Cyprus’ GDP is expected to further decline by 2014, said Tuesday Central Bank Governor, Panicos Demetriades, noting that fiscal deficit target of 2.6% of GDP is not expected to be met.
Central Bank Governor said that the country’s fiscal deficit is expected to rise to 4.8%, while the Public debt is expected to reach 87.3%.
Speaking at an event organized by the Larnaka Chamber of Commerce and Industry (EVEL), Demetriades noted that all the aforementioned negative developments require the conclusion of a reconstruction program as soon as possible in the context of Cyprus’ application for financial assistance from the EU bailout mechanism.
He also expressed the view that the recent discovery of significant hydrocarbon reserves within Cyprus` Exclusive Economic Zone and Cyprus’s accession to the European Support Mechanism provides a unique opportunity for a comprehensive reform and modernization of the Cypriot economy.
He noted that "Cyprus, as well as the euro zone, are facing great challenges due to the global financial crisis that erupted in 2007 in the United States and gradually turned into a debt crisis," he said.
He added that "in Cyprus, the need to recapitalize the financial system after the haircut on Greek debt, and the need to refinance public debt, led our country to set up a programme to support and reconstruct the economy under the auspices of the European Union and the International Monetary Fund. "
Central Bank Governor expressed the view that "the sooner this programme is agreed and implemented, the sooner the country will get back on the path of sustainable growth and jobs.
“As the European Stability Mechanism (ESM) enters into force within 2013, it will be able to directly recapitalize banks in Eurozone without adding debt to the national governments.
"The issue of banking supervision is extremely important because it is a prerequisite for the immediate recapitalization of the banks by the ESM", he added.
He added that "this issue directly concerns Cyprus, Greece, Spain and Ireland."
"The key message of what is happening in the euro zone", he continued, is that “Cyprus must, as soon as possible, make all the necessary reforms so that it could enjoy the benefits from the strengthening of the economic governance in the euro zone area.
The government sent its counterproposals to the troika on Monday evening, following the conclusion of lengthy rounds of talks with political parties, social partners and the Governor of the Central Bank of Cyprus.
Government Spokesman said on Monday that there is adequate time to conclude the negotiations and finalise the memorandum until the Eurogroup meeting on November 12, noting that the government needs the support of all political parties and social partners to secure the best measures for the people of Cyprus.
Cyprus applied for financial assistance from the EU bailout mechanism (EFSF/ESM) to recapitilise its banking sector whose liquidity has been depleted as a result of the Greek sovereign debt haircut as well as to cover its fiscal needs.
However rating agencies and economists have suggested that after receiving the loan which, Cyprus` national debt will reach unsustainable levels. With Cyprus` national debt amounting to 74,6% of GDP in the first quarter of 2012, rating agencies say the island will need an additional loan equivalent to 60% of Cyprus` GDP