THE EUROPEAN Commission has given a guardedly optimistic forecast for the Cyprus economy in the coming year, saying there will be a slight contraction due to a slowing of domestic demand, and warning that the country is becoming overly dependant on the tourist industry.
“The medium term prospects for the economy are good, with growth in 2002 expected to recover to the levels enjoyed in recent years,” the Commission says. But it cautions that “the long run growth potential depends crucially upon whether or not Cyprus will be able to limit its dependence upon tourism and diversify into other service-related activities.”
The Cyprus economy will contract slightly in the coming year due to a slowing of domestic demand, largely in response to what the EC calls “underlying macroeconomic disequilibria experienced in recent years” or, more plainly, the decline of the stock market.
Public consumption will also slow, the EC says, as the government continues to put downward pressure on the fiscal deficit, but it will be offset by a “significant recovery” in fixed investment.
“After a dismal performance in 1999, fixed investment posted a limited increase in 2000. The slowdown in 1999 was an indirect consequence of the extraordinary speculative bubble in equity prices. The local stock market pulled liquidity away from both the banking sector and investment expenditure, as loanable funds were used to purchase shares. The forecast anticipates that this recovery will gain speed during the next two years.”
The EC also says a “degree of uncertainty” surrounds the new monetary policy regime, with its more flexible interest-rate policy, and notes that the Central Bank has come under some political pressure to cut rates.
It notes with approval that “the Central Bank has pursued interest rate stability in order to provide time to local commercial banks to adapt to the new monetary environment” and says that “the cautious position of the central bank is justified.”
The EC points to the deterioration in the country’s current account, but attributes it to higher world oil prices rather than increased consumer spending or to increasing public sector wages. Lower oil prices will ease the external account burden, the Commission says.
On tourism, the EC says that tourist receipts are expected to grow strongly throughout the forecast period and points out that, as a result, the Cypriot economy is likely to become even more reliant upon tourist-related activities.
It warns that this makes the economy increasingly vulnerable to external shocks, above all from core tourist markets such as the UK.
The EC says that inflation could fall under three per cent in the coming year, depending on domestic agricultural prices, and oil prices.
“If agricultural production picks up more rapidly than expected, the prices of certain domestically produced staple items could fall more rapidly and bring inflation down faster than anticipated by the Commission.”
Fiscal consolidation is expected to be strong throughout the forecast period, with the deficit likely to fall to just under 2.5 per cent by 2002. Revenue performance is likely to be exceptionally buoyant, as many of the measures introduced in 2000, such as the two per cent increase in the VAT rate, will start to have their full impact.
However, considerable expenditure pressures will appear, especially in the run-up to the parliamentary elections, and the Commission warns that further vigilance is needed to ensure that the reductions in the fiscal deficit achieved over the last two years can be sustained in the run up to EU accession.
The Cyprus Mail is the only English-language daily newspaper published in Cyprus. It was established in 1945 and today, with its popular and widely-read website, the Cyprus Mail is among the most trusted news sites in Cyprus. The newspaper is not affiliated with any political parties and has always striven to maintain its independence. Over the past 70-plus years, the Cyprus Mail, with a small dedicated team, has covered momentous events in Cyprus’ modern history, chronicling the last gasps of British colonial rule, Cyprus’ truncated independence, the coup and Turkish invasion, and the decades of negotiations to stitch the divided island back together, plus a myriad of scandals, murders, and human interests stories that capture the island and its -people. Observers describe it as politically conservative.
