THE RECESSION may be technically over but risks to the economy’s growth remain due to the unpredictable external environment Finance Minister Charilaos Stavrakis warned yesterday.
Stavrakis said Cyprus expected to cut its public deficit to 3.8 percent in 2011, while almost doubling its growth rate compared to this year’s 0.8 per cent.
The economy contracted for the first time in more than three decades in 2009 — by 1.7 percent — on the back of a decline in tourism and construction. While construction is still negative, tourism and financial services have picked up.
Stavrakis said he expected a 0.8 per cent growth this year to rise to 1.5 per cent in 2011, while public deficit will likely drop to 3.8 per cent in the next year from 2010’s forecasted 5.5 per cent. The International Monetary Fund and the Central Bank forecast a 1.8 per cent growth rate.
“Certainly there are elements that could raise the growth rate – the course of the global economy, especially the eurozone and foreign investment,” Stavrakis said.
But he warned that there were also many risks that could negatively affect next year’s growth. Among those are the global economy and failure to achieve targets towards better public finances.
“Fiscal consolidation is a very important element that will establish positive consumer and investment outlook,” Stavrakis said.
He said problems in important public organisations or in one or more countries using the euro that could lead to debt restructuring could create problems to Cyprus and the eurozone.
Stavrakis also said he could not rule out new taxes, days after announcing a 5.0 per cent VAT hike on food and medicines, and a new tax on tobacco.
“I believe we should speak about a reduction in spending, and not exclusively about new taxes … (but) I don’t think any responsible economist can rule anything out,” Stavrakis said.
Cypriot debt is estimated at 60 per cent of GDP in 2010, rising to 61.6 per cent by the end of 2011. The minister said Cyprus planned to issue debt on international markets towards the end of 2011 to cover part of an estimated €1.3 billion in maturing debt and plug its public deficit.
After a long absence, the island started reappearing on international markets in 2009 and again twice this year.
“The basic plan at the moment is to cover financing with short-term domestic borrowing for the first eight to nine months of the year,” Stavrakis said. “We may possibly go to the international markets for longer term financing towards the end of the year.”
Part of that amount was expected to refinance debt maturing, while some would also be directed to the deficit.
The EU has started legal action against Cyprus for running a fiscal shortfall exceeding 3.0 per cent of GDP.
Under the EU deficit process, the island must curb the shortfall to 4.5 per cent of GDP in 2011 and below 3.0 per cent in 2012.
A 2011 budget approved last week calls for the introduction of a 5.0 per cent VAT on food and medicine from January 10, while the government also plans to tax large bank deposits and start a dialogue for pension reform in an inflated public sector, which numbers 52,580 (including civil service, teachers, security forces and the judiciary).
Government spokesman Stefanos Stefanou who was present at the news conference, said President Demetris Christofias will be personally involved in discussions on pension reform, which the government will try to close inside 2011.
