A LACK of political will to restructure public finances, and “fictitious reforms aimed at simply prettifying the situation temporarily” are hampering the country’s prospects for growth, Central Bank (CB) Governor Athanasios Orphanides warned yesterday.
“The longer we take to make the structural changes needed to put public finances back onto a healthy basis, the more painful for the country’s economy will be the inevitable corrections,” he said in a forthright speech presenting the CB’s 2009 report.
Orphanides said given that “almost all” politicians, economists and social partners “recognise this fact”, the country is faced with a simple choice: “to either proceed boldly with readjusting fiscal policy on a rational basis, or to remain inert and trapped by unproductive bickering.”
Referring to 2009 as a year with “two significant negative developments for Cyprus’ economy”, Orphanides said that with a reduction of 1.7 per cent of real gross domestic product (GDP), the country had witnessed “the most significant negative growth since 1974-1975”. The second negative development was the “serious increase in the budget deficit beyond a point that could be explained as resulting from the economic recession”.
Describing the deterioration of the budget deficit in 2009 compared to the previous two years as being “structural in character and due to a major extent to the large increase in non-growth-targeted public spending”, Orphanides said that the government’s recent Convergence Programme (CP) submitted to the European Commission itself contained a clear danger signal.
He said that although public spending had reached the historic high of 46.4 per cent of GDP in 2009, the CP forecast a further increase to 47.6 per cent in 2010. “Of course, this trend cannot continue without particularly negative consequences for the country’s economy”, he added.
“What is urgent, therefore, is to focus fiscal policy on returning the public finances to a sustainable basis without undermining the country’s foundations for growth. Unfortunately, irresolution over taking essential structural measures has already negatively affected the country’s growth. It is imperative that a rational and long-term planned approach is immediately formulated, and fictitious reforms aimed at simply prettifying the situation temporarily are avoided,” he said.
Orphanides said that it was positive that the government had acknowledged that there was a problem which needed to be solved through its convergence programme. However, “many of the measures it refers to are not specific” and there are “significant gaps” which need to be filled through “further discussion” which “must be completed very quickly”.
Reiterating the need for the formulation of long-term fiscal policy in order “to better manage the public finances”, Orphanides said that this must take into account “the acute and long-standing problem of finding sources to fund pensions” – especially in view of an ageing population – and should address “domestic inflationary pressures (that) continue to threaten and are stronger in comparison with the rest of the eurozone”.
Referring to Greece’s public finance crisis, Orphanides said that Cyprus’ fiscal policy needs to be corrected on an urgent basis: “The sooner we move towards reform, the better prospects for growth, and the easier we can avoid having to take very harsh measures like some of those that certain countries are being forced to take because they did not move quickly enough.”
As to the aim of those measures, Orphanides was blunt: “We need to limit non-productive state spending”, he said. “If we move quickly and simply limit increases in spending, we can avoid the pain that some people will surely feel temporarily in Greece due to the austerity measures to be taken there”, he added.
Noting that “despite the negative developments in the real economy, our banking system continues to be in a very good state”, the Governor sounded another note of warning, pointing out that one of the side effects of the Greek government’s fiscal crisis was to starve the Greek banks of liquidity.
He insisted that before the fiscal crisis, “the Greek banking system was not suffering, but was robust and in a good condition”, but had faced huge liquidity problems “over the last few months and weeks”.
In fact, the €110 billion rescue package put together by the EU and IMF in the form of three-year loans will include €10 billion earmarked to provide relatively cheap liquidity to the banks.
“I insist on this point because I want to stress how important it is to address fiscal policy if we want to avoid side effects on the financial and banking sector, especially in countries where the banking sector contributes decisively towards the growth of the economy”, he said.
