Updated convergence programme of Cyprus, 2005-2009 - Main contents

EN

Official Journal of the European Union

C 82/36

On 14 March 2006, the Council examined the updated convergence programme of Cyprus, which covers the period 2005 to 2009.

Supported by robust productivity and employment growth, Cyprus' real GDP growth (3,5 %) was among the highest in the EU over the last decade. Net borrowing vis-à-vis the rest of the world (the external deficit) has expanded (4,8 % of GDP in 2004) due to a number of factors, including robust domestic demand, competitiveness losses related to increased competition in some of Cyprus' main export sectors, the appreciation of the Cyprus pound, as well as higher reinvested earnings. This was largely matched by the borrowing needs of the public sector, which posted a deficit of 4,1 % of GDP in 2004. HICP inflation remained below 3 % for most of the decade.

On 5 July 2004, the Council decided that Cyprus was in excessive deficit. According to the Council recommendation under Article 104(7) of the same date, the excessive deficit had to be corrected by 2005. In its opinion of 8 March 2005 on the previous update of the convergence programme, covering the period 2004-2008, the Council invited Cyprus to implement with vigour the measures envisaged to bring the deficit below 3 % of GDP by 2005, ensure that the debt ratio started to decline by then, and pursue pension and health reforms.

The current update estimates the 2005 deficit outcome at 2,5 % of GDP, compared with 2,75 % of GDP in the Commission services' autumn 2005 forecast and just below 3 % in the previous update. The difference with the update mainly reflects a 0,5 % of GDP better than expected interest expenditure.

The new programme broadly follows the model structure and data provision requirements for stability and convergence programmes specified in the new code of conduct (2). The update was submitted 2 weeks beyond the 1 December deadline set in the code of conduct reflecting the authorities' wish to incorporate the budgetary measures announced in the second week of December.

The macroeconomic scenario underlying the programme envisages real GDP growth just above 4 % over the period 2005-2009. Assessed against currently available information, this scenario appears to be based on plausible growth assumptions until 2007 and slightly favourable ones in 2008 and 2009. As a result, cyclical conditions, as measured by the output gap, might be more favourable than implied by the programme's projections. The programme's projections for inflation appear realistic.

Building on the deficit reduction to below 3 % of GDP in 2005, the update aims at further consolidating public finances until 2009, when the deficit would approach 0,5 % of GDP. After reaching 0,75 % of GDP in 2005, the primary surplus is projected to rise gradually to 1,75 % of GDP in 2009. The narrowing of the deficit reflects a cut in the expenditure ratio by around 4 % of GDP that is less than fully compensated by a decline in the revenue ratio (by 2 %). The adjustment is based on structural cuts in current primary expenditure, savings on interest expenditure and a combination of structural and one-off measures on the revenue...