Country Report Cyprus April 2009

Outlook for 2009-10

• Full settlement negotiations started in September 2008, but progress has been painfully slow. The Economist Intelligence Unit puts the chances of a settlement during the outlook period at about 40%.
• There will be strong pressure on both communities and on Turkey to solve the Cyprus issue as it is hindering external relations for the EU and NATO.
• The main focus of economic policy in 2009-10 will be trying to mitigate the impact on the Cypriot economy of the global financial and economic crises, which has been limited so far, but is expected to deepen.
• We expect the budget balance to swing back into deficit in 2009-10, following surpluses in 2007 and 2008. However, at 2-2.5% of GDP it will remain comfortably below the 3% ceiling for euro area countries.
• GDP growth is forecast to slow from 3.7% in 2008 to 1% in 2009 and 1.2% in 2010. This would compare well with a 3.4% decline this year for the euro area, but will be the weakest growth that Cyprus has recorded since 1993.

Monthly review

• The negotiations to resolve the Cyprus issue continued in March. They have been slow, but are expected to speed up after the Turkish Cypriot legislative elections on April 19th.
• Opinion polls conducted on both sides have shown a high level of scepticism that an agreement can be reached and approved in separate referendums.
• In March the (Greek Cypriot) parliament approved a law to take effect in April that will raise social security contributions paid by employees and employers.
• Cypriot interest rates have been slow to respond to the large interest rate cuts introduced by the European Central Bank (ECB) owing to intense competition for deposits from Greek banks.
• Strong government spending helped to ease the slowdown in GDP growth in the fourth quarter of 2008. It was 2.9% compared with 3.5% in the previous quarter of that year.
• Turkish Cypriot zone: In early March Turkey disbursed a US$500m loan to help the ailing economy in the north.
• Turkish Cypriot zone: A poll on March 5th gave the right-wing opposition party, the National Unity Party (UBP) 43.3% of the votes and just 28.3% for the ruling Republican Turkish Party (CTP) ahead of the elections in April.