Central Bank warns of sacrifices ahead in battle against deficit

CENTRAL Bank governor Christodoulos Christodoulou warned yesterday the current budgetary deficit could not be overcome without economic and political cost.
Speaking after the regular meeting of the Monetary Policy Committee, which decided to leave interest rates unchanged at 4.5 per cent and the overnight deposit facility at 2.5 per cent, Christodoulou added his warning to the growing row between government and opposition over the fiscal deficit.
The finance ministry expects the fiscal deficit to exceed five per cent of gross domestic product this year, putting Cyprus outside the 3.0 per cent ceiling required by the European Union to adopt the euro.

Cyprus joins the European Union next May, and hopes to become a member of the eurozone by January 2007.

Tax reforms and lower than expected government Value Added Tax revenues, due to a slump in consumer spending have been blamed for a widening of the deficit.
“The budgetary deficit cannot be faced either with prayer books or theories,” Christodoulou said, adding that it could be overcome but not without some difficulties, and not without economic and political sacrifices.

“The Monetary Policy Committee has highlighted the need for inflationary pressures to be contained and calls for fiscal discipline,” said Christodoulou. He said it was within the bounds of possibility and said the government’s approach to the problem seemed to be satisfactory.
Last week, Finance Minister Marcos Kyprianou told ministers they must tighten their belts and said some development projects might have to be put on ice, a statement that drew strong criticism from DISY official Averoff Neophytou, a communications minister in the previous government.

Asked by reporters if tax hikes might be in the offing, as suggested by Neophytou, Christodoulou said people should not think one-track on the issue. He said there were many ways to reduce the deficit.

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