Country Report Cyprus July 2008

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 risen, reaching 4.9% in May, reflecting high food and energy prices. It is expected to rise further in the coming months but should ease later in the year to average of 4.4% in 2008 to 2.7% in 2009.

Monthly review

• Preliminary talks aimed at restarting fully fledged negotiations later this year have continued. Although progress has been slow there still appears to be the political will to find a settlement.
• There were tensions between Mr Christofias and the leader of the Turkish Cypriot community, Mehmet Ali Talat, in June.
• The budget appeared to be still in surplus in the first half of 2008, but according to data from the Inland Revenue for January-May, tax revenue rose by 1% year on year, compared with a rise of 48% in the same period of 2007.
• The Central Bank of Cyprus has eased deposit requirements for mortgage borrowers, probably because of the drop in property related tax and concerns about the slowdown in the property market.
• GDP growth slowed to 4% in the first quarter of 2008, compared with 4.3% in the final quarter of 2007.
• Turkish Cypriot zone. While in June slow progress was made in the preliminary talks, some small steps were taken to improve business relations between the two sides and to boost trade.
• Turkish Cypriot zone. Turkish Cypriots have remained pessimistic about economic prospects as they depend on construction and the property market.