September review to determine whether Cyprus will apply early to join ERM-2

NICOSIA (Reuters) – Cyprus’s bid to join the ERM-2 European Exchange Rate mechanism this year is likely to hinge on a review in September of progress in tidying up public finances, the central bank said late on Friday. The island’s budget deficit and public debt levels at present exceed European Union rules for joining the eurozone. Cyprus wants to adopt the single currency by 2007. Among the new European Union members, Estonia and Lithuania have already announced their intention to join ERM-2 in July. Asked if he thought it feasible for Cyprus to apply to join the mechanism this year, central bank governor Christodoulos Christodoulou said: «I think there is still time. (We need) to show by September that the measures contained in the convergence program are being implemented.» He was speaking after a meeting of the monetary policy committee, which decided to leave rates unchanged. Cyprus has a forecast budget deficit of 4.2 percent of gross domestic product for 2004. To join the eurozone by 2007 would require it to reduce the deficit to under 3 percent of GDP. The rate mechanism, the anteroom to euro membership, would lock the Cyprus pound against the European currency and require it to hold within a range against the euro for at least two years. Authorities have prepared a fiscal consolidation plan designed to cut shortfalls, but there are elements to the blueprint which require parliamentary approval, adding to delays. Though the plan itself has not been made public, it is understood to involve a clampdown on civil servant payrolls and a review of fees for public services the government provides.