By Hamza Hendawi
THE Island’s services-based economy will grow by a healthy 4.7 per cent this year, but Finance Minister Christodoulos Christodoulou warned yesterday that fiscal reforms were needed to prepare Cyprus for EU membership early in the next century.
The minister said that Cyprus needed to boost revenues with adjustments to Value Added Tax and other indirect taxes.
Addressing the House Finance Committee, the minister said the economy was expected to grow by four per cent in 1999.
His forecast of a 4.7 per cent growth this year was higher than figures floated by independent economists, which range between three and four per cent. The economy grew by 2.5 per cent last year and by 2.2. per cent in 1996.
Tourist arrivals in the January-July period of 1998 increased by 9.3 per cent, said the minister, compared to a rise of only 1.5 per cent in the same period last year. Tourism is the backbone of the Cyprus economy and accounts for nearly 20 per cent of gross domestic product.
The island earned about $1.61 billion from the 2.08 million tourists who visited in 1997 and looks set to earn just under $2 billion this year.
“The ability to make further savings in public expenditure is very limited and therefore there is a need to boost revenues with adjustments in Value Added Tax and other indirect taxes,” said Christodoulou.
VAT is at present calculated at eight per cent and he is expected to ask the House later this year to approve an increase of four percentage points as part of a revised package of tax hikes. The original proposals were thrown out by deputies who accused the government of failing to hold sufficient advance consultations on the measures. The average VAT in EU countries is 15 per cent, although some charge as much as 20 per cent.
Christodoulou said yesterday that the public debt in 1999 would reach 61.7 per cent of GDP, breaching for the first time the Maastricht ceiling of 60 per cent for membership of Economic and Monetary Union (EMU). Public debt is provisionally forecast at 59.8 per cent this year.
“Such a development would certainly act against the good image of the Cypriot economy in the framework of its (EU) accession course and our aspiration that Cyprus be included in the Economic and Monetary Union immediately after accession,” said Christodoulou.
Cyprus is also in breach of the three per cent ceiling on fiscal deficit. This is forecast to hit 5.7 per cent this year and shoot to 6.3 per cent in 1999. It was originally forecast to end 1998 higher, but lower energy prices on world markets, better tax collection and a one per cent hike in the Defence Fund Tax helped slow its rise.
Christodoulou last week announced a series of measures to reduce government expenditure, introducing restrictions on overtime pay for policemen, entertainment expenses, allowances for officials travelling abroad on business and the use of state-owned vehicles.
Last month he said the state payroll, including pensions, would increase in 1999 by £59 million, or 10 per cent, to a staggering £645 million.
The minister appeared before the committee yesterday to discuss the draft 1999 budget, which forecasts a deficit of £581 million on expenditure of £1.68 billion and revenues of £1.1 billion.
The draft budget must be approved by the House before the end of the year.
