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Al-Ahram Weekly 18 - 24 March 1999 Issue No. 421 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 18 - 24 March 1999 Issue No. 421
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Culture Profile Features Travel Living Sports People Time Out Chronicles Cartoons Letters Tough talk in Cyprus
By Hamza HendawiWith one eye on EU membership and another on his own growing unpopularity, Greek-Cypriot President Glafcos Clerides this month embarked on a drive to persuade political party leaders of the need to move rapidly on legislation that would bring the country closer to its future European Union partners.
With one recent opinion poll showing him to be the least popular president ever to hold office since the Mediterranean holiday island became independent in 1960, the 79-year-old leader faces a tough task in achieving a consensus over EU harmonisation. Indeed, in the end Clerides may have no choice but to ride roughshod over outstanding differences and push laws through the 56-seat parliament with a simple majority.
A recent series of one-on-one meetings between the president and political party leaders coincided with a report by the authoritative Moody's Investors Service which deemed the chances of legislation being passed to bring the island into line with the acquis communautaires to be "less than certain" in view of what it termed the "factitious" political atmosphere on the island.
Beside their long-standing ideological differences, Clerides' Democratic Rally and the other political groups on the island have been deeply divided by the government's December decision not to deploy Russian anti-aircraft missiles in Cyprus in the face of Turkish threats and the concern of Western powers. Earlier last year, parliament threw out a package of tax hikes proposed by the government on the grounds that Clerides had promised not to increase taxes in 1998 and had not sufficiently consulted with party leaders over his change of plan.
The climb-down over the missiles and the embarrassment of seeing fiscal reforms rejected by deputies for the first time since independence have seriously undermined the government's credibility just at the time when it is most needed.
Cyprus opened accession talks with the EU nearly a year ago and hopes to join the 15-nation grouping by 1 January 2003 at the earliest. The negotiations with the EU are being conducted by Clerides' Greek-Cypriot government. Turkish Cypriots living in the Turkish-occupied northern third of the island have declined his invitation to join him at the negotiating table. Their leader, Rauf Denktash, insists that his self-declared state must first be recognised.
High on Clerides' list of EU harmonisation requirements are new legislation pertaining to interest rates, financial sector liberalisation and tax hikes aimed at narrowing his government's growing fiscal deficit.
Already, the government has submitted to parliament a draft law which would free up interest rates, repealing a law dating back to the 1940s which set a nine per cent ceiling on rates in an attempt to combat usury. There are also plans to hike value added tax (VAT) by four percentage points to 12 per cent, and for a draft law to grant independence to the Central Bank.
The VAT hike and other proposed tax increases are designed to close a fiscal deficit gap that, if left unattended, is set to shoot up to nearly six per cent of GDP this year -- almost twice the ceiling set for membership of the single currency. Public debt is also due to cross the 60 per cent threshold this year, thus breaching another Maastricht criterion for adopting the Euro. The growing fiscal deficit, estimated at close to 300 million Cypriot pounds (about 600 million dollars), is the legacy of expansive spending in 1997 to revive sluggish sectors of the economy, and was aggravated by the loss of revenue from import tariffs removed under the island's Customs Union Agreement with the EU. "Moody's analysts emphasise that the significant widening of the fiscal and current account deficits since 1995 increases the urgency of [Cyprus'] economic reform agenda, especially the proposed hike in value added tax rate," the agency observed in their report released last week.
The fiscal deficit and the public debt are possibly the most conspicuous shortcomings of the island's economic performance. Economic growth averaged 4.2 per cent in the 1994-98 period and is forecast to reach five per cent in 1999. Both unemployment and inflation are enviably under three per cent, and tourism -- which accounts for more than 20 percent of GDP -- is witnessing a revival. Close to 2.3 million tourists visited the island in 1998.
Talk of reform, particularly the freeing of interest rates, has already brought results. Analysts say the prospect of lower interest rates as a result of repealing the nine per cent ceiling has attracted investors back to the stock market, whose index hit an all-time high in early February, rising by more than 15 per cent since the start of the year.
Indeed, the new year had barely begun, when the government gave notice of its intentions, projecting an unusually resolute stance on the need to press ahead with what many believe to be overdue reform. Thus it recently made crystal clear to Cyprus Airways that it is ready to pull the plug on the national carrier -- of which the state owns 80 per cent -- should its financial condition deteriorate yet further.
The government has also declared its intention to set telecommunications monopoly CyTA -- one of the most successful companies of its kind in Europe -- on the path to privatisation by transforming the semi-governmental organisation into a joint-stock company.
However, some observers believe that all this talk of reform remains largely rhetorical. In particular, they believe the government has lost the key battle to win over the hearts and minds of Cypriots in the face of opposition from the trade unions and leftist parties. "Liberalisation, deregulation and privatisation -- you hear the word so often now, but nothing really happens," said Marios Clerides, chief economist at the Hellenic Bank.
"I don't think that anyone has yet bitten the bullet of privatisation, for example. The government has failed to put forward a convincing argument that privatisation can mean lower prices and more efficiency," he said.
