ECONOMY

Cyprus is firmly on euro road

NICOSIA – Cyprus is well on its way to joining the eurozone next year, fulfilling most EU criteria, but still needs to convince people of the single currency’s merits, the country’s finance minister said yesterday. The Mediterranean island, which joined the EU in 2004, is working hard to bring its key budget deficit, debt and inflation figures to within the EU’s limits and hopes to adopt the euro on January 1, Finance Minister Michalis Sarris told Reuters in an interview. «For us it’s an extremely important goal, perhaps only second to entering the European Union,» he said. «We have worked hard over a number of years.» Draft proposals from the European Commission, obtained by Reuters on Thursday, showed the EU executive will give a green light later this month for Cyprus and its fellow Mediterranean island Malta to join the eurozone on January 1, 2008. Sarris said the Cyprus pound, which has been fluctuating against the euro at an agreed rate within the ERM2 stabilization grid for the past two years, will be irreversibly locked against the euro on July 10. «I think it will be at about the rate of ERM2, around 1.7 (euros to the Cyprus pound). I don’t think we will have a significant change,» Sarris said. Better tax receipts and booming economic growth are helping to reduce the budget deficit to about 1.2 percent of GDP this year, compared with an initial target of 1.5 percent, and even better next year, when it is expected at 1 percent of GDP. »I think that in an election year, and the pressures that there are to increase spending. .. we stayed away from unplanned and unpredictable large expenses,» said Sarris. Cutting debt He said Cyprus aims to have a balanced budget by 2009 or 2010 and its declining deficit is also helping to reduce the country’s debt. Previously forecast at 65 percent of GDP for 2007, the debt will be 2-3 percentage points lower this year and is estimated to fall to 55 percent of GDP in 2008, he added. Despite a world energy crisis, Cyprus’s 8.9 billion Cypriot pound (-15.1 billion) economy will also grow slightly better than expected this year, by about 4 percent or slightly higher, compared with 3.8 percent last year. Inflation will remain low, at 2 percent in 2007 from 2.2 percent in 2006, a full percentage point below the current EU requirement. But challenges remain, especially convincing a skeptical public that abandoning the Cyprus pound and adopting a single European currency is a good thing. Asked how well authorities were doing in winning over the public, Sarris said: «Not as well as we would like.» In order to limit the negative affects of euro adoption, Cyprus will postpone adjusting some value-added tax rates, as required by the EU, until the middle of next year, Sarris said. These include imposing a 5 percent VAT on food and medicines, goods which now enjoy a zero rating. «The EU may not be happy with everything, for example they would have liked us to convince more people by now that the euro is a good thing,» said Sarris. «They may like us to be more aggressive in punishing those unnecessarily raising prices… but we are not a country which has a tradition of policing, we do it more through persuasion.» (Reuters)