Cyprus’s deficit falling

NICOSIA – Cyprus is on target to cut its fiscal deficit to 2 percent of gross domestic product in 2006 and expects no major monetary policy changes as it prepares to join the eurozone in 2008, the Finance Ministry said. In an economic review dated October 31, Cyprus said its economic forecasts were on track but that meeting its deficit target was still contingent on the state receiving dividends from the profits of semi-government corporations. GDP was expected to expand by 4 percent this year from 3.8 percent in 2005, and annual inflation to settle at the end of the year between 2.5 percent and 2.6 percent. Cyprus hopes to adopt the euro as its national currency by January 1, 2008. It must keep its budgetary shortfall to within 3 percent of GDP, converge on interest rates, show a progressively declining public debt and keep inflation under control. Interest rates on the island are now at 4.5 percent, a premium of 1.25 percentage points over the eurozone rate. The Cypriot pound is in ERM2, a currency stabilization grid which keeps it anchored against the euro in a 2.25 percent fluctuation band. «The anticipated further convergence of (Cypriot) interest rates to those in the eurozone will be aided by the expected increase in eurozone rates in the second half of 2006. As a consequence, and taking into account the need for interest rate alignment, no major changes are expected to monetary policy,» the Finance Ministry said in a footnote to its report. Christodoulos Christodoulou, the Cypriot central bank governor, told Reuters in an interview earlier this week that he expected the island to attain interest rate parity with the ECB by June or July 2007. Cyprus’s budget deficit was 2.4 percent of GDP in 2005, and forecasts the shortfall declining to 1.6 percent of GDP in 2007. In the first seven months of the year, state revenues were up 15.6 percent from a year earlier. The report highlighted that spending rose 6.4 percent on payments for goods and services.

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