The Economy

THE ECONOMY

INTRODUCTION

Cyprus has a record of successful economic performance, reflected in rapid growth, full employment and stability almost throughout the post-Independence period. The underdeveloped economy of 1960 has been transformed into a modern economy with dynamic services, industrial and agricultural sectors and advanced physical and social infrastructure. In terms of per capita income, currently estimated at $11.000,(1993) Cyprus is classified among upper middle income countries.These achievements appear all the more striking in view of the severe economic and social dislocation and the loss of resources caused by the Turkish invasion of 1974.

The success of Cyprus in the economic sphere is the combined result of the existence of a dynamic and flexible entrepreneurial community and of a well-educated labour force, the adoption of a market oriented economic system and the sound economic policies followed by the government.

Over the last decade the economy has increasingly become oriented towards Europe. The European Union, with which a Customs Union Agreement was put into effect in 1988, is now the largest trading partner of Cyprus. The application of Cyprus to become a full member of the Union in July 1990 is a clear indication of the European orientation of Cyprus and has led to the adoption of harmonization of economic and social institutions and policies with those of the European Union as a major policy objective.

HISTORICAL OVERVIEW

Developments Between 1960 and 1973

In 1960, the newly formed Government of Cyprus inherited an economy which exhibited most of the symptoms of underdevelopment. The productive base of the country was inadequate and economic activity was dependent upon unstable factors. Agriculture was the dominant sector in economic activity and accounted for 16% of GDP and 45% of gainful employment; manufacturing activity was essentially restricted to the processing of locally produced agricultural raw materials; tourism had not yet taken off; exports had the characteristic structure of underdeveloped countries, with primary commodities, such as minerals (53% of the total) and agricultural products (32%), dominating; unemployment was high, underemployment was widespread and mass emigration was taking place; financial capital was flowing out of the country, a clear indication of the existing uncertainty.

In view of the structural weaknesses of the economy, the Cyprus government adopted the basic principles of indicative planning, according to which private initiative is the basic motive force of the economy and the role of the state is to create the necessary physical and social infrastructure, create a stable and favourable economic environment, guide the private sector towards desired directions and administer social policy. The development strategy and the economic policies of the government were embodied in Five-Year Development Plans.

The years between Independence and the Turkish invasion are characterised by sustained growth, accompanied by conditions of economic stability. GDP grew at an average annual rate of about 7% in real terms and that of per capita national income by almost 10% per annum. Agricultural production doubled, while industrial production and exports of goods and services more than trebled. Tourism became the largest single foreign exchange earner. Unemployment was very low and conditions of full employment were the characteristic of the early 70's. Earnings of employees more than doubled in real terms. Investment in infrastructural projects like dams, roads, ports, airports, communications, etc., reached a very satisfactory level. The rate of inflation was contained to 2,4% on average per annum and the current account of the Balance of Payments was mostly kept in surplus. As a consequence, accumulated foreign debt by 1973 was low, at a level equivalent to 7,5% of GDP.

The Turkish Invasion and its Aftermath

The favourable results of 13 years of planned development were utterly disrupted by the Turkish invasion of 1974, when the Turkish army occupied about a third of the territory of the country and a third of the population became refugees. The displacement of such a large number of people and the seizure of their property and the country's assets inevitably shattered the economy. Moreover, the area under occupation was the most productive and developed part of Cyprus, since it produced the bulk of citrus, the main export item at that time, was rich in mineral and quarrying materials, attracted a heavy concentration of tourist facilities (66% of the total) and included the only deep water port of Famagusta, which handled more than 80% of general cargo. The closure of Nicosia International Airport, now in the buffer zone, was an additional blow.

As a result of the economic dislocation, GDP dropped sharply and in 1975 it was 33% below the level of 1973 in real terms, despite the partial reactivation which took place in the meantime. The size of the economic catastrophe was reflected in the unemployment figure, which during the latter part of 1974 averaged 30% of the economically active population and led to conditions of poverty and increased dependence on the state, at a time when state revenues declined sharply. A small country, which even under normal circumstances was poor in natural resources was deprived of some of its most valuable ones. The dependence of the country on foreign sources for raw materials, consumer goods as well as financing increased. Shortages appeared in all sectors particularly in housing. A climate of political and economic uncertainty was created.

THE REACTIVATION EFFORT, 1976-81

Under the new circumstances of mass unemployment and loss of confidence, the Government adopted a dual approach. On the one hand, the first priority was the provision of relief assistance to the displaced and the needy to meet their basic subsistence needs. On the other hand, the long-term approach necessitated that Government policy arrest the economic slide and lay the foundations for economic recovery and the creation of employment opportunities. Both objectives depended on expansionary, fiscal and monetary policies, the promotion of labour intensive projects and the implementation of a large number of specific programmes and projects. Therefore, although the principles of indicative planning were not abandoned, initially Government intervention was of necessity greater. With reactivation, the role of the private sector was restored.

With well-coordinated and collective action, Cyprus was able to overcome the destabilising effects of the Turkish invasion and to attain a very high rate of economic growth. However, success had its price, since the increased dependence of the country on foreign sources was translated into a large and growing foreign debt and inflationary pressures.

The progress in the economic field is indicated by the impressive rate of real growth, which over the period 1976-81 averaged about 8,5% per annum. This emanated from the excellent performance of exports of goods and services which grew on average by 11% and 18% in constant terms, respectively. The leading sectors were manufacturing, tourism and construction.

Cyprus invested regularly more than 30% of GDP in an attempt to replace lost productive capacity and social and economic infrastructure, particularly in housing, as well as to expand capacity. As a result, a very large number of employment opportunities were created. Gainful employment grew on average by 6% per annum, achieving full employment by 1978: conditions which continued to prevail up to 1981. The unemployment rate in 1981 was 2,6% of the economically active population.

The impressive growth performance was based on a number of exogenous and endogenous factors. Exogenous factors, such as the booming Arab markets, the Lebanese crisis of 1975, favourable weather and high international market prices for some of the major Cyprus agricultural products provided the impetus that lifted the economy. An additional element was foreign aid, which helped bridge the financing gap.

Internally, the aggressive and expansionary fiscal and monetary policies, the acceptance by trade unions of a substantial cut in wage levels, the entrepreneurial ability, which exploited export opportunities that came along, the diligence, perseverance, self-sacrifice and hard work of the people formed the front which led the economy to the path of recovery. The willingness to undertake large investments was also a significant factor. Furthermore, the adoption of a labour intensive strategy and the policy to encourage the temporary employment of Cypriots abroad helped ease the unemployment problem.

However, the rapid recovery of the economy, in conjunction with rising inflation worldwide, led to overheating tendencies and substantial increases of domestic prices (11% in 1981). Moreover, the current account of the Balance of Payments exhibited large deficits, about 160 million or 7% of GDP in 1981. Both accelerating inflation and large deficits in the current account of the Balance of Payments, were clear signs of instability, which required positive action from the Government.

THE FOURTH EMERGENCY ECONOMIC ACTION PLAN, 1982-1986

The rapid recovery of the economy and the attainment of full employment conditions by the end of the '70s brought in surface stability problems and structural weaknesses which threatened further progress. In the context of the Fourth Emergency Plan, 1982-86, it was hence considered necessary to adopt a new strategy, attaching emphasis on capital rather than labour intensive projects and on the restructuring of the economy, while in parallel addressing the problems of external and internal instability, mainly by pursuing a more restrictive fiscal policy.

The basic objectives and targets of the Plan, regarding growth, employment and internal stability were attained. Moreover, the decline of oil prices in world markets, the relatively low real interest rates prevailing at that time and the partial recovery of demand in the industrialised countries, in conjunction with stabilisation measures introduced by the Government, helped to ameliorate, towards the end of the planning period, the problem of external instability and improving the Balance of Payments position of the country.

Despite the poor performance of domestic exports, the economy achieved an average real rate of growth of almost 6% per annum, much higher than the planned target of 4%, basically on the account of the extraordinary performance of tourism. The sectoral pattern of growth was substantially different than planned, as manufacturing output was much below target growth.

More specifically, the tertiary service sectors grew by 7,5% p.a., in real terms during the period 1982-86, compared to 4,6% set in the Plan. Tourism continued to be the dominant sector and its excellent performance had a positive impact on the level of activity in the rest of the services sectors. Manufacturing failed to provide the anticipated impetus to growth, because of problems in the export field, growing by 3,3% per annum, compared with the planned rate of 6,3%.

Gainful employment continued to rise rapidly, by 2,5% per annum - far above target - whilst productivity increased by more than 3%. Nevertheless, unemployment also increased and in 1986 it was 3,7%. Inflation was brought down from 11% in 1981 to 1,2% in 1986.

The progress achieved in the Balance of Payments and in the fiscal sphere was on average less favourable than expected and as a result foreign borrowing and service payments were higher than anticipated. Nevertheless the servicing of foreign debt was low by international standards, at 13% and it did not cause any apparent problems for the economy.

MAIN ECONOMIC DEVELOPMENTS DURING 1987-1988

Despite the reduction in tariffs, in line with the Customs Union Agreement with the E.U. which came into effect in 1988, the Cyprus economy improved further during 1987-88. Average annual real GDP growth exceeded 7,5%, on the strength of continuing fast increases in tourist arrivals and resurgence of industrial exports.

Services continued to constitute the main pillar to growth and recorded an overall real increase of 7% in 1987 and 9.5% in 1988, their contribution to GDP stabilised around 64%. Significant growth was registered in the secondary sectors as well. Manufacturing grew by 8% in real terms, in 1987 and 7% in 1988, on account of the recovery of exports to the Arab markets, the further penetration in European markets as well as the increased spending by tourists. The period 1987-88 turned to be exceptional for the agricultural sector which, benefiting from favourable weather conditions, recorded real growth rates of 3,5% in 1987 and 11% in 1988.

The rapid output led to the further creation of a large number of new employment opportunities and consequently, to a decrease of unemployment to 2,8% in 1988. Inflation pressures remained moderate. The retail price index climbed from the exceptionally low level of 1,2% in 1986 to 2,8% in 1987 and 3,4% in 1988, reflecting mainly international trends.

The current account of the Balance of Payments improved considerably during 1987, exhibiting a surplus of 44 million or 2,5% of GDP, for the first time since the Turkish invasion. The improved performance during 1987 is attributed to the resurgence of exports of goods (especially industrial), the continuing increases in exports of services (mainly tourism), as well as the containment of the rate of increase of imports to a level lower than that of total demand. In 1988, imports rose faster, by more than 20%, a development which almost wiped out the current account surplus achieved in 1987.

A slight improvement was also observed in the operations of the public sector. The fiscal deficit remained stable in absolute figures at 64 million, while it decreased as percentage of GDP from 4% in 1986 to 3% in 1988.

THE FIVE-YEAR DEVELOPMENT PLAN 1989-93
The Five-Year Development Plan 1989-93 incorporate new ideas regarding the procedure of its elaboration and evaluation and constitutes an effort to adapt development planning to today's conditions.

The main innovation was the provision for a systematic follow-up of the Plan on an annual basis and for a revision of its various programmes, measures and objectives when considered necessary. The provision for an annual evaluation of the Plan secured flexibility and adaptability to the rapidly changing conditions and consequently to an efficient materialisation of its provisions.

Another important procedure introduced in this new Plan was the extensive participation of the private sector throughout all the stages of the planning process, including the evaluation of its implementation. This active participation was considered necessary, since the successful implementation of the Plan significantly depended upon the response of the private sector. In general the Development Plan 1989-93 aimed at achieving high growth, balanced sectorally and regionally, under conditions of economic stability in the price level and in the Balance of Payments. Preconditions for the realization of these objectives were the technological upgrading, the improvement of competitiveness in all sectors of the economy and success in the effort to further penetrate the renumerative European market.

Progress in the Implementation of the Development Plan, 1989-93

The major quantitative developmental targets set in the Development Plan 1989-93 have been achieved to a satisfactory extent notwithstanding the adverse conditions faced during the first half of 1991 and the only marginal growth in economic activity in 1993. However significant deviations were observed regarding the structure and stability of the economy.

Demand - Domestic Production (1)

The average rate of growth of the G.D.P. during the period 1989-93 reached 5% in real terms, in conformity with the target set in the Plan. However, towards the end of 1992 and during 1993 the economic growth slowed down reflecting the structural problems and the gradual erosion of the competitiveness of the exporting sectors and particularly of manufacturing and tourism.

The Development Plan provided that the main pillar of development would have been the foreign demand for goods and particularly for services offered by Cyprus, taking into account the small size of the domestic market. In actual fact, however, the contribution of foreign demand to development lagged behind expectations. The exports of goods and services expanded by 5,5% in real terms during the period 1989-93, compared to the Plan target of 6,3%. This was attributed to the adverse conditions, faced in export markets due to the prolonged period of recession in European countries, and also to the problem of competitiveness mainly regarding the exports of industrial and agricultural products. A deviation from the target was also observed in tourism, due to the decrease of the per capita expenditure of foreign visitors in real terms, a development which does not conform with the provisions of the Plan for enriching the tourism product and attracting higher income tourists. In contrast, re-exports and exports of services, apart from those linked with tourism, surpassed the target of the Plan, reflecting the enhanced role of Cyprus as a regional transit trade centre and the progress achieved with regard to the attraction of offshore companies.

Domestic demand growth ranged at the levels forecast in the Plan and has been the main pillar of development. Private consumption expenditure expanded at an average annual real rate of about 5% during the period 1989-93, in line with the target of the Plan, despite the downward trend which was observed particularly in consumption, of certain durable consumer goods during 1993. The expansion of employment and incomes at comparatively high rates, despite the adverse conditions in the first half of 1991 and during 1993, the expansionary impetus which came from the transactions of the public sector, the reduction of the real interest rates and in general the comfortable financing conditions, as well as the expectations which prevailed at times regarding the imposition of new indirect taxes have been the major factors which fuelled consumption.

Public consumption expanded at an average annual rate of about 5% in real terms during the 1989-93 period, slightly higher than the target of 4,5%, set in the Plan. This development was mainly attributed to the significant increase of employment in the public sector, 2,5% compared to 1% annually, which was the target of the Plan. During 1993, corrective measures were introduced which included, inter alia, a freeze in new recruitments within the context of the policy of the new Government to improve public finances.

Investment activity was maintained at satisfactory levels 25% of the G.D.P. in 1993, and compares favourably with the levels of investment activity in the countries of the European Union, which is at 20,5% of the G.D.P. on average. However, at the same time, the structural weaknesses of investment have become more pronounced given that the share of construction in total investment increased in contrast to the provisions of the Plan.

More specifically, gross fixed capital formation expanded by 3,3% in real terms during the period 1989-93, a rate only marginally lower than the targeted rate of 3,4%. Particularly intense activity was observed in the construction of dwellings, Including second homes and tourist accommodation. The public sector played a significant role in the investment activity in construction, through the promotion of various development projects with emphasis on the expansion of road network.

Investment in machinery exhibited continuous fluctuations and expanded at a relatively low average annual rate of about 3,5% in real terms during the 1989-93 period, indicating that the progress in the field of restructuring and technological upgrading did not reach the anticipated levels. It should be noted that the Development Plan, recognising the significance of investment in machinery for the expansion of production capacity and the improvement of the competitiveness of the economy, set an ambitious target for an average annual increase of 5,6% in real terms.

Domestic savings rose in relative terms during the 1989-90 period, fell during the 1991-92 period and rose again in 1993. In total, domestic savings amounted to 23,5% of the G.D.P. on average, during 1989-1993 compared to the target of 24%. The level of savings was not sufficient to cover the financing needs of the economy, consequently the financing resource gap reached 2,5% of the G.D.P. on average during the period 1989-93, and exceeded the level anticipated in the Plan 0,5%.

Major deviations from the provisions of the Plan were also observed in the production sphere. The value added in the sector of agriculture expanded by 2% annually in real terms during the period 1989-93, while the Plan anticipated an average annual increase of 2,5%. The deviation from the target was mainly attributed to the prolonged period of drought during 1989-91. The value added of the manufacturing sector expanded marginally by 0,5% in real terms, which is much lower than the target, 5%, reflecting the adverse conditions encountered in the key export markets of Cyprus and the structural problems faced by the sector.

Growth in the services sectors linked with tourism was also lower than anticipated by the Plan, on account of the adverse conditions encountered in 1991 and the problems experienced in 1993. The value added of the sector of hotels and restaurants increased at a relatively low average annual rate of 6,5% in real terms during the period 1989-93, compared to 7,9% anticipated by the Plan, while the transport sector registered an increase of 2,5% during the same period, as against the targeted 4,5%.

Despite the problems faced at times by the sectors linked with tourism, the tertiary sectors of services as a whole displayed a satisfactory increase of 6,5% the leading sectors were communication (11%, target 9,5%), professional services (11%, target 7,5%), bank services (11%, target 5,5%), and social services (9,5% target 7%). In general, these sectors proved to be more dynamic than anticipated by the Plan. This development was attributed to the high income elasticity of demand of most services and, in terms of the supply conditions, with the high educational standard of the labour force, and the favourable geographic location of Cyprus.

Apart from certain services sectors, the progress during 1989-93 was also based on the intense activity of the construction sector which experienced an average annual increase of its value added of the order of 3,5% in real terms, despite the problems observed in 1993, compared to 1% which was the target of the Plan.

The Labour Market

Developments in the labour market during 1989-93 exhibited fluctuations. The first four years were characterized by an intensive demand for labour and severe shortages in all sectors of the economy. In contrast, during 1993 the demand for labour decreased as a result of the slow-down of economic activity and unemployment rose steeply.

The gainfully employed population increased from 237,5 thousand persons in 1988 to 265,0 thousand in 1993 or at an average annual rate of 2,2%, marginally higher than the target set in the Plan, 1,9%. The overshooting of the provision of the Plan was due to the rapid development of the economy, despite the fluctuations exhibited at times, and particularly of the services sectors, which are labour intensive. The unemployment rate was contained to 2,3% of the gainfully employed population on average during 1989-93, a percentage lower than envisaged in the Plan, 2,7%, while the participation rate rose from the already high, by international standards rate of 47,5% in 1988 to 48,5% in 1993 (1), as provided for by the Plan. The increase in the participation rate concerned almost exclusively women.

The shortages in the labour market, during the first years of the implementation of the Plan led to radical changes of Government policy regarding the employment of foreign workers and to granting of permits for the employment of foreign workers on a large scale, in contrast with the provisions of the Plan which aimed at a balance between demand and indigenous sources of labour. As a result the number of the gainfully employed foreign workers reached 5% in 1993, as against 1,5% of the gainfully employed population in 1988.

Productivity per employed person rose at a satisfactory rate of around 3% on average during the period 1989-93, in line with the target of the Plan, surpassing the average annual rate of the improvement of productivity in the countries of the EU, which fluctuated around 2%. As a result, the gap between Cyprus and the countries of the European Union narrowed. This encouraging development mainly reflects the gradual progress made in the sector of training during the last years. Nevertheless, the gap between Cyprus and the European Union remains quite large, since the level of productivity in Cyprus amounts to 45-50% of the average level in the European Union members countries.

Earnings expanded at an average annual rate of 9,5% in real terms during the period 1989- 93, compared to 8,5% which was the target of the Plan, on account of the acute shortage of labour which affected the results of the Collective Bargaining Agreements and the salary increments granted within the context of the C.O.L.A. system. As a consequence, the unit labour costs expanded at a rate of 6,5%, which is also higher than the target of 5%, and higher than the corresponding increases in the countries of the European Union, leading to a fall of the profitability of business units and a deterioration of the competitiveness of the Cyprus economy.

Most countries of the European Union have lower participation rates than Cyprus, while only Denmark has a substantially higher participation rate.

The Rate of Inflation

The rate of inflation reached 5% during the period of the 1989-93 Development Plan, surpassing the Plan provision which was set at 4,3%. Factors which contributed to the increase of inflation to levels higher than anticipated were, on the demand side, the high fiscal deficits and the great overshooting of the target regarding the money supply, and on the supply side, the adverse weather conditions which affected the production of the domestically produced agricultural goods, as well as the labour shortages which led to high increases of unit labour costs.

The Balance of Payments

The external transactions of the country deviated considerably from the targets set in the 1989-93 Development Plan. The current account balance exhibited an average deficit of the order of 1,5 million Cyprus Pounds compared to an average surplus of 22,5 million Cyprus Pounds which is the target for the five years of the Plan.

Total exports of goods expanded by an average annual rate of 5% compared to the target of 9%. This outcome was mainly due to unsatisfactory developments in domestic exports, as a result both of the low performance of agricultural exports, due mainly to problems in basic agricultural products, such as citrus fruits and grapes, and also to industrial exports which fell by an average of 4% compared to the target set for an average increase of 9%. The significantly poor result vis-a-vis the target in the exports of industrial products reflects both the structural problems of the manufacturing sector which had accumulated and led to a reduction of competitiveness of industrial exports during this period, and also the problems created by the international recession which prevailed during the last years of the Plan.

It is worth noting that a significant diversification took place regarding the geographical distribution of domestic exports, with Europe absorbing approximately 60% in 1993 as against 48% in 1988.

The exports of services increased at an average annual rate of 11,5%, very close to the target of 11,3%. Earnings from tourism increased at a lower average annual rate of 12%, compared to the target of 13,4%, due to the fall by 8% of tourist arrivals in 1993. Exports of all other services as a whole expanded at an average annual rate of 10,5%, overshooting the target of 8%. This reflects the very good performance in services, such as off-shore companies, consultancy, professional, shipping and other services.

Imports of goods and services increased at an average annual rate of 8%, lower than the target of 9,7% set for the five-year period. This is due, to a large extent, to the fact that imports during 1993 exhibited a significant deceleration on account of the low economic activity.

Developments in the current account balance, the surplus in the capital account and the higher inflow of non-residents deposits led to a rise of foreign exchange reserves to very satisfactory levels. Import coverage by foreign exchange reserves reached on average nearly 11,5 months, compared to 9 months which was the target set in the Plan, and more than covered the country's foreign debt by 29%.

Foreign debt as a percentage of the G.D.P. moved in the direction set by the Plan. It dropped from 33,2% in 1988 to about 26% in 1993, while the debt service ratio was confined to 9,5% on average compared to the anticipated 11%.

Public Finances

The fiscal deficit exhibited an upward trend for almost all the years of the Plan, the only exception being 1992 during which there was a great impetus in public revenue due to the implementation of V.A.T. and the tax reforms which took place, and also to the very high rate of economic growth. During 1993, the last year of the Plan, the fiscal deficit as a percentage of G.D.P. rose to 3% (2), a level which diverges from the Plan provision of 1,5%. Nevertheless, it is worth noting that the fiscal deficit on average was 73,5 million Cyprus Pounds during the 1989-93 period, a level which marginally surpasses the provision made by the Plan of 70,4 million Cyprus Pounds and which represents approximately 3% of the G.D.P.

Both total public revenue and total public expenditure increased, during the 1989-93 five year period, at higher average annual rates than those anticipated by the Plan, 13% and 12,5%, compared to 11,5% and 9,5% respectively.

The main reasons for the deviation from the targets, in terms of the public revenue, were the satisfactory yield of direct taxation, the higher receipts from Social Insurance Funds contributions, and also the greater non-tax receipts.

Developments regarding wages and salaries, interest payments, purchases of goods and services, as well as transfer payments played a decisive role in determining the higher realised average annual rate of growth of total public expenditure, 12,5%, compared to the Plan's target, 9,5/%.

The Government's payroll expansion, 10,5% compared to the target of 8,9%, was due to the general increases paid on basic salaries during 1990 and 1991 (4% and 1,5%, target: 0,4% annually), the readjustment of salaries due to C.O.L.A. (4,8%, target: 4,3% annually) and also the higher than originally planned rate of recruitment (2,5%, target: 1%) to cover mainly the needs in the sectors of health, education and defence.

As regards interest payments, the higher rate of growth, 12%, compared to the Plan, 10,6%, was attributed to the higher financing needs of the Government during the last years.

Government investment expenditure, in spite of realising a higher average annual rate of growth than that anticipated by the Plan, 11% compared to 6,8% respectively, in absolute magnitudes reached the level of approximately 4ll,5 million Cyprus Pounds during the five year period 1989-93, a level very close to that anticipated by the Plan 417,4 million Cyprus Pounds. However some partial differentiations occurred in various Budgets. More specifically, the Development Budget and the Social Insurance Funds were lower than those targeted (305,5 million Cyprus Pounds target: 345 million Cyprus Pounds, and 0 million Cyprus Pounds, target: 2,4 million Cyprus Pounds respectively), while investments from the Ordinary Budget and the Cyprus Relief Fund for Displaced and Affected Persons exceeded the target (40 million Cyprus Pounds target: 17,2 million Cyprus Pounds and 66 million Cyprus Pounds target: 52,8 million Cyprus Pounds respectively). The lower investment activities of the Development Budget are basically due to the delay in the realization of some large projects, the most significant ones being the construction work of the Southern Conveyor and also the construction of the new passenger terminal building at Larnaca airport. Furthermore, no expenditure was made during 1989-93 regarding the Computerization Plan of the Social Insurance Fund, despite the fact that this had already begun in mid 1992, since the relevant agreement states that the full amount of nearly all the investment needed is to be paid as soon as the project is completed, and this is not expected to happen before the middle of 1994 (target 2,4 million Cyprus Pounds). The higher Ordinary Budget's investment activity is basically due to the satisfaction of larger needs by the Police Force in machinery and equipment, as well as to the expenditure on computerization for the technological upgrading of the public sector. The Cyprus Relief Fund's for Displaced and Affected Persons investment expenditure is higher compared to the Plan's provisions due to the undertaking of more infrastructural works and the initiation of the scheme for the replacement or repair of unsuitable houses in governmental and self-help housing estates. Moreover, the above Fund also includes investment expenditure realised from the assistance provided by the United Nations High Commission for the Refugees. This expenditure was higher than the relevant Plan's provision, for the first three years, due to the incurring of additional expenditure for new projects regarding both town planning and the agricultural sector.

The financing of the fiscal deficit during the 1989-93 was within the target framework which was set out in order to limit dependence on foreign borrowing. The only divergence from the targets occurred in 1991 when additional foreign borrowing was undertaken due both to the high fiscal deficit and also the almost full coverage of the legal margins of domestic borrowing credit limits.

Monetary - Credit

During the five-year period, monetary developments diverged from the targets set in the 1989-93 Five Year Development Plan. Total money supply expanded during this period at an average annual rate of 15,5%, compared to the target of 9,5% which was set on the basis of a similar forecast regarding the G.D.P. The divergence from the target was mainly due to the larger amount of bank credit to the private sector at a rate of 16,5%, compared to the Plan's target of 9,5%, and to some extent also to the fiscal deficit. These developments contributed to the creation of conditions of overheating in the economy, during the first four years of the Plan, which is reflected in the expansion of imports and the aggravation of inflationary pressures.

The Cooperative Credit Institutions also contributed to the creation of conditions of overheating; their credit increased at a rate of 19,5% during the 1989-93 period, increasing their share in the total cumulative credit of the economy in 1993 to 33% from 31% in 1988.

Conclusions - Prospech

The Cyprus economy is expected to face a more favourable environment during 1994, in comparison to 1993, mainly due to the anticipated further recovery in the E.U. member countries and particularly in Britain. The sectors interlinked with tourism are expected to be the main beneficiaries. A partial rebound of economic activity is also expected in the manufacturing sector, however, the prevailing structural problems are likely to prevent a full exploitation of the improvement of the external environment.

Bearing the above in mind, G.D.P. is projected to attain a respectable growth of the order of 3-3,5%, while full employment conditions will be maintained with the unemployment rate remaining in the region of 2,5-3%. Underlying inflation, (excluding the effect from the increase of the V.A.T. rate and of other indirect taxes), is expected to exhibit a small increase from the relatively low level of 3-3,5% in 1993 to 4% in 1994, which corresponds to the medium term trend of the Cyprus economy. The current account is expected to remain in surplus, albeit lower than in 1993, leading to a further build up of foreign exchange reserves and a decrease of foreign debt and of the debt service ratio. Despite the fact that prospects for 1994 appear to be somewhat more favourable compared to 1993, nevertheless full recovery of the Cyprus economy will involve deep cuts and the cooperation of all social partners.