Cyprus trade deficit hits records CYP 2.17 bln

But currency remains unaffected

 

The trade deficit in Cyprus reached a record CYP 2.17 bln in January-October, as imports of fuels and aircraft far outstripped exports from the tiny agricultural and manufacturing sectors.

According to preliminary estimates, total imports/ arrivals amounted to CYP 2.69 bln in the first ten months of 2006, an increase of 12.6% on Jan-Oct 2005 and of 24.4% on Jan-Oct 2004.

Total exports/dispatches amounted to CYP 513.4 mln in the same period, recording a fall of 10.5% on Jan-Oct 2005 but a rise of 14.7% compared with Jan-Oct 2004.

The trade deficit therefore reached a record CYP 2.17 bln in the first ten months.

However, while in some countries a gaping trade deficit might lead to a run on the currency, as traders rush to sell the local currency in order to pay for their supplies in dollars or euro, in Cyprus the local currency is unfazed.

The Cyprus pound was at 0.578 CYP per euro on December 12, only a tiny bit weaker than earlier in the year, and still around 1.2% stronger than its central parity rate in ERM2.

This suggests that the foreign exchange flowing out of the country to pay for imports is flowing back in elsewhere. This is coming partly in the form of bank deposits by our wealthy non-resident friends who like our tax rates, but also partly because of huge amounts of euro borrowing for housing purposes that is flowing into the country.

This is not great news either: even if we are about to adopt the euro in just over 12 months’ time, the general rise in credit raises questions about how we are going to handle the demographic timebomb. But this is something that will affect us in the longer term, rather than in the short term and hence the currency is not affected.

Cyprus’ main exports are pharmaceuticals, potatoes, citrus fruits and halloumi, while its main imports are consumer and intermediate goods.

Fiona Mullen, Sapienta Economics Ltd