Growth rate seen 0.6% lower due to fuel

The sharp increase in fuel prices has forced the Finance Ministry to fine tune its economic forecasts for 2005 and 2006, with the Ministry technocrats forecasting that if oil prices stay around $65 per barrel, then there will be a negative impact on the rate of growth and higher inflation.

Based on oil prices remaining at $65 a barrel, the Finance Ministry sees the rate of growth declining by 0.6% from the forecasted 3.9% rate, while the rate of inflation is seen edging up 1.2% and the deficit widening by 0.3%.

With fuel costs having a 5.85% share in the way the Consumer Price Index is formulated, the more than 50% increase in fuel costs is seen having a negative impact on the rate of inflation, which is now seen hovering between 2.5% to 3.0% for the year. According to the Finance Ministry technocrats, every $1 barrel increase in oil, generally adds the inflation rate by 0.09%.

The rate of growth is also seen being negatively affected from the increase in oil prices, with the Ministry forecasting a decline of 0.5% to 0.6% if oil prices stay at current levels. The additional cost of import of oil is seen at CYP 90 mln.

Higher oil will also hurt state finances, which will be burdened by higher operational expenses that should increase the deficit by 0.09%. On the other hand, higher oil will also boost VAT receipts, which are seen 0.07% higher.