Cyprus central bank urges control on surplus

NICOSIA (Reuters) – Cyprus’s central bank governor, S Orphanides, urged politicians yesterday to resist spending a rare budget surplus that the island has recorded for 2007. Cyprus, which is expected to achieve a budget surplus amounting to 1.5 percent of gross domestic product this year, has presidential elections in February and more pressure is likely to come on spending in the runup to the poll. «The budgetary situation is satisfactory, but there is no reason for complacency and increased government spending,» Orphanides told parliament. «Aside from the fact that the improved situation is the result of (unexpectedly) higher tax revenues, we should not forget the risks entailed by the social insurance fund resulting from an aging population,» he said. Orphanides added that «even if we now have (budget) surpluses, they are a passing phenomenon and they do not take into account future obligations.» To illustrate the future situation should no action be taken, the governor said that according to the International Monetary Fund, an increase of the value-added tax rate by 10 percentage points would be necessary to meet the challenges of the social security fund. Orphanides also urged the island’s political leadership to think of ways of keeping inflation at bay. «Otherwise, higher domestic inflation in a unified market with a common currency will, among other things, mean that the market penetration of Cyprus’s more expensive products and services will suffer, jobs will be lost and deficits in the budget and current account will increase.» Orphanides emphasized the need for improving the island’s competitiveness by avoiding wage increases exceeding productivity rises, and indicated that the country’s wage indexation system could be revised. «We have to see how we can help the private sector to become more competitive and bring better jobs to Cyprus,» said Orphanides.