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24th Jun 2017

Bailout paper gives Cyprus four years to balance budget

  • Only the President and the speaker of parliament will be able to fly business class on short flights (Photo: angeloangelo)

Cyprus has four years to implement austerity plans and to balance its budget, according to a leaked copy of bailout terms proposed by international lenders.

The 24-page Memorandum of Understanding (MoU) published in Cypriot press on Monday (1 April) sets out a detailed programme including tax rises, spending cuts, privatisation of state assets and healthcare and pension reforms.

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In its 2013 budget, the Cypriot government will be required to find an additional €351 million in tax rises and spending cuts.

The MoU says that reining in the Cypriot budget is "of overriding importance in order to stabilise the economy and to restore the confidence of companies, citizens and foreign investors in the longer-term economic prospects of Cyprus."

An earlier MoU between Cyprus and the "troika" of lenders (the European Commission, European Central Bank and International Monetary Fund) was drafted in November 2012.

But the deal has been altered in order to reflect developments since a new centre-right government came to power in February.

The latest document, which sets out a four year programme for Cyprus from 2013-2016, includes a 3 percent cut across the board to all public sector wages and pensions.

The Cypriot government is also expected to draw up plans to cut the number of civil servants by 1,800 by 2016, while the retirement age will go up by two years to 65.

As part of a series of tax increases, Cyprus is meant to raise its corporate tax rate to 12.5 percent and its VAT to 19 percent.

Together with higher consumption taxes, even winners of the country's national lottery will feel the pain, with a 20 percent levy on all winnings over €5,000.

In order to help collect tax revenue, the MoU says Cypriot-based trusts and offshore firms will have to provide "timely access to information on beneficial ownership" and a reliable "audit trail of financial transactions."

On health, fewer people are to receive free care, while those who pay are to see their fees go up by 30 percent.

Any future changes to the minimum wage will have to be agreed by the troika.

Assets slated for privatisation include the national telecom provider, CyTA, the state's electricity firm EAC and its ports authority, the CPA.

The MoU also calls on Cyprus to draw up "a roll-out plan for the infrastructure required for the exploitation of natural gas, taking into account the current large uncertainties and risks in this context."

Cyprus could make billions of euros a year extra if it gets access to gas deposits in the Mediterranean Sea.

But the "uncertainties and risks" include Turkey's blockade of gas exploration so long as the 40-year-old Cypriot-Turkish conflict remains unsolved.

The memo, which still needs the approval of the Cypriot government, also contains humbling measures on government expenditure.

It says that politicians and officials who travel overseas should get 15 percent less spending money.

It adds they should stop travelling in first or business class, except on transatlantic flights and except for the President himself and for the parliament speaker.

Meanwhile, the Cypriot stock exchange is expected to re-open this week for the first time since talks on the EU 's €10 billion rescue package began in earnest two weeks ago.

Last week the government put in place strict capital controls on all bank transfers in and out of Cyprus, alongside a €300 limit on daily cash withdrawals, in a bid to prevent a flight of capital from the country.

According to the European Commission's Winter Forecast released in February, the Cypriot economy is expected to shrink by 3.5 percent in 2013.

However, analysts fear that the controls will remain in place for months and could lead to a deep recession of between 5-15 percent.

If the worst case scenario comes to be, it could derail the EU bailout deal and lead to a restructuring of Cyprus' debts.

Cypriot banks re-open without panic

Cyprus' banks opened without panic on Thursday after a 10 day lockout as the government struggled to agree a €10 billion rescue package.

Cyprus economy to shrink 12.5% despite EU bailout

Cyprus' economy will shrink by 12.5 percent and its government needs to sell part of its gold reserves in order to meet the conditions of an EU-IMF bailout, a leaked paper says.

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