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Cyprus economy to grow in 2011 July 27, 2010

Posted by Yilan in Cyprus.
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Cyprus should see its economy bottom out this year and return to modest growth in 2011 but tough measures are needed to trim a bloated fiscal deficit, an International Monetary Fund report said on Monday.

The preliminary report’s conclusions follow a routine fact-finding tour by an IMF team which said the government must make some hard decisions on public spending cuts if the fiscal deficit is to be brought down to the EU ceiling of three percent of GDP.

Last year the deficit reached 6.1 percent and the government is seeking to keep it at around six percent this year by cutting 1,000 public sector jobs and freezing general pay increases.

“Economic conditions have started to stabilize after the economic downturn and the Cypriot economy is poised to return to modest growth in 2011,” said an IMF statement. “Cyprus should also act forcefully and with a greater sense of urgency to reverse its high fiscal deficits.”

Containing public expenditure and enhancing wage flexibility are needed to boost productivity and improve growth, said the fund. The holiday island was in recession last year — for the first time since 1974 — on the back of poor tourism revenues and a property slump, but 2010 first quarter growth showed a marginal recovery of 0.1 per cent.

“The mission expects growth to be around zero or slightly below in 2010, followed by a modest recovery in 2011 and gradual acceleration in later years.” The government predicts the economy will grow by 0.5 per cent in 2010.

However, the IMF said the biggest challenge facing Cyprus is to reverse the large structural deficit fuelled by public sector wage hikes, “not well-targeted” spending to help the poorest sectors of society when the end of the property boom has seen a loss of assured revenues.

“The government’s targets for reducing the deficit to below three per cent of GDP by 2012 are appropriate but bold measures are required to achieve these goals,” the IMF said. Slashing the state wage bill is key, the report said, as the size of the public sector is close to half of the island’s GDP.

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