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News Analysis: Tight spending, but strong growth expected in Cypriot economy

Xinhua, April 2, 2016 Adjust font size:

Discipline and tight spending was the message which was given by Finance Minister Harris Georgiades as Cyprus officially exited its bailout economic adjustment program at midnight on Tuesday.

Continuation of austerity that saw salaries and pensions in the public sector over the last three years coming down sharply could hardly be expected to encourage growth as consumers lost about 20 percent of their purchase power.

Even so, both the Cypriot Finance Ministry and international lenders who bailed out Cyprus with a 10-billion-euro assistance program in March 2013, project a growth of GDP in 2016 of up to 1.6 percent.

There is a belief that the modest growth could hardly make a marked dent on unemployment, currently standing at 15 percent, which is the biggest headache for the government.

Finance Minister Harris Georgiades said that though there would not be a return to past bad practices of increasing public spending, the government will start bringing down taxes, in a bid to promote growth through demand.

The extent of tax reduction will depend on the performance of the economy. The prospect of a gradual restoring of salaries and pensions to pre-bailout levels as of 2017 are expected to further help demand-oriented growth.

But the best omen so far is an announcement by the hoteliers association that they have a sold out for the duration of the tourist season that ends at the end of October.

Cyprus's Tourism Organization (CTO) has just announced that it expects a marked increase in arrivals, most notably from Russia which is expected to send 50 percent more visitors this year, compared to 2015.

That means that about 300,000 more Russian tourists will visit Cyprus this year than previous year, bringing the annual total to 900,000.

Cyprus benefited last year from the closure of the Egyptian tourist resort of Sharm el Sheik after the downing of a Russian plane over the Sinai Peninsula by the Islamic State (IS).

This year Cyprus will also to some extent benefit from tensions between Russia and Turkey after the downing of a jet fighter over Syria last year.

CTO chairman Angelos Loizou said that though Russian tour operators still maintain their links with Turkey, some of them have asked for facilities from Cypriot hoteliers in a move to keep their business afloat.

A sizeable increase of the tourist sector, which accounts for about 12 percent of Cyprus's annual economy of 18 billion euros could prove enough to produce a growth of close to 2.0 percent this year.

The Economic Research Center of the University of Cyprus in its latest Economic Outlook bulletin projects a 2016 GDP growth of 2.7 percent, more than one percentage point over the official prediction.

It listed as factors which will help the economy a strong growth in the third quarter of 2015, the lowering of lending rates in conditions of high unemployment, the stabilization of the banking sector and increased trust in the Cypriot economy by international agencies.

The fall in oil prices and low inflation in Europe which supports consumer demand, and also a cheaper euro are factors with expected positive impact on the Cypriot economy.

Foreign investment in a casino resort which will be licensed any time now and further licensing for natural gas exploration will add to the improvement of the economic climate.

On the risk side, there are some factors which could adversely affect the economy any time. These are mainly the high rate of non-performing loans, a slowdown in bringing about reforms because of stronger public opposition and a possible worsening in the international economic climate, such as a recession in Russia and a lower rate of growth in the eurozone.

However, many analysts agree that the Cypriot economy will really take off in the event of a solution reunifying the eastern Mediterranean island after four decades of division.

It has been estimated that investment in infrastructure needed for the reunification will add an additional 3.0 percent on the economy each year. Endit