Cyprus’s parliament approved the 2012 budget today, slashing as much as 110 million euros ($143 million) in spending and earmarking a further 100 million euros in cuts for future consideration.
The parliament also passed “a complete freeze” on hiring in the public sector, reductions of overtime pay to civil servants and the abolishment of interest-free loans to civil servants, Nicholas Papadopoulos, who chairs the finance committee, told reporters in Nicosia.
The spending reductions, which come on top of a fiscal consolidation package approved two days ago worth 855 million euros over three years, “may hopefully reduce next year’s budget deficit” to below 2 percent of gross domestic product from a forecast 2.5 percent, Papadopoulos said.
Cyprus, the euro area’s third-smallest economy, has been shut out of the markets since May and was rocked by a July 11 explosion that knocked out half of its electricity production capacity. Fitch Ratings placed Cyprus’s BBB sovereign credit grade on negative outlook today along with five other countries, citing doubts that a comprehensive solution to the debt crisis was achieved by European leaders at a Dec. 9 summit.
With “strong political consensus” on a medium-term fiscal consolidation program, “the government will follow strict budgetary rules in the future,” the country’s finance ministry said in an e-mailed statement in response to Fitch’s decision. In addition, Cyprus “has already covered in advance most of its 2012 financing needs. There are therefore no serious causes of particular concern for Cyprus.”
Moody’s Investors Service lowered Cyprus’s credit rating two levels on Nov. 4 to Baa3 by after Standard & Poor’s cut it on Oct. 27 to BBB from BBB+. Both cited fiscal concerns and Cypriot banks’ holdings of Greek debt.
The ministry of finance budgeted overall expenses at 7.5 billion euros for 2012, when the economy is forecast to grow 0.2 percent, compared to 8 billion euros for 2011, according to a statement emailed on Dec. 8. Total revenue in 2012 is expected to rise to 6.2 billion euros compared with 5.6 billion euros in 2011. Public debt is expected to rise to 66 percent of economic output next year from 65 percent in 2011, according to the ministry.