THE INTERNATIONAL Monetary Fund officials last Monday repeated what everyone, with an ounce of economic sense, has been telling the government for more than a year now. Unless it controlled state expenditure and in particular the public sector wage-bill it would not meet the target of bringing the budget deficit to below three per cent by 2013.
This was a statement of the obvious, but when it comes to economics nothing is obvious to the Christofias government which has been operating under the illusion that it could reduce the deficit by increasing revenue during the worst recession we have experienced. Apart from the IMF, the European Commission and the Governor of the Central Bank had also said that fiscal consolidation had to be based on controlling expenditure.
The IMF Consultation Mission leader, Bernard J Laurens repeatedly stressed on Monday the need for urgency in reducing the public sector wage-bill, “not because there is an imminent crisis, but perhaps to prevent one”. Growing deficits, he said, would “drain resources from the economy and could add risk to our outlook”. The only way “to safeguard the sustainability of public financing and increase the scope of public sector growth” was to reduce the fiscal deficit.
Finance minister Charilaos Stavrakis called a news conference the following day to inform us that the IMF’s preliminary report “contains many positive comments” and was more favourable compared to previous ones. A different remedy had been chosen for reducing spending – rather than slashing wages in the public sector the number of employees would be reduced he said. To show the IMF that there was a sense of urgency, on Wednesday it was announced that 400 public sector positions would be cut.
He had previously said that public sector numbers would be cut by a thousand every year, but it is very difficult to believe the government will meet this target. Only last year, in the midst of the recession, it created more than a thousand new positions. Wednesday’s announcement was probably made for benefit of the IMF, the reports of which have an effect on the ratings given to the country by credit-rating agencies.
The real problem for Cyprus is the bloody-minded arrogance of President Christofias, who seriously thinks he has a better understanding of how an economy works than the experts at the IMF, the European Commission and the World Bank, not to mention the highly-respected Governor of his own Central Bank. The only advice he is prepared to listen to on the economy is from ignorant union bosses, who know as little about the workings of a market economy as he does. He even ignores his minister’s advice.
We are the only country in the world that still has a system of automatic adjustment of wages, despite its harmful effects on the economy. Laurens mentioned this on Monday, but he was ignored, because union leaders – the only experts Christofias would listen to, say it is a good thing.
What hope is there for our economy when the president listens only to the economic advice of clueless union bosses and completely ignores the people with real expertise?
