ECONOMY

Lower military spending makes Cyprus confident of scaling back budget deficit after 2003 spike

NICOSIA (Reuters) – Cyprus’s general government budget deficit climbed to 6.4 of gross domestic product last year from 4.6 percent in 2002, but the Finance Ministry said yesterday it remained confident of the deficit slipping back again this year. Public debt on the island state, which was one of 10 nations joining the European Union in May and which hopes to enter the eurozone in early 2007, swelled to 70.9 percent of GDP from 67.4 percent in 2002. Both figures bust EU convergence guidelines for member states seeking to adopt the euro. But official figures earlier this week showed the deficit for January-May this year fell significantly in numerical terms to 74.1 million pounds ($156.7 million) from 156.9 million pounds in the corresponding period of 2003. A key reason behind the drop was a cut in defense outlays, which is traditionally high on the island ethnically divided between Greek and Turkish Cypriots since 1974. «The figures do suggest a declining trend (for the whole year) and we are optimistic of meeting our deficit target of 5.2 percent,» a Finance Ministry official told Reuters. To qualify for eurozone membership, countries are meant to bring their budget deficits to below 3 percent of GDP and their overall public debt to below 60 percent of GDP. Cyprus’s general government accounts were compiled in accordance with the European System of Accounts (ESA95) guidelines, the statistics department said. They apply only to the southern part of the island controlled by the internationally recognized government. The final figure for the deficit was almost level with 2003 forecasts at 6.3 percent. Public debt had been forecast to hit 72.6 percent of GDP. Projections for the current financial year suggest overall public debt will climb to 75.2 percent of GDP this year. Authorities are in the throes of introducing a fiscal consolidation plan designed to incrementally lower the deficit to 1.6 percent of GDP in 2007 and the public debt level to 67.3 percent It entails capping expenditure through a salary freeze in the public sector, outsourcing more and lowering borrowing costs in the secondary bond market. Tax increases appear to be ruled out for now.