The International Monetary Fund (IMF) has spoken out in support of the application of the Excessive Deficit Procedure of the European Union in respect of Cyprus, which has prompted adoption of a program of fiscal consolidation aimed at reducing the fiscal deficit to 4.5% of Gross Domestic Product (GDP) in 2011 and below 3% in 2012.
The IMF says that Cyprus's fiscal deficit widened sharply in 2009, mostly reflecting structural factors. In particular, expenditures rose sharply on the back of higher wages and salaries, social transfers, and investment spending. The IMF noted that the increases were for the most part permanent rather than one-off or cyclical.
Declining revenues reflected the economic downturn and the unwinding of exceptional revenues associated with the real estate boom of the preceding years. The cyclically adjusted primary balance declined by some 6% in 2009, imparting a large fiscal stimulus and resulting in a fiscal deficit of 6.1% of gross domestic product (GDP), according to the IMF.
The IMF welcomes the steps already taken to stabilize the deficit in 2010, but thinks that additional measures would be needed to reach the 2011 and 2012 fiscal targets. The IMF thinks that returning the economy to its potential growth path depends critically on a credible fiscal consolidation, continued market confidence in the financial sector, and structural reforms to improve competitiveness and the business climate.
With regard to the immediate policy challenge - to reverse the large structural fiscal deficit following the sizeable stimulus in 2009, with a view to preserving debt sustainability and creating fiscal space to guard against financial sector risks - the IMF notes that this would require more forceful action and wishes to see specific measures declared to achieve the goal. Containing the wage bill and better targeting of social transfers are seen as important elements.
.Tags: tax | law | investment | gross domestic product (GDP) | International Monetary Fund (IMF) | Cyprus | fiscal policy | Cyprus | IMF
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