The Cypriot economy will return to growth on a sound and sustainable basis when the two fundamental problems of the economy, the imbalances of public finances and the untargeted and irrational credit expansion are rectified, Minister of Finance Harris Georgiades has said.
Speaking during an event hosted by the office of the European Parliament in Cyprus Georgiades said Cyprus should focus on the adjustment programme it signed with its international lenders last March if it wants to create prospects for growth which will come from the private sector.
"If we want to define our way forward, we should look back and reflect on what went wrong," he said, noting that the economy was derailed by a combination of two problems that were left to swell both in the public sector and the banking sector.
In his remarks, Georgiades said that Cyprus widened its fiscal deficit and its public debt with expenditure which increased from 35% of its GDP during the 90s close to 50% by 2012 and he questioned whether this spending was conducive to growth.
"It is doubtful whether public spending in its entirety had a positive multiplier for growth," he said.
With regard to the banking sector, the Finance Minister said that in the past decade, the banking system registered "an excessive and irrational credit expansion, and excessive lending."
"What rendered this expansion even more dangerous is that it has been offered by the banking system without considering the repayment capacity," he said, noting that "lending on the basis of collateral alone inevitably led us to adventures."
Referring to the way forward, Georgiades said "we want a public sector which is smaller, which spends less, is more effective and more functional which will not weigh down on the productive sectors of the economy with continuous tax hikes and public debt increases. At the same time we want a banking sector which will also be smaller, more effectively supervised and in position to finance the productive forces of the economy."
He noted that "a series of omissions, negligence and some political decisions were tantamount to the final blow both to the banking system and to the economy in general."
"If we uphold these two targets as fundamental and direct all our actions, changes and all obligations stemming from the memorandum towards these targets we will respond to the challenge of restoring the economy on a sound and sustainable basis,” he said.
Excluded from the international markets since May 2011, Cyprus applied for financial assistance from the EU bailout mechanism to rescue its two largest banks which posted mammoth losses after investing in junk-rated Greek bonds, as well as to cover its increasing fiscal deficits. The Troika of the European Commission, the European Central Bank granted Cyprus a €10 billion rescue package containing a series of strict reforms to the public and banking sectors, which would enable Cyprus to return to the markets by 2016.
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