THE STATE is hoping to rake in up to £200 million from new taxes on secret accounts, once a bill is approved enabling officials to crack down on tax evasion.
Deputies yesterday hinted at new legislation this week to address the issue, helping give state finances a much-needed boost.
AKEL’s Stavrou Evagorou, who chairs the House Finance Committee, said that by Friday parliament would “regulate” the issue of secret bank accounts, but did not comment when asked if a relevant bill would be fast-tracked.
Tighter checks on bank accounts would automatically rake in anywhere from £50 to 100 million, Evagorou added, although other deputies cited figures as high as £200 million.
Evagorou said that, according to Central Bank estimates, the amount of money kept in secret bank accounts was £1 to £2 billion, an enormous sum by Cyprus standards.
The need to enforce stricter legislation has come to the fore after recent admonitions by the Central Bank’s director that government spending must be reined in if the public deficit is not to spiral out of control. According to official figures, the deficit forecast for this year is 5.4 per cent of GDP, far exceeding the 3 per cent limit for euro zone nations.
Cyprus joins the EU next May, and has committed to converting to the single European currency — the euro — by January 2007.
But a recent worsening of key indicators – in particular the fiscal deficit — has cast some doubt on whether it can be trimmed down to the EU requirement over the next three years.
Central Bank director Christodoulos Christodoulou last week warned the public deficit could not be slashed just with a reduction in government expenditure, most of which was “inelastic”, as he put it. He also ruled out the option of raising taxes, a measure the present administration has pledged not to resort to.
Therefore Christodoulou proposed clamping down on tax evasion, and hinted at possible “small” interest rate hikes early next year.
Both Christodoulou and Finance Minister Kyprianou have categorically denied reports of a devaluation of the Cypriot pound as a means of rendering the economy more competitive.
There has been speculation in the press that the Central Bank is considering a gradual devaluation of the currency over a three-year period, as an alternative to a one-off sharp depreciation that would send shockwaves rippling through the economy.
The Cyprus pound has been pegged to the euro and its predecessor, the ECU, since 1992.
For his part, Kyprianou yesterday insisted the economy was on a sure footing, denying reports of a crisis; but he pointed out that state finances needed to be streamlined and that there was still room for increase in productivity.
The island’s economy has a forecast 2 per cent growth rate this year, higher than the EU average but well below the usual figures of 4 to 4.5 per cent.
But economic analysts have wondered whether the crackdown on secret bank accounts will ultimately make just for a quick fix, leaving long-term problems untouched. The poor state of public finances has been attributed to four major factors: the high public deficit; the public debt that stands at 65 per cent of GDP; over-dependence on the tourism sector; and the civil service payroll, seen as excessively high.
Analysts see devaluation as a measure to be implemented only when the economy is under particular strain; several countries have devaluated their currency, with varying results. The rebound of the US economy in recent months has been partially attributed to the Federal Reserve’s devaluation of the dollar.
According to Marios Mavrides, an economist with Cyprus College, there are both pros and cons to devaluation, but the measure should by no means be regarded as unorthodox. In his view, the Central Bank’s policy of denying devaluation is sound, as any announcement of such a measure would upset the market.
Instead, suggested Mavrides, the Central Bank has been letting the Cypriot pound gradually “slip” against the euro in recent years, in anticipation of heightened competition once the country joins the EU.
Devaluating the pound would likely see an increase in exports, particularly in the tourism and services sectors, as foreigners would be more attracted to lower prices. Considering that the tourism industry takes up 20 per cent of GDP, Mavrides said devaluation was a “viable option” if the state of the economy worsened.
The downside would be higher inflation and a further increase in the national debt; although Mavrides said an overall rise in prices was not a necessary outcome, since increased competition upon joining the EU would probably bring prices down.
Andreas Theofanous, professor of Political Economy at Intercollege, adopted a different approach, saying devaluation should be a last-ditch measure when all else has failed. “I would like to see the island joining the EU with a strong national currency,” he told the Cyprus Mail. Although the economy faced some structural problems, these could be remedied with measures such as controlling the civil service payroll and promoting Cyprus as a research and financial centre.
