Governor of the Central Bank of Cyprus, Athanasios Orphanides, has said that Cyprus is in a better condition than most of its EU partners to implement a fiscal consolidation plan at the moment.
In an interview with Reuters, Orphanides expressed hope that a fiscal consolidation plan will be agreed upon and implemented in the next few months.
“Cyprus is in a better condition than most of our peers in the European Union to implement a fiscal consolidation plan at the moment'', he said.
Furthermore, he noted that ''it is only in the past two or so years that we have seen a significant deterioration in the fiscal finances, driven in large part by increases in non-productive government expenditures''.
Orphanides recalled that some analysts as well as the Central Bank were warning about the deterioration in fiscal finances and the need for a correction, last year.
“However, this view was not universally accepted”, he remarked.
He described as a very healthy development the fact that the need for fiscal consolidation is now understood.
“I find it very important that it is now universally agreed by all involved that we do need to discuss, agree and implement as a country a fiscal consolidation programme. That is a very positive element”, he went on to say.
Referring to the rejection on behalf of the parliament of the government’s fiscal consolidation plan, he said that “in the analysis that we have done at the Central Bank, we have seen that those plans were not sufficient to address the fiscal consolidation that needs to take place”.
“My interpretation is that there was a call for the government, working together with parliament, to agree on a complete fiscal consolidation programme that would place appropriate emphasis on expenditure reduction, without hampering long-term growth prospects”, he said.
He expressed hope that such a programme will be agreed upon and implemented in the next few months, in the context of the discussions for the budget that will be prepared by government and presented to parliament in the fall.
Regarding the warnings for credit ratings downgrade by Standard and Poor’s, he said that the warning is a symptom of the deterioration of our fiscal finances and the need for putting back our fiscal finances onto solid footing.
“It is a warning that we should also take very seriously because, if we do see a materialization of these downgrades, that would imply necessarily an increase in financing costs throughout the economy, which would be detrimental for growth prospects for our economy both in the short term and in the long term” he continued.
Orphanides said it is imperative that whatever actions are taken by government, avoid a deterioration in the long- term prospects of our economy.
Asked whether there is any risk Cyprus to follow the path of Greece, he reiterated that Cyprus is in a better condition than other countries.
“Observing the damage arising from the procrastination in taking action to put the fiscal finances back on to a solid footing and the pain that this can cause to the people of the country, which is what we are observing in Greece, is something that I trust would help our government and our parliament in taking the corrective action promptly”, he went on to say.
Asked if there could be a double dip, Orphanides said that our baseline scenario is that we will have some increase in GDP in the second half of the year.
“However, growth is not projected to be very high and I am concerned that we will continue to see an increase in unemployment for somewhat longer before the recovery is more solid”, he said.
Asked about the economic situation in Greece, he said he was pleased to see the statement of the European Commission, the ECB and the IMF on their review mission, saying “perhaps because I was one of the optimists on the success of this programme all along, I am not surprised by the strong start that has been made on the programme”.
Asked what would take in terms of fiscal progress to convince bond markets, the CB Governor recalled that the troika mission pointed out that the Greek government is on track in consolidating its finances, saying that “this is what is important”.
“After a very long period in which it was not clear whether the Greek government could deliver, the most convincing element for markets, I believe, is for the government to continue implementing what has been agreed and continue demonstrating with its actions that it has the resolve to implement the agreed programme”, he pointed out.
Concluding, he expressed optimism for Greece saying: “I am optimistic on Greece. I think the courage and determination the Greek government has shown to implement a programme destined to put the Greek economy back on track is commendable”.
