Cyprus prepares to adopt the euro

NICOSIA – Two months before Cyprus signs a European Union accession treaty, authorities are already laying out plans to switch to the euro in 2006. The International Monetary Fund (IMF) backs the idea of a short transition to scrapping the Cyprus pound, which would make the Mediterranean island among the first of 10 new EU member states to adopt the single currency. «The authorities’ objective of joining the euro area as soon as possible is appropriate and within reach, given their established record of monetary and exchange rate stability,» the IMF said in an assessment of the $11.4 billion Cypriot economy. Regardless of the outcome of the diplomatic push to clinch a United Nations-brokered deal to end the island’s decades-long partition, Cyprus is set to sign EU accession on April 16. Barring setbacks in the enlargement process, it will join the European Union in May 2004. «The time frame to join the euro is two years after accession,» says Sofronis Eteocleous, chief economist at Laiki Bank in Nicosia. «Maybe a (unification) settlement could delay us a little on the issue of joining the euro. If this happens it will be an issue of priorities,» he said. The target date for joining the eurozone remains 2006 after the surprise victory of opposition leader Tassos Papadopoulos in last Sunday’s presidential elections cast doubt over the UN reunification plan given his skepticism toward the complex blueprint. «The Cyprus pound has shown stability, its exchange rate is reflecting pretty much its true market value. I don’t forecast significant fluctuations when we enter ERM-2 (the European Union’s Exchange Rate Mechanism),» he said. Cyprus has done much to align its institutional setting for the conduct of monetary and exchange rate policy to EU requirements. In 2001 it abolished a 9 percent ceiling on interest rates, allowing banks to compete more effectively and price risks better. Its central bank was granted full independence in July 2002, bringing it into line with the European banks. New legislation prohibits public sector borrowing from the central bank. And since August 2001, the exchange rate band around the central euro parity has been widened to plus/minus 15 percent from 2.5 percent previously. The current arrangement emulates the ERM-2 regime eurozone candidates are required to adopt in their transition to the monetary union. Restrictions on medium- and long-term capital movements have been lifted and short-term flows will be liberalized by EU accession. «Cyprus has pursued a stable pound policy versus the euro with the currency floating freely against sterling and the dollar. Despite a difficult international environment, the pound has performed well,» Eteocleous says. Yesterday, one Cyprus pound bought 1.72 euros.