ReportNo. 5522-CY Cyprus CountryEconomic Memorandum Public Disclosure Authorized July 1985 CountryPrograms Department 11 Europe,Middle East and NorthAfrica Region FOR OFFICIAL USE ONLY
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Public Disclosure Authorized Documentof theWorld Bank
Thisdocument has a restricteddistribution and may be usedby recipients onlyin the performanceof theirofficial duties. Its contents may not otherwise be disclosedwithout World Bankauthorization. CYPRUS
EXCHANGERATE EQUIVALENT
Us$/Cf. 1975 2.7162 1976 2.4371 1977 2.4510 1978 2.6788 1979 2.8221 1980 2.8341 1981 2.3789 1982 2. 1071 1983 1.9008 1984 1.7039
FISCAL YEAR
January 1 - December 31 F0R OMCIAL USE ONLY
ABSTRACT
1. The economy of the southern part of Cyprus, which remains under control of the Government after the de facto partition of the country in 1974, has continued to perform well in the past few years. Growth has been high, with practically full employment and low inflation. This otherwise good performance, however, has been accompanied by substantial budget and balance of payments deficits to the tune of 7-9 percent of GDP. They are the result largely of rapid growth in government current expenditures, inadequate tax revenues, and weak saving incentives.
2. The deficits have been financed by grants, private foreign investment and increasingly by external borrowing. As a restlt, external debt has grown rapidly from less than $150 million in 1976 to over $1 billion at end 1984. So far Cyprus has managcd its external debt well; terms are favorable, interest rates are relatively low, and sources of borrowing and currency composition are well balanced. The sharp increase in borrowing, however, has raised the debt service ratio to 13 percent in 1984. Without reducing the budget and balance of payments deficits, the debt service ratio will soon exceed 15 percent, the limit set in the Fourth Plan (1982-86).
3. To reduce deficits and avoid further undue increase in external indebtedness, the Government should curtail growth of current budget expenditures, particularly those for civil servant salaries, and for subsidies, and raise additional revenues; a value-added tax currently being considered would go a long way toward raising the required revenues and should be adopted without delay. At the same time, private savings should be further promoted. Abolishing the interest rate ceiling, which has been fixed at 9 percent, and allowing rates to change according to economic conditions, would help stimulate private savings as well as to stem the outflow of private capital seeking higher yields abroad.
4. The past good performance has been achieved with rapid growth of exports and imports, thereby increasing the economy's dependence on external markets. The volatility of tourism, which has been a major contributor to recent growth, has added to the possibility that the economy could be adversely affected by unpredictable external events. It is, therefore, essential that external reserves should be increased to at least six months of imports and the temptation of using reserves to finance the projected budget and balance of payments deficits in 1985 and immediately beyond should be strongly resisted.
ITbis docament has a restricted distibution and may be used by recipients only in the performanceof thir offwcialduties. Its contents may not otherwise be disdosed without World Bank authorization. This report is based on the-.findingsof an economicmission which visited Cyprus duringNovember 5-16, 1984 and was comprisedof Messrs.Sawai Boonma (MissionChief) and John Underwood(External Debt/Capital Market Specialist). CYPRUS
COUNTRY ECONOMIC MEMORANDUM
Table of Contents
Pate No.
Basic Data
SUMMARY AND CONCLUSIONS ...... i - vi
I. INTRODUCTION ...... 1
II. RECENT ECONOMIC DEVELOPMENTS ...... 3
A. Output, Employment and Prices ...... 3 B. Fiscal and Monetary Developments ...... 6 C. External Trade and Balance of Payments ...... 9
III. AN ANALYSIS OF EXTERNAL DEBT POSITION ...... 15
A. Growth and Structure of the External Debt ...... 15 B. Terms of the Debt ...... 17 C. Creditor Data ...... 19 D. Debt Management in Cyprus ... . . 19 E. Private Bankers' View of Cyprus ...... 21 F. Implications and Recommendations ...... ?.1
IV. MEDIUM-TERMPROSPECTS AND DEVELOPMENTISSUES ...... 24
A. The Fourth (1982-86) Plan and 1982-84 Performance . . . . 24 B. Balance of Payments Projections ...... 25 C. Salient Development Issues ...... 27
STATISTICAL ANNEX Page 1 of 2 COUNTRY DATA- CYPRUS1/
AREA POPULATION DENSITY (1983) 9,300 sq. km. 645 thousand (mid-1983) 69 per square km. Rate of growth: 0.4Z (from 1975 to 1983)
POPULATIONCHARACIERISTICS (1981) HEALTH (1981) Crude birth rate (per 1,000) 19.7 Population per physician 1120 Crude birth rate (per 1.000) 8.4 Population per hospital bed 190
ACCESS TO PIPED WATER(1979) ACCESS TO ELECTRICITY (1979) Occupied dwellings vithout Z of population - urban 99 piped vater (S) 5.0 - rural - total
NUTRITION (1981) EDUCATION(1979) Calorie intake as & of requirements 127.0 Adult literacy rate Z 89.0 Per capita protein intake Primary school enrollment Z 84.0 (grams/day) 95.0
GNP PER CAPITA IN 1983: US13720
GROSS NATIONALPRODUCT IN 1983 ANNUALRATE OF GROWTH (percent constant prices) USt Kln Percent 1977-79 1980-83
CNP at mrket prices 2118 100.00 7.8 2.9 Gross domestic investment 656 31.0 11.7 -1.2 Cross national savings 445 21.0 25.9 -20.6 Current account balance -205 -9.7 31.5 -8.6 Exports of goods, NFS 1056 49.9 12.3 10.3 Imports of goods. NFS 1351 63.8 12.2 9.4
OUTPUT. EMPLOYMENTAND PRODUCTIVITYIN 1983
Value Added Labor Force V.A. Per Worker uSS mn eTd. Percent us$ Percent
Agriculture 178 9.3 43.4 18.8 4101 44.1 Industry 663 34.7 64.9 28.2 10216 109.9 Services 1070 56.0 97.2 42.2 11001 118.3 Unallocated 2/ - - 25.0 10.8 - - Total/Average 1911 100.0 230.5 100. 0 9299 100.0
PUBLIC FINANCE
CE KIn. Percent of GDP 1983 1983 1981-83
Current receipts 275 25.2 23.7 Current expenditures 306 28.0 26.2 Sswpluc/Deficit C-) -31 2.8 -2.5 Irvestment 42 3.9 3.8
1/ Data on area, population, population density, and per capita GNP refers to the whole country; the rest relates only to the Government-controlled area.
2/ Include unemployueot, vorkers employed in British bases, foreign organizations, and in other countries.
February 1985 Pm. 2 of 2
cNR! DAM - cws
MIY. CQEDrrAMEZS ND
Millins of Cyprus pims outstaixi at ernd period )KIAI EKE1'S (1981-83 AWRh) 1979 1980 1981 1982 13 USs in Fhmcenr
Money s-tp1y 129.5 153.3 188.3 218.5 248.4 Citrus 26.3 6.5 Bak credit to public se:tor 49.6 76.2 100.6 94.3 114.7 Potatoes 36.4 9.0 Bank credit to priuste sector 356.7 404.7 462.4 542.7 609.5 Clothirg 77.8 19.2 Fonamr 34.0 8.4 Ceymt 22.4 5.5 Pe_tege of Ilex Nmbers Others 208.4 51.4 Total 405.3 100.0 Mney as perent of GDP 21.0 20.6 22.0 21.9 22,7 P deflator (1973 - 100) 176.5 199.3 223.6 247.0 264.1 EtEIA MIEIC EE. DEMR 31. 1983 Amual percentage charee in:
GDPdeflatDr 12.4 12.9 12.2 10.5 6.9 Bank credit to public sector 60.0 53.6 32.0 -6.3 21.6 Disbsami only 650 Bank credit to private sector 21.9 13.5 14.3 17.4 12.3 Lahdlio urisrs 835
BAIANEOFPADENrS M SEWI MMEOFMR 1983
1980 1982 1983 Millions of US Dollars__ Per__t Public Debt 12.0 Emports of goods, NFS 954.6 1065.3 1056.0 Ilports of goods, NFS 1319.3 136. 1 1350.7 PRssrce gap (defict -) -364.7 -280.8 -294.7 IBRIM [DG. DE2OMi 31. 193
Net fator iae 64.3 58.2 62.0 Net transfers 32.5 30.3 27.9 us* Min Current account balate TM 3lk (deficit = -) -267.9 -192.3 -204.8 atamLimg an! 74.4 - Grant to goR.nat 40.8 41.0 26.2 distamed. Nommeoan y capital 218.8 219.7 142.7 Undisbursd 68.7 Net errors and amissicas 32.7 16.2 12.7 utestmdizg 143.1 ovmll balace (deficit - -) 24.4 84.6 23.2 icluding Gwss reerves (end year) 445.0 606.7 625.0 ulia r Petrulem imports 221.8 246.9 227.9
0660S June 1985 SUMMARY AND CONCLUSIONS
i. This Memorandum covers exclusively the southern part of Cyprus which remains under the control of the internationally-recognizedGovernment of the Republic of Cyprus; this part covers about two-thirds of the land area and about four-fifths of the island's total population. The Memorandum reviews recent economic developments and assesses prospects of the Cypriot economy in the medium-term; it also reviews the structure and management of the country's external debt.
Recent Economic Developments
ii. GDP growth rate during 1982-84 averaged slightly over 5 percent per annum, a substantial decline from the annual average rate of 7.6 percent achieved in 1978-80. The slow-down resulted mainly from the fact that the economy has operated at practically full employment (para. iv). With a low growth rate of the labor force (about one percent per annum), the GDP growth rate of 5 percent is probably the highest that can be expected without overheating the economy as was the case during 197P-80. Annual and sectoral growth rates, however, fluctuated considerably due partly to weather conditions, external demand and extraordinary factors such as the civil war in Lebanon. These factors affected, respectively, agricultural output, manufacturing activities and services such as transhipment and re-export trade. An outstanding feature of relative sectoral growth has been the continued rapid expansion of the service sector, which by 1983 accounted for about 57 percent of GDP compared to 53 percent five years ago. Tourism, in particular, has continued to expand rapidly.
iii. On the demand s-de, total consumption grew roughly in line with GDP, and its share in GDP averaged about 81 percent. Government consumption, however, grew considerably faster than GDP due to continued rapid increase in current expenditures. As a result, Government consumption averaged 16.7 percent of GDP in 1983-84 compared to 14 percent in 1978-80. Fixed investment averaged about 30 percent of GDP, somewhat lower than the level achieved in the earlier period; but the sharp increase to almost 32 percent of GDP in 1984 appears to have reversed the declining trend in the previous three years. Both exports and imports grew sharply, over 12 percent per year; this was due partly to increased re-export trade with Lebanon since 1982 and continued rapid growth in tourism (without re-exports, the rates would be about 9 percent). It is estimated that by 1984, exports were equivalent to about 58 percent of GDP, and imports, 71 percent. This compared to 45 percent and 64 percent, respectively, in 1978-80. Cyprus' dependence on external markets has, therefore, further increased.
iv. The economy has been operating virtually at full employment with unemployment rate averaging about 3 percent during 1982-84. This is slightly higher than the 1.9 percent in 1978-80 which was achieved only with an overheated economy, with wage increases averaging close to 25 percent and inflation rising over 10 percent per year. In contrast, wage increases slowed down to about 9 percent and inflation to 5 percent in 1984. - ii -
v. Despite full employment, the Government budget has remained expansionary with an overall budget deficit averaging close to 8 percent of GDP during 1982-84. Furthermore, Government savings have continued to be neRative ranging between 1.7 percent of GDP in 1982 and 1.1 percent in 1984, compared to 0.7 percent in 1978-80. This has taken place despite rapid growth in revenues (which increased from under 20 percent of GDP in 1978-80 to over 25 percent in 1984) because current expenditures - mainly salaries and subsidies -- have grown at an even faster pace. To correct this situation, the Government has attempted to raise additional revenues, in particular, through a value-added tax and to curb the growth in current expenditures. These attempts, however, have yet to lead to the desired result.
vi. The deficits have been financed by grants, domestic borrowing and foreign borrowing. Grants have covered an increasingly smaller part of the deficits as most refugees of the 1974 events have been settled. Large amounts of foreign borrowing have been used to finance the deficits and, as a result, external debt has risen continuously over the past decade (see below).
vii. The expansionary budgets have been accompanied by a rather mixed monetary policy. The liquidity ratios financial institutions are required to maintain have been increased periodically from 23 percent in 1981 to 27 percent in January 1985. Some credit controls, in particular on consumption related financing, were maintained until January 1985. With the maximum rate limited by law at 9 percent, however, interest rates have not been eff-ctively used as a means for monetary control. As a result, money supply is risen slightly faster than nominal GDP during the past few years. viii. As mentioned in para. iii, both exports and imports have increased rapidly over the past three years. Part of the growth resulted from increased re-export trade, in particular with Lebanon, which rose from CE31 million (16 percent of total goods exports) in 1980 to CE72 million (27 percent of total goods exports) in 1983. Goods exports, however, have grown much slower than service exports; as a result, the share of goods exports declined to 40 percent of total foreign exchange earnings in 1983 from 57 percent in 1978. The growth of service exports is led by tourism, which by 1983 earned over one-third of total foreign exchange earnings (goods and non-factor services). Other services such as air passenger services, transhipment and banking also grew considerably. Apart from tourism, other exports are quite well diversified, with the leading item, clothing, earning only about 8 percent of total exports, followed by footwear (3.5 percent) and citrus (3 percent). Cyprus has also achieved reasonable diversification in terms of export markets, with the leading trade partner, U.K., accounting for only 16 percent of total goods exports. Achievement of export diversification nothwithstanding, Cyprus remains highly susceptible to external shocks because of the increased degree of dependence on foreign markets. Considering the large role played by tourism, the vulnerability of the foreign-exchange earning base is even higher. - 111 -
ix. With exportsand importsgrowing at practicallythe same rate, the balanceof paymentscurrent account continuedto show substantialdeficits averagingover 9 percentof GDP during 1982-84. Less than half of the deficitswere financedby borrowing,however, because of large inflowof privatecapital and grants. Nevertheless,foreign borrowing was substantial,resulting in a rapidly increasingexternal indebtnessas discussedbelow. With total capital inflow (grants,transfers, direct investmentand borrowedcapital) slightly larger than deficits,external reserveshave graduallyincreased; they, however,remain modest at less than 6 months of imports in 1984.
ExternalDebt
x. Total externaldebt of Cyprus has grown rapidlyover the last decade; it is estimatedat over $1 billionat end-1984 comparedto less than $150 millionat end-1976. In 1976, Cyprus was a net creditor to the rest of the world,with external reserveslarger than gross debt. But by 1984 net externaldebt was about 36 percentof GNP, a ratio comparableto that of Braziland Korea. About 80 percentof the total debt is medium and long-termdebt, over 90 percentof which is public and publicly guaranteed. Short-termdebt at the end of 1984 was estimatedfrom creditor sourcesat $215 million,which was rather low at less than one-fifthof merchandiseimports. Since short-termprivate suppliers' and trade credits arrangeddirectly with suppliers'and foreignbanks are not includedin the reportingsystem, short-term debt could be substantiallyunderestimated. Cyprus borrows mainly -- about 60 percent of debt -- from private sources. Multilateralagencies accounted for about one-thirdof total debt, with the World Bank holdingabout 12 percent. The debt is reasonably well-diversifiedin terms of currencydenomination with a little over one-halfof publicand publicly-guaranteeddebt denominatedin dollars comparedto 75 percentfor all countriesreporting to the Bank. Deutsche marks, Swiss francs and Japaneseyen account for most of the rest.
xi. The terms of debt are relativelyfavorable. The average interest rate (9.9 percent in 1983) has been consistentlybelow averagemarket rates, partly becauseof the large weight of the two Europeancurrencies and the yen. About half of long-termdebt carries floatingrates, which are normallyhigher than fixed rate debt. Publicdebt has also carried relativelylong terms;commitments made during 1978-83have maturityof 10.5 years with 3.5 years of grace. In spite of these terms, long-term debt coming due takes a quantum jump in 1985 and will remainat a high level for the next few years. As a result,the debt service ratio,once quite low by internationalstandards, has climbed to about 12 percent in 1984 or about half the average for all developingcountries. xii. Data from the Bank for InternationalSettlements (BIS) on the externalclaims of BIS-reportingbanks reveala sharp rise from $75 million to $161 million in short-termclaims on Cyprus in 1983. There appears no adequateexplanation for this sudden rise which should be furtherexamined becauseexperiences of other countriesshow that excessiveshort-term debt can easily lead to debt servicingproblems. The BIS data also reveal a steady rise in Cypriot depositsin BIS-reportingbanks, from $484 million - iv - at end-1977 to $1004 million at end-1983. This rise partly reflects the increase in official reserves; but more than $50 million per year appears to be outflow of private capital from Cyprus. Hence, as much as one-third of the external debt may have financed capital outflow. This is another aspect of external debt that should be further examined and monitored. xiii. The Central Bank of Cyprus maintains the information on both public and private debt. The only debt that is not reported to it relates to short-term trade credit arranged directly with foreign banks or with suppliers. As mentioned above, this may be the main reason that the BIS reports much larger short-term claims on Cyprus than are reported in the Cypriot debt data. The debt information and debt reporting system is generally of very high quality. Although it appears at times not all agencies involved in the debt - the Central Bank, the Finance Ministry and the Treasury -- are fully up to date on the newest changes reported to one of them, this can probably be overcome by regular meetings of staff of these agencies working on debt. xiv. The average interest rate on external borrowing was 9.9 percent in 1983, a decline from a rate as high as 14 percent two years earlier. This. of course, is higher than the maximum domestic interest rate of 9 percent. To some extent, it might be argued that the Government, by not borrowing domestically at lower cost (perhaps for fears of "crowding out"). indirectly subsidized local private investment. Another aspect of Cyprus' external debt relates to the predominance of public debt which has to be serviced from Government revenues. This makes it more urgent that the budget deficit be reduced because as the debt service obligation steadily rises, creditors may well become concerned about the ability of the Government to sufficiently raise revenues to service debt. xv. The Government has been able to avoid Eurocurrency borrowings for the past two years (1983-84) because loans from other sources were sufficient. With continued budget and balance of payment deficits, however, it would be difficult to stay away from such borrowings. There have been some discussions that instead of Eurocurrency borrowing, international reserves may be used. This seems not a viable alternative, however, because (i) the level of reserves (at less than 6 months of imports) is already modest, to run it down might adversely affect the country's credit standing; and (ii) since Cyprus can borrow at quite a narrow spread -- at 1/16 - 1/8 of a percentage point over LIBOR -- the savings is marginal.
Medium-Term Prospects and Development Issues xvi. The overall growth of GDP during 1982-84 (about 5 percent) was above the Plan target of 4 percent. Composition of growth, however, differed quite significantly from that visualized in the Fourth Plan (1982-86). On the supply side, growth in both agriculture and industry fell far short of targets, while services performed better than envisaged. Agriculture was affected by weather conditions and to some extent stagnating external demand, while manufacturing suffered from strong - v - competitionabroad and lack of new investment. Continuedspectacular growthof tourismon the other hand, was the main factorbehind rapid growthof services. On the demand side. the main problem lies with continuedhigh level of domesticconsumption, both Governmentand private. As a result, the resourcegap remainsvery large (almost14 percentof GDP), and the Governmentcontinued to incur substantialnegative savings at 1-2 percentof GDP. xvii. Given these persistentdisequilibria, the past achievementof the overallGDP growth targetmay have very littlemeaning because sooner or later the resourcegap will have to be reducedand demandbrought into reasonablebalance with supply. Projectionsshow that the demand need not be actuallycompressed if rmeasuresto limit its growth start as soon as 1985. With the growth of Governmentconsumption limited to about the rate of growthof GDP (4 percent)or less and that of privateper capita consumptiongrowing at around 2-2.5 percentper year, the resourcegap can be substantiallyreduced from 14 percentof GDP in 1983 to 6 percent in 1990. Under the presentoutlook for transfers,grants, private direct investmentand borrowingterms, such reductionwill be sufficientto limit the external indebtednessto a manageablelevel; and the Governmentwill be able to achieveanother Fourth Plan targetof maintainingthe debt service ratio below 15 percent. xviii. The above discussionsraise a number of issueswhich need to be tackledby the Government. Five, in particular,stand out prominently. First, limitingthe growth of Governmentconsumption is a critical factor to reduce the balance of paymentsdisequilibria and, thus, to maintain sustainablelong-term economic growth. Details of ways to limit growth in expenditures,notably those relatingto slower growth in civil servants' wage bills and reductionof agriculturalsubsidies, have been discussedin an earlier Bank report. 1/ Those conclusionsremain valid, and further delays in adoptingthe recommendedmeasures can only increasethe severity of the requiredadjustments. It shouldbe pointed out in this context that slowingdown the growth of Governmentexpenditures to no higher than the growth of GDP is necessarynot only to restorea reasonablebalance in the economybut also to maintain the fundamentalphilosophy of development. If the past increasingtrend of the Governmentexpenditure share in GDP were allowed to continuefurther, it might some day adverselyaffect the private dynamism that has been so instrumentalin the developmentof Cyprus. Limitinggrowth of expenditureswould need to be complementedby additional revenuesto wipe out negativeGovernmer.t savings. A VAT bill being drafted by the Governmentat present is a welconemeasure; it shouldbe adopted and implementedwithout delay. xix. Second,private consumption has also grown much more rapidly than desirable. A relativelylow tax level is one of the factorscontributing to this development. Adoptinga VAT, improvingthe income tax scheme, strengtheningtax administration,and restrainingwage increasesas discussedin the above-mentionedreport will reduce privatedisposable income. Furthermore,to stimulateprivate savings and reducecapital
1/ Trends and Issues in Public Finance,July 1984. - vi -
outflow, the Government should remove the interest ceiling of 9 percent and allow savings rates to go higher. Removal of the ceiling and allowing interest rates to rise and fall according to the market conditions should not only stimulate private savings and reduce private capital outflow, but also allow the Government to more effectively use this powerful tool of monetary management; monetary policies have been rather passive partly because of the lack of this instrument. xx_ Third, although the level of investment seems to be within the Plan targets, its sectoral composition appears to substantially deviate from the Plan; tourism has received more while manufacturing has received less than envisaged. As a result, tourism has become more prominent in the structure of output and export earnings. Although employment and export earnings are currently maintained at reasonably high levels, significantly greater reliance on tourism could jeopardize the long-term stable growth of the economy because experiences in other countries show that tourism could be highly volatile. In the past few years, attempts have been made to increase investment in manufacturing partly through various incentive programs, and to limit investment in tourism by withdrawal of incentives; nevertheless, investment in these two sectors has been significantly different from what was considered optimal for a healthy growth of the economy in the longer term. The underlying reasons should be studied carefully by the Government. Such a study could provide a valuable input into the strategy and policies of the Fifth Plan due to be drafted in 1986. As discussed in the Bank's earlier reports, lack of appropriate mechanism to promote investment in new lines of manufacturing has been recognized as a contributing factor to declining investment in this sector; launching of such mechanism which has been part of the Government's promotion scheme should no longer be delayed. xxi. Fourth, achievement of satisfactory growth has been accompanied by increased dependence on external markets. In particular, increasingly larger shares of income and foreign exchange earnings come from tourism and related activities. In this situation of increased susceptability to unpredictable external shocks, it would seem necessary to increase foreign exchange reserves, which continue to be modest at less than 6 months of imports, and the temptation of using part of the reserves to finance the expected budget and balance of payments deficits in 1985 should be strongly resisted. xxii. Fifth, Cyprus has managed its external borrowing well and has achieved a good balance in terms of debt structure, sources of borrowing, and currency composition. Nevertheless, the rapid increases in short-term external claims on Cyprus, in private capital outflow, and in the official external debt should be watched. The amounts are substantial (over $160 million for the first and over $300 million for the second). Since short-term debt and private capital outflow could easily lead to debt service problems, they need to be urgently studied and monitored in the future. Interest rate policies should be reviewed with this aspect also in mind. I. INTRODUCTION
1. The last Bank economic report (Report No. 5010-CY) was issued in July 1984; it deals mainly with public finance which was identified by an earlier economic report (Report No. 4069-CY, January 1983) as the leading issue in the economy of Cyprus. This memorandum reviews recent economic developments and assesses prospects of the Cypriot economy in the medium-term. It deals exclusively with the area under control of the Government of the Republic of Cyprus - the southern sixty percent or so of the total land area. Since the de facto partition of the country in mid-1974, the two parts of the island have had separate economies with virtuallr no link between them. While economic data on the southern part are well up to date, those relating to the northern part, which is under control of the Turkish Cypriot Administration, l/ remain very limited, rendering impossible a comprehensive analysis of the whole island.
2. Since the end-1970s, thieeconomic issues facing the Government have drastically changed. In the immediate aftermath of the mid-1974 events, the Government's immediate concern was to reactivate the economy severely hit by the dislocations resulting from the de facto partition of the country. With timely and appropriate policies, the economy fu.aly recovered by end 1978. Since then, the main economic problem has been how to achieve long-term growth with price stability and external equilibrium. The Third Emergency Economic Action Plan (1979-81) and the Fourth Emergency Economic Action Plan (1982-86) have explicitly attempted to deal with these issues.
3. So far overall growth objectives have been achieved to a great extent; those relating to external equilibrium, however, have not. One factor contributing to this situation is the continuing large budget deficits, contributing to rapidly increasing domestic demand and imports, and, thus, high balance of payments deficits. These deficits have been covered partly by private capital inflow and by external borrowing. As a result external debt has rapidly atcumulated. from unter $150 million in 1976 to about $1,000 million by end-1984. In terms of GNP (about 36 percent), this is relatively high comparable to the levels attained by Korea and Brazil. With grace periods ending, the debt service obligations have also rapidly risen and without immediate actions to reduce the growth of domestic demand, the debt service ratio may soon exceed 15 percent, a ceiling set in the Fourth Plan. Unless managed well, this relatively high debt could adversely affect the achievement of the Government's economic development objectives. This memorandum will review the external debt situation and assess its implications.
1/ The Turkish Cypriot Administration declared independence on November 15, 1983, naming area under its control "Turkish federated State of Northern Cyprus". So far, only Turkey has recognized it. - 2 -
4. The memorandum deals with recent macroeconomic developments in Chapter II, discusses the external debt situation in Chapter III and assesses the medium-term prospects and issues in Chapter IV. Data are presented in the Statistical Annex. -3 -
II. RECENT ECONOMIC DEVELOPMENTS
A. Output, Employment and Prices
5. Economic growth since 1981 has been considerably lower than the level achieved during 1978-80 (Table 1-1). This is mainly because the stimulus provided by the post-1974 economic reactivation programs finally ran its course: full employment was restored by about 1978 and by the early 1980s, people with restored income and pent-up demand had finally slowed down their purchases and the above-normal demand growth ended; the construction boom, partly fuelled by housing needs of refugees, also came to an end as most refugees found adequate accommodations.
Table 1-1: Real GDP Growth Rate (In Percent)
Average 1978-80 1981 1982 1983 1984 a/
Agriculture 1.8 -0.6 0.4 -4.7 5.8
Industry
Manufacturing 8.3 6.8 5.2 2.0 6.9 Construction 12.5 -11.2 -3.3 0.2 0.6 Mining & quarrying -2.2 -12.1 -1.1 -4.7 -12.2 Electricity, gas 4.7 1.0 3.0 22.; 3.9 and water
Transport, storage, 5.2 7.4 7.1 11.7 10.5 commnunications
Trade 12.4 4.8 8.3 2.0 6.8
Banking, insurance, 10.3 15.1 11.2 3.4 6.1 real estate
Public administration and services 5.8 5.9 6.9 5.5 4.9
Other services 5.8 9.6 -1.6 10.8 6.0
GDP 7.9 3.3 5.3 4.1 6.0 a/ Provisional
Source: Statistical Annex; Ministry of Finance - 4 -
6. On the supply side, beginning in 1981, construction sharply declined, bringing down with it closely related activities such as quarrying. This was compounded by a continued decline of mining activities because of further depletion of mineral deposits, and by fluctuating agricultural output. In 1982, although construction and related activities continued to slightly decline, some sectors grew quite vigorously, particularly, trade, which was spurred by transhipment and re-export trade with Lebanon. As a result, overall GDP growth accelerated from 3.3 percent in 1981 to 5.3 percent in 1982. In 1983, hit by another year of bad weather, agricultural output sharply declined. In addition, Cyprus continued to have difficulty competing in its traditional markets for manufactured goods in the Middle East. 1/ Exports to Libya declined from CE 23 million in 1981 to only CE 14 million, to Iraq from CE 18 million in 1982 to only CE 5 million and to Syria from CE 11 million to CE 6 million. Manufacturing, therefore, grew only modestly. The situation was reversed in 1984 when agriculture grew sharply due to relatively good weather and high demand in export markets. With full restoration of the Libyan market, manufacturing output also showed a growth of close to 7 percent.
7. The sharp annual fluctuations in growth pointed to the fact that as the economy becomes increasingly open (see below), export markets, including those providing tourism and other service incomes, have played an increasingly prominent role in determining the level of domestic output. These export markets have turned out to be highly volatile.
8. On the demand side, total consumption has remained quite high as a share in GDP. While private consumption has declined as a share of GDP, the Government's share has increased considerably from 14 percent of GDP in 1978-80 to 16.7 percent in 1982-84 (Table 1-2). As will be discussed below, this results from a rapid increase in current Government expenditures in recent years. Fixed capital formation, which was very high in the earlier years due partly to housing construction to accommodate refugees, and appeared to have gradually declined to about 29 percent of GDP in 1983 sharply increased to 31.6 percent in 1984. Both exports and imports as percent of GDP have significantly grown, pointing to the fact that the economy has become increasingly dependent on external markets and sources for supply. For a small economy with limited resource endowment such as Cyprus, this increased openness is inevitable for continued economic growth. The resource gap as share in GDP has significantly declined in recent years; it remains, however, at a rather high level of over 13 percent of GDP.
1/ Factors causing erosion in Cyprus' ability to compete in the international markets appear outside recent changes in exchange rates. Although the Cyprus pound, which is tied to a basket of major currencies, slightly appreciated (3.5 percent) against 17 currencies except the U.S. dollar during two and a half years ending in mid-1984, the real exchange rate has been virtually stable since 1979. -5-
Table 1-2: Use of Resources (In Percent of GDP)
Average 1978-80 1981 1982 1983 1984 at
Consumption 82.6 80.2 81.9 82.9 79.8
Private 68.6 64.3 65.2 65.9 63.4 Government 14.0 15.9 16.7 17.0 16.4
(Gross domestic (17.4) (19.8) (18.1) (17.1) (20.2) savings)
Gross fixed capital 34.7 31.9 30.3 28.7 31.6 formation
Change in stocks 3.0 2.1 2.3 2.2 2.2
Exports of goods and 45.0 51.1 52.2 51.7 57.6 services
Imports of goods and 64.2 64.4 65.9 65.7 70.9 services
(Resourcegap) (-19.2) (-L3.3) (-13.7) (-14.0) (-13.3)
GDP b/ 100.0 100.0 100.0 100.0 100.0
Memo Item: GDP at current market 622.8 860.7 999.5 1107.1 1256.9 prices (C£ million)
a/ Provisional b/ Components may not add up to 100 due to small statistical discrepancy introduced by Cypriot officials to reconcile data.
Source: Statistical Annex; Ministry of Finance
9. With revived economic growth in 1984, the unemployment rate (at 3.3 percent) did not increase as it did in the previous three years. Although this is higher than the 1.9 percent level achieved in 1978-80, a significant decline may not be possible without putting pressures on wages as was the case in the earlier period when wages went up close to 25 percent per year (Table 1-3). Besides, a large group of the unemployed is particularly difficult to be absorbed even if the demand would warrant higher employment - university graduates without skills required by the market. They represent about one-fifth of the unemployed. With continued moderation in wage demand, and only moderate increases in prices of imports domestic inflation has declined to around five percent. - 6 -
Table 1-3: Annual Increase in Prices-and Wages (In Percent)
Average 1978-80 1981 1982 1983 1984
Retail prices 10.2 10.7 6.4 5.1 6.0
Wholesale prices 10.2 10.5 6.3 5.1 5.0
Import prices 8.6 13.3 4.7 3.4 5.1
Average wage 24.9 18.2 18.0 9.7 9.4
Memo Item: Unemployment rate 1.9 2.6 2.8 3.3 3.3
Source: Ministry of Finance; Department of Statistics and Research
B. Fiscal and Monetary Developments
10. The most important feature of fiscal development is that the expansionary budget, a main instrument of economic reactivation programs, has continued in recent years, although the need for such expansionary budget was over as far back as 1978-79. In fact, in relative terms, the budget has become even more expansionary in recent years than in 1978-80 because the deficit/GDP ratio has increased from 6.7 percent average in 1978-80 to about 7.8 percent average during 1981-84 (Table 1-4). This has taken place despite continued rapid growth in revenues as shown by the increase in the revenue/GDP ratio from 20.6 percent in 1978-80 to 25.4 percent in 1984. It reflects the very rapid growth in current budgetary expenditures, 1/ resulting in increasing negative savings by the Government sector. While at the end of the 1970s, positive public savings seemed within reach, the situation has worsened since.
1/ Detail of issues relating to all aspects of public finance can be found in a recent Bank report, Cyprus Trends and Issues in Public Finance, July 1984 (Report No. 5010-CY) - 7 -
Table 1-4: Central Government Financial Operations (In Millions of Cyprus Pounds)
Average 1978-80 1981 1982 1983 1984 a/
Revenue b/ 128.1 191.3 232.8 275.6 319.1
Expenditures c/ 178.5 263.1 311.1 366.7 406.9 (Current expenditure) (132.3) (216.5) (249.7) (301.0) (333.5)
Balance -41.7 -71.8 -78.3 -91.1 -87.8
Financing:
ForeigL grants d/ 12.9 12.1 19.5 13.8 11.5
Domestic borrowing (net) 13.2 36.5 9.8 49.1 63.0 (Central Bank) (11.8) (-3.0) (8.0) (6.6) (38.0) (Non bank) ( ) (7.5) (10.1) (21.5) (15.4)
Foreign borrowing 17.9 27.5 53.7 31.9 14.4
IMF transaction -2.3 -4.3 -4.7 -3.7 -1.1
Memo Items:
Revenue/GDP (X) 20.6 22.2 23.3 24.9 25.4 Expenditures/GDP (X) 28.7 30.6 31.1 33.1 32.4 Deficit/GDP (X) 6.7 8.3 7.8 °.2 7.0 Government savings/GDP (Z) -0.7 -2.9 -1.7 -2.3 -1.1 at Estimates b/ Virtually all are current revenues as capital revenues averaged about CE 0.12 million per year. c/ Include small amounts of net lending d/ Grants are considered part of financing; they are, however, put "above the line" in the government account.
Source: Statistical Annex
11. The deficits have been financed by grants, domestic borrowing and foreign borrowing. Grants have come mostly from Greece; they have, however, covered an increasingly smaller part of the budget deficits. Domestic and foreign borrowings have fluctuated. In 1983-84, domestic borrowing played a greater role and no Eurocurrency borrowing was made to supplement the existing project finance. It is worth noting that in 1984, borrowings from the Central Bank were expected to be very large (C. 38 million), covering as much as 43 percent of the overall GovernmcDt deficit. This appears to indicate a break from past government policy of - 8 -
limiting borrowing from the Central Bank to avoid creation of additional liquidity and/or use of international reserves. To avoid this and in order not to create a possibility of "crowding out" the private sector, external borrowing would have to be stepped up in 1985 and perhaps beyond (see para. 33).
12. The Government is well aware of the above unfavorable trends and has taken measures to reverse the situation. So far these measures have concentrated mostly on the revenue side and have yielded considerable results as the revenue/GDP ratio has continued to increase. Currently, a bill to adopt a value-added tax (VAT) is being drafted. If approved by Parliament, this major tax package would yield significant additional revenue. Considering that the public finance problem is created less and less by a relatively low revenue level but more and more by rapidly growing current expenditures, it is imperative that measures be adopted to restrain growth in current expenditures as well, in particular those relating to subsidies and civil servants' salaries. If further growth in Government expenditure is not kept within range of growth of total GDP, the chances of revenue catching up with expenditures will become more and more remote, as possibilities to raise additional revenue become increasingly limited. As data in Table 1-4 points out, the rapid growth in government expenditure has considerably increased the role of Government in the economy to about one-third of GDP. Apart from the issues relating to financing of the deficits, an increasingly worrysome aspect of further rapid increases in the role of the Government are their likely effects on the overall economy which relies mainly on private sector dynamism for attaining its development objectives.
13. The expansionary budgets of the past few years have been accompanied by rather mixed monetary policies. On one hand, the Central Bank has periodically increased liquidity ratio to be maintained by financial institutions, from 23 percent in 1981 to 26 percent in 1984. (Table 1-5). It also maintained selective credit controls, especially relating to import and personal loans, and hire-purchase finance. In 1984, banks were required to maintain such loans at the 1983 level, which already was restricted; all credit controls were abolished in January 1985. On the other hand, with maximum interest rate limited by law at 9 percent, these restrictive measures were not sufficient to limit the growth of money supply which grew considerably faster than nominal GDP. As a result, broad money (M2)/GDP ratio increased from less than 61 percent in 1980 to almost 66 percent in 1984. A major factor contributing to this relatively high growth in money supply was the financing of the public sector budget deficits.
14. With the legal interest rate ceiling remaining at 9 percent, real interest rates on commercial bank credits were negative during 1978-81, but became positive in 1982 when inflation rate fell below that level. During the period when real interest rates were substantially negative, there was a proposal to abolish the ceiling; this issue, however, appears to have become less urgent in the Government economic management programs as inflation has declined. But if interest rates were to become an effective instrument for monetary management, the monetary authority should be given discretionary power of changing interest rates as dictated by economic conditions. In fact, since inflation is now relatively low and the fear of interest rates going up substantially has subsided, it may be the right time for Government to consider introduction of more flexible interest rate policies. - 9 -
Table 1-5: SelectedMonetary Indicators (In Percent)
1980 1981 1982 1983 1984
Liquidityratio a/ 23 23 25 25 26 Discount rate 6 6 6 6 6 Maximum interestrate 9 9 9 9 9 Ml/GDP 18.3 18.9 19.2 19.8 19.0 M2/GDP 61.2 62.9 64.2 65.9 65.9
a/ Exclude portion set aside for financing priority projects which was increased from 6 percent to 7 percent in 1982.
Source: Central Bank
15. In addition to regular monetary management, monetary policy has also been used to effect changes in production structure. The case in point relates to a regulation requiring banks to channel a certain portion of their funds to finance priority projects considered essential for long-term economic growth. Since 1982, banks have been required to make available 7 percent of their deposits for these purposes. Over the years the sector and project contents of eligible projects have been periodically changed to reflect changes in priority as the economy develops.
C. External Trade and Balance of Payments
16. As mentionedin Paragraph8, the Cyprus economyhas become increasinglymore dependenton foreignmarkets as the export share in GDP has increased. Concurrentlysources of foreign exchangeearnings have also substantiallychanged. Whereas in 1978, domesticgoods exportsearned 57 percent of foreignexchange generated by exportsof goods (excluding re-exports)and non-factorservices, their share has declinedto less than 40 percentby 1983. A major factor contributingto this dramaticchange has been very rapid growth in tourismand tourism relatedactivities such as air passengerservices. Tourismearnings were estimatedat close to CE 175 million in 1983, comparedto CE 33 million in 1978 - a growth rate of 40 percent per year; these earningsrepresent well over one-thirdof domesticexports of goods and non-factorservices in 1983. While these developmentshave been major factorscontributing to past rapid growth and current full employment,they also have increasedvulnerability of bhe Cyprioteconomy to externalshocks. For example,the temporaryclosure of the Libyan market in 1982 had a substantialimpact on merchandiseexports (see below) and on the entire economy. It is also recognizedthat tourism could be badly affectedby adverse externalevents.
An Analysis of MerchandiseExports
17. Cyprus has had a largelydiversified export base for quite some time. Clothinghas been the largestexport *tem; but it rarely exceeded one-fifthof total merchandise exports (Table1-6). In 1982, its share was a low 16 percent due mainly to paymentdisputes and temporaryclosure - 10 -
of the Libyan market. Next to it has been footwear, which has earned less than half of clothing. Together they have contributed 25-30 percent of total earnings from merchandise exports in the past six years, or between 10 and 13 percent of total earnings from exports of goods and non-factor services. Five leading export items - clothing, footwear, potatoes, citrus, and cement - have earned less than half of total merchandise export earnings.
Table 1-6: Shares of Leading Domestic Merchandise Exports (In Percent Total Merchandise Exports)
Average 1978-80 1981 1982 1983
Clothing 17.5 20.4 16.1 21.3 Footwear 7.1 8.4 8.1 8.8 Potatoes 9.8 8.3 11.5 6.9 Citrus 6.3 5.7 6.5 7.5 Cement 8.3 5.7 5.4 5.5 Paper products 3.9 5.1 4.6 2.9 Cigarettes 4.9 4.6 4.6 3.3 Others 49.7 41.8 43.2 43.8
Total exports in 126.6 193.3 196.5 179.9 CE million
Source: Statistical Annex
18. Cyprus has also achieved reasonable diversification in export markets. Although the U.K. remains the largest market, absorbing largely agricultural products - potatoes, vegetables, citrus - its share has gradually declined from 23 percent in 1978-80 to just 16 percent in 1983 (Table 1-7). Middle East oil surplus countries have been the largest importers of Cypriot manufactured goods - clothing, footwear, cigarettes. As mentioned before, this market has turned out to be highly volatile and risky. While exports to Saudi Arabia, the largest importer in this group, have been relatively steady at 7-9 percent of exports, exports to Libya have fluctuated widely; in 1982 when payment disputes arose, the share of Libyan market was down to 2 percent. Rather sharp fluctuations take place also concerning Lebanon, but they relate mostly to re-exports whose share went up sharply since 1982 due to Lebanon's domestic problems. Considering proximity and size of the market, there appears considerable potential for expansion into the much more steady markets of Western Europe, whose share has been around 12 percent. This would of course require changes in manufactured products, in particular, from medium-quality clothing and footwear aimed primarily at Middle Eastern markets toward high quality ones.
Exports Of Services
19. Cyprus has been highly successful in promoting exports of non-factor services, particularly tourism and tourism-related activit.es like air passenger services. Warehousing and service fees for ships and aircraft have also earned large sums (Table 1-8). Since earnings from - 11 -
tourism have become so large, any substantial drop, which could suddenly happen, would have a significant adverse impact on the balance of payments. In addition, considering the large investments that have gone into this sector and the many linkages with other domestic sectors, such a drop would set off a chain reaction in the entire economy. Government is well aware of this situation and has been attempting to slowdown the growth by withdrawing eligibility for certain categories of tourism projects from the fund to finance priority projects, etc. So far, there has been no noticeable effect on the growth of this sector.
Table 1-7: Shares of Export Markets (In Percent of Total Merchandise Exports)
Average 1978-80 1981 1982 1983 United Kingdom 23.2 18.8 20.4 16.4 Middle East oil surplus countries a/ 24.3 32.4 26.0 24.3 (Saudi Arabia) (8.0) (7.1) (9.3) (8.4) (Libya) (5.9) (9.7) (2.0) (5.3) Lebanon 9.8 6.4 12.2 13.7 Other Western Europe b/ 12.5 11.7 11.7 12.6 Other Middle East c/ 8.4 7.8 7.2 7.1 Centrally planned economies d/ 6.2 6.5 6.1 6.3 Others 15.7 16.4 16.4 19.6
Total exports in 159.4 234.8 263.8 260.5 CE million e/ a/ Bahrain, UAE, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia b/ Austria, Belgium, Denmark, Finland, France, Germany (F.R.), Greece, Ireland, Italy, Netherlands, Norway, Spain, Sweden, Switzerland c/ Egypt, Israel, Syria d/ Bulgaria, Czechoslovakia, Germany (D.R.), Hurngary,Poland, Romania, U.S.S.R., Yugoslavia e/ Include re-exports and stores for ships and aircraft
Source: Statistical Annex - 12 -
Table 1-8: Exports of Non-Factor Services (In Million Cyprus Pounds)
1978 1980 1982 1983
Tourism 33.3 71.7 138.7 174.8 Foreign military bases 30.9 43.2 54.0 62.6 Stores for ships & aircraft 4.3 12.3 23.5 27.2 Passenger services 8.3 11.5 17.6 21.1 Others 3.3 10.4 12.5 14.3
TOTAL 80.1 149.1 246.3 300.0
Source: Central Bank of Cyprus, Bulletin, June 1984.
Imports
20. As in case of exports, imports have been growing at a higher rate than GDP. As a result, the share of merchandise imports in GDP has risen from 55 percent in 1978 to 59 percent in 1983. Intermediate inputs represent the largest group of imports, accounting for 40-45 percent of the total merchandise (Table 1-9). This is to be expected because of the lack of domestic resource endowment. About one-fifth of imports are consumer goods, while fuel imports take a slightly lower share.
Table 1-9: Structure of Merchandise Imports (In Percent of Total)
Average 1978-80 1981 1982 1983 Consumer goods 19.1 19.1 21.7 23.3 Intermediategoods 45.1 43.7 40.8 40.4 Capital goods 10.8 8.8 9.0 8.3 Transport equipment 10.2 6.9 8.2 9.2 Fuels and lubricants 14.5 21.5 20.3 18.7 Unclassified 0.3 0.1 0.1 0.1
Total imports in 354.9 489.5 577.6 642.0 CE million
Source: Statistical Annex - 13 -
21. In terms of trends, the share of intermediategoods appear to have been on a decline, while those of consumer goods and fuels have increased. Without price changes, fuel imports, however, have risen considerably faster then GDP as the real GDP elasticity of fuel imports was 1.22 during 1978-83. Since virtually all energy consumption comes from imports, Lhe relatively high elasticity indicates increased energy consumption in relation to income. Government'srecent efforts to conserve energy may need to be intensifiedto reduce the rate of growth of energy consumption to that of GDP so as to minimize the impact on the economy of the volatility of energy prices. Imports of non-factor services represent only about 20 percent of merchandise imports. In 1983, totaL service imports were about CE 110 million, somewhaL over half for freight and insurance. Over the past five years, service imports have risen rapidly with a GDP elasticity of about 1.24.
Balance of Payments
22. The balance of payments current account remains negative (Tabl- 1-10). It was over 9 percent of GDP in 1982-84. Although this ratio was lower than those in 1979 and 1980, it appears to be on an increasing trend since 1981. 1/ Such continued large deficits would have had serious implicationson external borrowing for a long time were it not for large capital inflow in the form of grants and direct investment which together
Table 1-10: Balance of Payments Suw#.ry (In Millions of US $)
1979 1980 1981 1982 1983 1984 a/
Trade balance -477.4 -582.8 -528.4 -588.4 -655.9 -704.1 Non-factor services (net) 137.8 199.2 255.8 301.0 361.2 399.7 Factor income (net) 62.4 75.4 64.3 64.2 41.4 44.3 Current transfers (net) 25.4 32.5 35.7 30.3 47.9 44.3 Current account balance b/ -251.7 -275.7 -172.6 -192.9 -205.3 -215.8
Direct private investment 70.6 85.0 78.5 71.4 68.4 68.2 Grants b/ 46.3 40.8 27.4 41.0 26.2 19.6 M< (net) 53.1 108.7 65.6 136.1 62.5 161.4 Other capital 75.7 38.0 16.9 11.0 28.3 17.7 Errors and omissions 28.8 27.5 36.9 27.0 25.2 22.8 Overall balance 22.8 24.3 52.7 93.6 5.3 73.9
Memo Items: Current account deficit/ GDP(%) 14.4 13.0 8.4 9.2 9.5 9.2 Direct investment/ CA deficit (t) 28.0 30.8 45.5 37.0 33.3 31.6 Grants/CA deficit (X} 18.4 14.8 15.9 21.3 12.8 9.1 a/ Ministry of Finance's estimates b/ Grants are not included among "above the line" items.
Source: Statistical Annex
1/ Despite an absolute decline in the prices of fuel imports, Cyprus terms of trade deterioratedslightly during 1982-84. - 14 -
financed about half of the total deficits over the past five years (1980-84). Grants were mainly from Greece and to a smaller extent from United Nations High Commission for Refugees. The former is expected to remain, while the latter will likely decline further because of completion of refugee settlement.
23. Direct private investment has been largely from Cypriots living abroad who invest in houses to which they will someday retire. The boom in tourism also attracts such funds from abroad to hotels and apartmenthouses in tourist areas. Continued large inflow under this category could also arise from the suspected systematic under-invoicing of exports and over-invoicing of imports, which could be part of the commonly accepted tax evasion problem. Such under-invoicing/over-invoicing,if proven correct, has made the balance of payments look more unfavorable than it actually is; continued large positive errors and omissions have also been suspected to be a result of activities relating tc tax evasion and under-invoicing/over-invoicingof trade. Since 1980, private capital inflow in dollar terms, however, has been declining (due to change in exchange rates, the amounts went up in terms of local currency). If this trend continues, large balance of payments deficits will require larger external borrowing (See Chapter III below).
24. Although the large inflow of grants and direct private investment has financed about half of the current account deficits, external borrowing has also been a major source of finance. As a result, external debt has been rising quite sharply in the past few years. Together, capital inflows have been larger than the financing requirement imposed by the cutrrent account deficits, resulting in an overall balance of payments surplus during the past few years. International reserves have, therefore, increased to $684 million at the end of 1984 or about 5.9 months of imports of goods and non-factor services. With increased dependency on external markets, this reserve level may need to be increased further in the medium term. - 15 -
III. AN ANALYSIS OF THE EXTERNALDEBT POSITION
A. Growth and Structure of The External Debt
25. The external debt of Cyprus has grown rapidly over the last decade (Table 3-1). 1/ The total external debt, which was less than $150 million in 1976, is estimated to have topped $1 billion at the end of 1984. The total external debt, net of external reserves, has grown even faster. In 1976, Cyprus was a net creditor to the rest of the world, with external reserves larger than its gross externsl debt. By 1984, total external debt net of reserves had risen to 36 percent of GNP, a ratio quite high by international standards, comparable to recent net debt/GNP ratios for Brazil, Portugal and Korea.
Table 3-1: Sunmmary of Cyprus' External Debt Structure (In Millions of US Dollars at End of Year)
1976 1980 1983 1984 a/
Long-term debt 104.b 448.5 708.4 806.0
Public debt 94.4 384.9 634.3 728.0 Publicly guaranteed - 13.1 15.4 11.0 private debt Private non-guaranteed 10.2 50.5 58.7 67.0 debt
Short-term debt 43.0 108.0 197.5 215.0
Public - - 14.4 15.0 Private 43.0 108.0 183.1 200.0
Total gross debt 147.6 556.5 905.9 1021.0 (as percent of GNP) (17.6) (26.3) (45.2) (52.0)
Net foreign exchange 258.7 290.9 348.0 350.0 reserves
Net external indebtedness -111.1 265.6 557.9 671.0 (as percent of GNP) (-13.3) (12.5) (27.5) (36.0)
a/ Estimated
Source: Statist4 .a± Ansuex
1/ Detailed debt data can be found in Statistical Annex Tables 4.1-4.9. - 16 -
26. The rapid increase in debt after the 1974 events represented a rational response to a temporary shock to the economy. In order to rebuild the economy, Cyprus needed to increase investment sharply. If this investment were to be financed entirely out of domestic savings, consumption would have had to decline dramatically. Hence, increased foreign borrowing was a sensible strategy to cushion consumption somewhat while boosting investment. Borrowing to smooth an economy over a temporary shock means that the growth of debt, relative to GNP, should have stopped once the economy was fully reactivated and expanding satisfactorily on its own. Continued budget and current account deficits, however, have necessitated additional borrowing. Hence, the net external debt has continued to rise, in absolute terms as well as relative to GNP. There are, of course, other reasons to borrow externally. External borrowing, wisely used, can supplement domestic savings and speed the development process. But, as discussed below, the debt has reached a size where a further increase, relative to GNP, might not be desirable.
27. The Cypriot public sector is the largest external borrower. At the end of 1983, 1/ government and government-guaranteeddebt accounted for 92 percent of all long-term external debt and for 73 percent of total debt. Only a small fraction of the total debt is government-guaranteed private debt. Among the public entities, the Government itself is the major borrower, accounting for close to 69 percent of total long-term public and publicly guaranteed debt. Most of this debt has gone to infrastructure expenditures; part was used to cover the recurrent budget deficit. The public electricity and telecommunicationsauthorities also borrow abroad, mostly loans and suppliers credits for the purchase of imported equipment. Recently, Cyprus Airways has been the major public borrower, financing the purchase of two Airbuses in 1984 through a $95 million syndicated bank loan guaranteed by foreign governments. Financing has been arranged for the purchase of a third Airbus for delivery in 1985. The small long-term private external debt is concentrated in the tourism (22 percent) and industry (47 percent) sectors. The Cypriot short-term debt is mostly private and is almost all related to external trade transactions. The level of short-term debt, estimated from Bank for International Settlements (BIS) and OECD creditor data, is quite low, relative to Cypriot trade. Cypriot short-term debt at the end of 1983 was about 16 percent of annual merchandise imports. 2/ It is possible that a large share of Cypriot imports are financed directly by private suppliers on a non-guaranteed basis, and these credits are not included in the BIS or OECD data. Overinvoicing of imports (see para. 28) may also account for part of the discrepancy.
I1 Complete information on Cypriot debt is available only through 1983. 21 There is some consensus that a country's short-term debt is not excessive if it is less than 50 percent of annual merchandise imports. - 17 -
28. By source, the externalpublic debt of Cypruswas about 60 percent privateand 40 percentofficial at the end of 1983. Loan terms indicate that some of the public debt to privatebanks, as much as $65 million at the end of 1983 and $160 millionnow because of the Airbus transaction,is guaranteedby creditorgovernments. Hence, the ultimatecredit risk of Cypriotpublic debt, which was about evenly split betweenofficial and privatecreditors, has shiftedtoward officialcreditors. Multilateral creditorsaccounted for about one third of public debt at the end of 1983. The Councilof Europe, throughits ResettlementFund, has providedover half of the multilateralloans. World Bank loans make up another one third of total multilateralloans, or about 12 percent of the total public debt of Cyprus. Banks are the major sourceof private credit to the public sector,although there is a small amount of long-termdebt to private suppliers(which, again, is mostly guaranteedby foreigngovernments). The privateexternal debt, both long-term aid short-term,represents mainly credit from foreignprivate banks. In total, privatefinancial institutionsheld 64 percent of the externaldebt at the end of 1983, although,as noted above, some fractionof this was guaranteedby creditor governments.
29. The debt is relativelywell-diversified in terms of currencyof denomination.At the end of 1983, betweenhalf and 64 percent of the long-termdebt was denominatedin dollars (the latterassuming all multicurrencyloans were dollar loans). By comparison,in 1983, the dollar was the currencyof denominationof fully 75 percent of the public and publiclyguaranteed debt of all countriesreporting debt data to the World Bank. Almosta quarterof the externaldebt of Cyprus was denominatedin DM, Swiss francs,and Japaneseyen. The large weight of these low interest rate currenciespartly explainsthe low average rate of intereston the externaldebt of Cyprus (see below).
B. Terms of The Debt
30. Cyprus has borrowedat relativelyfavorable terms. Although the average interestrate on publicand publiclyguaranteed debt rose from less than 5 percentin 1974 to 10 percentin 1983, the rate was consistently below averagemarket rates. Slightlyover half of the long-termexternal debt of Cyprus is at floatingrates, 49.6 percentof the long-termpublic and publiclyguaranteed debt and about 62 percentof the long-termprivate debt. Floatingrate debt is normallymore expensivethan fixed rate debt. As mentionedearlier, fixed-rate debt almost always representscredits from or guaranteedby officialsources. This debt tends to be concessional.1/ Short-termdebt is floatingrate debt by definition,since it matures in less than one year. New short-termcredits carry the going interestrate. A small amount of the short-termdebt is debt owed to or guaranteedby foreignofficial entities (such as the U.S. CommodityCredit Corporation) at an interestrate somewhatbelow the privatemarket rate. The bulk of the short-termdebt of Cyprus,however, is at hard terms.
1/ Guaranteedexport credits,as opposed to direct creditsfrom official sources,are sometimesat or near market rates if the private lender pays a substantialguarantee fee. - 18 -
31. Debt servicedata 1/ and standarddebt serviceratios show that debt service,relative to exportsof goods and non-factorservices is low by internationalstandards but has risen steadilyover the last 10 years, to about 12 percent in 1984 or about half the average for all developing countries. Debt service,relative to GNP, is, by contrast,over 30 percent above the average for all developingcountries (6.7 percentvis-a-vis 5.1 percent in 1983). This divergence,however, is explainedmostly by the fact that Cyprus has a comparativelyopen economywith a very high ratio of exports (and imports)to GNP.
32. The averageinterest cost of the Cypriotdebt has remainedquite stable over the last six years. However,the real interestcost of the debt, calculatedas the nominal rate deflatedby the rate of changeof the Cypriot price index,converted to dollars,has risen sharply.2/ The real cost of the debt was about 7 percent of GNP in 1984. There is a rule of thumb in the debt literaturestating that, in order for a debtor country to remain solvent,the debt/GNPratio cannot grow if the real interestrate is expectedto be above the real rate of growthof GNP. Hence, accordingto this rule, if the current real rate of interestof about 4 percentprevails in the future,Cyprus must achieve a sustainablegrowth rate of 4 percent or more or else it must stabilizeor cut its debt/GNPratio. In any case, the high expectedcost of foreignborrowing means that fewer projectswould have a high enough expectedrate of returnto be viable.
33. The Cypriot public sector has been able to borrow at relatively long terms. Over the six years from 1978 to 1983, the averagematurity of new commitmentswas 10-1/2years including3-1/2 years of grace. In spite of this, the amount of long-termdebt comingdue this year (1985) takes a quantumjump and will remainat the higher level for the next few years. The jump in principalpayments due reflectsthe high level of commitments and disbursementsover the last five years and the end of grace periods. Over the last two years, Cyprus has avoided going to the privatemarket and has financedits currentaccount deficits with cheaper suppliers'credits. The higher level of debt coming due, togetherwith the continuedhigh level of new borrowingsneeded to financebudget and currentaccount deficits, will eventuallyforce Cyprus back to more expensiveEurocurrency borrowings. Hence the cost of the Cypriotexternal debt is likely to rise. (See the discussionof debt managementbelow.)
1/ Excludeprincipal and interestpayments on short-termdebt.
2/ The real interestrate also could have been calculatedas the nominal rate of intereqtdeflated by the rate of change of the Cypriotexport price index in dollars. Both methods,however, show a similar pattern. Note these are both ex post real rates, not necessarilythe real rates expectedat the time the debt was acquired. - 19 -
C. CreditorData
34. Data from the Bank for InternationalSettlements (BIS) on the externalclaims of BIS-reportingbanks mainly in OECD countriesreveal a sharp jump in short-termlending to Cyprus between the end of 1982 and the end of 1983, from $75 millionto $161 million. The rise coincideswith a tighteningof domesticbank loans to finance imports. The jump appears too large to be explainedby the change in bank regulationsalone, however, and does not occur in letterof credit data from Cypriotbanks reported to the CentralBank. Privatebanks in Cyprus,however, do report turning away requestsfor domesticloans to finance imports. Withoutfirm data, Central Bank officialsconjectured that internationalfirms operatingin Cyprus were borrowingshort-term from Cyprus but with a home office guarantee. This discrepancyneeds to be further investigated:The experienceof a host of countries,most notablyVenezuela, indicates that short-termdebt can lead to debt serviceproblems, just as severe,and even more quickly, than long-termdebt.
35. The BIS data also reveala steady rise in depositsby Cypriots in foreignbanks, from $484 million at the end of 1977 to $1,004 million at the end of 1983. The rise partly reflects the increasein official reserve assets. But the remainder,more than $50 million per year, appears to be an outflowof private capitalfrom Cyprus, due partlyperhaps by interest rate differentialsbetween Cyprusand internationalcapital markets. Hence, as much as one-thirdof the externaldebt of Cyprusmay have financedindirectly the acquisitionof privateexternal claims. These claims may representunrepatriated external earnings of Cypriots,both privateindividuals and firms. The size of these claims,however, should be monitoredin the future,as they representa possiblebarometer of privatesector confidence in the Cyprioteconomy. D. Debt Managementin Cyprus
36. There are severalaspects to a debt managementsystem. The first is the debt informationsystem. Another is the relationshipbetween debt and macroeconomicpolicy. A thirdaspect is the borrowingstrategy, once a desired level of borrowinghas been determined. Each of these aspects of the Cypriotdebt managementsystem is discussedbelow.
The Debt InformationSystem and BorrowingRegulations
37. The basic sourceof externaldebt data in Cyprus is the Central Bank of Cyprus. All privateexternal borrowing in Cyprus requires the approvalof the CentralBank. Publicand publiclyguaranteed external loans approvedby the Councilof Ministersmust be reportedto the Central Bank.
38. Approvalof trade-relatedexternal loans with a maturity of less than 210 days is automatic under current Central Bank regulations. However, banks in Cyprus do report to the CentralBank data on short-term external credit arranged through them. This is the private short-term debt data used by the Central Bank of Cyprus. Short-term trade credit arranged directlywith a foreignbank or with suppliersis missed by the reporting system. As discussedearlier, the BIS reportsmuch largershort-term claims on Cyprus than are includedin the Cypriot debt data. - 20 -
39. The Cyprus Treasury, an agency in the Ministry of Finance, reports to the External Debt Division of The World Bank data on the public and publicly guaranteed external loans of Cyprus. The Treasury uses these data in connection with the government budget process. The Ministry itself maintains data on external loans of the Central Government and projects future debt service requirements.
40. While the debt information and debt reporting system in Cyprus is of very high quality, there is room for improvement. The Treasury does not always pick up revisions, reported to the Central Bank, in the terms of external loans. The Finance Ministry is sometimes slow in reporting new Central Government borrowing to the Central Bank and external loans guaranteed by the Central Bank, as opposed to the Finance Ministry, are not reported by the Treasury to the World Bank as publicly guaranteed loans. For some reason mixed credit loans from France are also not reported.
41. Many of these shortcomings could be overcome by regular meetings, perhaps monthly, of debt specialists at the Cypriot Treasury, the Central Bank, and the Finance Ministry. The participants could compare loan-by-loan information. The Finance Ministry could report on new project loans signed. Each group could present its debt estimates and debt and debt service projections. Even if these agencies could not agree on a common set of projections, they could identify the reasons why their projections differ. The other agencies could verify the Debtor Reporting System forms prepared by the Treasury for submission to the World Bank. In this way revisions in terms, reported to the Central Bank, could be passed on to the Treasury for submission to the World Bank Debt Reporting System.
Debt Management and Macroeconomic Management
42. The Government has, over the last decade, followed a policy of large budget deficits financed mainly by external borrowing. At the same time, domestic interest rates have been kept low (with a ceiling of 9 percent) and were sometimes negative in real terms. To the extent that the Government finances its deficit by borrowing abroad at interest rates significantly above the domestic ceiling instead of selling bonds domestically, the private sector finds it easier to finance investment locally. (There is no "financial crowding out.") Hence, it might be argued that the public sector is subsidizing local private investment by borrowing abroad. Although the average rate on the external public debt was low, the rate on new commitments reached a high of 14.3 percent in 1981.
43. The high level of public sector borrowing has another potential adverse implication: This debt must be serviced from Government revenues. The interest cost of the debt has been rising steadily. Without significant narrowing of the budget and current account deficits, as a share of GNP, creditors may well become concerned about the Government's ability to service the debt. It is, therefore, imperative that budget and current account deficits be substantially narrowed in the next few years.
The Borrowing Strategy
44. In the last two years, the Government of Cyprus has avoided Eurocurrency borrowings by relying on multilateral loans and bilateral official or officially guaranteed suppliers credits. As a result, private - 21 -
banks are anxious to lend to Cyprus at quite narrow spreads, as low as 1/16 to 1/8 of a percentage point above LIBOR. (By comparison, the average spread on Eurocurrency borrowings by all developing countries in the first niue months of 1984 was about 1-1/2 percentage points.)
45. As outlined above, the rise in principal payments due over the next few years will make it difficult for Cyprus to avoid going back to the market for Eurocurrency loans. The gross borrowing requirement will rise to as much as $350 million in 1987, from less than $200 million in 1983. Hence, it will be difficult for the Government to raise the necessary funds exclusively through multilateral loans and concessional suppliers' credits as has been possible during 1983-84.
46. The Government has indicated no significant change in its borrowing strategy for 1985: It would finance part of the current account deficit by running down reserves and, thus, avoid going to the Eurocurrency market. This, however, may not be a desirable policy for three main reasons: (i) The reserve level, at less than 6 months of imports, is quite modest for a highly open economy where imports account for close to two-thirds of GDP; if anything, reserves should be increased. (ii) The net interest savings will be quite small, just the spread between the deposit rate earned on Eurodollar assets and the rate at which Cyprus can borrow. Given the small spread that Cyprus has to pay in the market, the savings will be minimal. (iii) This policy is obviously only a stopgap measure, as Cypriot net reserves would soon approach unacceptably low levels if the policy continued into 1986.
E. Private Bankers' View of Cyprus
47. There appears to be a dichotomous view among bankers with respect to Cyprus. One group of banks is quite eager to provide Cyprus with additional loans and at quite favorable spreads (one sixteenth to one eighth over LIBOR were mentioned). These are mostly banks that have been involved in syndicated loans to Cyprus in the past. Another group are quite aware of Cyprus but do not see any suitable lending opportunities.
48. For the most part these latter banks make sovereign loans only in connection with projects and not just for balance-of-payments purposes. As mentioned above, Cyprus has been quite successful in acquiring concessional financing for projects. Without changes in economic policy, Cyprus will need in the future more and more balance-of-payment loans. Hence, banks that have not been actively lending to Cyprus in the past are not likely to lend to Cyprus in the future.
49. Cyprus should not, therefore, be misled by its good credit rating in international financial markets. This credit rating reflects expectations that it would take timely action before a serious debt crisis were imminent. Evidence to the contrary, such as a rapid rise in the Government budget deficit and in the country's short term debt, could change the bankers' perception of Cyprus very quickly.
F. Implications and Recommendations
50. The debt management system in Cyprus is efficient and effective. Debt statistics are timely, complete and accurate. However, there is room for improvement. As recommended earlier, regular meetings between debt - 22 -
specialists at the Central Bank, the Treasury and the Finance Ministry would be useful in improving the accuracy and timeliness of the debt statistics. In addition, Government should be aware of and monitor debt statistics from creditor sources. Both the BIS and the IMF publish data on bank claims on Cyprus. Where discrepancies exist or develop, they should be investigated. Both creditor sources report bank claims on Cyprus that are higher than those reported by the Central Bank of Cyprus; most of the discrepancy is in short-term claims.
51. The more serious problems with respect to debt lie in the relationship between debt and macroeconomic management. Projections of continuing government budget and current account deficits and large gross borrowing requirements point to a growing level of debt, relative to GNP, and a more costly debt. Simple debt theory shows that a country remains solvent in the long term even with a growing debt/GNP ratio as long as the real rate of interest on the debt is below the expected rate of growth of the economy. Real interest rates are likely to remain high for several years. Hence, a serious, prolongated slow-down in overall economic growth could result in a situation in which Cyprus would not be able to borrow enough to pay the interest on its external debt. Obviously a large external debt increases the vulnerability of a country to internal and external shocks. Therefore, any further increase in the net debt/GNP ratio as a result of large budget deficits and the resulting current account deficits should be considered carefully.
52. The external debt of Cyprus is predominantly public debt. Hence, another limiting factor in the size of the debt is the ability of the public sector to raise revenues. At some point, creditors are likely to become concerned about the ability of the Government of Cyprus to raise the revenues necessary to service the debt.
53. Cyprus should also reconsider its st-ategy of severely limiting the long-term external borrowing of the private sector. The cap on internal interest rates, combined with external financing of the government budget deficit, has had the appearance of an indirect subsidy for private investments. However, the overall effect on private investment of low interest rates on the one hand, but bank loan rationing on the other, is difficult to assess.
54. Given the high level of public sector external borrowing required, the Government has been quite effective at keeping borrowing costs low. It has taken good advantage of the availability of relatively low-cost funds from multilateral and bilateral official sources. Cyprus has not arranged a floating-rate Eurocurrency loan for two years. However, with gross borrowing requirements rising as old debt matures, Cyprus will likely need to return to the private market. There are two new market instruments that have recently been developed that Cyprus, with its current good credit rating, could use to keep borrowing costs down. One is the floating rate note (FRN). These are variabie interest rate bonds, which have gained market preference over traditional fixed-rate bonds. FRNs cost less than syndicated bank loans. The other is the revolving underwriting facility (RUF), which operates as follows. The borrower signs an agreement with a syndicate of banks for funds over a long-term, say 10-year, period. The country then, over the 10 years, issues three- or six-month notes, which - 23 - the banks underwriteat a prearrangedfee and discount. The banks then market the bonds or hold them in their own portfolios. The country is guaranteedaccess to the funds over the long term, because in any period in which the notes cannot be sold in the market, the underwritersmust hold them. The total cost of the RUF is less than that of a syndicatedloan. Finally,Cyprus might also look into interestswaps as a means of reducing interestrate risks. - 24 -
IV. MEDIUM-TERMPROSPECTS AND DEVELOPMENTISSUES
A. The Fourth (1982-86)Plan and 1982-84Performance
55. Followinga number of highly successfuleconomic reactivation programs,Cyprus launchedthe presentFourth EmergencyEconomic Action Plan (1982-86). The Plan set out to providea frameworkfor growth as well as to tackleemerging issues such as declininginvestment in manufacturingand lack of governmentsavings. Table 4-1 summarizesthe major targetsof the Plan, and comparesthem with the performanceof the first three years. While averagegrowth of total GDP has exceededthe target, the composition of growthwas significantlydifferent from what the Plan envisages. Both agricultureand industryfell far short of targetswhile servicesexceeded growth targetby a substantialmargin. Weather conditionsand external demand playeda crucial role in the lower then expectedgrowth of agric"ilture,while industrywas adverselyaffected by increasedcompetition and extraordinaryfactors in marketsfor manufactureexports. The services sector,on the other hand, grew more rapidly than expectedbecause of strong performancein tourism,trade, transport and banking. On the demand side, consumption,both privateand government,investment, exports and imports,far exceeded targets. The resourcegap (as shown in Table 1-2), however,worsened rather than improvedas envisagedin the Plan.
Table 4-1: Comparisonof Plan Targetsand Actual Growth Rates (In percent)
Fourth Plan Annual Actual Annual Average 1982-84 Average 1982-84
Output - GDP (f.c.) 4.0 4.7
Agriculture 2.9 0.4 Industry 3.3 2.6 Services 4.6 6.6
Use of resources
Consumption 3.9 6.3 Private 4.0 6.5 Government 3.0 5.3 Fixed Investment 1.5 6.9 Exportsof goods and NFS 6.0 12.6 Importsof goods and NFS 4.4 12.2
Source: PlanningBureau and StatisticalAnnex - 25 -
56. With such a mixed performance,some important Plan targets are unlikely to be achieved. In particular, without substantial reductionLin the growth of consumptionand of the resource gap. achievement of the overall growth target itself may have little meaning because sooner or Later demand will need to be compressed to bring overall supply and demand into a reasonable balance. So far, the impact of recent over-consumption on the debt service burden may not have been substantial;but it cannot be avoided because the related increase in debt will later need to be serviced. Without future reduction in the growth of consumption, it will become increasinglydifficult to achieve other Plan objectives. Projections below are intended to show that to keep the debt service burden in line with the ceiling of around 15 percent of exports as set out in the 1982-86 Plan, the resource gap will have to be reduced substantially and without delay.
B. Balance of Payments Proiections
57. The balance of payments projections shown in Table 4-2 maintain the consistency framework of the current Five Year Plan, with the growth rate of 4 percent per annum, exports of goods and non-factor services of 6
Table 4-2: Balance of Payments Projections (In millions of US dollars)
Actual Proiected 1983 1985 1990
Exports of goods and NFS 1087.8 1231.6 2411.5 Imports of goods and NFS 1382.5 1507.9 2654.4 Resource balance -294.7 -276.3 -242.9 (As percent of CDP) (14.0) (12.0) (6.0)
Factor income (net) 41.4 58.7 58.6 Transfers (net) 47.9 53.8 72.0 Current account balance -205.3 -163.8 -112.4 (As percent of GDP) (9.5) (7.0) (2.7)
Grants 26.2 26.5 26.5 Private direct investment 68.4 70.5 75.0 Medium and long-term capital (net) 62.5 138.4 164.3 Other 53.5 - _ Capital account balance 210.6 235.4 275.8
Overall balance = 5.3 71.6 163.4 increase in reserves
Memo Items:
Consumption/GDP (X) 82.9 82.3 78.7 Reserves/imports(months) 4.6 6.0 6.0 Debt service/exports(S) 11.6 13.2 14.6 Gross capital inflow (Mn $) 172.3 258.2 405.3 (As percent of GDP) (8.2) (11.2) (9.8)
GDP at market prices (Mn $) 2104.8 2310.8 4122.3 - 26 -
percent, import elasticity of unity and gradual decline of the investment rate to about 27.5 percent of GDP by 1990. The difference between these projections and those made earlier when the Plan was drafted were mainly on composition of exports, with slightly increased weight for services and slightly lower weight for goods.
58. It is clear from these projections that in order to maintain the debt service burden within what the Government rightly believes is a reasonable level (around 15 percent of exports), the resource gap must be substantially reduced as a proportion of GDP from 14 percent in 1983 to about 6 percent by 1990. In order to achieve that, the growth in domestic demand will have to be substantially curtailed. Since the investment rate can only be brought down gradually in order not to affect future growth, the major adjustment will have to be made on consumption.
59. In 1983, consumption was 82.9 percent of GDP (17 percent for the Government and 65.9 percent for the private sector). There are various options as to how this share can be reduced. One possible option is to keep the share of the Government constant at around 17 percent and find a way to reduce the private share from 65.9 percent to 61.7 percent. This option allows Government consumption in real terms to grow at the rate of CDP and private consumption to grow at about 3.2 percent annually (2 - 2.5 percent growth in per capita consumption); thus, it would not present any actual compression on neither the Government nor the private sector. With adoption of a value-added tax now being considered, this option would help the Government bring into balance its revenue and current expenditures. 1/ Cautious wage and salary policies could contribute markedly to slow down growth of public and private consumption, while an increase in interest rates would stimulate private savings. The projections shown below are based on this option.
60. With this level of resource gap and current outlook for transfers, private direct investment 2/ and international interest rates and the need to increase reserves to about 6 months of imports, it seems possible that the current accounitdeficit could be kept at below the 1983 level. Since more than half of the deficit is financed by grant and private direct investment, the need for borrowed capital can be kept at manageable levels, althoughthe requiredgross inflowwill still increasefrom $172 million in 1983 to over $400 million by 1990. In terms of ratio to GDP, however, the gross capital requirement will not exceed 10-11 percent and begin to gradually decline. This appears to be the only way to contain the external
I/ Detail of a VAT proposal and its impact is discussed in the Bank's earlier report, Trends and Issues in Public Finance (July 1984). Some Government savings could in fact be generated with a VAT of about 5 percent. 2/ As indicated in Table 1-10, private direct investment in dollar terms has been declining since the peak of $85 million in 1980. With tourism facilities reaching close to saturating point and opportunities in this sector becoming more limited, substantial increases in private direct investment in tourism facilities are not expected. Investment in houses and apartments by Cypriots living abroad, however, are expected to continue to increase at least in nominal terms. - 27 - debt level within the target set in the Fourth Plan. It must be emphasized, however, that this sustainable balance can only be achieved if growth of domestic consumption is curtailed to reduce the share of consumption in GDP to below 79 percent by 1990, and if private direct investment continues to be substantial in the range of $70-75 million per year.
C. Salient Development Issues
61. The above discussions raise a number of issues which need to be tackled by the Government. These, in particular, stand out prominently. First, limiting the growth of Government consumption is a critical factor for maintaining sustainable future growth of around 4 percent per annum. Government consumption has increased more rapidly than considered desirable. Details of ways to limit growth in expenditures, notably those relating to slower growth in civil servants' wage bills and to reduced agricultural subsidies, have already been discussed in an earlier Bank report. 1/ Those conclusions remain valid, and further delay in adopting the recommended measures can only increase the severity of the required adjustments. Limiting growth of expenditures would need to be complemented by some additional revenues to turn the negative Government savings of recent years into positive savings. A VAT bill being drafted by the Government at present is a welcome measure; it should be adopted and implemented without delay. Furthermore, as discussed in para. 12, a slow-down in the growth of Government expenditures to no higher than the growth of GDP is not only pertinent in terms of allowing the economy to restore a reasonable balance but also in terms of maintaining the fundamental philosophy of development. The past increasing trend of the Government expenditure share in GDP, if allowed to continue unchecked, w;uld someday adversely affect the private dynamism that has been so instrumental in the development of Cyprus. Although difficult to substantiate, the increased role of the Government in recent years may have something to do with widespread tax evasion, the suspected under-invoicing of exports and over-invoicing of imports, and the rapidly rising private capital outflow to banks outside Cyprus.
62. Second, private consumption has also grown more rapidly than desirable. Adopting a VAT, improving the income tax scheme, strengthening the tax administration and adopting a more cautious wage pcoicy as discussed in the above-mentioned report will reduce private disposable income. This, however, may not be sufficient to reduce the growth in private consumption and more should be done to stimulate private savings. Although not much is known about the private sector's response to higher interest rates, Government should remove the interest rate ceiling of 9 percent. Flexible interest policies, allowing interest rate to rise and fall according to market conditions, should not only stimulate private savings and discourse capital outflow, but also allow Government to more effectively use this powerful tool of monetary management; monetary policies have been constrained in the past partly because of the lack of this instrument.
1/ Trends and Issues in Public Finance, July 1984. - 28 -
63. Third, although the level of investment seems so far to have exceeded Plan targets, its sectoral composition appears to substantially deviate from the Plan; tourism has received more while manufacturing has received less than envisaged. As a result, tourism has become more prominent in the structure of output and export earnings. Although employment and export earnings are currently maintained at reasonably high levels, the volatility of tourism could jeopardize long-term stable growth of the economy. In the past few years, attempts have been made to increase investment in manufacturing partly through various incentive programs, and to limit investment in tourism by withdrawal of incentives; despite these changes in incentives/disincentives,investment in these two sectors has been significantly different from what was considered optimal for healthy growth of the economy in the longer term. It may be worthwhile for the Government, therefore, to assess in detail various factors, including incentive schemes, giving rise to this investment pattern. Such a study would be a valuable input into the strategy and policies of the Fifth Plan due to be drafted in 1986. As discussed in the Bank's earlier reports, lack of appropriate mechanism to promote investment in new lines of manufacturing has been recognized as a contributing factor to declining investment in this sector; in consequence, launching of such a mechanism which has been part of the Government's promotion scheme should receive high priority and should not be delayed any further.
64. Fourth, achievement of satisfactory growth has been accompanied by increased dependence on external markets. As a result, the economy has become more susceptible to unpredictable external shocks; such susceptibility has to some extent been also raised by the fact that increasingly larger shares of income and foreign exchange earnings come from tourism and related activities. These appear to be sufficient reasons, therefore, to increase foreign exchange reserves, which continue to be quite modest at less than 6 months of imports. The Government's intention to use part of the reserves to finance the expected budget and balance of payments deficits in 1985, therefore, would appear very inappropriate and should be rescinded.
65. Fifth, although Cyprus has managed its external borrowing well and has achieved a reasonable balance in terms of debt structure, sources of borrowing, and currency composition, the recent rapid increases in short-term external borrowing and in private capital outflow to foreign banks (concurrent with the increase in the official external debt) should be carefully watched. The amounts are now substantial (over $160 million for the former and over $300 million for the latter). Since short-term debt and capital outflow could easily lead to serious debt service problems, they need to be urgently studied and monitored. - 29 -
STATISTICAL APPENDIX
List of Tables
Table Number
Standard Tables
1. National Accounts Summary 2. National Accounts Sluwnary(at 1980 prices) 3. Balance of Payments
Section 1; Employment and Population
1.1 Sectoral Employment and Population
Section 2: National Accounts
2.1 Gross Domestic Product by Sector (at current prices) 2.2 Gross Domestic Product by Sector (at 1980 prices) 2.3 Gross Domestic Product by Expenditure (at current prices) 2.4 Gross Domestic Product by Expenditure (at 1980 prices) 2.5 Gross Fixed Capital Formation by Activity
Section 3: External Trade
3.1 Exports by Main Commodities 3.2 Exports by Main Countries 3.3 Imports by Economic Classification 3.4 Invisibles Account
Section 4: External Debt
4.1 Structure of Debt 4.2 Net External Debt of Cyprus 4.3 Long-term Public and Publicly Guaranteed Debt, by Borrower 4.4 Long-term Private Debt of Cyprus, by Sector 4.5 Long-term External Debt, by Source 4.6 Cyprus Long-term Debt by Currency - End 1983 4.7 Debt Service 4.8 Average Interest Costs of the External Debt of Cyprus 4.9 Maturity Structure of the External Debt of Cyprus
Section 5; Public Finance
5.1 Consolidated Central Government Budget 5.2 Central Government Ordinary Budget 5.3 Accounts of Public Loans Fund 5.4 Accounts of Social Insurance Funds 5.5 Accounts of Relief Fund for Displaced Persons - 30 - Section 6: Monetary Sector
6.1 Monetary Survey 6.2 Interest Rates in Cyprus
Section 7: Prices and Wages
7.1 Price Indices 7.2 Price Index of Domestic Exports 7.3 Import Price Index
Section 8: Other
8.1 Arrivals of Tourists and Excursionists and Estimated Income from Tourism 8.2 Visitors by Country of Residence
Symbols used:
p - preliminary or provisional -- = none or negligible = not available
Note: Data cover only area under Government's control. TabLe 1: NATIONALACCOUNTS SUMMARY: 1976-84 (MILLIONSOF CURRENTCYPRUS POUNDS)
ITEM 1976 1977 1978 1979 1980 1981 1982 1983 1984
GROSS DOMESTIC PRODUCT 329.3 417.5 498.8 620.6 749.1 860.7 999.5 1,107.1 1,256.9 (STATS. DISCREP) -12.0 -16.3 -14.6 -4.1 -0.5 -7.7 -8.7 2.6 -4.0
RESOURCE GAP (M-X) 43.0 84.4 104.3 120.2 135.4 114.5 136.5 155.0 167.1 IMPORTS, G&NFS 209.1 286.7 318.7 401.6 479.5 554.7 658.4 727.2 891.6 EXPORTS, GONFS 166.1 202.3 2t4.4 281.4 344.1 440.2 521.9 572.2 724.5
TOTAL EXPENDITURES 384.3 518.2 617.7 744.9 885.0 982.9 1,144.7 1,259.5 1,428.0
CONSUMPTION 302.2 375.5 431.4 507.1 604.0 690.0 818.6 917.9 1,002.5 GENERAL GOVT. 56.1 61.3 67.0 86.3 107.5 136.9 167.1 188.2 205.7 PRIVATE 246.1 314.2 364.4 420.8 496.5 553.1 661.3 729.7 796.8
INVESTMENT 82.1 142.7 186.3 237.8 281.0 292.9 326.1 341.6 425.5 FIXED 68.6 122.4 170.4 218.7 299.1 274.6 303.1 317.3 397.5 CHANGES IN STOCKS 13.5 20.3 15.9 19.1 21.9 18.3 23.0 24.3 28.0 DOMESTIC SAVINGS 27.1 42.0 67.4 113.5 145.1 170.7 180.9 189.2 254.4 NET FACTOR INCOME 13.9 18.8 20.2 22.1 26.6 27.0 30.5 2t.8 26.0 CURRENT TRANSFERS 11.8 14.5 11.5 12.6 14.8 15.0 16.8 26.8 30.2 NATIONAL SAVINGS 52.8 75.3 99.1 148.2 186.5 212.7 228.2 237.8 310.6
AVERAGE EXCHANGE RATES CYPRUS POUND PER USS 0.4 0.4 0.4 0.4 0.4 0.4 0.5 0.5 0.6 CYPRUS POUND PER SDR 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.6 0.6
SOURCE: MINISTRYOF FINANCE TABLE CYP/IA/10 TabLe 2: NATIONALACCOUNTS SUMMARY, 1976-84 (MILLIONSOF USSAT CONSTANT1980 PRICES)
ITEM 1976 1977 1978 1979 1980 1981 1982 1983 1984
GROSS DOMESTIC PRODUCT 1,480.5 1.690.9 1,828.0 2,021.0 2,122.1 2,192.1 2,309.1 2,404.5 2,549.6 (STAT. DISC.IN GOP) 1/ 165.2 117.8 44.8 55.8 -1.4 11.3 -26.6 -34.8 -40.2 TERMS OF TRADE EFFECT 88.8 67.1 4.7 13.9 - 10.5 30.4 2.5 37.6 GROSS DOMESTIC INCOME 1,569.2 1,758.0 1,832.8 2,034.8 2,122.1 2,202.6 2,339.4 2,407.0 2,587.2
RESOURCE GAP 169.6 306.3 357.3 382.7 383.6 286.4 326.0 .358.1 367.5 IMPORTS, G8NFS 824.6 1,040.5 1,091.8 1,278.8 1,358.4 1,387.3 1,572.5 1,680.2 1.960.9 CAPACITY TO IMPORTS 655.1 734.2 734.5 896.0 974.8 1,100.9 1,246.5 1,322.0 1,593.4 (EXPORTS,G INFS) 566.3 667.1 729.7 882.2 974.8 1,090.4 1,216.1 1,319.5 1,555.8
TOTAL EXPENDITURES 1,573.7 1,946.5 2,145.3 2,361.8 2,507.1 2,477.6 2,692.1 2,800.0 2,994.9
CqNSUMPTION 1.222.7 1,409.1 1,509.1 1,626.9 1,711.0 1,748.2 1,921.5 2.036.3 2,098.9 PRIVATE 955.5 1,137.7 1,246.2 1,336.8 1,406.5 1,409.6 1,558.4 1,653.5 1.703.1 GENERAL GOVERNMENT 267.1 271.4 262.9 290.1 304.5 338.5 363.2 382.7 395.P
INVESTMENT 351.0 837.4 636.3 734.8 796.0 729.5 770.5 763.7 896.0 FIXED INVESTMENT 295.5 457.8 577.9 672.2 734.0 683.9 717.3 709.6 836.0 CHANGES IN STOCKS 55.5 79.6 58.4 62.6 62.0 45.6 53.3 54.1 60.1
DOMESTIC SAVINGS 346.6 348.9 323.7 407.9 411.0 454.4 417.9 370.8 488.3 L NET FACTOR INCOME 62.3 76.2 73.9 72.0 75.4 68.8 70.5 47.6 53.0 CURRENT TRANSFERS 53.0 58.7 42.1 41.0 41.9 38.2 38.8 58.2 61.3 1 NATIONAL SAVINGS 461.9 483.9 439.8 520.9 528.3 561.5 527.2 476.6 602.6
POUNO DEFLATORS (1980g100)
GROSS DOMESTIC PRODUCT 63.0 69.9 77.3 87.0 100.0 111.1 122.6 130.4 139.6 IMPORTS,GINFS 71.8 79.1 82.7 89.0 100.0 113.3 118.6 122.6 128.9 EXPORTS, GINFS 83.1 85.9 83.2 90.4 100.0 114.4 121.6 122.8 131.9 TOTAL EXPENOITURES 69.2 75.4 81.6 89.3 100.0 112.4 120.5 127.4 135.1 AbVERNMENT CONSUMPTION 59.5 64.0 72.2 84.3 100.0 114.6 13O.3 139.3 147.2 PRIVATE CONSUMPTION 73.0 78.2 82.8 89.2 100.0 111.2 118.4 125.0 132.5 FIXED INVESTMENT 65.8 75.7 83.5 92.2 100.0 113.8 119.7 126.7 134.8 CHANGE IN STOCKS 68.9 72.2 77.2 86.4 100.0 113.7 122.3 127.2 132.0
SOURCE: NATIONAL ACCOUNTS TABLES, MINISTRY OF FINANCE
TABLE CYP/IA/11 TabLe 3: BALANCEOF PAYMENTS:1976-83 1/ (MILLIONS OF CURRENTUSS)
ITEM 1976 1977 1978 1979 1980 1981 1982 1983
EXPORTS, oSNFS 405.1 495.8 574.8 794.9 974.8 1,048.1 1,099.7 1,087.8 MERCHANDISE 250.3 304.4 327.1 422.3 489.2 508.8 500.0 438.3 NMN-FACT.SERVICES 164.8 191.4 247.7 372.6 485.0 539.3 598.7 649.5 IMPORTS, G&NFS 610.0 702.7 854.4 1,134.5 1,358.4 1,320.7 1,386.1 1,382.6 MERCHANDISE 395.1 SS8.1 679.9 899.7 1,072.0 1,037.2 1,088.4 1,024.2 NON-FACTOR SERVICES 114.2 146.6 174.5 234.8 286.4 283.5 297.7 288.3 RESOURCE BALANCE -104.9 -206.9 -279.6 -339.5 -383.6 -272.6 -287.4 -294.7 NET FACTOR INCOME 33.9 46.1 54.2 62.4 76.4 64.3 64.2 41.4 RECEIPTS 47.6 68.4 88.5 120.1 148.2 102.5 181.0 171.6 PAYMENTS 13.7 22.3 34.3 57.7 72.8 38.2 116.8 130.2 (MOLT INTEREST) 5.3 14.2 22.5 24.8 29.3 41.5 49.8 62.9 NET CURRENTTRANSFERS 13.1 14.2 22.5 25.4 32.5 35.7 30.3 47.9 RECEIPTS 16.3 17.4 25.7 29.4 36.5 39.0 33.4 50.9 PAYMENTS 3.2 3.2 3.2 4.0 4.0 3.3 3.1 3.0 CURRENT ACCOUNTBALANCE -57.9 -146.6 -203.0 -251.7 -275.7 -172.6 -192.9 -205.3 u.. .us... a...... a UUEUUUUU...... *EEEEUUU U.....uu...... u. *u.u.u=
DIRECT INVESTMENT , 32.4 41.2 57.1 70.6 85.0 78.5 71.4 68.4 GRANTS 47.6 68.6 45.0 46.3 40.8 27.4 41.0 26.2 NET M< LOANS (ORS) 18.0 58.4 65.7 53.1 108.7 65.6 136.1 J2.5 DISBURSEMENT 27.3 67.7 78.1 68.6 138.9 141.4 185.8 130.0 i) REPAYMENTS 9.3 9.3 12.4 15.5 30.2 75.8 49.7 67.5 OTHER NWLT, NET 12.2 -14.5 21.4 50.3 25.1 11.2 12.2 11.8 NET CREDIT FROM IMF 42.3 2.7 -16.3 1.1 7.2 -9.5 -10.2 -12.0 DISBURSEMENTS 42.3 2.7 4.3 12.4 29.5 0.3 - 7.8 REPAYMENTS - - 20.6 11.3 22.4 9.8 -10.2 -19.8 NET SHORT-TERM CAPITAL -12.7 2.2 8.6 24.3 S.7 15.2 9.0 28.5 OTHER CAPITAL, NEI ------ERRORS& OMM4SSIONS 5.9 11.5 20.4 28.8 27.5 36.9 27.0 25.2 CHANGEIN RESERVES -87.8 -13.5 1.1 -22.8 -24.3 -52.7 -93.6 -5.3 (-INDICATED INCREASE) t/ 1984 PRELIMINARY SOURCE: MINISTRY OF FINANCE TABLE CYP/tA/12 - 34 -
Table 1.1: SECTORAL EMPLOYMENT AND POPULATION (In thousands)
1976 1981 1982 1983
Agriculture 45.2 44.8 43.8 43.4
Mining and quarrying 2.3 1.6 1.4 1.2
Manufacturing 28.3 42.2 41.7 41.8
Electricity, gas and water 1.3 1.4 1.4 1.5
Construction 10.8 20.9 20.3 20.4
Transportation, storage and 8.3 10.4 10.5 10.6 communications
Trade, wholesale and retail 23.8 35.4 36.5 38.4
Banking, insurance and 4.6 7.1 7.7 8.2 real estate
Services 29.2 36.2 38.4 39.8
Other 1/ 26.9 21.8 21.6 21.0
British military authorities 5.4 4.2 4.1 4.0 and foreign organizations
Unemployed 2/ 16.8 5.9 6.4 7.8
Rate of unemployment (Z) 8.2 2.6 2.7 3.3
Total economically active 202.9 231.9 233.8 238.1 population
Total population 498.0 517.6 521.7 526.9 (mid-year estimates)
1/ Includes Cypriots working abroad. 2/ Monthly average
Source: Department of Statistics and Research, Ministry of Finance. Table 2.1: GROSSDOMESTIC PRODUCT, BY SECTOR,1976-84 1/ (MILLIONSOF CURRENTPOUNDS)
ITEM 1976 1977 1978 1971 1980 1981 1982 1983 1984
AGRIC.& FISH 53.0 55.9 55.2 64.3 72.4 80.4 94.3 89.0 111.9 MINING 7.3 8.8 8.7 9.5 9.9 9.8 U.S 8.0 7.6 MANUFACTURING 56.8 74.1 91.4 109.6 132.2 153.3 172.2 184.8 212.5 ELECT.,aAS, VATER 5.1 5.6 7.0 7.8 10.0 14.7 17.2 22.1 25.7 CONSTRUCTION 26.1 41.2 68.6 79.8 101.1 103.9 113.9 123.3 134.7 TRADE 45.6 60.6 7t.3 93.2 112.3 t32.3 15S.7 172.5 194.0 TRANSP.,COMMUNICAT. 27.4 34.2 41.7 48.7 60.5 72.0 84.6 101.6 117.9 FINANCE.INSUR..BUSINESS 51.1 61.5 72.2 88.9 104.4 128.5 145.8 155.3 171.5 COMWJNITY, SOCIAL SERVIC. 10.2 14.0 16.5 20.9 25.6 31.3 35.5 43.1 47.7
TOTAL INDUSTRIES 282.8 355.7 422.0 522.7 628.4 726.2 828.0 899.7 1.023.5
GOVERNMENT SERVICES 40.1 46.5 54.5 69.4 88.8 107.9 132.8 149.8 165.1 PUBLIC ADMIN. & DEFENSE 25.8 27.9 '31.6 40.4 52.0 65.0 77.9 88.5 98.5 PUBLIC SERVICES 14.3 18.6 22.9 29.0 36.8 42.9 54.9 61.3 66.6 OTHER PRODUCERS 1.6 1.8 2.3 2.8 3.6 4.1 4.7 6.0 6.8
GOP, FACTOR COST 324.5 404.0 479.4 594.9 720.8 838.2 965.5 1,055.5 1,195.4
IMPUTED BANK SERVICE CHARGE 8.9 11.9 13.1 18.3 23.0 33.4 36.8 31.7 33.3 IMPORT DUTIES 13.7 25.4 32.5 44.0 51.3 55.9 70.8 83.3 94.8
GOP, MARKET PRICES 329.3 417.5 498.8 620.6 749.1 860.7 999.5 1,107.1 1,256.9
1/ 1984 PRELIMINARY
SOURCE: MINISTRY OF FINANCE
TABLE CYP/IA/5 TabLe 2.2: GROSSDOMESTIC PRODUCT, BY SECTOR,1976-84 1/ (MILLIONSOF 1980 POUNDS)
ITEM 1976 1977 1978 f979 1980 1981 1982 1983 1984
AGRICULTURE & FISH. 68.6 68.8 66.4 68.8 72.4 72.0 72.3 68.9 72.9 MINING 10.4 10.6 10.0 9.7 9.9 8.7 8.6 8.2 7.2 MANUFACTURING 91.0 104.2 114.0 124.5 132.2 141.2 148.4 151.5 162.0 ELECT.,GAS, WATER 8.1 8.7 9.2 9.8 10.0 10.1 10.4 12.7 13.2 CONSTRUCTION 54.2 71.5 85.7 97.9 101.1 89.8 86.8 87.0 87.5 TRAOE 63.3 79.4 8e.7 105.0 112.3 117.7 127.5 t30.0 138.8 TRANSPORT. COMMUNICAT. 47.2 52.1 57.5 59.6 60.5 65.0 69.6 77.7 85.9 FINANCE, INSURAN., BUSINESS 67.3 78.0 87.1 99.8 104.4 120.2 133.6 138.3 146.7 C0MMUNITY, SOCIAL SERVICES 17.5 21.8 21.6 24.0 25.6 28.1 27.t 30.4 32.4
TOTAL INDUSTRIES 427.6 495.2 538.2 599.1 628.4 652.7 684.8 704.6 746.6
GOVERNMENT SERVICES 70.2 74.9 76.8 83.2. 88.8 94.0 100.5 106.0 111.2 PUBLIC ADMIN. & DEFENSE 44.7 44.6 44.5 48.4 52.0 56.7 59.1 62.8 66.5 PUBLIC SERVICES 25.5 30.3 32.3 34.8 36.8 37.3 41.4 43.2 44.7 OTHER PRODUCERS 2.7 2.9 3.1 3.3 3.6 3.9 4.0 4.5 4.6
GOP, FACTOR COST 500.5 573.0 618.1 685.6 720.8 750.6 789.3 815.1 862.4
IMPUTED BANK SERVICE CHARGE 13.7 16.9 16.9 21.1 23.0 29.9 30.1 24.5 24.0 IMPORT OUTIES 35.8 40.9 44.2 48.8 51.3 53.0 55.8 58.1 61.6
GOP, MARKET PRICES 522.6 596.9 645.3 713.4 749.1 773.8 815.1 848.8 90.0 :---E -us:2------. ------.--- ...------. .. u-u-u..-... u.-.... - .. - - ...... --...... u
1/ 1984 PRELIMINARY
SOURCE: MINISTRY OF FINANCE
TABLE CYP/lA/6 Table 2.3: GROSSDOMESTIC PRODUCT, BY EXPENDITURE,1976-84 1/ (MILLIONS CURRENTPOUNDS)
ITEM 1976 1977 1978 1979 1980 1981 1982 1983 1984
CONSUMPTION 302.2 375.5 431.4 507.1 604.0 690.0 818.6 917.9 1,002.5 PRIVATE 246.1 314.2 364.4 420.8 496.5 553.1 651.5 729.7 796.8 GOVERNMENT 56.1 61.3 67.0 86.3 107.5 136.9 167.1 188.2 205.7 GROSS DOMESTIC INVESTMENT 82.1 142.7 186.3 237.8 281.0 292.9 326.1 341.6 425.5 GROSS FIXED INVESTMENT 68.6 122.4 170.4 218.7 259.1 274.6 203.1 317.3 397 5 CHANGE IN STOCKS 13.5 20.3 15.9 19.1 21.9 18.3 23.0 24.3 28.0 RESOURCE BALANCE -43.0 -84.4 -104.3 -120.2 -135.4 -114.5 -136.5 -155.0 -167.1 EXPORTS, GSNFS 166.1 202.3 214.4 281.4 344.1 440.2 521.9 572.2 724.5 IMPORTS, G&NFS 209.1 286.7 318.7 401.6 479.5 554.7 658.4 727.2 691.6 (STATISTICALDISCREPANCY) -12.0 -16.3 -14.6 -4.1 -0.5 -7.7 -8.7 2.6 -4.0 GROSS DOMES. PROD. (MKT PRICE) 329.3 417.5 498.8 620.6 749.1 860.7 999.5 1,107.1 1.256.9 NET FACTOR INCOME FROM ABROAD 13.9 18.8 20.2 22.1 26.6 27.0 30.5 21.8 26.0
GROSS NATIONAL PRODUCT 343.2 436.3 519.0 642.7 775.7 887.7 1,030.0 1,128.9 1,282.9 --- W .__ ___. --- _------.- __-_- -.-- --- __------_----_-___ --- --_ ------1/ PRELIMINARY SOURCE: MINISTRY OF FINANCE TABLE CYP/1A/1 TabLe 2.4: GROSS DOMESTICPRODUCT BY EXPENDITURE,1976-84 1/ (MILLIONSOF 1980 POUNDS)
…------ITEM 1976 1977 1978 1979 1980 1981 1982 1983 1954
CONSUMPTION 431.6 497.4 532.7 574.3 604.0 617.1 678.3 718.8 740.9 PRIVATE 337.3 401.6 439.9 471.9 496.5 497.6 550.1 583.7 601.2 GOVERNMENT 94.3 95.8 92.8 102.4 1O7.5 119.5 128.2 135.1 139.7
GROSS DOMESTIC INVESTMENT 123.9 189.7 224.6 259.4 281.0 257.5 272.0 269.6 316.3 GROSS FIXED INVESTMENT 104.3 161.6 204.0 237.3 259.1 241.4 253.2 250.5 295.1 CHANGE IN STOCKS 19.6 28.f 20.6 22.1 21.9 16.1 18.8 19.1 21.2
RESOURCE BALANCE -91.2 -131.8 -127.8 -140.0 -135.4 -104.8 -125.B -127.3 -143.0 EXPORTS. G&NFS 199.9 235.5 257.6 311.4 344.1 384.9 429.3 465.8 549.2 IMPORTS, GSNFS 291.1 367.3 385.4 451.4 479.5 489.7 555.1 593.1 692.2 (STATISTICAL DISCREP) 58.3 41.6 15.8 19.7 -0.5 4.0 -9.4 -12.3 -14.2
GROSS DOMESTIC PRODUCT 522.6 596.9 645.3 713.4 749.1 773.8 815.1 948.9 900.0
NET FACTOR INCOME FROM ABROAD 22.0 26.9 26.1 25.4 26.6 24.3 24.9 16.8 18.7
GROSS NATIONAL PRODUCT 544.6 623.8 671.4 738.8 775.7 798.1 840.0 865.6 918.7 1 00
1/ 1984 PRELIMINARY
SOURCE: MINISTRY OF FINANCE
TABLE CYP/IA/4 TabLe 2.5: GROSS FIXED CAPITAL FORMATIONBY ACTIVITY, 1976-83 (MILLIONS OF CURRENTPOUNDS)
...... *...... 1983 ITEM 1976 1977 1976 1979 1980 1981 1982
15.6 19.6 24.4 AGRICUL, FISHING 6.3 8.S 11.9 16.0 1S.0 1.0 1.1 1.4 1.7 1.3 1.5 0.9 0.4 MINING 24.7 27.4 24.2 MANUFACTURING 9.4 20.3 24.0 20.5 27.4 3.5 4.7 4.1 4.1 10.9 18.3 20.4 11.6 ELECT..GAS.ATER 9.4 10.6 CONSTURCTION 1.2 4.0 6.3 9.3 11.7 7.0 5.5 10.2 16.6 22.5 37.6 41.0 50.0 57.3 TRADE,RESTAUR,HOTELS 51.9 59.5 TRANSP..STOR.,COMMUN. 11.1 22.1 33.3 37.5 38.9 50.5 25.7 44.6 67.9 94.4 107.1 104.4 110.2 117.2 FINANCE,INSUR.BUSINESS 11.6 13.3 11.9 COMMUNITV.SOCIALSERV. 4.9 6.9 4.9 5.9 9.2 68.6 122.4 170.4 218.7 259.1 274.6 303.1 317.3 TOTAL-FIXED INVESTMENT a.ua as...... s.ensuou. .au.....m. mmmaa. assesse.s mame.ma mameamas
_____-____-__ -_ -______-__ -_ -_ __. __.__.___ ...... -----...------__ ----- __-__-______-__-______- SOURCE: MINISTRY OF FINANCE TABLE CVP/IA/6 w l0 - 40 -
Table 3.1: EXPDRSBY MIN (Tht)I5TIS (In thousands of Oyprus pounds)
1975 1976 1977 1978 1979 198D 1981 1982 1983
Citzua 5,203 5,115 6,631 6,701 8,851 8,227 11,045 12,750 13,510 Pbtatoeu 7,725 17,707 19,435 10,772 13,624 12,683 16,064 22,530 12,372 Grapes 2,343 2,577 2,746 3,448 4,272 4,506 3,879 3,921 3,476 Ftesh vegetables 562 1,570 2,192 2,761 2,797 2,388 2,730 3,156 2,421 Carwts 284 509 850 326 600 645 1,084 528 708 Carobs 592 1,021 1,402 1,110 1,172 1,247 803 2,708 3,533 Hides wd skins 416 538 565 997 1,141 1,018 594 924 612 Wine ndW rape =.st 3,780 4,927 6,147 5,778 6,717 6,456 7,927 8,832 9,236 Alcoholic beverages 385 2,415 1,061 662 1,263 1,612 2,388 1,839 1,756 Cig.zstteu 1,321 3,348 3,815 5,915 5,705 6,983 8,834 8,984 5,956 Clothing 3,450 8,355 11,983 16,322 22,111 27,937 39,507 31,664 38,382 Footwear 1,758 4,557 5,933 7,104 8,342 11,663 16,287 15,841 15,770 Paper product 1,378 1,464 2,034 2,959 5,219 6,767 9,788 8,965 5,290 PbortnA cinent 5,980 9,168 10,556 8,306 10,251 12,880 10,923 10,584 9,955 Ambestos 2,127 3,316 4,381 3,724 5,2D2 4,616 6,056 4,009 3,250 Iron Pyrites 1,573 641 888 476 847 1,172 412 17 155 Cuprious occentrates 2,495 3,339 1,864 1,462 995 105 - - - Chromim 764 484 719 566 472 390 584 721 527 Other 6,671 14,114 26,299 24,186 28,063 37,190 52,659 58,540 52,933
?JIAL 48,813 85,165 109,501 103,575 127,644 148,485 193,298 196,513 179,902
Souce: Centa1 unk, Bulletin! Jne 983 - 41 - Table 3.2: EXPKRISBY HAUN ODUNRIESY (In thousamns of qTrLs pouMds)
1975 1976 1977 1978 1979 1980 1981 1982 1983
Ebuain 272 1,240 2,066 2,320 1,808 2,435 2,971 3,052 3,208 Belgium 288 664 675 1,106 1,265 1,851 2,732 4,335 3,529 (zedhoslovakia 1,254 931 1,096 1,650 1,268 1,190 1,091 719 1,708 Dermark 429 557 823 1,111 1,723 1,160 845 967 655 Dubai 923 1,820 3,028 2,697 2,542 3,543 5,717 6,135 5,684 Giumauy (F.RL) 973 597 1,579 2,661 3,713 4,837 7,900 8,157 7,462 Gbeece 2,334 2,233 2,714 3,554 3,986 4,763 5,643 4,306 6,437 Iraq 816 1,977 1,143 1,883 2,957 3,649 14,914 17,990 4,937 Italy 1,211 1,164 1,286 1,339 1,785 2,430 1,22 2,274 2,506 Kuwait 580 2,294 3,171 5,752 6,334 6,671 6,701 7,697 8,780 Lebanon 2,194 18,025 12,012 12,953 15,092 18,660 15,024 32,067 35,794 Libya 4,062 5,836 6,970 5,727 8,217 15,514 22,840 5,162 13,928 1atherlEids 1,357 1,877 1,060 2,407 2,013 2,523 3,033 4,414 4,283 oman 551 1,297 1,987 1,229 975 1,053 1,839 1,979 2,753 Rbland 177 125 1,111 1,225 1,373 479 230 92 86 Qatar 116 1,147 1,335 1,018 945 1,131 1,418 2,154 2,112 Smidi Arabia 1,297 6,313 16,465 11,527 12,034 14,411 19,688 24,425 21,779 Spain 1,043 2,109 1,054 1,08B 1,223 546 726 581 149 Roden 983 1,975 1,833 1,467 1,284 1,328 1,795 747 1,524 Syria 4,475 6,419 3,653 6,803 10,785 12,694 11,705 10,594 6,225 U.AR. 286 829 4,571 2,864 2,697 3,110 5,679 7,428 8,716 U.K. 19,557 29,466 37,205 30,040 41,159 38,964 44,188 53,716 42,841 U.S.A. 278 508 1,102 1,894 2,199 2,462 2,337 2,849 6,262 U.S.S.R 2,410 4,844 4,180 3,40L 3,221 7,163 9,979 12,366 10,291 Odhes 8,182 12,085 16,632 20,654 31.173 35,469 44,656 44,603 58,876
-s-uAL 5F6,287106,332 129,751 128,370 161,s87118036 234,773 263,809 260,525
11 ItEudes reeqports and ship utczes.
Sou=e: Oeral Bank; Bull June 1983 - 42 -
Table 3.3: IMPORTS BY ECONOMIC CLASSIFICATION (in millions of Cyprus poundi)
1977 1978 1979 1980 1981 1982 1983
Consumer goods 49.3 56.2 67.8 79.5 93.3 125.4 149.3
Durables 10.4 12.9 18.4 22.8 26.8 36.5 47.4 Semidurables 9.2 10.0 13.6 16.4 18.7 26.1 29.4 Nondurables 29.7 33.3 35.8 40.4 47.7 62.8 72.5
Intermediate Inputs 115.2 122.7 172.4 185.3 213.8 235.5 259.6
Agriculture 7.5 5.9 9.2 9.4 11.2 13.2 11.4 Construction and Mining 15.7 19.1 31.9 27.9 28.4 35.1 33.2 Manufacturing 86.4 93.4 126.7 142.6 167.7 179.7 205.7 Transport, storage and Communications 0.6 0.7 1.2 0.7 1.1 1.1 2.5 O-ther 4.9 3.6 3.4 4.7 5.4 6.3 6.8
Capital goods 31.6 34.4 39.3 40.9 43.0 52.0 53.4
Agriculture 3.2 2.7 3.7 3.5 3.9 4.4 5.3 Construction and mining 3.4 5.8 6.8 6.2 7.9 8.9 8.8 Manufacturing 16.6 16.4 15.1 17.0 14.8 17.8 16.3 Transport, storage and Communications 3.9 4.0 6.4 6.1 8.6 10.3 10.4 Others 4.5 5.5 7.1 8.1 7.8 10.6 12.6
Transport equipment 21.5 36.5 32.8 39.7 33.7 47.1 59.2
Fuels and lubricants 35.2 31.0 44.5 78.3 105.3 117.3 119.9
Others 1.2 1.9 0.9 0.3 0.4 0.3 0.6
TOTAL 254.0 282.7 357.6 424.3 489.5 577.6 642.0
Source: Central Bank, Bulletin, June 1983 - 43 -
Table 3.4: IWISILZ ACWT (Inmillions of Cypzus pounds)
1975 1976 1977 1978 1979 1980 1981 1982 1983 (P)
eight andirance -7.8 -1319 -20.8 -22.1 -29.6 -35.8 42.1 -50.1 55.5 Receipts 3.4 3.8 4.5 5.0 5.7 6.3 6.7 7.5 8.5 Payments -11.2 -17.7 -25.3 -27.1 -35.3 -42.1 -48.8 -57.6 -64.0
Other trarnportation -1.3 -1.0 1.8 4.3 1L0 14.8 24.1 32.3 38.8
Passerger Services -2.0 0.3 1.1 3.3 6.0 11.5 16.0 17.6 21.1 Aviati2M and shippig fees 1.4 1.0 1.3 1.4 1.2 1.2 1.0 1.1 1.5 Stores for ships and aircraft 0.6 1.4 3.0 4.3 9.5 12.3 16.7 23.5 27.2 ort Servicesn.i.e. -1.3 -3.7 -3.6 -4.7 -5.7 -10.2 -9.6 -9.9 -110
auel -4.2 11.0 12.0 19.5 34.1 51.9 78.3 306.4 139.9
Foreigi visitors' eopntuxe in Cyrpus 5.4 20.7 23.8 33.3 50.1 71.7 102.4 138.7 174.8 Cypriotvisitors' experditure abmad -5.0 -4.? -5.3 -5.8 -6.9 -8.4 -10.4 -15.0 -15.4 Cypriot students' ependiture abroad -4.6 -5.0 -6.5 -8.0 -9.1 -11.4 -13.7 -17.3 -19.5 tnwesten2t ie -0.1 -2.4 -4.0 -. 8 -3.7 -5.8 -8.9 -10.0 -23.4
Foreign coanies and persons -1.7 -2.6 --2.4 -2.2 -2.2 -2.6 -2.6 -2.8 -3.2 Interestreeived 5.3 5.1 4.8 6.1 8.6 12.3 19.1 28.4 24.8 Interest paymes -3.7 -4.9 -6.4 -7.7 -10.1 -15.5 -25.4 -35.6 -45.0 oher Goods Services and tIcome 31.6 37.8 49.3 51.7 61.9 74.4 86.6 95.6 112.4
Official 29.2 29.4 34.6 32.8 39.5 46.1 54.6 57.9 66.9 Foreign military exenditure 27.8 28.2 32.8 30.9 37.5 43.2 51.4 54.0 62.6 Other 1.4 1.2 1.8 1.9 2.0 2.9 3.2 3.9 4.3 Private 2.4 8.4 14.7 18.9 22.4 28.3 32.0 37.7 45.5 Workers remittawes 4.0 7.0 14.2 16.6 17.7 22.2 24.0 26.4 28.5 Eamirgsby non-esidents -2.0 -1.1 -0.8 -1.2 -1.9 -2.3 -2.2 -2.7 -2.5 Other 0.4 2.5 1.3 3.5 6.6 8.4 10.2 14.0 19.5
Transferpwynmits 26.6 24.9 29.7 25.2 25.4 25.9 26.5 33.9 39.0
Private remittarmes 5.6 5.4 5.8 8.4 9.0 11.5 11.5 11.8 12.2 Official aid received 21.0 19.5 23.9 16.8 16.4 14.4 15.0 22.1 26.8
Net 44.8 56.4 68.0 74.8 99.1 125.4 164.5 208.1 251.2
Soure: Central Bank,Bulletin, June 1983 - 44 -
Table 4.1: SIITC CF DEBT1976-1484 (US$ Millims)
A-mal Growt 1976 1978 1979 1980 1981 1982 1983 1984 e/ Rate (Pewent) 1976-84 lorg-Term 104.6 266.3 334.2 448.5 530.3 657.8 708.4 806.0 29.1
Total Piblic arin Publicly Grwanteed Debt 94.4 241.3 299.6 398.0 486.9 608.9 649.7 739.0 29.3
Public Debt 94.4 236.4 291.4 384.9 470.0 594.9 634.3 728.0 29.1
Publicly Giranteed Private Debt - 4.9 8.2 13.1 16.9 14.0 15.4 11.0 -
Private 10.2 25.0 34.6 50.5 43.4 48.9 58.7 67.0 26.4
Short-Term Debt e/ 43.0 75.0 98.7 108.0 113.3 110.5 197.5 215.0 22.4
Official ShorL-Tema ------14.4 15.0 -
Privat Short-Term 43.0 75.0 98.7 108.0 113.3 110.5 183.1 200.0 21.3
Total External Debt e/ 147.6 341.3 432.9 556.5 643.6 768.3 905.9 1,021.0 27.4
Mo Item:
Use of DF Credit V 50.0 42.9 50.0 39.0 25.2 13.6 5.7 4.2 e/ Estimated.
I/ NIt inlied in the external debt data abs e. - 45 - Table 4.2; THEMr EXIA EfBTOF CES (Tiflicm of Cyprus Pouns)
NbrResidet GoSs Net Gmss Debt Net Debt GmsS Deposits in Not External External Nominal Relative to Relatiwe to End of: Reseres 1/ Cypriot Bats Reseves 21 Debt Debt 3/ CM 1 GNP(Peccent) OW (POent)
1976 126.9 20.4 106.5 60.8 -45.7 343.2 17.7 -13.3
1978 139.1 29.3 109.8 119.9 10.1 519.0 23.1 L9
1979 143.6 39.0 104.6 149.6 45.0 64*2.7 23.3 7.0
1i80 157.0 50.9 106.1 203.0 96.9 775.7 26.2 12.5
1981 213.5 72.9 140.6 278.4 137.8 887.7 31.4 15.5
L982 288.8 99.2 189.6 375.1 185.5 1030.0 36.4 18.0
1983 32&7 135.1 193.6 504.0 310.4 1128.9 44.6 27.5
1984 e 200.0 642.0 442.0 1240.0 52.0 36.0
I/ External assets of the public sector and bankidg system. Soum: Central Bank of Cypus Bulletinu
2/ Gross res s mirs mnoreuidet nowbaik deoits (uDstly demminated in U.S. dollars and British ponds) in Cypriot banks. An alternative would bae bem to inlule these external claim on Cypriot banks in gmrs etrl debt, but tbh effect on net extemal debt wd a hae been the sa. Note that gold reseres aze valued at aquisition cost. Vluirg gold at muket prices would add abot ;125 udinin to ed-1984 reserves.
3/ Gross extenul debt mis the external assets of the public sector and bad=r systea. External assets of the Cypriot private km-bmksector are exclmIed on the grounis that these clams are ot accessible by the Cypriot Gownmet.
4/ NominalOW for the year as a wbole. e/ Estimtedi - 46 - Table 4.3: LONG-TERMPUBLIC AND PUBLICLY GUARANTEEDDEBT BY BORROWER End 1983 (US$ Mill.,ons)
(Percent of Total)
Government of Cyprus 445.4 (68.6)
Electrical Authority of Cyprus 82.4 (12.7)
Cyprus Telecommunications Authority 40.9 (6.3)
Cyprus Development Bank 17.6 (2.7)
Cyprus Airways 1/ 15.9 1/ (2.4) 1/
Cyprus Development Corporation 15.0 (2.3)
Other Public 17.1 (2.6)
Government-Guaranteed Private Loans 15.4 (2.4)
TOTAL 649.7 (100.0)
1/ Cyprus Airways subsequently purchased two Airbusses and will purchase another in 1985. After this last purchase, its total externsl debt will have increased to about $150 million. - 47 -
Table 4.4: LONG-TERM PRIVATE DEBT OF CYPRUS BY SECTOR 1/
End-1985 (USS Millions)
(Percent of Total)
Tourism 2/ 16.4 (22.1)
Banking 9.2 (12.4)
Industry 1/ 34.5 (46.6)
Shipping 0.5 (0.7)
Trade 13.5 (18.2)
TOTAL 74.1 (100.0)
1/ Includes $15.4 million guaranteed by the Government of Cyprus.
2/ The bulk of the undisbursed commitments at the end of 1983 were in the tourism sector. The share of the tourism sector is estimated to have risen to as high as 30 percent by the end of 1984 and is projected to rise further in 1985. - 48 - Table 4.5: LONG-TERM EXTERNAL DEBT BY SOURCE
End 1983 (U.S. $ Millions)
Percent of Public and Publicly Percent of Guaranteed Total Long- Debt Term Debt
Public and Publicly Guaranteed Debt
Official Creditors 258.7 (39.8) (36.5) Multilateral 214.7 (33.0) (30.3) IBRD 74.4 (11.5) (10.5) Council of Europe 128.8 (19.8) (18.2) European Investment Bank 11.3 (1.8) (1.6) Bilateral 44.1 (6.8) (6.2)
Private Creditors 391.0 (60.2) (55.2) Suppliers 22.0 (3.4) (3.1) Financial Institutions 369.0 (56.8) (52.1)
Total Public and Publicly Guaranteed Debt 649.7 (100.0) (91.7)
Percent of Long-Term Private Non- Percent of Guaranteed Total Long- Debt Term Debt
Private Non-Guaranteed Debt
Official Creditors 0.2 (0.3) (*) Multilateral 0.2 (0.3) (*) Bilateral -() (_)
Private Creditors 58.5 (99.7) (8.3)
Suppliers 11.3 (19.3) (1.6) Financial Institutions 47.2 (80.4) (6.7)
Total Private Non-Guaranteed 58.7 (100.0) (8.3)
Total Long-Term External Debt 708.4 (100.0)
(*) Less than 5/100 of a percent. - 49 -
Table 4.6: CYPRUS LONG-TERH EXTERNAL DEBT BY CURRENCY -- END 1983 (Cyprus Pounds, Millions)
Public Private Total Guvernment Enterprises Sector 1/ CE Million X
Loans From IBRD 18.2 19.3 - 37.5 9.4 Other Multicurrency Loans 144.3 25.3 10.8 180.4 45.3
Loans Repayable In: U.S.Dollars - 24.0 14.5 38.5 9.7 £ Sterling 0.1 9.6 7.2 16.9 4.2 D Mark 46.9 10.4 0.8 58.1 14.6 Swiss Franc 11.6 0.4 1.2 13.2 3.3 Japanese Yen 20.8 1.1 - 21.9 5.5 Belgian Franc 1.0 - 0.8 1.8 0.5 E.C.U. 0.4 - 0.4 0.1 S.D.R. 3.2 - 3.2 0.8 Cypriot £ 0.1 0.5 - 0.6 0.2 Kuwaiti Dinar 2.8 - 0.5 3.3 0.8 French Franc 2.3 7.5 - 9.8 2.5 Austrian Schilling - 6.1 - 6.1 1.5 Dutch Guilder - 0.8 - 0.8 0.2 Italian Lira 0.1 - - 0.1 * SwedishKroner - - 0.2 0.2 0.1 Lebanese Pound - - 0.3 0.3 0.1 Other Currencies - - 0.8 0.8 0.2 Unspecified - - 4.1 4.1 1.0
TOTAL 251.8 105.0 41.2 398.0 100.0
Source: Central Bank of Cyprus
Note: Because of small differences between the Central Bank of Cyprus and World Bank data on Cypriot external debt, the total differs slightly, in dollars, from the total in Table 3.1.
1/ Including publicly-guaranteedloans. - 50 -
Table 4.7; MN SERVICE (US$ million)
1978 1980 1981 1982 1983 1984 e/ 19851/
Prircipal Rqayims 17.5 40.7 40.4 58.2 75.6 73.7 121.0
Public/Publicly Qiznteed Debt 12.4 30.2 34.7 49.7 67.2 66.5 110.0
Official Creditors 6.0 12.7 14.7 20.1 32.9 multilateml 2.8 6.6 8.7 16.0 29.9 IND 2.7 3.9 6.6 7.5 8.1 Bilteal 3.2 6.1 6.0 4.1 3.0
Private Creditors 6.4 17.5 19.9 29.6 34.3 Suppliers 2.3 2.2 2.0 4.9 5.3 Fizaixial Markets 4.1 15.3 17.9 24.7 29.0
Private Frateed 5.1 10.5 5.7 8.5 8.1 7.2 lLO
Interest Payments oa LT Debt 14.2 32.6 47.3 54.1 67.4 69.3 77.0
LT Public/Publicly Gamranteed 13.4 29.3 41.5 49.8 62.9 63.7 70.0
Official Creditors 7.9 11.0 11.0 11.0 16.5 Hutilateral 6.9 9.0 9.0 9.2 14.6 IBM 3.4 4.4 4.7 4.2 5.2 Bilateral 1.0 2.0 2.0 L8 L9
Private Creditors 5.5 18.3 30.4 38.8 46.4 Suppliers 0.5 1.3 1.4 L7 2.0 Finc:ia1 Markets 5.0 17.0 29.0 37.1 44.4
LT Privte: HozVranteed 0.8 3.3 5.8 4.3 4.5 5.6 7.0
Total Debt Service O LT Debt 31.7 73.3 8.7 112.3 143.0 143.0 198.0
Interest on Sboht-Teun Debt el 6.4 14.3 17.2 14.5 15.5 21.4 22.0
Total Interest Pay'mts e/ 20.6 46.9 64.5 68.6 82.9 90.7 99.0
Total Debt Service e/ 38.1 87.6 104.9 268 158.5 164.4 22X.0 e/ Estimated pf Projection - 51 -
ab3le*A: AVERAGEINTEREST COST OF THE EXTERNALDEBT OF CYPRUS3/ (Percent)
1979 1980 1981 1982 1983 195U/
Total Debt 9.3 9.5 10.7 9.7 9.9 9.4
LT Public and Publicly Guaranteed Debt 2/ 9.2 8.4 9.4 9.1 10.0 9.2
LT Private Debt V' 4.4 7.8 12.4 9.3 8.4 8.9
Short-Term Debt / 11.3 13.8 15.5 13.0 10.0 10.4
Real Interest Rate or Total Debt 5/ -5.3 -3.9 19.0 16.6 16.1 15.0
Memo Iten:
Six-ionthDollar LIBOR i/ lZ.ZZ .0 16.6 13.5 9.8 11.2
Three-Nonth SDR LIBORi/ Z/ 10.3 12.8 14.5 12.0 9.0 9.3
Rate of Increase of Cypriot Retail 13L4 14.0 -7.0 -5.9 -S.3 -4.9 Price Index In Dollar Terms A/
V/ Calculated as total interest payments divided by the average level of debt outstanding during the year. The latter is estimated as the average of the level of outstanding at the end of the year and the end of the previous year.
2/ Source: World Sank Debt Reporting System.
2/ Source: Central Sank of Cyprus. 3/ World Bank staff estimates.
5/ Calculated as the nominal rate deflated by the rate of change of the Cypriot retail price index In dollar terms. fi LIDOR: London Interbank Offer Rate. e.g., the Euromarket rate.
V/ Constructedusing current SOR weights for the years 1979-1981. Source for 1982-1984 data: IF ZES.
A/ Constructed using IHF IES lines rh and 64 for Cyprus. - 52 - Table 4.9: MATURITY STRUCTURE OF THE EXTERNAL DEBT OF CYPRUS End-1983 1/
(US$ Millions)
(Percent of Debt Government- Outstanding at Guaranteed 2/ Private 3/ Total End of 1983)
Short-Term 14.4 183.1 197.5 (21.8)
LT Debt Maturing in: 1984 66.5 12.4 78.9 (8.7) 1985 105.2 15.8 121.0 (13.4) 1986 91.1 16.0 107.1 (11.8) 1987 100.4 12.5 113.0 (12.5) 1984-1987 363.2 56.8 420.0 (46.4)
Short-Term Plus 1984-1987 377.6 239.9 617.5 (68.2) Maturities
1/ Refers only to debt contracted before the end of 1983.
2/ Source: World Bank Debtor Reporting System.
3/ Source: Central Bank of Cyprus - 53 -
Table 5.1; Consolidated Goverminnt Budget (I1 millions of Cyprus pounds)
1976 1977 1978 1979 1980 1981 1982 1983
Ibvemie 63.3 82.4 99.7 123.5 161.2 191.3 232.9 275.6
Qirient reveuie 63.2 82.3 99.5 123.3 161.1 191.2 232.7 275.4 Tax 46.3 63.2 78.9 101.0 129.3 159.2 189.0 223.5 Incce and property 16.5 18.8 22.1 29.0 42.5 45.0 52.0 65.0 SDC. Sec. bntributions 5.2 6.5 9.6 11.6 16.9 38.3 43.0 48.4 Indirect 24.6 37.9 47.2 60.4 69.9 75.9 94.0 110.1 NInt,c 16.9 19.2 20.6 22.3 31.8 32.0 43.7 51.9
Capital reveue 0.1 0.1 0.2 0.2 0.1 0.1 0.2 0.2 fzpemiture 101.6 114.0 135.2 171.0 220.3 258.6 297.8 357.3
Onrent exrenditure 82.4 91.8 106.6 130.2 176.0 213.4 254.0 306.1 Wages and salaries 30.6 36.0 42.9 58.1 72.6 90.4 107.1 123.2 Goads and services 17.5 18.2 20.8 23.5 25.2 34.0 35.4 39.9 Subsidies 5.0 5.0 3.0 7.0 15.3 27.1 23.3 30.1 Interest payments 4.1 6.4 7.4 10.9 14.3 20.4 28.9 39.6 Transfers 22.2 26.4 25.9 27.5 35.8 44.6 55.0 68.2 Unallocable 2.9 -0.2 6.6 3.2 12.8 -3.1 4.3 5.1
Capital expenditure 19.2 22.2 28.6 40.8 44.3 45.2 43.8 51.2 Investment 16.1 16.9 20.9 29.6 34.3 36.1 33.8 41.8 Transfers 3.1 5.3 7.7 11.2 10.0 9.1 10.0 9.4
Net lendizg 3.2 3.9 7.2 5.7 5.7 4.5 13.3 9.4
TItal expenditure & net lending 101.8 118.1 135.4 176.7 226.0 263.1 311.1 366.7
Overall balacce -385 -35.7 -35.7 -53.2 -64.8 -71.8 -78.2 -91.9
Smu=ve: ministry of finane - 54 - Table 5.2: C8NIRALG0ENME 01ENARYAND IVELOFMENrBGEr (In willions of oyprusposdxs)
1976 1977 1978 1979 1980 1981 1982 1983
Total Revemue 48.4 66.1 81.1 102.1 125.0 133.1 167.3 200.0
Direct taxes 9.7 14.1 19.2 22.5 29.3 33.8 41.1 52.8 Itcexi taxes 6.8 9.7 14.5 20.5 ]2T3i T7iO NX WIg Conpanies 2.0 2.2 3.2 6.6 6.6 8.8 9.5 12.2 Individuals 4.8 7.5 11.3 13.9 20.3 21.6 28.1 36.6 Property taxes 0.7 1.3 1.7 2.0 2.4 3.4 3.5 4.0
Indirect taxes 24.7 35.8 44.5 60.3 67.1 72.5 90.1 105.2 Taxes on goods & services 11.2 13.7 21 1 35.1 36.9 37.4 45.4 352 Selective excises 9.5 11.9 18.8 28.5 29.7 30.1 36.3 42.4 Licenses & other receipts 1.7 1.8 2.3 6.6 7.2 7.3 9.1 10.0 Import duties 11.5 19.7 20.4 22.2 26.6 30.9 39.3 45.5 Other 2.0 2.4 3.0 3.0 3.6 4.2 5.4 7.3
Nbmtaxrexenue 1/ 14.0 16.2 17.7 19.3 28.6 26.8 36.1 42.0 Of which: CentralBank profits 4.0 4.0 4.0 3.4 7.5 6.1 12.4 15.1
Total expenditure £ net lendivg 71.1 84.1 97.3 126.6 151.8 192.3 234.0 260.6 Ojrrest expenditure 63.1 74.5 82.2 107.0 131.5 168.9 204.3 222.7 Wes andsalaries 30.1 34.8 42.0 56.3 70.3 87.7 103.9 119.7 Goodsand services 14.6 15.4 19.9 22.7 24.3 33.1 34.4 38 Interest peysents 4.1 6.4 7.4 10.8 14.2 20.3 28.7 39.5 Subsidies 5.0 5.0 3.0 7.0 10.0 15.0 20.0 5.8 Transfers 8.3 12.9 9.9 10.2 12.7 12.8 17.3 18.9
cupital expenliture 8.0 8.3 12.2 18.9 20.4 23.4 26.8 36.0 Fixed capital fozmation 7.2 7.3 11.0 17.2 17.1 20.9 22.8 32.5 Tranrfers 0.8 1.0 1.2 1.7 3.3 2.5 4.0 3.5
Netlending = 1.3 2.9 0.7 -0.1 - 2.9 1.9
Overall balamwe -22.7 -18.0 -16.2 -24.5 -26.8 -59.2 -66.7 -60.6
/ Iwcludescapital reverue
Soutes: Ministry of Finauxe- - 55 -
Table 5.3: AMt] C(1PULIC LQZWFUNW (IT willions of Oypru. pawxds)
1976 1977 1978 1979 1980 1981 1982 1983
Reveue 0.7 0.7 0.8 0.9 0.9 1.3 1.1 1.2
Inteest Received 0.7 0.7 0.8 0.9 0.9 1.3 1.1 1.2
&Enditure 0.1 0.1 0.1 0.2 0.1 0.1 0.1 0.2
Net lexIiz 2.9 1.7 2.6 1.4 2.0 1.6 3.2 4.9
SDumce:ministry of Finmre - 56 - Table5.4: ACODUNISOF SOCICL DNUM FM (In millions of (jypus pouzxs)
1976 1977 1978 1979 1980 1981 1982 1983
Reveme 5.7 7.1 10.7 12.6 18.2 40.8 47.7 55.4 sployers' and selfped coctributiDns 3.5 4.4 6.5 7.9 11.0 22.9 24.8 26.4 Employees' contributions 1.7 2.2 3.2 3.7 5.9 15.4 18.2 22.0 Interest andOther Iacoe 0.5 0.6 0.8 1.1 1.3 2.5 4.7 7.0
Ecpenditure 8.1 10.0 12.8 15.2 20.7 29.4 35.3 47.0 Adiunistrative expenses 0.4 0.5 0.6 0.6 0.7 0.9 1.2 1.3 Bmefit "yments 7.7 9.5 12.2 14.6 20.0 28.5 34.1 45.7
Net Iendirg - 0.3 0.4 0.4 0.2 - -0.1
Smince: Ministry of Finance - 57 - Table 5.5. ACCOUNTSOF RELIEF FUNL FOR DISPLACEDPERSONS (In millions of Cyprus pounds)
1976 1977 1978 19/9 1980 1981 1982 1983
Receipts 11.2 19.3 10.1 12.5 20.8 17.3 20.8 19.4
Taxes on income & profits 6.8 4.5 2.9 2.9 9.5 7.6 6.4 7.4 Temporary import levy - 2.1 2.7 3.6 6.4 6.9 8.2 9.5 Other indirect taxes 0.6 0.4 0.1 0.1 0.1 0.1 0.2 0.2 Non tax receipts 0.5 1.0 0.9 0.8 0.4 0.7 0.6 0.7 Grants 3.3 11.3 3.5 5.1 4.4 2.0 5.4 1.6
Expenditures 19.8 21.6 22.6 26.5 29.5 27.8 23.8 22.1
Current expenditure 8.6 7.7 5.4 4.6 5.6 6.0 6.6 7.0 Administrationexpenses 3.5 3.7 1.9 1.9 2.5 2.7 3.0 3.2 Transfers 5.1 4.0 3.5 2.7 3.1 3.3 3.6 3.8
Capital expenditure 11.2 13.9 17.2 21.9 23 9 21.8 17.2 15.1 Fixed capital formation 8.9 9.6 10.7 12.4 17.2 15.2 11.0 9.2 Transfers 2.3 4.3 6.5 9.5 6.7 6.6 6.2 5.9
Set-lending 0.3 0.9 1.4 1.8 2.4 2.8 4.5 4.3
Source; Ministry of Finance. - 58 - Table 6.1: ONNETARYSURVEY (End of period, in millions of Cyprus pounds)
1975 1976 1977 1978 1979 1980 1981 1982 1983
Assets of the banking system:
Foreign assets (net) 69.1 86.8 88.1 92.4 84.7 90.1 129.1 181.8 193.3
Domestic credit 195.4 228.2 269.1 323.9 406.3 481.0 562.9 637.0 724.2 Claims on government (net) 16.2 32.1 20.7 31.0 49.6 76.2 100.6 94.3 114.7 Claims on private sector 179.1 196.1 248.4 292.9 356.7 404.7 462.4 542.7 609.5
TOTALASSETS 264.5 315.0 357.2 416.3 491.0 571.1 692.0 818.8 917.5
Liabiliciesof the banking system:
Money 62.1 80.1 85.9 100.8 129.5 153.3 188.3 218.5 248.5
Quasi-money 167.6 195.1 230.1 262.5 304.0 347.9 413.2 491.0 542.7
Sub-Total(broad money) 229.7 275.2 316.0 363.3 433.5 501.2 601.5 709.5 791.2
Other items (net) 34.8 39.8 41.2 52.9 57.5 69.9 90.6 109.3 126.3
TOTAL LIABILITIES 264.5 315.0 357.2 416.3 491.0 571.7 692.0 818.8 917.5
Source: IMF, InternationalFinancial Statistics, May 1982, October 1983 - 59 -
Table 6.2: INTEREST RATES IN CYPRUS Tin percent per year)
Rate
Central Bank discount rate I/ 6.0
Central Bank loans to government agencies 6.0
Government Treasury Bills 5.5
One-oonth's deposits with Central Bank 5.0
Current accounts with Central Bank 4.5
Minimum reserve ratio account 5.0 - 5.5
Usuka
Demand deposits 2/
For balances up to $1,000 No Interest For balances over $1,000 2.0
Savings deposi ts. 4.0
Time deposits
Up to seven days' notice or period
For balances up to $5,000 4.5 For balances over S5,000 4.75
over seven days' notice or period up to three
months' notice or period
For balances up to $5,000 5.0 For balances over $5,000 5.25
Over three months' but less than twelve months' notice or period
For balances up to $5,000 5.5 For balances over $5,000 5.75
Twelve months' notice or over
For balanwes up to $5,000 6.0 For balances over $5,000 up to $10,000 6.25
For balances over $10,000 up to $20,000 6.5
For balances over $20,000 up to $50,000 6.75
For balances over $50,000 7.0
Advances and lo ns Up to 9.0
1/ Applicable to discount of Treasury Bills.
2/ Rates on minimu monthly balance.
Source: Central Bank of Cyprus - 60 - Table 7.1: PRICE INDICES
1977 1978 1979 1980 1981 1982 1983
Retail prices July 1976-June 1977 - 100 1981-100
All items 104.1 111.8 122.4 139.0 153.9 109.4 113.9
Food and drink 105.5 111.4 119.0 136.3 151.9 112.2 114.8
Rents and housing 102.4 111.0 122.8 135.9 145.9 106.8 110.4
Fuel and light 102.5 109.3 124.3 170.6 223.8 107.4 122.3
Clothing and footwear 104.9 113.9 125.3 136.5 147.0 112.1 119.4
Household equipment 105.3 114.6 124.5 136.4 145.4 109.4 111.6
Household operations 101.7 104.2 109.9 125.4 140.4 107.9 109.5
Miscellaneous 103.4 111.8 124.7 143.5 160.9 107.6 113.1
Wholesale prices (1972 = 100) As of October
Primary local production for domestic consumption 160.9 165.5 174.5 195.2 223.8 236.2 250.3
Local industrial production for domestic consumption 188.3 192.8 227.6 271.6 302.6 325.1 332.2
Domestic goods 177.5 182.0 206.7 241.5 271.5 290.1 299.9
Imported goods 180.6 186.2 207.0 230.5 246.8 252.9 260.0
All Items 178.5 183.3 206.8 238.1 263.9 278.6 287.6
Source: Central Bank, Bulletin, June 1983. - 61 -
Table 7.2: PRICE INDEX OF DOMESTIC EXPORTS (1977 - 100)
1977 1978 1979 1980 1981 1982 1983
Food 100.0 100.2 108.5 111.7 131.5 149.8 128.1
Citrus 100.0 120.0 135.7 139.6 151.7 155.2 164.6 Grapes 100.0 105.1 121.1 142.9 149.1 133.1 175.4 Raisins 100.0 99.2 124.2 138.5 149.9 139.4 139.4 Potatoes 100.0 86.5 96.1 82.3 106.7 158.2 182.9 Carrots 100.0 78.7 99.2 122.1 165.5 76.2 79.6 Carobs 100.0 124.2 131.1 177.7 140.0 159.2 210.7
Beverages and tobacco 100.0 105.4 111.4 117.4 125.4 122.5 128.3
Wine 100.0 105.0 105.4 105.0 109.2 107.5 116.3 Leaf tobacco 100.0 92.3 95.0 101.5 117.3 107.4 133.0
Crude materials 100.0 95.8 112.4 133.2 167.0 166.1 157.9
Asbestos crude washed or ground 100.0 102.5 107.3 122.3 168.1 169.2 192.3 Iron pyrites 100.0 75.5 116.1 257.3 226.8 302.4 275.4 Copreousconcentrates 100.0 93.3 135.4 213.9 - - -
Total domestic exports, excluding minerals 100.0 100.4 106.8 115.4 141.0 137.8 135.6
ALL DOMESTIC EXPORTS 100.0 100.1 107.1 116.3 142.4 139.2 137.0
Source: Central Bank, Bulletin, June 1983 - 62 - Table 7.3: IMPORT PRICE INDEX (1977 - 100)
1977 1978 1979 1980 1981 1982 1983
Food 100.0 91.6 105.5 119.8 145.4 138.8 140.9
Beverages and tobacco 100.0 100.7 108.1 115.2 135.9 152.4 185.2
Inedible crude materials, 100.0 94.3 103.3 125.4 143.3 121.8 125.6 except fuels
Mineral fuels, lubricants and 100.0 90.6 124.5 192.7 259.5 265.1 262.9 related materials
Animal and vegetable oils and 100.0 99.2 114.3 108.4 110.4 106.0 129.3 fats
Chemicals 100.0 97.1 107.5 123.2 126.7 132.7 120.4
Manufactured goods classified 100.0 97.8 110.1 123.5 126.8 136.0 138.0 by materials
Machinery and transportation 100.0 110.0 110.8 109.6 118.8 118.1 126.8 equipment
Miscellaneous manufactured 100.0 117.4 111.8 116.9 126.6 123.0 119.4 articles
ALL IMPORTS 100.0 100.5 111.3 127.3 144.1 144.2 146.6
Source: Central Bank, Bulletin, June 1983 - 63 - Table 8.1: ARRIVALSOF TOURISTS AND EXCURSIONISTS AND ESTIMATEDINCOME FROM TOURISM
1976 1977 1978 1979 1980 1981 1982 1983
Visitors of Over One Day 180,206 178,185 216,679 297,013 353,375 429,313 548,180 620,726 Holiday 165,164 141,686 171,114 247,152 322,679 404,139 492,219 575,435 Business 14,319 19,727 24,928 25,930 23,083 20,399 24,231 24,720
Other 723 16,772 20,607 23,931 7,613 4,775 31,730 20,571
Excursionist 34,516 74,503 72,247 60,968 145,829 68,745 58,697 94,771 (one-day stopover)
TOTAL 214,722 252,688 288,926 357,981 499i204 498,058 606,877 715,497
Estimated income from tourism ( m) 20.7 23.8 33.3 50.1 70.5 102.4 140.0 174.8
Source: Central Bank, Bulletin,June 1983; Annual Report 1982 - 64 - Table 8.2: VISIIMRSVY aUMIR CF RESIDEC
1975 1976 1977 1978 1979 1980 1981 1982 1983
U.K. 17,474 34,501 55,565 74.593 106,287 111,359 129,051 134,767 168,000
Greece 7,506 15,826 22,376 25,518 33,649 33,586 27,850 34,679 32,633
Sweden 623 1,961 3,127 6,516 11,629 30,597 67,778 85,369 54,434
GesWay (F.R.) 1,108 4,278 7,708 10,573 19,838 28,565 31,070 35,391 37,016
Lebaixx 4,312 77,887 26,307 25,866 26,295 22,704 31,381 52,483 78,696
Austria 443 508 800 1,020 3,389 8,688 10,265 11,667 11,776
Finland 175 384 1,189 3,770 6,994 7,039 7,573 na Ua
Switzerland 407 736 1,118 2,605 4,066 8,149 10,691 12,328 17,722
Syria 469 2,275 2,139 3,198 4,498 7,213 7,273 9,802 11,042
Egypt 878 3,209 5,790 1,939 2,370 6,738 6,931 8,351 13,230
U.S.A. 2,090 4,967 7,477 7,049 7,909 7,322 8,076 10,817 14,023
France 776 2,501 2,899 3,512 4,628 5,113 6,038 9,719 10,303
Other 10,823 31,173 41,690 50,520 65,461 76,302 85,336 142,807 171,811
TCTAL 47,084 18,206 178,185 216,679 297,013 353,375 429,313 548,180 620,726
Source Department of Statistics and Reseanh, Ministry of Finare, Economic Report, 1981; Oentral Bank, Bulletin, Jume 1983. r4tzz -W~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~3W2 ME E AD I N r E ~R SR AE ~ N A ~ ~ ~ ~ ~~~~~~~~~DR
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