By Michele Kambas
THE GOVERNMENT faces tough decisions on curbing budget deficits if it is to meet its target of adopting the euro as soon as possible after the country joins the European Union.
Wide ranging tax reforms introduced by the previous government before it came to power in a February general election are combining with low growth prospects to push the fiscal deficit higher.
Current projections see the deficit spiking to 3.9 per cent in 2003, and easing to 3.4 per cent in 2004, exceeding the government’s target of meeting single currency criteria of three per cent or less.
Cyprus, due to join the EU next May alongside Malta and eight eastern European states, has set an aim of 2006 for entering the eurozone, giving authorities just less than three years to tidy up their finances.
The government’s main player, Communist AKEL, is philosophically reluctant to close the budget gap with privatisation, although some analysts believe it may come to that.
The government also says new taxes would be a last resort to plug deficits, but it has hinted that it may trim spending, a feat in itself now that Cyprus has significant overheads as it gears up for EU membership.
“We cannot place our hopes on any sudden increase in economic activity, as we have done in the past,” says Pambos Papageorgiou, a senior researcher at Cyprus College. “Drastic measures are required.”
The island’s fate is tied up with the fickle sector of tourism, which accounts for 25 per cent of its gross domestic product, and which has been battered as a result of the US led war on Iraq.
The £6.2 billion economy is projected to expand by some 2.2 per cent this year, easing on last year’s 2.3 per cent.
Economist Costas Apostolides said the government should not cut spending to stave off a widening shortfall. That would cut growth rates and stoke unemployment, he said.
“The key to recovery is economic growth. I would recommend riding this out, maintaining the current budgetary levels and lowering interest rates,” he told Reuters.
A government advisor, speaking on conditions of anonymity, told Reuters, “The tax reforms were introduced when the economy appeared to be rebounding, but now consumption has slackened.
“I think that somewhere there may have also been a miscalculation.”
Both Papageorgiou and the adviser said the government could make a good start by preparing balanced budgets and not the deficit-yielding ones passed by parliament every year.
Lucrative state assets including state telecoms CyTA and the electricity authority EAC — whose surpluses are already being creamed off by the government to plug deficits — could be sold off to generate revenue.
But that would be a bitter pill for AKEL, which is against selloffs on principle.
As part of a deregulation drive, Cyprus plans to auction off a mobile telephone licence to the private sector by the end of October, but it is unlikely to see any major cash injections unless it privatises existing utilities, say economists.
“I think the state may have to sell of some of its entrepreneurial activities, like the post office, telecoms and the electricity authority,” said Papageorgiou. (R)
The Cyprus Mail is the only English-language daily newspaper published in Cyprus. It was established in 1945 and today, with its popular and widely-read website, the Cyprus Mail is among the most trusted news sites in Cyprus. The newspaper is not affiliated with any political parties and has always striven to maintain its independence. Over the past 70-plus years, the Cyprus Mail, with a small dedicated team, has covered momentous events in Cyprus’ modern history, chronicling the last gasps of British colonial rule, Cyprus’ truncated independence, the coup and Turkish invasion, and the decades of negotiations to stitch the divided island back together, plus a myriad of scandals, murders, and human interests stories that capture the island and its -people. Observers describe it as politically conservative.
