.jpg)
Cyprus could not be exempted from the across the board deterioration of the economic outlook, but its economy is doing relatively better than most other economies in the European Union, Governor of the Central Bank of Cyprus (CBC) Athanasios Orphanides said in a speech during a dinner of the Institute of Certified Public Accountants on “The International Financial Turmoil and the Economy”.
Noting that according to the Commission Cyprus GDP growth for 2009 is expected to average just 1,1%, compared to the 2,9% forecast presented in the autumn, Orphanides said that “however, we cannot overlook the fact that any negative repercussions will be substantially milder as a result of our accession to the euro area and the adoption of the euro which acts as a shield against an exchange rate crisis.”
“In addition, the stability of the single currency has been a significant factor in preserving the attractiveness of our banking system for foreign deposits in Cyprus. The biggest risk factor facing the banking system has been avoided and so far no serious problems have been experienced,” he said, adding that the euro adoption in combination with the banking supervision by the Central Bank and the conservative lending policies of the commercial banks have contributed to the shield against the crisis.
“Of course, the fact that the UK, one of our major trading partners is one of the countries most affected by the financial crisis continues to be a source of concern. We will have to wait and see whether the expected decline in UK tourist arrivals and British purchases of houses will be as bad as is anticipated. In any event, our economy is doing relatively better than most other economies in the European Union,” Orphanides noted.
He said that while Cyprus’ economy compares well with other economies in the euro area, it must be recognized that it is slowing down. “The construction and tourism industries are facing a downturn and overall consumer confidence has fallen. More important, the degree of uncertainty regarding the outlook of the global economy is so substantial at the moment that the country should be prepared with an emergency recovery plan in case a worst case growth scenario materializes owing to a worse than expected deterioration in the euro area, the UK, and the economies of our other major trading partners,” he added.
He said it is essential to plan in advance of the need to implement measures that might be deemed appropriate for limiting the repercussions of the crisis in Cyprus. “In light of the well known lags associated with the implementation of government initiatives, it is imperative that the preparatory work needed to implement specific and carefully planned measures is done well in advance. As always, attention should be given to those development projects from which our economy would derive a higher value added and a larger productivity gain,” he noted.
Orphanides said “the issue of productivity is extremely important in the current situation of slowing foreign demand, increased competition and tougher borrowing conditions as a reduction in competitiveness can undermine the performance of Cypriot enterprises compete overseas.”
''Productivity boosting measures, such as the adoption of innovations and new technologies, should constitute a high priority for the business world and the government. Further progress can also be achieved with more simplified administrative procedures dealing with businesses and a reduction of bureaucracy,” he added.
He expressed the belief that the banking sector, contrary to the problems appearing in several other countries including some in the euro area remains healthy and strong.
However as he said the international turmoil has inevitably affected the lending conditions in Cyprus. “As in many other countries, deposit and lending interest rates have increased considerably, along with the interbank rate Euribor, which constitutes a reference rate for lending and deposit rates. However, these interest rates increases are gradually being reversed, as can already be seen from the continuing decrease in Euribor interest rates. The drastic and decisive action taken by the ECB and other central banks, has contributed decisively to this process of normalization,” he said.
He noted that the Cyprus government could also contribute to the enhancement of credit availability in the private sector by taking measures similar to those that have already been implemented in a number of other euro area countries in line with the Common European Action Plan agreed to by the EU and national authorities in October. Such measures could include the issuance of special government bonds which could be lent to banks, which in turn, would use them as collateral to access cheap funding from the Eurosystem, as well as the provision of government guarantees to banks wishing to access the international capital markets through bond issuance.
The implementation of such measures may facilitate credit at lower cost. Because such measures have already been implemented in other euro area countries including Greece, it may be particularly important for our government to consider them also in order to promote a level playing field between local and foreign banks and thus avoiding putting our banks in a competitive disadvantage, Orphanides said.
