THE PUBLIC deficit cannot be wished away with a magic wand, the Central Bank Governor said yesterday, warning starkly that belts would have to be tightened to save the economy.
Christodoulos Christodoulou stressed the need for immediate measures to control the public deficit and public debt, adding drastic spending cuts would be required.
“I insist that spending should be cut or contained, or at least to cut the rate of public spending drastically,” the governor said.
Speaking at a news conference, where he presented the Central Bank’s annual report for 2003, Christodoulou said the most important thing was to cut the spiralling civil service wage bill and set a moratorium on the opening of new positions for at least two or three years.
He said last year there 770 new positions were opened at a time when the public deficit was at 6.3 per cent.
“These two elements do not reconcile.”
He suggested raising the retirement age, noting that Europe was already looking to extend it to 67 from the average 65. The current retirement age in Cyprus is 60.
Asked whether he considered the government’s measures satisfactory, Christodoulou said in theory they were partly satisfactory, but despite the repeated declarations, they had not been implemented.
He added, however, that even once enforced they would not be enough to rectify the problem.
The Central Bank Governor warned that if Cyprus wanted to join the Eurozone in 2007, it would be necessary for the public deficit to fall under three per cent by 2005 and be judged as sustainable.
In 2003, the public deficit reached 6.3 per cent of GDP, compared to 4.5 per cent in 2002. According to the Maastricht criteria, the public deficit cannot exceed three per cent of GDP.
The public debt in 2003 reached 73.1 per cent of GDP, compared to 67.4 per cent in 2002; it should not exceed 60 per cent, according to the Maastricht criteria.
Christodoulou said Cyprus would take a definitive decision “soon” on when it would apply to join the exchange rate mechanism (ERM2), which is the ante room to euro adoption. The situation would be clarified with the government by July, he said.
As for this year, Christodoulou said it was expected that the global economy would recover and inflation in Cyprus would be drastically cut.
Unemployment could display a small improvement, Christodoulou said.
Concerning the feared flight of capital with full liberalisation, Christodoulou said £13 million had been exported in the first three days of the month, while yesterday and the day before there had been an influx of around £10 million.
In the last 15 days of April, £96 million – £9 million per day over 11 working days — were exported into foreign currency, Christodoulou said.
He added that the one per cent hike in interest rates had arrested the flight and showed the people that the Central Bank was determined to support the pound.
