Economist Intelligence Unit rules out CYP devaluation

As Cyprus makes its official application to adopt the euro this week, the Economist Intelligence Unit has ruled out any devaluation of the Cyprus pound in its latest report on Cyprus published last week, while the report’s author says that the reason why Britons feel the Cyprus pound is overvalued is because of their own currency’s swings against the euro.

“We expect Cyprus to adopt the euro on schedule on January 1st 2008 at its

central parity rate within the EU’s revised exchange-rate mechanism (ERM-2) of CYP0.585:EUR1”, says the EIU’s February Country Report updater.

The Economist Intelligence Unit’s February forecast notes that the Cyprus pound has consistently traded close to its central parity rate and its ECU equivalent for around 14 years, without recession or other crisis.

“This suggests that the parity rate is appropriate, and therefore no devaluation is expected,” the report says.

The EIU added that the Cyprus pound is already approaching the central parity rate: at the end of January 2007 it was 1.1% stronger than the parity rate, compared with 1.5% stronger in October 2006.

 

Sterling v. the euro

 

Asked why some Britons living in Cyprus are calling for devaluation, the report’s author, Fiona Mullen, said that their perceptions about the Cyprus pound’s value are probably influenced by sterling’s swings against the euro in the past few years.

“While the Cyprus pound has moved by a maximum of only 1.3% in any year against the euro in the past ten years or so, sterling has swung much more dramatically – by as much as 17% in one year, even after sterling fell out of the Exchange Rate Mechanism,” she said.

She added that in 2006, sterling was actually not that far from its level against the Cyprus pound in 1990.

“But because sterling rose and then fell again in the intervening years, Britons are feeling the pinch. Ironically you could say that this, along with higher mortgage interest rates, is one of the prices Britons end up paying for staying out of the euro.”

Mullen said that devaluation is something you only resort to when you are having a crisis.

“But this is not an economy in crisis. The Cyprus pound has been rock steady against the euro and its ecu-predecessors for many years and in most of these years it has also enjoyed stronger growth than both the UK and the wider EU,” she said.

Although she admitted that there is an issue to be addressed about value-for-money in the Cyprus tourism sector, she said that devaluation is not the answer.

“It would only result in more inflation and even higher costs for British tourists,” she said.