— Trade deficit eyes 30% of GDP in 2006, Questions about the balance of payments
The trade deficit in Cyprus could reach a record 30% of gross domestic product (GDP) this year as exports continue to decline and imports continue to rise, and could force the government to borrow abroad to keep the balance of payments stable.
In July total imports reached CYP 246.7 mln, according to preliminary figures from the Statistical Service. Although this was only a rise of 3% compared with July 2005, total exports fell by 11.4% in the same month to reach CYP 52.0 mln.
Cumulative imports in the first seven months reached CYP 1.89 bln (up 17.1% year on year), while cumulative exports reached CYP 373.8 mln (down 1.5%). This brought the year-to-date deficit to CYP 1.5 bln: a rise of 22.9% on Jan-July 2005 and probably a record.
Although volume data for exports of goods are not available, statistics on GDP in the first and second quarters suggest that it is not just the value of imports that are up (imports of fuels and lubricants rose by 55% in the first half of the year) but also volumes. Strong import volumes act as a drag on GDP growth.
For the year as a whole, the trade deficit looks like it could reach a record 30% of GDP.
This could cause balance-of-payments difficulties if the trade gap is not filled by inflows from elsewhere. Normally the gap in Cyprus is covered by a mix of other items in the balance of payments: services (tourism and financial services); investment (shares, takeovers and real estate); other small items; and last but not least, a very large item called “other investment assets”, which includes bank loans and non-resident bank deposits.
Tourism revenue amounted to only CYP 542 mln in the first seven months of the year: in other words, covering only about one-third of the trade deficit, If the other items together are not large enough to cover the trade gap, then the Ministry of Finance and Central Bank have a number of options.
One option is to use up foreign exchange reserves. However, this is not such a good option as it implies that foreign lenders do not have enough confidence in your country to lend money to you at affordable rates. It therefore tends to lead to a fall in the currency.
A second, much more drastic, option is to ban imports. This is normally not allowed under EU and WTO rules in any case, although the Central Bank has already implemented a milder version of this by raising interest rates to curb import demand.
That leaves the third option, namely to pull in money to cover the gap from abroad, for example by issuing a Eurobond. Although this raises overall debt, it is the least worst option for a country that should find it fairly easy to find foreign lenders.
Depending on where all that foreign borrowing by residents fits into the picture, don’t be surprised if the government suddenly announces a foreign bond issue before the end of the year.
