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President of Cyprus Tassos Papadopoulos signs the EU Accession Treaty on the 16th of April 2003 in Athens.

Accordingly European
As it continues its structural reform programme with a view to joining the Eurozone in 2008, Cyprus is fast-becoming a model EU performer

Cyprus has responded to the challenges of EU accession and its proposed entry into the Eurozone by building an increasingly lean and dynamic economy.
Whilst EU membership has brought much to Cyprus in terms of security and confidence, the performance of the Cypriot economy and the government’s attempts to build on the country’s key competitive advantages are enhancing the country’s credibility.

Attempts to put its public finances in order are paying off. In July this year, the European Commission decided to remove Cyprus from the EU’s Excessive Deficit Procedure (EDP) making it the first of the six new member states to fulfil the provisions of the EU’s growth and stability pact. Joaquín Almunia, European Commissioner for Economic and Monetary Affairs, commended Cyprus’s commitment to fiscal discipline, commenting, “The Cypriot case shows that budgetary consolidation undertaken with resolve can achieve sustainable results.”

With a fiscal deficit of 6.25 per cent in 2003, Cyprus was placed on the excessive deficit procedure along with six other new member states in July 2004.

By 2005, the deficit of Cyprus had been contained and fell to 2.4 per cent of GDP. At the same time, the government debt-to-GDP ratio decreased to 70 per cent. According to the European Commission’s forecasts, both deficit and debt are expected to fall further, with the Cypriot government targeting a 2 per cent deficit by 2007, allowing the debt ratio to diminish progressively towards the 60 per cent of GDP threshold.

Crucially, this process does not seem to have negatively impacted the country’s impressive growth rates. GDP growth is projected to remain at 3.8 per cent in 2006 and 2007, significantly higher than the average of the EU25.

Michalis Sarris Michalis Sarris
Minister of Finance
‘Our ambition must be to become the link between the Middle East and Europe’
Manthos Mavromatis Manthos Mavromatis
President of the CCCI
‘Moves by foreign investors to buy into our banking sector foreshadow wider changes’

STRUCTURAL REFORM. These strong and encouraging financial results come as a result of a range of measures introduced into the tax system in the lead up to accession that brought Cyprus fully in-line with all EU directives. One-off incentives – including a tax amnesty that offered people the chance to legalise any undeclared money that yielded CYP120 million (£140 million) over two years - have been complemented by substantial structural reforms taken by the Cypriot authorities.

By closing loopholes and improving tax collection, the government has succeeded in raising tax revenues without raising tax rates. The Inland Revenue Department (IRD) reported a further 30 per cent increase in revenue to CYP 305 million (£357 million) during the first half of 2006, underpinning the administration’s efforts to further reduce the budget deficit.

JOINING THE EUROZONE. The Cypriot government has shown focussed determination to join the Eurozone and adopt the single currency by 1st January 2008. Michalis Sarris, Minister of Finance since September 2005 and a former Director for the World Bank, insists that all the indicators show Cyprus is on track to hit the deadline. “We are already fulfilling the Maastricht criteria and we will make the deadline,” he affirms. “The real challenges for us are rather preparing technically and at the same time convincing people of the benefits of changing our currency.”

“In a world of economic imbalances and uncertainty, a small, open economy is better served by being part of a wider monetary union,” he adds. “Heading into the euro is for us a way of reconfirming our commitment to playing by the rules in terms of fiscal discipline and laying the foundations for macroeconomic stability as the basis for high economic growth.”

UPSURGE IN INVESTMENT. Accession to the EU has also led to increased investment flows as Cypriot firms expand their operations abroad and foreign, especially Greek, investors turn their attentions to the island. An upsurge in mergers and acquisitions activity saw it reach over CYP 380 million (£445 million) in the first six months of 2006, eclipsing the combined value of such deals made in the previous three years.

Manthos Mavromatis, President of the Cyprus Chamber of Commerce and Industry, explains, “We are changing from a small, isolated and protected market to part of the largest integrated market on the planet, and are witnessing moves that were unthinkable before. For example, I strongly believe that the moves by foreign investors to buy into the Cypriot banking sector foreshadow changes in the wider economy.”

Mr Sarris believes that this opening of the economy provides an important opportunity for Cyprus. “In the same way that Ireland has become the United States’ springboard to the rest of Europe, our ambition must be to become the link between the Middle East and Europe. As a government, we must ensure that regulation and legislation is clear and that red tape is streamlined. Business must not be inhibited by one permit too many,” he argues.

This falls in line with the wider strategy of President Tassos Papadopoulos. Whilst technical discussions with the authorities in the Turkish occupied north of the island have again restarted after being stalled for nearly two years, he insists that the nation’s economic future remains his government’s primary concern. “A healthy, steady, strong and increasingly developing economy is not only a factor for the progress and welfare of our people but it also serves as a solid foundation for our efforts to reunite our people and our country,” he states.