articles | 03 June 2013

Cyprus to cut spending by €1b over three years

Cyprus plans to cut spending by around a billion in the next three years to rein in the deficit and a spiraling public debt.

According to a Cyprus Finance Ministry circular on the budget and three year framework, spending in 2014 – excluding debt servicing — will drop 10.9% to €5.5 billion, compared with €6.2 billion this year. Further cuts were also planned for 2015, 1.4%, and 2016, 5.0%, to bring down spending to €5.2 billion.

The finance ministry has placed spending caps on all ministries and departments, which will have to prepare their budgets for the next three years within those strict limits. “Any diversion from the ceilings jeopardises the achievement of the fiscal objectives,” the ministry said.

The government aims putting an end to excessive deficits in 2016 and achieve primary surpluses in a bid to cut public debt and free resources for development. All development projects and programmes will be reviewed and the need of implementation redefined, the ministry said. “All projects were planned under completely different economic conditions, when the economy recorded high growth rates, aswell as completely different priorities,” the circular said.

The three-year framework will favour projects with high added value “that will boost the economy further, bringing lasting benefits. Advancing large development projects costing over 5.0 million will depend on a cost-benefit study that must show their positive contribution to the economy.” Experiencing its worse economic crisis in decades, exacerbated by a messy bailout, Cyprus will see its economy contract by more that 8.7% this year with any signs of growth expected in 2015. In 2014 the economy is expected to contract by 3.9% before returning to black – 1.1% in 2015 and 1.9% the year after.

The final rate of contraction depended on tackling the challenges in the banking sector effectively, the recovery of the international economy, and full implementation of the structural measures included in the bailout agreement, the ministry said. The jobless rate is expected to reach 15.5% — compared with 11.8% last year – and continue its climb to 16.9% in 2014. It is expected to start falling in 2015 although rates will remain high – 14.6% and 13.7% in 2016 – the ministry said.

“The prospects of the Cypriot economy are expected to improve in the midterm,” it said, after the restructuring and recapitalisation of the banking sector and removal of capital controls. “In combination with the prospects in the energy sector, our economy is expected to recover and record positive growth rates from 2015 onwards.” the ministry said.

In exchange for a €10 billion bailout from its EU partners and the International Monetary Fund, Cyprus had to resolve its second-largest bank, Laiki, and take cash from Bank of Cyprus depositors to recapitalise the lender. Meanwhile, total deposits in the Cypriot banking system dropped by €6.3 billion in April, from €63.7 billion the previous month. The reduction was also attributed to the 37.5% ‘haircut’ imposed on deposits in addition to outflows. It is understood however that the figures did not include the losses incurred by Laiki’s resolution.

Source: Cyprus Mail

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