THE Planning Bureau yesterday predicted a 4.0 per cent growth rate in 2005 boosted by consumer confidence and an improvement in the business climate.
In its report on economic developments for the first nine months and prospects for 2005, the Planning Bureau, an arm of the Finance Ministry, said the fiscal deficit would drop to 2.9 per cent.
This would result from increase in state revenue, restraint in public spending and improvements in tax collection.
Authorities have boosted revenue collection with more vigorous pursuit of tax dodgers – VAT inspectors launched a blitz of raids in the autumn – and a cap on spending.
The fiscal deficit in the first nine months of 2004 recorded a 50 per cent drop to £178.7 million compared to £392.4 million in the corresponding period of 2003, the Bureau said.
“Although factors that negatively affected the growth rate in 2004 will continue to affect the island in 2005, the island’s economy will grow by 4.0 per cent,” a statement from the Bureau said.
It predicts that unemployment in 2005 will drop to 3.4 per cent compared to 3.6 per cent in 2004. Inflation is expected to increase slightly to 2.5 per cent in 2005.
The bureau avoided giving any forecasts for tourism, saying it was too early. However, some growth is expected in the wake of a 2.0 per cent increase the sector in 2004.
Cyprus expects to link its pound to the European Exchange Rate Mechanism (ERM-2) by March or April at the latest, after the European Commission took Cyprus off the excessive deficit procedure watch-list. The recommendation was made official in Brussels on Tuesday.
Finance Minister Makis Keravnos said yesterday ECOFIN’s decision was “very significant”.
The suspension of the Stability and Growth Pact’s monitoring procedure was decided after a comprehensive scrutiny of Cyprus’ proposed convergence programme, the aims of which have been described as realistic and feasible.
In May 2004, Cyprus submitted a revised convergence progamme with a view to curbing the public deficit to 2.9 per cent by the end of 2005.
The EU’s Economic and Monetary Affairs Commissioner Joaquin Almunia is expected to visit Cyprus on May 19 and 20.
ERM-2 would require Cyprus to anchor the pound at an agreed parity rate against the euro in a stabilisation band designed to protect currencies from pressure backed by the firepower of the European Central Bank.
Cyprus became a member of the European Union on May 1, but saw its bid for swift accession to ERM-2 troubled by wide budget deficits and high debt levels, which exceed guidelines for the euro zone.
Of the 10 countries which joined the EU in May, three – Estonia, Lithuania and Slovenia – have already entered ERM2.
Analysts and markets are speculating that Cyprus could join ERM2 with Latvia, another newcomer. Latvian Finance Minister, whose country also aspires to join the ERM II by next April, has invited Keravnos to visit Latvia in February with a view to co-ordinate moves to achieve this goal.
