Keravnos satisfied with ECOFIN decision on Cyprus

Financial Mirror Online
Monday,  January 24, 2005, 14.00

Finance Minister Iacovos Keravnos expressed the government's satisfaction for the position taken by the EU Economic and Financial Affairs Council (ECOFIN) that Cyprus has carried out all effective actions to purify its public finances and that it has implemented all measures included in its revised convergence programme.

He told a press conference that ECOFIN's position justifies the current economic policy followed by the government and assured Cypriots that the implementation of the convergence programme will continue with determination.

He added that the government aims to make Cyprus economically stable within the EU framework and proceed, according to the convergence programme, with its membership of the Exchange Rate Mechanism (ERM II) by April.

Keravnos said the government did not take hasty decisions to correct its public finances by imposing taxes to cover the public deficit.

Cyprus submitted in May 2004 a revised convergence programme with a view to curb public deficit to 2.9% by the end of 2005.

ECOFIN adopted a Commission recommendation to suspend a monitoring procedure on Cyprus, imposed in the summer of last year because of excessive public deficit recorded in 2003.

The Council is now anticipating the implementation of the 2005 budget in Cyprus and a reduction of the public deficit to a figure under 3% of the Gross Domestic Product (GDP) to terminate the monitoring procedure.

The reduction in the deficit is to result from increase in state revenue, restraint in public spending and improvements in tax collection.

Authorities have boosted revenue collection with more vigorous pursuit of tax dodgers – VAT inspectors launched a blitz of raids in the autumn – and a cap on spending.

As the government struggles to bring the deficit down to from 4.8%, to 2.9% by the end of this year Keravnos warned that the road to fulfilling the Maastricht criteria was a "thorny" one, and that 2005 would be a difficult year.

Keravnos said according to a recent study by the statistics department, the number of families living under CYP 5,000 per annum had dropped from 19% in 1998 to 7.0%.

"This means we have increased the percentage of households with a bigger income and as a result have reduced inflation," he said.

He also said that although prices had increased by a small percentage over the past few years, the phenomenon appeared bigger due to profiteering.

The Planning Bureau predicted a 4.0% growth rate in 2005 boosted by consumer confidence and an improvement in the business climate.

Responding to journalist comment that the massive reduction in defense spending, coupled with higher receipts from direct and indirect taxation should have curtailed the deficit for 2004 to 3.3% of GDP instead of 4.8% as forecasted and down from 6.3% in 2003, Keravnos responded that the success of the Convergence Plan depends on better collection of taxes, adding that even though that the state could resort to higher taxation, yet at this stage, he stressed that the government does not have such plans.

The government also plans to extend the retirement age for civil servants beyond 63 to such an extent in order to cover the 2% wage increase promised for 2006 and amounting to 2%.

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