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Economists say no room for populism after IMF Report

The IMF HQ in Washington DC

By Stelios Orphanides

CYPRUS must go ahead with economic reforms, help banks clear their balance sheets and cut further government spending or else it may have to pay yet again a heavy price for being complacent, two economists interviewed by the Cyprus Mail said.

The economists were commenting on the latest International Monetary Fund report on Cyprus which suggested the Cypriot government should further slash public payroll in an attempt to limit government spending, speed up its efforts to put the reform programme back on track following the recent limbo on foreclosures amid “heightened political opposition, entrenched vested interests and reform fatigue”.

The same time, the report served as an excuse for opposition parties to criticise the government’s fiscal policy as well as its intention to attempt an exit from the bailout programme by the end of 2015, a year earlier than scheduled.

“From the moment that the passing of certain reforms has been linked to the next tranche of bailout money, these reforms must go through or else Cyprus will face a serious prospect of defaulting in end 2015 because of expiring foreign debt,” academic economist Alexandros Apostolides said in a telephone interview yesterday.

According to the Public Debt Management Office, the government has more than €2 billion in debt maturing in 2015.

“Parties have not learned their lessons,” Apostolides who teaches at the European University of Cyprus said. “Their thoughts are already at the 2016 parliamentary elections instead of how to make the country better in 2016. We are not learning from our mistakes or even from Greece’s mistakes which announced an early exit from the programme and got punished by the market”.

President Nicos Anastasiades said in September that Cyprus could exit the memorandum of understanding with international lenders before the end of 2015 “if all goes as planned”.

Apostolides added that the reforms left, such as privatisations and the opening of the service industry to competition “are the most important ones for the future of Cyprus”.

“It’s sad that they have only started to be addressed now because of the uncertainty in the financial system was gaining the majority of attention,” he said.

Another economist who insisted on anonymity said that while the banking system is in a “critical phase” with respect to tackling non-performing loans, the banks without clearing their balance sheets will not be able to do their job which is financing economic activity. “We also have to factor in that prolonged instability translates into loss of national income, jobs and decreased potential of the economy” which declined by a cumulative €3 billion in output over the crisis period, he said.

“The economy has to achieve a primary balance surplus of 4 per cent of gross domestic product 2018,” he said and added that “if we take the 2013 deficit as a starting point, the distance that has to be covered until 2018 is long. If economic growth rates in the meantime are not sufficiently adequate, we will face dilemmas” in the form of additional fiscal measures to safeguard the sustainability of public finances.

“Addressing this by the economic-political system must be a matter of national interest and togetherness,” as the cost of a perpetuation of the crisis will be incalculable, the economist added.

Apostolides said that criticism of the IMF for its emphasis on non-performing loans is justified, as “the whole programme was not designed to take into account the unpredictable responses of the Cypriots to the bail-in and the fact that the whole programme was not supposed to have capital controls which are still in effect”.

Main opposition AKEL, criticised the government for having given assurances in the past that it would take no further fiscal consolidation measures.

The IMF wants “to see austerity and budget cut policies continue even after the programme expires in 2016,” Charis Polycarpou, a member of the economic research bureau of the communist party’s central committee said in a statement.

Centre-right DIKO, said the IMF “expresses reservations with respect to meeting budget objectives and attempts to distance itself from the government projections”, while the government wants to exit the programme by 2015.

DIKO added that while “current indications” show that Cypriot banks are expected to successfully pass the European Central Bank’s asset quality review, mass liquidations of collateralised properties “can help banks solve their problems, but they don’t address the problems faced by the real economy, households and small and medium sized enterprises,” DIKO said in a statement in reference to the foreclosure bill.

Giorgos Lillikas, chairman of the populist Citizens’ Alliance, said that the IMF “uncovered the government’s fairytale” of the 2015 programme exit.


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