The European Commission assessed the updated Stability Programme of Cyprus and found that the fiscal policy in 2009 will be rather expansionary.
According to a press release issued by the Commission on Tuesday, this should be reversed in the following years in view of the large external imbalances.
The press release noted that Cyprus has adopted a significant stimulus package for 2009 in line with the European Recovery Plan that is expected to result, in the programme, in a budget deficit of nearly 0.6%% in 2009 and 1% in 2010 as opposed to an estimated surplus of roughly the same amount last year.
''In the subsequent years, the structural deficit would deteriorate further. Whilst the deficit would remain below 3%, this does not appear warranted by the economic prospects, which remain relatively good, or desirable given the existence of a large external imbalance,'' the press release added.
''Moreover, against the background of a sharp deterioration in the global economic environment, the budgetary strategy is subject to significant downside risks. In light of the high external imbalance, maintaining prudent budgetary policies and strengthening fiscal sustainability should remain a priority,'' the Commission noted.
The Commission recommended to the Council to invite Cyprus to: (i) Implement the measures in response to the Recovery Plan as planned while avoiding further deterioration of public finances in 2009 compared to the target, (ii) Reverse the projected fiscal loosening in 2010 and beyond, by restraining expenditures in order to ensure a sound fiscal position in the medium term, (iii) In view of the ongoing fiscal deterioration and of the projected impact of ageing on government expenditure, improve the long-term sustainability of public finances by pursuing the reform of the pension and health care systems.
The Commission forecasts that Cyprus GDP will expand by 1.1% in 2009 and 2% in 2010. Inflation (harmonized) will reach according to Commission’s forecast 2% in 2009 and 2.3% in 2010, while public debt will reach 46.7% in 2009 whereas it will slightly decrease to 45.7% in 2010.
Cyprus government forecasts included in the Stability Programme are: GDP 2.1% in 2009 and 2.4% in 2010, Inflation (harmonized) 2% in 2009 and 2.3% in 2010, public deficit as a GDP percentage -0.8% in 2009 and -1.4% in 2010 and public debt as a GDP percentage 46.8% in 2009 and 45.4% in 2010.
