The cost of living is surging in Cyprus, and the island nation's inhabitants are paying the price.
The Sek Labor Federation estimated that the cost-of-living adjustment (COLA) would jump by at least 6 percent beginning in July, just as a 2 percent value-added tax (VAT) is expected to take effect. The price increases come amid fears from International Monetary Fund officials that inflation in Cyprus is likely to skyrocket by 5.5 percent in 2000, a level 3 times higher than those in EU nations.
The Central Bank of Cyprus (est. 1963) indicated that inflationary rates would not be favorable in the near future, falling outside EU criteria. Cyprus, known regionally for its relatively lower cost of living for a comparable standard and quality of living, had boasted an inflation rate as low as 1.5 percent until late 1999. But the picture is changing -- the figure has been rising since the final quarter of 1999, in large part due to swelling oil prices, Cyprus News Agency reported.
According to the Cyprus Statistics Department, the average rate of increase of the consumer price index (CPI) for the period from January to May 2000 was 4.54 percent, when compared to the equivalent period last year. For May alone, the index jumped by 0.39 percent to 106.06 units compared to 105.65 units in April. Fresh fruit and electricity prices soared, despite a decline in computer, potato (one of the main national exports) and vegetable prices. Cyprus' main trading partner is the European Union, accounting for approximately 55 percent of imports and 40 percent of exports. The economy is driven by thriving tourist and service sectors and a fast growing export-oriented industry.
The State (the largest employer), companies and trade unions, anxiously await the CPI figure for June, to see how much this will affect the expected cost-of-living adjustment increase. Sek estimates that should the index remain unchanged for June, the COLA will rise by just over 7 percent - hitting 215.53 percent on basic salaries, from the current 208.41 percent. If the index falls by one unit, again the cost of living allowance will increase - by 6.6 percent. COLA is readjusted automatically each six month period, depending on the movement of the index during that period.
Cyprus Finance Minister, Takis Klerides, recently conveyed that the VAT increase (from 8 percent to 10 percent) which will take force in July, would push up COLA by 1.1 percent. This will in turn drive up inflation, which has been surging upward in recent months.
The IMF team, which recently visited the open free market economy nation, disclosed "Taking into account the planned increase in VAT rates, inflation in 2000 is projected to average 5.5 percent, roughly three times the level in the EU."
The IMF has called on Cyprus in the past to eliminate or reform the COLA system, drawing protests from trade unions and certain political parties. In its latest release, the IMF asked the Cyprus government to exclude the VAT increase from the cost-of-living-adjustment calculations.
The IMF commented: "As regards the automatic cost-of-living adjustment (COLA), we understand that many in Cyprus believe that its benefits in terms of ensuring social peace outweigh its costs. Even if this is so, it is wrong to include in the Cola the indirect tax increases that are planned for 2000 and the coming years, because this will compound and prolong the impact of these increases on inflation. The resulting loss of competitiveness and jobs will eventually hurt workers more than the exclusion of indirect tax increases from COLA. We therefore urge the government to reconsider the decision to include the impact of VAT rate increases in the COLA."
In a recent Union Bank of Switzerland study, Nicosia, the capital, ranked as the seventh least expensive of the leading 56 international business centres surveyed in prices and earnings around the Globe. Yet many experts believe that the surging inflation rate and added VAT tax, are, and will continue to write a new chapter for the Cypriot Island's inhabitants and economy. Whether the Government will comply with IMF urges remains to be seen.
- albawaba.com
© 2000 Mena Report (www.menareport.com)
