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Cyprus approves first post-bailout budget

Net expenditures minus interest payments will reach $9.1bn in 2014 compared to $10.1bn in 2013

Published: Updated:

The Cyprus parliament has approved the island’s first post-bailout budget providing deep spending cuts in 2014 of about 10 percent to ensure international bailout targets are met.

The late Thursday majority vote -- 30 for, 20 against and four abstentions -- came after a two-day debate.

Around $1bn has been shaved off the budget compared to 2013.

Net expenditure, minus interest payments, will reach 5.59 billion euros ($9.93bn) next year compared with $10.1bn provided for in the 2013 budget.

In return for a 10bn-euro bailout ($13bn), international creditors demanded the winding up of the country’s second largest bank Laiki and a “haircut” on deposits above 100,000 euros in its largest lender, Bank of Cyprus.

The unprecedented eurozone “haircut” on deposits forced the government to close all the island’s banks for nearly two weeks in March and impose draconian controls when they reopened.

Ruling Disy called the bailout adjustment program a “one-way street,” and said positive results were beginning to show, with the economy not shrinking as fast as first feared.

International lenders expect the economy to contract at around 7.7 percent from an initial estimate of 8.7 percent.

Opposition Akel, which voted against the budget, said government’s austerity policies were not creating jobs but making more people poorer as benefits and pensions are slashed.

Socialist Edek, whose MPs abstained, agreed, saying that more austerity would just deepen the recession with the specter of home repossessions as battered banks try to claw back debts.

Coalition partner Diko blamed the reckless spending of the previous Akel communist administration for sending one in three Cypriots towards the poverty line, with one in five expected to be jobless in 2014.

The government says it is well within its targets set by international lenders -- under the bailout deal -- on the primary and fiscal deficits.

The fiscal deficit is estimated to reach 7.5 percent of GDP in 2014 -- but if pension payments and compensation are excluded it comes to 5.5 percent.

The deficit for 2013 is estimated to be 5.5 percent of GDP while the primary deficit is projected at 3.4 percent for next year.

Budget projections see the economy shrinking slower at 3.9 percent of GDP in 2014 from an 8.7 percent contraction this year.

International lenders do not expect Cyprus -- suffering record 17 percent unemployment and a credit squeeze -- to exit recession until 2015.

Cypriots have had to endure tough austerity measures which have seen wages slashed in the private and public sectors and increased consumer taxes such as VAT.

Nicosia says it is fully committed to honoring the bailout terms despite their harshness and an enforced regime of capital controls -- the only eurozone member to have them.

There is already a freeze on public sector hiring and the government seeks to shed another 4,000 civil service jobs by 2016.

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