Cyprus has so far weathered the storm, but the 2009 outlook is more uncertain, it is noted in Cyprus' Stability Programme (SP) for the period 2008-2012 which has been submitted to the European Commission.
The Stability Programme for the Period 2008-2012 which has been approved by the Council of Ministers on December 17, 2008 and subsequently amended on February 3rd, 2009, takes into account the European Commission’s recent proposal for a coordinated recovery plan to address the current economic downturn, and the joint conclusion adopted by the European Council in December 2008.
A key policy aim of the government is to promote growth and strengthen social cohesion. In this regard, the government aims at re-directing resources in favour of social expenditure and growth-enhancing expenditure categories, improving physical infrastructure in various segments of the economy while, at the same time, safeguarding macroeconomic stability.
Another key strategic aim of the government is to boost its social spending in favour of that part of the population that is in greater need and also significantly reduce the public debt to GDP ratio over the medium term allowing thus more flexibility in fiscal policy.
The ongoing international financial crisis has deepened considerably since September 2008 and the prospects for the world economy have become gloomier in recent weeks, it is mentioned in the SP.
The SP says that in the event of a prolonged slowdown, the government has the necessary room to manoeuvre, given the underlying sound fiscal position and is ready to implement additional measures, if required.
Nevertheless, and despite the unfolding economic crisis and prospective slowdown of economic activity in the EU and the Euro area -and the need to safeguard the important achievements – this Stability Programme reaffirms its ambitiousMedium-Term Objective of a balanced budget.
Economic activity in the UK, which is by far the most important economic partner of Cyprus, slowed markedly in the first three quarters of 2008 resulting in a decrease of the number of British tourists visiting Cyprus and to a fall in property demand by UK nationals.
The central scenario, according to the Stability Programme, is based on the assumption that the current international economic crisis will primarily affect the construction, real estate and tourism sectors, and, to a lesser extent, exports of services other than tourism.
Under such scenario, growth may fall to 1%, with adverse effects on public finances. Nevertheless, even under this pessimistic scenario, the underlying fiscal position is expected to remain sound, as reflected in the public debt-to-GDP ratio remaining below 50% of GDP.
According to the preliminary estimates of the Statistical Service of Cyprus, the GDP in constant prices increased by 3.9% in the first nine months of 2008 compared to the corresponding period of the previous year.
Recent data for the whole of 2008 has shown that the overall number of tourist arrivals in 2008 decreased by 0.5%, compared to 2007.
Based on this scenario, real GDP will expand by 2.1% in 2009 and 2.4% in 2010, with the recovery gathering pace in 2011-12.
The debt-to-GDP ratio in2009 is projected to continue its downward path and fall to around 46.8% of GDP exhibiting a further decrease of approximately 2.5 percent points of GDP.
Based on the central scenario, primary balances, as a percentage to GDP, over the remainder of the programming period are projected to continue to be broadly in surplus and are estimated to decline from 1.5% in 2009 to 0.8% in 2010 and gradually falling to a marginal deficit of around 0.2% by 2012.
According to a pessimistic scenario, which is included in this SP, the debt-to-GDP ratio is expected to continue exhibiting a downward trend, albeit at a more moderate pace.
The baseline scenario included in this SP envisages growth significantly below potential in 2009-2010 and a gradual recovery thereafter.
According to the central scenario, a deeper demand shock could lower growth to some 1% from 2.1% in 2009. Other things being equal, the budget balance is projected to deteriorate by some 0.4 percent of GDP at the beginning of the programming period to a deficit of 1.2 percent of GDP in 2009; the resulting deficit path follows an upward trend reaching 3.8% of GDP by the end of the programming period.
The public debt-to-GDP ratio is projected to remain on a downward path during the period 2009-2011, albeit less pronounced, falling to 45.4% by 2011 and then a reversal of the trend is projected with the debt-to-GDP rising to 45.8% by the end of the programming period, 4 percent points of GDP higher compared with the baseline or the central scenario.
