…Oil at $80 will force growth to 3-3.5%
The Cyprus economy is on track for another impressive year of growth in 2006 with inflation under control and the fiscal deficit declining according to government forecasts, but the rising oil prices is a worry that may affect the global and Cyprus economy.
Finance Minister Michalis Sarris said during a press conference Thursday that the economy is humming along at a very satisfactory pace and Ministry of Finance forecasts and targets received a nod of approval from the European Commission in its latest Spring Forecast 2006.
“The Commission agrees with our forecasts for 2006 and 2007 and views them as sustainable and feasible,” said a confident Sarris, who nevertheless is worried about the fast increase in oil prices and its damaging impact likely to have both on the global and Cyprus economy.
Growth
The EU25 GDP growth for 2006 is forecast at 2.6% and 2.2% in 2007 based on oil prices averaging $69 per barrel for 2006 and $71 in 2007, while for Cyprus in particular, the Commission is forecasting GDP growth of 3.8% in 2006 and 2007.
Sarris said the EC forecast is very close to the Finance Ministry forecast of 4% GDP growth for both 2006 and 2007.
Sarris told the Financial Mirror that the pace of increase in oil prices is a worrying factor. He stressed that the economy has shown a remarkable resilience to the oil price increase, which he believes will eventually lead the public to resort to saving energy and cutting waste.
But Sarris warned that if the price of oil continues rising due to global political tension, then at around $80 per barrel, it would force the Cyprus GDP growth rate down to 3-3.5%.
The Commission expects a 5% real term increase in investments, both from abroad and from local resources, with Sarris placing particular emphasis on the dynamic growth of the pharmaceutical industry as a key example where investment is heading.
Inflation
The Harmonised Consumer Price Index is forecast by the Commission to hover at 2.1-2.2% in 2006 and 2007 for EU25, while for Cyprus, the EC is forecasting HCPI at 2.4% and 2.2% in 2006 and 2007 respectively. This a bit higher than the Finance Ministry forecast for Cyprus HCPI of 2% for 2006 and 2007.
Fiscal recovery
The Commission forecasts the EU25 fiscal deficit to hover around 2.3% of GDP in 2006 and 2.2% in 2007, while for Cyprus, it is forecasting fiscal deficit of 2.1% and 2% in 2006 and 2007 respectively compared to 2.4% in 2005.
Sarris said his Ministry is sticking to its forecast of Cyprus fiscal deficit declining to 2% in 2006 and 1.8% of GDP in 2007, because of the government’s prudent strategy of controlling expenditure while at the same time boosting income through better tax collection and other fiscal measures.
Tax reform
Commenting on various demands for changes to be brought to the tax regime suggested ahead of the elections by the parties, Sarris again insisted that there are no plans to increase taxation, but said that through dialogue with all parties concerned, such issues may be resolved.
Sarris however, noted that most of the demands involve increasing costs and reduction of revenue, at a time when all parties agree on the current course for fiscal recovery and discipline.
“One is contradicting the other, which is why we shall solve all relevant issues through a healthy dialogue.”
Rising unemployment
Though never mentioned in the Finance Ministry presentation, journalists pointed to Sarris that the EC is also forecasting higher unemployment for Cyprus, seen at 5.4%, which is far above what Cyprus has been accustomed to.
Sarris acknowledged that unemployment is rising but stressed that the EC forecast of 5.4% jobless is based on a Labour Survey, whereas in fact the true level of unemployment is 3.7%.
“Jobs are being created, but not to the liking of Cypriots, which explains the moderate increase in unemployment levels, but we need to note that our 3.7% average still compares extremely well with the 10% level prevailing in many member states,” said Sarris.
