Cyprus urges 2013 austerity as recession deepens

(NICOSIA) - Cyprus must impose harsh austerity under the terms of an agreed EU bailout as it faces an unprecedented recession, Finance Minister Vassos Shiarly told parliament on Thursday.

Shiarly urged MPs to pass the 2013 austerity budget to help Cyprus rebuild its Greek-exposed economy.

He called it the "most crucial" budget MPs were called on to approve in the island's modern history. The three-day budget debate is scheduled to start on December 17.

"2013 will be especially difficult due to the external environment, unavoidable corrections in the construction and banking sectors plus fiscal corrections due to the negative economic climate," he said in a speech to parliament.

The draft budget includes tax hikes coupled with public sector job and salary cuts as part of an in-principle bailout agreement with the troika of international lenders.

Cyprus has yet to reach a final agreement with the troika but needs to push through measures before the end of the year.

The country has been unable to borrow from international markets since July 2011 due to its Greek-exposed banks and junk rating from credit agencies.

The economy is predicted to shrink by 2.4 percent of GDP in 2012, falling deeper into recession at 3.5 percent in 2013 and slow down to -1.3 percent in 2014.

He said only by cutting expenditure and improving revenue would Cyprus be able to meet its bailout obligations by streamlining the fiscal deficit to 4.4 percent from an expected 5.5 percent of GDP this year.

The bailout terms covers a four-year period with the aim of Cyprus achieving a four percent budget surplus in 2016, although the correctional measures it must impose are equivalent to 7.25 percent of GDP.

Shiarly said the biggest challenge to the economy was the Greek-exposed banking sector which needs to recapitalise -- a figure has yet to be agreed with the troika.

He said obstacles to short term recovery are low consumer spending, a lack of credit in the economy, weakened banks and a continued slump in the construction industry.

To make savings the government will gradually increase the retirement age in public service to 65, chop generous allowances for senior officials and reduce the number of people on the state payroll.

While the economy slips deeper into recession, unemployment will reach 12 percent in 2012, skyrocket to 13.8 percent next year and 14.2 percent in 2014.

Budget provisions, excluding loan payments, is 7.01 billion euros ($9.1 billion) compared to 7.44 billion in 2012 showing a 5.8 percent reduction. Projected income for 2013 is 5.86 billion from €5.78 billion in 2012.