Commission forecast for Cyprus

10 November 2011

Expenditure slippages appear to be related to rising social outlays due to higher unemployment and redundancy payments, as well as due to the electoral cycle and the higher cost of financing.

Overall, risks appear to be broadly balanced. On the one hand, risks associated with financial markets' reactions to developments in the euro area as well as adverse spillovers from Greece, particularly in view of the large exposure of the financial sector, are not negligible. Moreover, the tightening of financial and credit conditions together with the already higher financing costs and the high degree of leverage of private agents could delay the rebound in consumption and investment. On the other hand, successful implementation of fiscal consolidation, coupled with promising outcomes of the ongoing gas exploration, could have significant confidence effects.

With a view to reducing the budget deficit, the government adopted a fiscal consolidation package yielding an estimated annual consolidation impact of about ½ pp GDP in 2011-12. The forecast at hand projects a deficit of 4.9 per cent of GDP for 2012. It incorporates a more prudent assessment of revenue prospects, given a less tax-rich growth composition, and possible overruns on the expenditure side, especially of current primary expenditure in view of past trends on key items such as the wage bill and social transfers. Moreover, measures that are still under discussion with an uncertain outcome or with no information on the modalities of their implementation, such as the two aforementioned measures, are not taken into account. The structural balance is expected to improve by about 1¾ per cent of GDP in 2012.

Based on the no-policy-change assumption, the deficit is set to subside marginally to 4.7 per cent of GDP in 2013, due to savings on the public wage bill from the abolition of public sector posts and the adopted measure of one new recruit for every four retirees in the broader public sector. With weak growth and an increasing deficit, the debt-to-GDP ratio should remain on a rising trend and reach almost 71 per cent of GDP by 2013. Debt projections also include the impact of guarantees to the EFSF, bilateral loans to Greece, and the participation in the capital of the ESM as planned by the cut-off date of the forecast.

Full forecast (Cyprus)

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