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Cyprus Mail: News Articles in English, 98-06-14
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From: The Cyprus Mail at <http://www.cynews.com/>
Sunday, June 14, 1998
 Fiscal fiasco was predicted three years agoBy Hamza Hendawi
IT WAS in May 1995, the story goes, when Christodoulos Christodoulou was warned by University of Cyprus economists that the fiscal deficit will grow significantly unless he gradually increased VAT to offset the depleting effect of EU harmonisation on state coffers.
Recalling the events which took place at a seminar jointly organised by the university and the Bank of Cyprus, Economics Professor Aris Spanos says the Finance Minister, invited as a guest speaker, boasted of a deficit that stood at only two per cent of GDP.
"But we said: 'no, no, this will be a problem in three years' time.' We warned the minister and he did absolutely nothing."
When later asked by reporters to comment, Christodoulou was dismissive of the academics' warning, according to Spanos.
Did Christodoulou not read the writing on the wall back in 1995?
No, he didn't - until three years later.
On May 28, 1998, he took to the House a taxation package which included a hike in VAT from 8 to 12 per cent and a 5 per cent hike on goods with zero VAT. His sales pitch to deputies included the need to compensate for the loss of income - about £130 million this year - from import tariffs removed to conform with a customs union agreement with the EU, part of the island's harmonisation with the Union.
The entire package, Christodoulou said, was designed to raise £147 million and with the measures came a warning: adopt the measures or the fiscal deficit would jump from 5.5 per cent of GDP at present to 7.0 per cent by year's end.
Deputies were not impressed and the mention of Maastricht criteria and European Union accession - phrases enjoying huge convincing powers in Cyprus of late - cut no ice. In fact, the House threw out one part of the package and the powerful Finance Committee later took care of the remainder, slotting it for discussions next October.
The fall-out from that embarrassing defeat in the House last month has proven to be far-reaching but somewhat difficult to quantify.
Among other things, it has caused serious soul-searching about the direction of the economy, sparked speculation on what the government planned to do to tackle the deficit, and raised questions on the viability of the proposed tax measures had they been adopted. The defeat has also raised serious questions about the government's credibility and its handling of the economy.
So, what now?
"State coffers will be empty and the government will be borrowing like mad and it might even be tempted to privatise in a hurry," was Professor Spanos' prediction about the government's next moves.
"My bet is that the government will still go for taxes, but it will probably do it in a more organised fashion," was the prediction of Marios Clerides, the Hellenic Bank's chief economist.
A large fiscal deficit, he explained, did not matter much so long as it is left for just one year. "The problem lies in the persistence of such a deficit. It is not a doom scenario yet, but it will be if nothing is done about it," he told the Cyprus Mail.
Borrowing, as Professor Spanos pointed out, is one option.
"I can see that the government is already orienting itself toward borrowing abroad," said the top economist of a large financial institution. This, he added, would probably be accompanied by some domestic borrowing through the issue of new treasury bills and going to local commercial banks.
But borrowing at home, he explained, could place unwanted pressure on the local capital market and create competition for the private sector in borrowing capital. Borrowing abroad is cheaper, he said.
"But when you borrow locally, and this is a pro, your repayments contribute to the money cycle at home," said the economist, who did not want to be named.
A government economist, who also wanted to remain anonymous, said domestic borrowing reduces the economy's overall savings.
"If interest rates in Cyprus were moving freely, heavy demand on capital would hike interest rates. But we don't, so the result of the government borrowing at home would be to crowd out investors seeking capital.
"After all, many investors prefer the safety of government papers."
The economists, academics and bankers who spoke to the Mail agreed that additional taxation was inevitable, but they had reservations about the timing and the manner in which their presentation was made.
"I don't dispute the need to raise taxes, but what we've done is that we waited for too long and haven't prepared the ground properly," said Panos Pashardes, an economics professor at the University of Cyprus.
Echoing a report by a recent fact-finding mission to Cyprus by the IMF, Pashardes pointed out that there had been a need to raise VAT gradually over the past few years and that the government did not have to reduce income tax as it did last year.
"In retrospect, that was a mistake since it is clear now that the government could not really afford to do so," he said.
An official press release on the IMF report said the government had not, as it should have done, increased indirect taxation, levies for defence and government services to offset the loss of income from compliance with the customs union agreement.
It also warned that a cut in state expenditure was needed to reduce "long- term macro-economic imbalances and ensure macro-economic stability."
"Had the House approved the VAT increase from 8.0 to 12 per cent as the government wanted, that would have added two percentage points to inflation rates at present," said Professor Spanos. The introduction of VAT on other goods would have badly hurt households with low incomes, triggered a negative chain reaction in the economy, and hit consumption levels, he added.
The government's blunder at the House last month, in what is seen as a positive by-product, has also fuelled a country-wide and healthy debate on lingering and politically sensitive issues such as the need to reform and streamline the elephantine civil service, privatising or selling chunks of state-owned companies to private investors, and more efficient tax- collection.
Another indication of the impact of the House's rejection of Christodoulou's taxation package is that Christodoulou's own party, senior coalition partner Disy, is embracing calls for reform.
Local media reports this week quoted House deputy and Finance Committee member Prodromos Prodromou as saying that the government had an obligation to show that it was making an effort in the direction of saving and austerity before it could ask Cypriots to carry a heavier tax burden.
"Additional taxation is needed but will not solve the problem on its own," said Prodromou who spoke in defence of Christodoulou's measures at the house on May 28.
There was a need for a radical review of the way people are employed in the public sector, he said. He also spoke of the need to show courage and decisiveness when handling the issue of the public sector wage bill.
The fall-out from that blunder also appears to have touched Christodoulou himself. He told reporters this month: "The government will listen carefully and will embark on a dialogue on the rest of the tax measures, because our aim is co-operation, not confrontation."
 France 'out of line' on EU callBy Martin Hellicar
THE government yesterday expressed surprise at France calling on the EU to suspend accession talks with Cyprus.
Government spokesman Christos Stylianides said Friday's statement by Catherine Colonna, spokeswoman for French President Jacques Chirac, was not in keeping with previously expressed French positions.
"The statements by the spokeswoman for the French presidency really surprised us, especially after the visit of Foreign Minister Cassoulides to Paris and other meetings with French officials," Stylianides said.
Colonna said the EU could not admit a divided Cyprus. "Admitting a country which is split in two is hard to envisage. Negotiations make no sense if reunification is not on the cards," she said.
Stylianides said Colonna's statements were "contrary to EU decisions on Cyprus and of course to the position of the British presidency (of the EU)".
He said the government was considering an official complaint to France over the matter, but added that "the battle will be fought at Cardiff."
EU leaders convene in the Welsh capital for a summit tomorrow and Tuesday. It is believed the French call for abandonment of talks with Cyprus, which began in March, will be on the agenda.
Suspending talks with Cyprus would require a unanimous decision from all EU countries.
Stylianides said the government was in touch with Greece over the issue and "decisions have been taken to deal with the situation".
Government sources said yesterday the French stance encouraged Turkish Cypriot leader Rauf Denktash and Turkey to remain intransigent on the Cyprus issue.
Denktash has refused to return to settlement negotiations unless the EU calls off accession talks with the Cyprus government.
The same sources also said the French move was probably designed to exert pressure on Greece to accept a softening of the EU stance towards Turkish entry to the Union. Turkey has been offered the possibility of membership talks but no formal invitation has yet been issued.
France was also trying to appease Turkey after the recent approval by the French parliament of a bill recognising as genocide the 1915 killings of Armenians by Turks, the government official said.
Paris has traditionally adopted a positive stance towards Turkey's EU aspirations, but relations with Ankara were soured by the genocide bill.
 'Missile deal off if Russia gets Turkish orders'RUSSIA may shelve the sale of S-300 missiles to Cyprus if it can win a spot in Turkey's multi-billion-dollar weapon procurement plans, a Russian diplomat said yesterday.
"We may give up the sale of S-300 missiles. After all, this is a commercial deal," Turkey's Anatolian news agency quoted an unidentified Ankara-based diplomat as saying.
"We want to take a place in Turkey's helicopter, tank, warship and Kalashnikov rifle purchases," the diplomat was quoted as saying.
The Turkish and Russian governments should set up a dialogue to discuss the issue, he added.
This is the first time a Russian diplomat has been quoted as saying Russia may agree to commercial bargaining with Turkey over the missile deal with Cyprus, which Turkey opposes.
Moscow has consistently stated that delivery of the ground-to-air missiles, due in the autumn, would only be cancelled in the event of a deal for the island's demilitarisation.
Government Spokesman Christos Stylianides declined to comment on the Anatolian report yesterday. "We have an embargo on statements on the missile issue," he said.
He reiterated the government position that the missiles would arrive on schedule unless there was significant progress towards a settlement or a demilitarisation deal.
Greek Foreign Minister Theodoros Pangalos said on Thursday the controversial shipment of Russian-built missiles would not be ready until November, after a Russian newspaper reported that the missiles had already been sent to the divided Mediterranean island.
The news report was denied by both Greece and Turkey, although Cyprus was cagey about it. Government sources said yesterday the missiles would be delivered in October.
Turkey has threatened to stop deployment of the missiles, which it sees as disrupting the balance of power on the island.
The Anatolian agency report said the Russian Kamov company had joined US and European firms in participating in a $4 billion assault helicopter tender by the Turkish army.
Russia is competing with 10 rivals for a project to produce 1,000 tanks worth $5 billion in Turkey. Russia has bid in the tender with its T-80 tanks, the agency said.
The Russian government also wants to sell Turkey warships and Kalashnikov assault rifles.
 Grey Wolves clash with settlersMEMBERS of the Turkish nationalist group the Grey Wolves have clashed with villagers in the occupied areas, Turkish Cypriot newspapers reported yesterday.
Late on Friday night, a convoy of cars carrying members of the Grey Wolves organisation arrived at Zodia village, the reports said.
A fight then broke out between the Grey Wolves, who were on their way to a 'solidarity meeting' in Morphou, and the villagers, with sticks and chairs being used as weapons. Four people were hurt in the fracas, which was eventually broken up by 'police' firing shots into the air.
The villagers, mainly settlers from Eastern Anatolia, later stood guard outside houses with sticks for hours into the night after the Grey Wolves had gone.
It is thought that the fight was related to political allegiances.
 Election for Morphou bishop goes ahead without MeraklisBy Martin Hellicar
FRESH elections for a new Morphou bishop, suspended two years ago after rioting outside the Archbishopric by supporters of then favourite Pancratios Meraklis, will be held early next month.
In March 1996, several people were injured when stone-throwing Meraklis supporters - incensed by Archbishop Chrysostomos's claims that their favourite was a homosexual and therefore unsuitable for promotion - clashed with police in old Nicosia.
This time around Meraklis, who has kept a very low profile since the events of 27 months ago, is not in the running for the post.
Costis Kyriakides, who was president of a committee of Morphou residents set up to support Meraklis at the height of the affair, told the Cyprus Mail yesterday that "health problems" ruled the cleric out.
Reports earlier this year suggested Meraklis, who always denied being gay, had contracted the HIV virus.
But Kyriakides said the picture concerning Meraklis's health is far from clear. "Medical tests have shown things are not as clear as first appeared. Some analyses showed Aids, others kidney trouble and others different things," he said.
"But the fact remains that he is ill and the Holy Synod has decided to suspend him due to poor health and that's where things stand," Kyriakides said.
He said Meraklis was not even well enough to perform his routine church duties. Press reports have suggested Meraklis has taken refuge in a relative's home in the Skouriotissa forest.
Two clerics are up for the Bishop post. They are Archimandrite Neophytos Masouras and Father Ioannis.
Masouras is considered the favourite as he apparently enjoys the support of political parties, the Morphou municipality and Morphou refugee associations.
The procedure for election of the new Bishop begins on July 5 with voting for special representatives who will then elect the Bishop.
 Toddler critical after accidentA three-year-old boy was in hospital yesterday after being seriously injured when he was hit by a car in Limassol.
Christos Antoniou, from Trachoni, was knocked down by the car, driven by Andreas Elissaiou Andreou, 21, at around 5.40pm on Friday evening. Andreou rushed the boy to Limassol General Hospital from where he was transferred to Nicosia General.
The boy's condition was described as extremely critical yesterday.
© Copyright Cyprus Mail 1998
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