Cyprus slashes planned spending by 10%

(NICOSIA) - The Cypriot cabinet approved Thursday a 2014 budget that would slash spending by 10 percent to ensure the financially strapped eurozone member meets the terms of an international bailout.

Finance Minister Haris Georgiades said spending, net of interest payments, will fall by 626 million euros ($845 million) to 5.59 billion euros from 6.22 billion euros this year.

"This budget reflects the challenging economic environment this country is going through," Georgiades told reporters.

"At a time when the people, households and businesses are enduring difficult days and cutting back the same must apply for the state."

In return for a 10 billion-euro ($13.5 billion) bailout in March, international creditors demanded the winding up of the island's second-largest bank, Laiki, and a haircut on deposits over 100,000 euros at largest lender Bank of Cyprus.

To avoid a possible run on banks, the government closed all the island's lenders for nearly two weeks and then imposed draconian capital controls when they reopened.

Cyprus has already passed its first review by the so-called troika of international lenders -- the European Commission, European Central Bank and International Monetary Fund.

Troika representatives are expected back in Nicosia this month to carry out a second inspection.

They do not expect that Cyprus - suffering record 17 percent unemployment and a credit squeeze -- will exit its recession until 2015.

Budget projections see the pace of economic contraction slowing in 2014, with GDP falling only 3.9 percent after a whopping drop of 8.7 percent this year.

Cypriots have had to endure tough austerity measures. Wages have been slashed in the private and public sector, while taxes, notably VAT, have been increased.

Spending ceilings have been set for each ministry and state benefits are expected to be reduced, while overtime pay and shift work in the public sector are also to come under the knife.

There is already a freeze on public-sector hiring, and the government aims to shed another 4,000 civil service jobs until 2016 with only one post filled for every four made vacant.

Cyprus has the biggest public sector in Europe in accordance with its size.

Under the bailout agreement the government must establish a balanced budget and generate a primary surplus by the end of 2016, when the adjustment programme expires.

The budget will be sent to parliament in the next few days before going for a vote before the end of the year.

The priority for the government is to revive a broken economy starved of liquidity and confidence.