The Cypriot economy is fast approaching average income levels in the European Union (EU). Growth over the past two years was robust, and the weakening in economic activity in the course of the current year has mainly reflected the global slowdown.
According to the International Monetary Fund (IMF)’s Article IV consultation on Cyrus, fiscal consolidation reduced the country’s budget deficit to three percent in 2001. A major tax reform was implemented in 2002, aligning indirect taxation more closely with EU standards and lowering direct taxation. Interest rate controls were removed; the central bank was made independent; and the capital account was further liberalized, without jeopardizing monetary and external stability.
Financial sector legislation is being strengthened, in line with EU directives and structural reform has proceeded to some extent. These achievements have been recognized by the EU in its latest Progress Report, which judges the Cypriot economy ready for EU membership.
Despite these impressive achievements, the IMF believes Cyprus still faces significant policy challenges, complicated by the unsettled international environment. Economic growth in 2002, which we expect to be around two percent, has been affected by the sharp decline in tourism.
Prospects for 2003 are more favorable, and absent negative external events growth should rebound above three percent. However, significant external risks remain-increased instability in the Middle East, the concurrent risk of an increase in oil prices, the impact of terrorist acts on people's propensity to travel, and further delays in the recovery of the European economy.
Because of its small size, external openness, and geographical location, Cyprus would be particularly affected by such developments. The Fund has confidence that continued commitment to sound economic policy and further structural reform is crucial to successfully cope with these challenges.
The Cypriot economy is undergoing a period of change on its way to EU accession. In recent years, a strong effort has been undertaken to improve macroeconomic management, reduce structural impediments to competition, and strengthen institutions, which has been endorsed by the EU.
Under Article IV of the IMF's Articles of Agreement, a staff team visits Cyprus, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. — (menareport.com)
© 2002 Mena Report (www.menareport.com)
