FINANCE MINISTER Charilaos Stavrakis was put on the back foot yesterday after Central Bank governor Athanasios Orphanides painted a less than rosy picture of the economy and called for “important steps” to be taken within the next two months.
Orphanides called on the need for the government to deal immediately with the public deficit, as the Central Bank had already highlighted in November 2009. “We’ve lost precious time,” said the CB governor, adding, “Certainly the problem we’re facing now is greater.”
A first step would be for the government to implement the cost-cutting measures pledged during the budget debate for 2011, in particular reduction of the state payroll, he said.
The next important step should be to address pension reform, he added.
Failure to tackle these issues “will create much worse problems for our economy in the future”, said Orphanides.
The governor expressed regret that “useful suggestions” discussed in 2010 did not lead to the expected progress “which would have lead to a structural improvement of the public deficit”.
He also highlighted that the European Commission may have noted some short-term improvements after Cyprus was put on the excessive deficit watch, but it also said Cyprus has yet to propose a comprehensive plan of fiscal consolidation based on curbing expenditure.
Speaking before the Economic Consultative Committee at the Finance Ministry yesterday, Orphanides said: “Important steps must be taken within the next two months to avert, or at least limit the possibility of further downgrades of the Cypriot economy.”
Asked to comment on the more downbeat assessment, Stavrakis said he would rather not comment on the statements of the CB governor who was entitled to express his views.
“What counts for the Cypriot economy is that we recently had the written opinion of the European Commission, which considers that the government’s measures on fiscal consolidation to be adequate and will help it to fully meet its aims for reducing the deficit to below three per cent,” he said.
The minister dismissed criticism that the recent improvement of the Cypriot economy came as a result of increased revenues and taxation.
“The improvement of the public finances, contrary to what some claim and want to claim, came mainly from the reduction in state expenditure,” he said, recalling that the government has for the first time reduced the number of public employees by 1,040 persons and kept the annual increase in operational expenditures close to zero, compared to previous years when it increased by eight to ten per cent.
Asked how future increases in state expenditure will be restricted without structural changes, Stavrakis replied that everyone, including the European Commission considers the fiscal package adopted by the government as sufficient to cover the fiscal targets of 2011, 2012 and 2013.
The 2010 public debt has been limited to close to 60 per cent of GDP, whereas growth has been accelerated, said Stavrakis noting that “these are objectively positive developments which no one should ignore”.
However, “the external environment remains very difficult”, he said, adding, “in the months ahead we are likely to have to deal with potential challenges or difficulties”.
Asked why consumer and investment confidence remains low despite encouraging figures for the economy, he said: “In the summer we all went on holiday, there were few daily confrontations on the economy and this alone improved the investment climate”.
Stavrakis called on social partners and political parties to “reduce the daily unnecessary and intense debate on the economy…because the bad image created which does not reflect reality at the end of the day harms the real economy, erodes the psychology of investors and we are all losers.”
The CB governor was not alone in his warnings, with DISY number two Averof Neophytou yesterday calling on Stavrakis to stop the “plastic surgery” on the economy, and instead help find ways to correct its long-standing structural problems.
The economy’s problems are long-standing and structural and relate to the pension system, state payroll and increased public health costs, he said.
“If we don’t find solutions in common, we put the long-term stability of Cyprus at risk,” said Neophytou.
The opposition deputy added: “When a patient has serious health problems, however much plastic surgery is done to improve the image of their face, their serious health problems will remain.
“So let’s see together how to correct these problems and will the finance minister stop his plastic operations in an effort to correct the image,” he pleaded.
