IMF supports Cyprus euro adoption plan

The International Monetary Fund (IMF) supports the Cypriot authorities’ target to adopt the euro on January 1, 2008. The statement was made at the end of the preliminary conclusions of an IMF mission visit to Cyprus, which underlined that robust economic activity has been safeguarded by prudent economic policies, with the reduction in the fiscal deficit laying the foundation for a flourishing Cypriot economy.
“However, safeguarding the economy against adverse shocks and taking full advantage of the opportunities available to Cyprus will require continued efforts to address short term risks and medium term pressures”, the conclusions noted.
Highlighting four issues that the Cypriot economy faces, Alexander W. Hoffmaister, assistant to the Director and Mission Chief said that Cyprus is well placed to benefit from adopting the euro since it is Cyprus’s largest trading partner, and trade linkages with the euro area are to strengthen further the introduction of the euro.
He said that the targeted adoption date implies that Cyprus would be evaluated against the Maastricht criteria sometime in the first half of 2007 with the exchange rate locked in at a rate determined in consultation with the European Council.
As far as safeguarding fiscal consolidation, Hoffmaister said that fiscal consolidation has proceeded resolutely, and the Convergence Programme envisages further reductions in the fiscal deficit. “The fiscal deficit was cut in half in two years to under three percent of GDP in 2005, and it is expected to fall below 2 percent of GDP in 2006. Tight fiscal policy has enabled public debt to return to a sustainable path and resulted in the cancellation of the Excessive Deficit Procedure in July. Cyprus thus became the first new member country to achieve this distinction”, Hoffmaister noted.
In the short term, fiscal consolidation will require keeping public expenditure under tight control”, said the IMF official, noting that “any higher-than-expected revenue should be saved and used to reduce public debt, which will be facilitated by the authorities’ decision to discontinue the use of supplementary budgets starting in 2007”.
Hoffmaister stressed “not only we want Cyprus to enter the eurozone, but we want Cyprus to become the star in the Eurozone”.
The IMF official stressed that the key long term fiscal issue in Cyprus is the aging-related pressure and said “the social security system needs to catch up with demographic trends and keep up with these developments in the future”.
Hoffmaister stressed the need to strengthen the financial sector, noting that over time, there will be a need to re-examine the institutional setting of the financial sector supervision.
Regarding sustaining economic growth through structural reforms, Hoffmaister said that the National Lisbon Programme establishes a strategy to enhance the growth potential of the economy. “We support this programme, including the authorities’ vision to support external competitiveness and increase the flexibility of the economy to withstand shocks”, he concluded.