Unemployment At Historic High - Central Bank

Unemployment in Cyprus is at historically high levels and most sectors of the economy continued to face difficulties in spite of a mild economic recovery in 2010, said Central Bank Governor Dr. Athanasios Orphanides in a speech reviewing the year 2010.

Inflation in 2010 stood significantly higher at 2.6 percent compared with 0.2 percent in 2009, he said. But the economy's main challenge is budgetary imbalances caused by increased government spending. Pension reform is also urgent given an ageing population, he said.

Although the government has recognised the problem by implementing some structural changes, it should move more quickly towards finding solutions, said Orphanides.

Any futher delays will send a negative message to international investors, which have already shown a decreased confidence in Cyprus' sovereign debt, he said, referring to recent credit rating agency downgrades. This makes it more difficult for banks and consumers to borrow money.

"Effective control over wages in the public sector and the reduction of the number of civil servants by 1000 people per year is paramount," said Orphanides.

Another major issue in 2010 was international investor concerns over the banking sector's exposure to Greece's bond market. These risks are manageable, he said, and the banks have adequate capital and are under strict supervision by the Central Bank. However, the Central Bank has taken additional steps to shore up the financial sector and imposed a special levy on banks to establish a stability fund, said Orphanides.