EU Report Says Cyprus's Growth Will Slow

by Lorys Charambolous, Tax-News.com, Nicosia

27 November 2001

In an autumn 2001 forecast for the Cyprus economy, the EU's general economic and financial affairs directorate says that the worsening international economic environment and increased uncertainty will take its toll on Cyprus, leading to lower growth. An expected sharp drop in tourist arrivals will prevent any significant improvement in the high current account deficit, despite slower growth of domestic demand and imports.

“Given the economic slowdown in the EU, notably in the UK, and Germany plus tourist travel and security concerns, tourism receipts are likely to drop for the remainder of this year and especially for next year”, says the report.

It sees inflation rising to 3.5% next year as a result of higher VAT, while unemployment for 2002 is projected at 4.8%. It says that after robust real GDP growth of 5.1% in 2000, economic growth in the first half of 2001 showed signs of some slowing down, especially in manufacturing and, most notably, in lower growth rates for tourist arrivals.

Real GDP growth is expected to reach 4% in 2001 and 3.3% in 2002, but a modest pick up is expected in 2003 as investment and tourism growth should regain some momentum. For the first half of 2001, the current account deficit reached nearly 500m euro, up from 348m in the same period last year.

“However, it is clear that this forecast is subject to more than the usual uncertainty and that the risks are mainly on the downside, in particular in the tourism sector,” say the report's authors.

Inflation in September 2001 stood at 2.2% year-on year. The average inflation rate for the first nine months of the year remained at 1.9%, similar to EU rates. This low rate was influenced, inter alia, by decreasing agricultural and energy prices. Overall for the year 2001, inflation is forecast at 1.8%. For next year and 2003 inflation is foreseen to increase to around 3.5% due to higher VAT rates due to be adopted as part of the EU harmonisation drive.

The report describes the government’s fiscal consolidation programme as successful, but says it is likely to be affected by the economic slowdown, at least for this year and next year.

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