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Cyprus Internet Directory [ Fiscal figures justify no optimism ]

Fiscal figures justify no optimism

Stelios Orphanides

ECONOMISTS are not optimistic about the performance of the economy following the release of the first-quarter results.

One economist, Symeon Matsis, who has served as undersecretary in various ministries, said the ‘worst-case scenario’ talked about earlier in the week by Finance Minister Charilaos Stavrakis, showing a fiscal deficit of 6 per cent of GDP, should now be regarded as realistic.

"Optimism is not justified," Matsis told the Sunday Mail. "Official figures show that public spending is increasing at a higher pace compared to last year while revenue falls, despite the introduction of VAT on foodstuff. The lower tax revenue indicates that economic performance is below what we initially expected".

Public revenue in the first quarter of the year fell 7.4 per cent year-on-year to €1.44b, while public spending rose 9.6 per cent to €1.75b, according to data published on the Finance Ministry's website on Friday.

The decrease in revenues in the first three months of the year resulted from an annual 8.3 per cent and 4.2 per cent slump in direct tax and indirect tax revenues, which fell to €413.2m and €591.8m respectively.

The increase in spending was caused mainly by a 53 per cent increase in interest payments which rose to €170.2m. A 5 per cent increase of the public payroll to €446.6m in the first quarter was also one of the main reasons that led to a deficit of €311.6m or 1.7 per cent of GDP in the first three months, compared to a deficit of €47.1m a year before.

The finance minister blamed once off factors for the deteriorating fiscal figures and named the decrease in the dividend the government received from the Central Bank's profit to €15m this year from €92m in 2010 or the €20m state aid to Cyprus Airways as examples. Stavrakis maintained his previous forecast that this year's fiscal deficit will be 4.5 per cent of economic output "or below".

Even as fiscal figures deteriorate following last year's budget deficit reduction, Cyprus's public debt and fiscal deficit are by far below those of Greece for the island to fear it may too need a bailout, according to Matsis. "If however Greece decides to restructure its debt, we shall then have a new situation".

As uncertainty over Greece's debt remains, Cyprus still faces risks as it has not reformed the public payroll and pension system, Matsis said.

The government's reluctance to address these issues makes its fiscal consolidation efforts ineffective, according to Kostas Christofides, assistant director general of the Cyprus Employers and Industrialists Federation.

"The business community is concerned over the lack of structural reforms that would help economic performance. Sparing the wage bill and the pension system but slashing budgets for trips and buying less paper for the public service is no structural change," he said.

As the government fails to create confidence among investors with its reluctance to carry out long needed structural reforms, its decision to turn to domestic lending following the recent rating cuts, makes things worse for businesses, according to Christofides. "This makes borrowing for companies more expensive which in turn discourages investment".

(Source: Cyprus Mail)
Copyright © Cyprus Mail 2008 Please contact Cyprus Mail for the copyright terms of this article.

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