By Hamza Hendawi
THE ECONOMY looks set to grow this year by as much as 4.7 per cent, 0.02 per cent more than official projections, but meeting the 1999 target of four per cent growth could be in serious jeopardy if the contagion in Asia, Russia and South America produces a global recession, bankers and economists said.
Finance Minister Christodoulos Christodoulou himself sounded a cautious note last week in his 1999 budget announcement, saying that unexpected domestic or outside developments could interfere with what he called satisfactory rates of growth in 1998 and 1999.
Beside the influence on the island’s economy of a possible world recession, the economists and bankers also spoke of other lurking dangers, primarily the persistently low productivity plaguing several sectors and a drought that has been scorching Cyprus for three years.
“A growth of four per cent in 1999 is certainly a feasible target,” said a senior government economist, who did not wish to be named.
“But the figure is shrouded in doubt because of the possible impact on the Cyprus economy from slower growth worldwide. After all, we do have a fairly open economy,” the economist told the Cyprus Mail.
The vulnerability of the island’s economy to outside influences arises mainly from its vital and fast growing services sector, which, according to official figures, accounted for nearly 60 per cent of GDP last year.
Prominent within the sector is tourism, which alone accounted for 20 per cent of GDP and $1.61 billion in foreign currency earnings last year, together with the offshore sector, which boasts some 34,000 companies registered on the island and earnings of nearly $350 million in 1997.
Growth in tourism, the economists and bankers say, was heavily intertwined with the economies of the countries from which the tourists come.
Britons, for example, account for more than a third of the two million plus tourists who come to the island every year.
The appreciation of Sterling against the Cyprus pound in the past 18 months or so has helped boost the number of British tourists coming to the island.
But growing signs that Britain is finally entering a recession period could pose danger to Cyprus tourism if Britons decide to stay home to save their money or take holidays at cheaper destinations.
Britain’s Labour government is also coming under increasing domestic pressure from industrialists to do something about the strength of Sterling, which has badly hit exports and negatively affected its own tourism industry.
The economic turmoil in Russia and the woes of its rouble could also spell trouble for Cyprus tourism in 1999.
Reports from Moscow suggest that a return to rigid foreign currency controls is likely in order to replenish foreign currency reserves and prop up the rouble. Under such a régime, only limited amounts of foreign currency would be legally available to Russians who wish to take a holiday abroad.
A dramatic decline in the number of Russian tourists coming to the island would be particularly painful to the industry since they constituted one of the fastest growing markets.
Russian tourists – some 200,000 were expected this year – have also established themselves on the island as among the biggest spenders together with Britons, at a time when spending by other tourists is on the decline.
“If we cannot get growth in tourism, then I don’t know where it will come from to sustain growth,” said Yiannos Tirkides, the Cyprus Popular Bank’s chief economist, alluding to the Russian crisis and Britain’ slow skid into recession.
Like in tourism, the potential danger of the contagion in Asia, Russia and South America engulfing the rest of the world could spell lean times for the lucrative offshore sector.
Already the number of offshore companies maintaining a fully-fledged presence on the island has declined in 1997 for the second successive year to 1,049, and Tirkides said that figures showed that many of the latest arrivals were just brass-plate companies.
Of the estimated 34,000 offshore companies registered on the island, approximately half of which are active, some 5,000 are Russian. These don’t include companies that are here solely to do business with Russia and eastern Europe.
These have reportedly seen their activity greatly diminished by the current uncertainty in Russia and the freeze on bank accounts enforced by the Moscow authorities soon after the crisis began five weeks ago.
The senior government economist also predicted that Russia’s new Prime Minister, Yevgeny Primakov, would be very reluctant to renew the Double Taxation Avoidance treaty with Cyprus in its present form. Instead, he said, he would press for additional sources of tax revenues.
The treaty, one of about 30 that Cyprus has with foreign countries, is crucial to the profitability of Russian companies and others doing business with Russia from Cyprus.
“Companies of good repute will cope with any changes if they are not too radical,” the economist pedicled. A change in the treaty, he said, “might actually work in our favour and help us down the road to create an attractive and efficient business environment for companies which are not here just for the tax breaks.”
