ECONOMY

Widening deficit seen as Cyprus’s biggest hurdle to early euro entry

NICOSIA – Cyprus aims to meet EU economic convergence criteria in 2007 but a widening public deficit is hampering efforts to meet the target date for eurozone membership. «The target is still realistic but the government needs to take bold measures by freezing state sector salaries and seeking to privatize public services,» analyst Pambos Papageorgiou told AFP. During European Union accession negotiations, Cyprus was best placed among the 10 prospective members to meet the convergence criteria and be among the first to adopt the euro. But even after advancing its target date once, Cyprus is already struggling to meet the new 2007 deadline, as spending spirals out of control and economic growth remains sluggish. For new member states, there is a two-year waiting period before any country can apply to join the eurozone. Although the island’s growth rate of 2.0 percent is above the EU average, it is below the rate to which Cyprus has grown accustomed in recent years. A slump in tourism over the past two years has been a major contributor to the slowdown. Economist Costas Apostolides argues that the economy has been put on hold due to UN-brokered efforts to reach a Cyprus settlement in time for EU entry. He says uncertainty over the UN reunification plan is hurting the economy. «Investment and consumer purchases are being held off due to the uncertainty over the UN plan, so expected 4 percent economic growth could take longer,» Apostolides told AFP. Latest figures show that the government’s public deficit reached 6.3 percent of GDP in 2003, the worst figure recorded since 1991. This puts Cyprus well outside the Maastricht criteria of 3.0 percent of GDP. Among new member states, only Malta and the Czech Republic registered a higher deficit in terms of GDP. Critics blame the government for the revenue shortfall, citing the introduction of costly welfare schemes, such as a $200 million universal child benefit program, to offset the hikes in VAT required to bring it up to the minimum 15 percent stipulated by the European Union. Moreover, the island’s public debt has increased to 72.2 percent of GDP, the worst figure among new EU members, with Malta close behind with 72 percent. If eurozone entry is to be achieved, the government debt must be reduced to 60 percent of GDP. Nevertheless, inflation is being kept in check with the rate for February given as 1.4 percent compared to 4.8 percent a year ago. For the 15-member bloc, average inflation was 1.5 percent in February. The authorities are hoping that the service sector will be bolstered by the island’s EU entry on May 1. The economy relies on a vibrant financial services sector with a sizable international banking and business center. Analysts believe that EU accession will attract more foreign investors and help the island develop as a regional financial center. «With a preferential tax regime between offshore and onshore businesses now replaced by a flat rate of tax, we are no longer seen as a tax haven,» said Papageorgiou. He said some Cyprus companies may go elsewhere, «but those who do leave, we may not want them to stay anyway.» With per capita income of some 18,000 euros ($22,000), the highest among new EU members, Cyprus is likely to be a net contributor to the bloc and not a burden. But Cypriots will hope to improve their standard of living, which, despite beating Greece, Spain or Portugal, still lags some 15 percent behind the EU’s average income.