By Hamza Hendawi
THE HOUSE Finance Committee yesterday approved a government request to raise $400 million abroad through a bond issue to cover deficits this year. The timing of the issue, which is likely to be in European currency units or euros, will be decided later by the Finance Ministry.
Committee Chairman Alexis Galanos said the government had notified members of the committee that the loan request had nothing to do with the taxation package submitted to the House late last month.
Part of that package was thrown out by the House on May 28, while the remainder was slotted for review by the committee in October.
Independent economists said they were not surprised by news of the government’s request, which is now virtually certain to be approved by the House plenum.
The fiscal deficit last year stood at more than five per cent of GDP and is set to leap to seven per cent by the end of 1998. Real GDP for 1998 is projected to be nearly £3.5 billion.
The government says the widening shortfall has mostly resulted from a deliberate expansive fiscal policy in 1997 to inject life into a sluggish economy, subsidies to an agriculture sector ravaged by a persistent drought, and the projected loss this year of some £130 million in import duties lifted to comply with a Customs Union agreement with the European Union.
Galanos, a Diko rebel who supports the government of President Glafcos Clerides, sought to defend the planned bond issue, arguing that interest rates abroad were lower than those at home – 4.5 to 5 per cent compared to 7 per cent – and that the island’s adequate foreign currency reserves, currently estimated at $1.75 billion, permitted the move.
“Prospects for interest rates abroad are not unfavourable and, barring any unforseen developments, should go down further,” said Yiannos Tirkides, the Popular Bank’s chief economist. “They don’t want to borrow at home so as not to put undue pressure on the credit market.”
Tirkides and other economists said that heavy government borrowing at home could crowd out investors seeking to tap the local capital market and pose something of an unfair competition in view of the general preference for the security of government papers.
