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Cyprus may remain stuck in recession in 2010, the central bank governor warned urging parliament to back a cost cutting drive and back reforms to shore up deteriorating public finances.
"Real GDP recorded a reduction of 1.7% in 2009. Unfortunately it appears the economy remains in recession and we cannot rule out a negative rate of growth also in 2010," Orphanides, who is also a member of the Governing Council of the European Central Bank, told parliament's finance committee.
Cyprus represents about 0.2% of the euro zone's economy. It slipped into recession in 2009 on the back of a collapse in real estate and tourism earnings.
The finance ministry last week said it expected growth of around 0.5% in 2010.
Last week the ministry unveiled a fiscal package designed to wrestle down a public deficit exceeding 6.0% of gross domestic product and therefore more than double the level permitted by the euro zone.
The government hopes to trim half a percentage point off a projected deficit of around 7.0% this year by adding five points on now zero-rated Value Added Tax products. It says it will pursue tax evasion and wants 70,000 employees of the broad public sector to accept moderation in wage demands.
Finance Minister Charilaos Stavrakis said that if reforms were not adopted now, they would inevitably be required in a few months.
"The measures are unavoidable. If we don't take them now we will take them in a few months and they will be harsher," Stavrakis told the same committee of parliament.
Orphanides has long argued that Cyprus's present economic difficulties are also the product of long-overdue economic reforms, and the absence of long-term planning to curb spending.
Within two years, there had been a 10 percentage point deterioration in the island's fiscal balance. "There are structural problems. Otherwise we cannot explain it," Orphanides told MPs.
"There should be an urgent targeting of fiscal policy to restore public finances to a sustainable level, without undermining the development of the country," Orphanides said.
"Our options are to take measures which will help us mitigate the problems and lay the foundation for long-term growth, or counter-productive confrontations and putting off the necessary cutbacks in state spending," Orphanides said.
