THE STATE must urgently tackle pension reform threatening to undermine public finances in the long run, and costly in the immediate future, Central Bank governor Athanasios Orphanides warned yesterday.
Orphanides, a member of the Governing Council of the European Central Bank, said that pension spending was expected to spiral to close to 30 per cent of gross domestic product by 2060 without reform. At present it is 19 per cent of GDP.
“We know what the choices are, they are inescapable,” Orphanides said.
“Either the government will significantly cut benefits, or increase contributions over the expected lifetimes of individuals, or both.”
Orphanides skirted any references to the broader euro zone economy, other than saying that the recession exposed that the EU stability and growth pact “did not really work as intended”.
Cyprus, one of the euro zone’s smallest countries, has seen a deterioration in its finances in the past three years. In part, that was caused by an expansionary fiscal policy to ease the island out of its first recession in more than three decades.
Reflecting concern over structural problems, Moody’s cut Cyprus’s ratings last month to A2, while Standard and Poor’s cut its ratings to A last November. Fitch, which rates Cyprus two notches higher at AA-, has placed the island on credit watch negative.
Cyprus emerged from recession in 2010, registering growth of around 0.9 to 1.0 per cent. This year the economy is set to grow by 1.5 per cent, though there are risks to the downside from high oil prices, Finance Minister Charilaos Stavrakis said last week.
The recession had lowered Cyprus’s growth outlook, Orphanides said. Though the pensions system was broadly acknowledged to be a problem, it had come into sharper focus now, he said.
“Before the crisis the growth prospects were around 4 per cent of GDP …we havent seen anything like that in the past three years and we are unlikely to see such growth in the near future,” Orphanides said.
Though Cyprus’s government deserved credit for identifying the pension problem, he said it needed to be translated into action.
“Until our government makes these changes and parliament ratifies it, market analysts will continue to harbour doubts regarding the determination of the government to put its finances in order,” he said.
Orphanides was speaking at an event of the Chartered Financial Analysts in Cyprus.
“We often tend to procrastinate. As individuals we don’t quite understand how costly inaction is, and the same holds true for governments in fiscal affairs,” he said.
