By George Psyllides
THE ECONOMY’S prospects are expected to continue to gradually improve though substantial risks still exist, mostly related to the banking sector whose prospects are crucial to recovery, the finance ministry said in a report to the House yesterday.
The report, entitled Economic Developments 2014 and Prospects 2015-2017, accompanied the state budget for 2015, which was submitted to parliament.
“According to the baseline scenario, in the medium term, the prospects of the Cypriot economy are expected to continue to gradually improve,” the report said. “… the economy is expected to start recovering in 2015 and thereafter.”
The government expects 2015 to record modest growth of around 0.4 per cent, 1.6 per cent in 2016 and 2.0 per cent the year after.
However, destabilising factors still loomed, mainly related with the prospects of the banking sector, which “are crucial for economic recovery.”
“Portfolio deleveraging, the level of non performing loans, and borrowing rates, constitute important indicators for the future course of the sector,” the report said.
Inflation is expected to reach 0.9 per cent in 2015, and will continue to climb to 1.3 per cent and 1.5 per cent in 2016 and 2017 respectively.
Unemployment is expected to peak at around 17 per cent in 2015 and fall to 15.8 per cent the following year and 14.4 per cent in 2017.
The state expects to collect some €5.9 billion in 2015 while expenditure will reach €6.6 billion.
The main sources of revenue are direct and indirect taxes, expected to reach around €4.9 billion in 2015 or 83 per cent of total revenues. The rest concerns sale of goods and services, as well as transfers, estimated at €999 million.
Revenues from direct taxation as a percentage of GDP will remain at the same levels as this year – 14 per cent – while indirect taxes will make up 17.1 per cent of GDP compared with 16.8 per cent in 2014.
On the expenditure side, payroll, pensions and bonuses, make up the biggest category though expected to be slightly less next year at €2.50 billion compared with 2.58 in 2014.
Personnel expenditure will see a 2.5 per cent reduction in 2015 due to a freeze in recruitment and the elimination of vacant positions. Pensions and retirement bonuses will also drop by 4.0 per cent due to a slowdown in early retirements compared with previous years.
There will be a rise in operational expenses however – 9.6 per cent or around €1.0 billion compared with €942 million in 2014.
The increase is mainly due to VAT returns, procurement of pharmaceuticals, and higher spending on lighting and heating.