Growth Forecasts Slashed By Cyprus Government Amid War Jitters

by Lorys Charalambous, Tax-News.com, Cyprus

20 March 2003

The government of Cyprus has been forced to dramatically cut its growth forecasts for the coming year as worsening economic conditions continue to bite and war looms in Iraq, according to a Financial Mirror report.

The previous forecast of 4.1% growth for 2003 has now been halved to 2.0%-2.5%, lower than the IMF/EU commission estimates of 3% and 3.5%. This is due in large part to a further slump in the tourist trade as a result of war fears. The island saw a drop of 10.3% in the number of tourists last year, and it is thought that the number could fall again by a similar amount this year.

In the light of this, Finance Minister Markos Kyprianou has outlined three fundamental areas of the Cypriot economy on which the government will seek to concentrate: boosting tourism and employment; and supporting business activity and investment as opposed to consumer spending. He has warned that should the war in Iraq be prolonged, plans laid out in the 2003 budget may have to be abandoned.

Other economic indicators that have undergone revision include the budget deficit, which is now predicted at 4% of GDP as opposed to the 2.7% previously forecast whilst the current account deficit is now seen at 5%, up from 4%. Inflation, which rose slightly last year as a result of VAT and other indirect taxation, is expected to rise to 4.5%-5%. An increase in the public sector debt is expected largely as a result of tax reforms put in place last year which have depressed revenue somewhat. They are also expected to be lower in 2003.

"If the war is brief and it happens soon, things will remain under control and we would not need to overburden state finances," Kyprianou explained, attempting to put a more optimistic spin on the outlook.

The failure of the Hague talks last week has also had a damaging impact on expectations for the Cypriot economy, according to the Economist Intelligence Unit which has revised growth down from 4.1% to 2.6%. "Our initial forecast for 2003 was based on both a solution to the divided island and a war against Iraq,” said EIU analyst Jan Friederich. “We now see a slightly higher than even chance of a settlement by the end of 2004, when Turkey will be assessed by the European Commission as a candidate for EU membership." Friederich continued. "However, the timing is very uncertain and our main scenario assumes that there will be no reunification boost to the Cyprus economy in 2003 or 2004."

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