Cyprus CB Governor calls for spending restraint

The outgoing Governor of the Cyprus Central Bank, Christodoulos Christodoulou called on all political parties, the government and social groups for spending restraint ahead of next year’s presidential elections, stating firmly and resolutely that euro accession needs constant vigilance to limiting expenditure and making sure that the recent improvement in economic criteria remain sustainable.

Speaking at the Third Annual Forecast Event of the CFA Society of Cyprus, Christodoulou unleashed a strong attack against the previous administration and all the political parties represented in parliament for the misguided policy of passing all the proceeds from the increase in the VAT rate from 10% to 15% back in the form of subsidies to low income and special interest groups.

“The policy of zero benefit had a devastating impact on state finances, with the result that by 2004 the fiscal deficit as a percentage of GDP shot above 6%, which forced the European Commission to place Cyprus under special scrutiny for busting the 3% maximum deficit target,” said Christodoulou.

The austerity package introduced by the government of President Papadopoulos and fiscal restraint allowed Cyprus to turn the situation around and by 2006, the fiscal deficit fell to 1.4%-1.5% of GDP, well below the 3% Maastricht criteria, thus satisfying a major requirement for joining the eurozone.

Cyprus also fulfils the other criteria of low inflation, a shrinking public debt to GDP ratio, very stable long term interest and exchange rates and low unemployment.

The improvement, according to Christodoulou allowed Cyprus to apply for eurozone membership and having fulfilled the economic criteria, the country is very close to winning eurozone membership.

“We cannot however allow for the situation to slip out of control,” Christodoulou told a packed CFA Society audience, adding that the real criteria for euro membership is to prove beyond doubt that “the improvement is sustainable.”

According to Christodoulou, this means that the government and the political parties should not enter into commitments to increase social spending without the relevant increase in state finances.

“We have a commitment to the EU to reduce our GDP deficit by 0.5% a year until we move into surplus,” said Christodoulou, adding that it would be wrong if ahead of the presidential elections due February 2008, the level of spending increases.