of Europe had been that old currencies had been worth less, meaning euro prices seemed numerically lower, and shopkeepers could round prices up with consumers mistakenly thinking the product was cheaper.
Christodoulou also said a bill was before the House of Representatives providing for compulsory dual pricing for four months before the euro is introduced and for six months afterwards.
Christodoulou said Cypriot banks were set to have the first euro coins and banknotes in the autumn.
“The distribution of coins in euro will probably begin in October and banknotes will be allocated a month later. Banks will subsequently supply businesses with the euro, coins and notes,” he said.
