THE RECESSION being faced by Cyprus this year will possibly be worse than expected, the island’s top banker said yesterday as he called for major structural changes to the public sector.
In an unusual move, the normally low-profile Central Bank Governor Athanasios Orphanides made a statement before a meeting yesterday of the Economic Advisory Committee.
Earlier this month, the European Commission (EC) forecast that Cyprus’ gross domestic product (GDP) would decline this year by 0.7 per cent, reaching 0.1 per cent growth next year and 1.3 per cent in 2011.
“Of course, these forecasts … did not take into consideration the deterioration displayed by the latest figures of the Statistical Service [issued on November 13],” Orphanides said.
According to the figures, the seasonally-adjusted GDP was down by 1.4 per cent in the third quarter of 2009 compared to the previous quarter. Orphanides said this was unprecedented for Cyprus.
The growth rate of the first six months of the year was also significantly revised downwards, Orphanides said. Cyprus lagged behind its euro zone peers and saw its economy tip into a recession in the second quarter of 2009, months after other countries.
State earnings have been sapped particularly by a slowdown in construction.
A decrease of the real GDP for the third quarter by 1.4 per cent “is an unprecedented fact for our country,” the Central Bank Governor said.
“Beyond the negative developments on GDP, I am particularly concerned at the significant deterioration in public finances, as is also noted by recent forecasts of the European Commission,” he added.
The EC estimates that the fiscal deficit will reach 3.5 per cent of GDP by the end of this year – “due to both lower than anticipated revenue and higher-than-planned expenditure” – climbing to 5.75 per cent in 2010.
Unless there is a change in policy, the EC is forecasting a 6.0 per cent budget deficit for Cyprus in 2011.
And the further deterioration in 2011 is expected despite the forecasted recovery of the economy.
“The conclusion is that this deterioration is of a structural nature and will inevitably lead our country to perpetual high deficits,” Orphanides said.
This would inevitably lead Cyprus to be placed under EU supervision for excessive deficit.
Orphanides said the severity of the situation necessitates changes in the public sector and radical structural changes in the country’s economy.
“The longer it takes to undertake structural actions required for the long-term tidying up of public finances, the more costly and difficult the adjustment will be to the economic
circumstances prevailing in the rest of the euro zone,” the Governor said.
“That is why long term planning is needed so that we overcome the crisis and secure the viable growth of the economy in the next decades.”
Finance Minister Charilaos Stavrakis said the challenge was to cut unnecessary state expenditure and increase revenues without imposing taxes.
Stavrakis said all sides at yesterday’s meeting agreed on most matters like the effort to “cut the cost of the public sector” and its unnecessary and non-productive expenditure, to give emphasis on development projects in the public and private sectors and the effort to maintain the public deficit on logical levels.
“The key and the challenges is the implementation of all these decisions, which really need a lot of effort and coordination,” the minister said.
