Country Report Cyprus

Outlook for 2008-09

• The Economist Intelligence Unit does not expect a solution to the division of Cyprus to be concluded during the outlook period, mainly because of the current political instability in Turkey, but prospects have improved.
• Pressure will be strong on both communities and Turkey to solve the Cyprus issue as it is hindering external relations for the EU and NATO.
• Economic policy will remain broadly unchanged. The new president, Demetris Christofias, of the nominally communist Progressive Party of the Working People (Akel), has appointed an independent minister of finance.
• Pre-election spending, an increase in social expenditure under Akel and a narrowing of the tax base are expected to result in a deterioration of the budget position in 2008-09, following a large surplus of 3.3% of GDP in 2007.
• Although some of the factors underpinning economic expansion in 2007 will not be present in 2008-09, solid GDP growth is still expected. It is forecast to slow from an estimated 4.4% in 2007 to 3.7% in 2008 and 3.1% in 2009.
• Consumer price inflation has accelerated, reflecting high food and energy prices, but is expected to ease later in the year from an average of 4.4% in the first three months of 2008 to 3.9% for the year and to 3.2% in 2009.

Monthly review

• Following a meeting on May 23rd Mr Christofias and the Turkish Cypriot leader, Mehmet Ali Talat, reaffirmed their commitment to a bi-zonal, bi-communal federation with political equality for the two communities.
• In the weeks prior to the meeting Mr Christofias appeared more cautious, probably because of uncertainty regarding Turkey's stance and opposition to developments from the hardline parties in the government coalition.
• The budget was still in surplus in the first quarter of 2008, mainly thanks to strong growth in revenue from value-added tax (VAT). Revenue from tax on wealth and income fell by 3% year on year.
• GDP growth was an estimated 4% in the first quarter of 2008, held up by strong domestic demand growth.
• Turkish Cypriot zone. Although preliminary talks with the Greek Cypriots are on track there has been debate in the north over whether Turkey will allow Turkish Cypriot negotiators a free hand in carving out a power-sharing deal.
• Turkish Cypriot zone. In May the government announced plans to increase tourist bed capacity in the north. The announcement was met with scorn by hoteliers. They say that they are already struggling to fill their current capacity.