Cyprus must maintain tight fiscal policy in order to enter the eurozone: IMF

NICOSIA (AFP) – The Cypriot government must maintain its tight fiscal policy if the island is to enter the eurozone, an International Monetary Fund (IMF) official said in Nicosia yesterday. Cyprus is soon to apply for entry into the Exchange Rate Mechanism (ERM2) to prepare for adopting the euro by 2007. «Successful participation in the ERM2 and ultimately the euro area are of paramount importance, and some sacrifices are needed,» Thomas Richardson told a press conference at the end of a regular biannual visit to compile a report on Cyprus. The IMF welcomed the government’s pledge to make fiscal adjustments to reduce public debt and noted that data for the first nine months of 2004 were «favorable.» However, he said, «There is no room for complacency. Previous efforts to contain the fiscal deficit have been disappointing, meaning the authorities’ credibility is now on the line as never before.» He warned that any «fiscal slippage» would jeopardize plans to adopt the euro early and that Cyprus must be able to adjust to external shocks, such as the rise in international oil prices, once inside the ERM2. The government is hoping to contain the fiscal deficit to 2.9 percent of GDP by next year, slightly below the 3 percent ceiling of the eurozone criteria laid out in the Maastricht Treaty. The target for 2004 is 5.2 percent, down from one of 6.4 percent last year that was driven by expenditure overruns. The debt-to-GDP ratio is also above the Maastricht ceiling of 60 percent, exceeding 70 percent in 2003. «Fiscal consolidation should be the authorities’ central priority,» said Richardson, confident the government would make good its pledge. The government is seeking to curb public spending by raising the retirement age of civil servants, enforcing a wage and jobs freeze in the public sector and prohibiting supplementary budgets. «These measures are politically difficult but extremely important if Cyprus is to maintain macroeconomic stability and enjoy the full benefit of EU membership, including early adoption of the euro,» Richardson said. In its preliminary conclusions, the IMF said Cyprus must also be prepared to take further measures to achieve fiscal adjustment targets. These include more aggressive collection of back taxes, increasing fees for government services, streamlining social benefits and, if necessary, a «limited tax increase.» Unfavorable indicators forced Cyprus to ditch its original euro target of 2006.