WRANGLING over the role of the Central Bank at the start of the economic crisis last year resulted in Cyprus shooting itself in the foot by missing out on significant investments, Governor Athanasios Orphanides said yesterday.
Addressing the House Finance Committee, Orphanides said Cyprus’ economic situation was “critical” and worse than forecast, making the need for structural changes and better long-term planning essential.
Referring to past mistakes he said Cyprus has missed out on deposits and investment as a result of political wrangling over the Central Bank’s role and the creation of a climate of doubt about the institution in the second half of 2008 when the global crisis hit.
“We shot ourselves in the foot and lost out significantly”, he said.
Orphanides drew the committee’s attention to the fact that Cyprus’ economy contracted by 1.4 per cent in the third quarter at a time when the eurozone saw 0.4 per cent growth – in line with European Commission (EC) forecasts.
“The economic recession which Cyprus is facing this year is possibly more pronounced than previous forecasts indicated”, he said. “According to the Central Bank’s new forecasts, real GDP in 2009 is contracting by more than 1.0 per cent, while only a marginal increase is expected in 2010,” said Orphanides.
The CB Governor said that based on these economic growth projections, “unemployment, which is already rising, will continue to increase significantly next year as well.”
In its autumn economic report, the EC said it expects unemployment in Cyprus to continue growing – “especially in labour-intensive sectors” such as construction – from 5.6 per cent this year to “historically high levels” of 6.6 per cent and 6.7 per cent in 2010 and 2011.
“What concerns me especially is the significant deterioration of the fiscal deficit, particularly from 2010 onwards,” Orphanides said.
Referring to the forecasts in the EC autumn report of the fiscal deficit rising to 5.75 per cent of GDP in 2010 and almost 6.0 per cent in 2011, Orphanides said that “further deterioration of the economy is expected in 2010 rather than the recovery that was forecast”, adding that on the basis of the CB’s analysis, “without changes in fiscal policy, we cannot rule out the possibility that the deficit will exceed 6.0 per cent in both 2010 and 2011.”
“These facts reveal that the fiscal deterioration we are facing is structural in nature.” Orphanides said that he stressed to the committee that, especially during difficult periods of high fiscal deficit and recession in the real economy, budget planning cannot be carried out on the basis of just one year’s figures. “It is not right for planning to be done on the basis of temporary measures, the benefit of which cannot be to reduce the fiscal deficit on a stable basis”, he said.
Instead, he said, planning should be on a longer-term basis, built on two fundamental principles: fiscal discipline in setting and working towards achieving long-term objectives, and fiscal flexibility in responding in a prudent manner to unforeseen developments in the economic environment.
“The situation is critical. The 2010 budget that is being discussed in the House should reflect the cuts which are necessary for long-term fiscal consolidation. Much-discussed cut-backs in the public sector can be a significant start. The sooner the structural changes required for managing the public finances happen, the smaller will be the cost and the sooner we will achieve sustainable growth and prosperity.”
Senior representatives of the three biggest parties all substantially agreed with Orphanides’ diagnosis and proposed cure, responding to his call for all political parties to co-operate in facing up to “the worst economic crisis in Cyprus since 1974”.
Finance Committee chairman and DIKO Vice-President Nicholas Papadopoulos gave particular emphasis to the assessment that the problem with the economy is structural, while AKEL spokesman Stavros Evagorou even endorsed the need for fiscal discipline and structural changes.
DISY Vice President Averoff Neophytou said that his party “completely” endorsed Orphanides’ position, adding that everyone should set aside ideological approaches and petty party squabbling in favour of structural changes “for the good of the economy”.
SIDEBAR
Big gap in pensions funding
According to a recent European Union report, Cyprus is one of the three countries with the biggest problem in guaranteeing the provision of pension benefits over the next few decades.
Orphanides said that “we continue to face a severe problem in finding sources for funding the pension schemes, a problem made worse by an ageing population.”
“Taking this into account, the structural fiscal problem is more serious than the European Commission’s recent estimates suggest”, he said.
