Cyprus Economy May Shrink More Than Forecast, Finance Chief Says

Cyprus’s economy, the third smallest in the euro area, may contract 1.5 percent this year, compared to an estimate of 0.5 percent due to budget-cutting efforts as it negotiates an international bailout, Finance Minister Vassos Shiarly said.

The finance chief told reporters in Nicosia today he aims to cut the fiscal shortfall to 3.5 percent of gross domestic product from a forecast 4.5 percent.

The Cypriot finance minster said that the government will need no additional financing should the fiscal deficit remain at 3.5 percent of GDP this year and added that next year’s budget gap will widen compared to the 0.5 percent of GDP initial forecast. In January to July, the central government’s fiscal deficit on a cash basis was 3.4 percent.

Shiarly said that talks with the European Commission, the European Central Bank and International Monetary Fund are continuing. “Talks are in a very advanced stage and I believe that at the next visit of the troika to Cyprus we will be in position to agree the first draft of the rescue memorandum,” he said.

On June 25, Cyprus, which assumed the EU’s rotating presidency in July, became the fifth of the euro area’s 17 member states to seek a rescue.

Troika officials told Cypriot lawmakers on July 27 that the country’s public finances “are in worse shape than we expected,” signaling that the bailout may exceed the 10 billion euros staffers first estimated. The new estimate is in the range of 12 billion ($15 billion) to 16 billion euros, a European official said last month on condition of anonymity.

Russian Loan

Shiarly said that Cyprus’s second bilateral loan request from Russia, from which it last year signed a 2.5 billion euros loan agreement, is not an obstacle in the negotiations with the troika.

The finance minister said that the island, which has been shut out of markets since May last year, will face no problem meeting its financial obligations for at least the next two months. “According to our planning, 380 million euros will also be settled in September without any problem,” after Cyprus refinanced 450 million euros in maturing debt in August, the finance minister said.

To contact the reporter on this story: Stelios Orphanides in Nicosia at sorphanides@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net