COMMISSION STAFF WORKING DOCUMENT Analysis by the Commission services of the budgetary situation in Cyprus in response to the Council Recommendation of 13 July 2010 with a view to bringing an end to the situation of excessive deficit
Date: 2012-01-11
Institutions: European Commission
Subjects: Cyprus, budget deficit, budget policy, stability pact

EUROPEAN COMMISSION 

Brussels, 11.1.2012 
SEC(2012) 49 final 

COMMISSION STAFF WORKING DOCUMENT 

Analysis by the Commission services of the budgetary situation in Cyprus in response to 
the Council Recommendation of 13 July 2010 with a view to bringing an end to the 
situation of excessive deficit 

Accompanying the document 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 

Assessment of budgetary implementation in the context of the ongoing Excessive Deficit 
Procedures after the Commission services' 2011 Autumn Forecast 

{COM(2012) 4 final} 
{SEC(2012) 50 final} 
{SEC(2012) 51 final} 
{SEC(2012) 52 final} 
{SEC(2012) 53 final} 

 
 
 
 
  
 
COMMISSION STAFF WORKING DOCUMENT 

Analysis by the Commission services of the budgetary situation in Cyprus in response to 
the Council Recommendation of 13 July 2010 with a view to bringing an end to the 
situation of excessive deficit 

Accompanying the document 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 

Assessment of budgetary implementation in the context of the ongoing Excessive Deficit 
Procedures after the Commission services' 2011 Autumn Forecast 

1. 

INTRODUCTION 

The  global  economic  crisis  and  counter-cyclical  policy  action  to  attenuate  its  impact  on  the 
Cypriot economy (in line with European Economy Recovery Plan, EERP), along with a shift 
in  aggregate  demand  towards  less  tax-rich  components,  led  to  a  swing  of  Cyprus'  general 
government balance from a surplus of 0.9% of GDP in 2008 to a deficit of 6.1% of GDP in 
2009. In parallel, the general government gross debt, which stood at 58.0% in 2009, embarked 
on  a  steep  upward  path  with  the  prospect  of  exceeding  the  60%  of  GDP  reference  value  in 
subsequent  years.  Against  this  background,  the  Council  decided  on  13  July  2010  that  an 
excessive  deficit  existed  and  addressed  recommendations  to  Cyprus  in  accordance  with 
Article 126(7)  of  the Treaty with a view to bringing an end to  the situation of an excessive 
government  deficit  by  2012.1  In  its  recommendations,  the  Council  established  in  line  with 
Article 3(4) of Regulation (EC) 1467/97 a deadline of 13 January 2011 for effective action to 
be taken. 

Specifically, the Council recommended Cyprus to bring the general government deficit below 
3% of GDP by 2012 in a credible and sustainable manner by taking action in a medium-term 
framework. To this end, Cyprus was recommended to: (a) take necessary measures to reduce 
the  2010  deficit  to  at  most  6%  of  GDP  and  define  an  expenditure-driven  consolidation 
strategy, in order to bring the deficit below the reference value by 2012; (b) ensure an average 
annual fiscal effort of at least 1½% of GDP in 2011-12, also in order to contribute to bringing 
the government gross debt ratio back on a declining path that approaches the reference value 
at  a  satisfactory  pace  by  restoring  an  adequate  level  of  the  primary  surplus;  and  (c)  specify 
and  rigorously  implement  the  measures  that  are  necessary  to  achieve  the  correction  of  the 
excessive deficit by 2012, cyclical conditions permitting, and accelerate the reduction of the 
deficit if economic or budgetary conditions turn out better than expected at the time.  

To  limit  risks  to  the  adjustment,  the  Council  requested  Cyprus  to  adopt  a  binding  medium-
term  budgetary  framework  and  to  better  monitor  budget  execution  throughout  the  year.  In 
addition, Cyprus was recommended to improve the long-term sustainability of public finances 
via control of pension and health care spending and to seize any opportunity beyond the fiscal 

1 

All EDP-related documents for Cyprus can be found at the following website: 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/cyprus_en.htm  

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effort,  including  from  better  economic  conditions,  to  control  the  negative  evolution  of  the 
gross debt ratio.  

This paper reviews the progress made by Cyprus towards a timely and sustainable correction 
of  the  excessive  deficit.  In  particular,  it  examines  the  budgetary  developments  since  the 
Commission  communication  to  the  Council  on  action  taken  as  of  27  January  2011.  The 
assessment takes into account all decisions publically announced after the cut-off date for the 
2011  Autumn  Forecast,  including  the  Budget  Law  for  2012  adopted  by  Parliament  on  16 
December 2011.  

2. 

ECONOMIC DEVELOPMENTS AND OUTLOOK 

Economic activity recovered in 2010 with real GDP growth of 1.1%. While the recovery was 
relatively modest, the outturn was considerably better than expected at the time of the Council 
recommendations of 13 July 2010 (when real GDP was expected to contract in 2010 by 0.4% 
according to the Commission services’ 2010 Spring Forecast, the latest available at the time). 
Despite an exceptionally good tourist season in 2011, the recovery suffered a setback from the 
grave  accident  in  July  2011  that  destroyed  the  country’s  largest  electricity  power  plant 
accounting  for  half  of  the  island's  generating  capacity.  A  worsening  external  economic 
environment and weakening financial and fiscal conditions compounded the damaging effect. 
As a consequence, the Commission services' 2011 Autumn Forecast revised GDP growth for 
2011  down  to  0.3%,  a  full  percentage  point  below  the  forecast  available  at  the  time  of  the 
Council recommendations (1.3%). 

Table 1: Comparison of macroeconomic developments and forecasts 

2010 

2011 

2012 

2013 

Outturn 

COM 
AF2011 

National 
projections

COM 
AF2011

National 
projections

COM 
AF2011 

National 
projections

1.1 

0.3 

0.5 

0.0 

0.2 

1.8 

2.0 

-1.2 

-0.8 

3.5 

-1.2 

0.0 

1.1 

0.5 

-0.1 

1.7 

0.1 

0.0 

-0.1 

1.1 

0.0 

0.6 

1.3 

0.0 

0.5 

1.7 

0.0 

1.7 

Real GDP  
(% change) 
Contributions to 
real GDP growth 
Final domestic 
demand 
Changes in 
inventories 
Net exports 

-1.0 

-0.3 

Employment  
(% change) 
GDP deflator  
(% change) 
Sources: Commission services' 2011 Autumn Forecast (COM AF 2011), National projections of the Ministry of 
Finance – November 2011 

-0.2 

-0.5 

3.0 

2.2 

2.0 

1.7 

3.1 

3.5 

2.7 

0.0 

0.4 

0.0 

Stagnation is projected to continue in 2012. The squeeze in disposable income, tighter lending 
conditions followed by commercial banks, and undermined consumer confidence will weigh 
on domestic demand, traditionally the main driver of growth, while the external environment 
will  provide  little  relief.  National  growth  assumptions  for  2012  underlying  the  budgetary 
plans  deviate  only  marginally  from  the  Commission  services'  2011  Autumn  Forecast, 
although they are somewhat more optimistic on export prospects.  

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For 2013, the Commission services project GDP growth of 1.8%, on account of a recovery of 
domestic demand and, to a lesser extent, a higher contribution from net exports.  

3. 

BUDGETARY SITUATION AND PROJECTIONS FOR THE PERIOD 2011-2013 

3.1. 

Estimated outturn for 2011 

For 2011, the Budget Law2 targeted a deficit of 5.4% of GDP, on the basis of an estimated 
deficit for 2010 of just below 6% of GDP. On the revenue side, the budget did not incorporate 
any  consolidation  measures,  apart  from  the  phasing-out  of  tax  relief  that  was  part  of  earlier 
stimulus measures, and the lagged effect of higher excise duties on petroleum products since 
July 2010. Nevertheless, these were partly offset by a reduction in other current revenues. On 
the expenditure side, the budget provided for a reduction of operational expenditure, as well 
as restraint in public investment and employment. However, these elements were fully offset 
by a rise in the public wage bill, interest payments and in social outlays.  

With  a  view  to  the  July  2010  Council  recommendation,  the  Parliament  adopted,  in  tandem 
with the 2011 Budget Law, a fiscal consolidation package designed to cut the fiscal deficit to 
4.5%  of  GDP  in  2011.  In  addition,  the  coalition  parties  at  that  time  had  agreed  on  an 
additional  set  of  measures,  both  revenue  supporting  and  expenditure  containing,  to  be 
submitted to the Parliament for approval in February 2011, with an estimated deficit reduction 
of 0.6% of GDP in 2011. 

The  Commission  services'  2010  Autumn  Forecast3,  on  the  basis  of  the  2011  draft  budget 
available at the time, had projected a deficit of 5.7% of GDP for 2011. That forecast did not 
incorporate  the  additional  consolidation  measures  agreed  by  the  coalition  parties  but  not 
adopted by the government and the Parliament by the data cut-off date. The forecast implied 
an improvement in the structural balance (the cyclically-adjusted balance net of one-off and 
other temporary measures) by ¾% of GDP in 2011. The adoption of the aforementioned fiscal 
consolidation packages, taken at face value, would have improved both the headline and the 
structural balance by 1.6% of GDP. As a result, the Commission concluded in January 2011 
that  Cyprus  had  ensured  a  fiscal  effort  of  at  least  1½%  of  GDP  in  2011  and  had  taken 
effective action with a view to putting an end to the situation of excessive deficit by 2012.  

However, the Commission noted that the bulk of the fiscal consolidation measures adopted by 
Cyprus had been on the revenue side despite the Council recommendation for an expenditure-
driven  consolidation  strategy.  The  Commission  also  pointed  out  that  there  were  risks  to  the 
achievement  of  the  deficit  targets,  mainly  stemming  from  the  standard  practice  of  adopting 
supplementary budgets during the course of the year. Slippages in social transfer spending to 
alleviate  the  impact  of  indirect  tax  rises  and  the  impact  of  wage  indexation  (COLA)  on  the 
public wage bill, in case of a higher-than-expected increase in inflation, were also considered 
to  pose  considerable  risks.  Moreover,  the  Commission  saw  implementation  risks  for 
announced,  but  not  yet  adopted  consolidation  measures,  due  to  political  pressure  from 
affected parties.  

2 
3 

The 2011 Budget Law was adopted by the Parliament on 16 December 2010. 
The Commission services’ 2010 Autumn Forecast was published on 29 November 2010. The data cut-
off date was 15 November 2010. 

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The 2011 update of the Stability Programme (SP) presented a planned deficit of 4.0% of GDP 
for 2011, on the basis of a lower-than-expected deficit outturn of 5.3% of GDP in 2010. The 
latter  was  owed  to  successful  expenditure  containment,  partly  offset  by  a  shortfall  in 
government  revenues.  It  also  benefited  from  a  one-off  receipt  from  an  interest-swap 
agreement and a higher-than-usual transfer of Central Bank profit. 

In contrast to the target of the 2011 update of the SP, the Commission services' 2011 Autumn 
Forecast estimates the budget deficit to have widened to 6.7% of GDP in 2011 from 5.3% in 
the previous year. The deviation from the national target of 4.0% of GDP is explained mainly 
by lower-than-expected revenues (2¼% of GDP) and also slightly higher expenditures (½% 
of  GDP).  The  revenue  shortfall  was  due  to:  (i)  a  slowdown  of  activity  and  non-negligible 
growth  composition  effects;  (ii)  reduced  corporate  profitability;  and  (iii)  the  disruption  of 
economic  activity  following  the  Vassilikos  power  plant  destruction.  At  the  same  time, 
expenditure  slippages  appear  to  be  related  to  (i)  rising  social  outlays  due  to  higher 
unemployment and redundancy payments, as well as to the electoral cycle and (ii) higher debt 
financing cost. 

In order to bring public finances on a consolidation path, the government adopted a series of 
fiscal "packages". The first one, adopted on 26 August 2011, is estimated to cut the deficit by 
about ½% of GDP p.a. in 2011-12. This package included two important structural measures: 
the enactment of contributions from public sector employees to their public pensions, and the 
inclusion  of  newcomers  in  public  sector  in  the  social  security  fund,  with  the  abolition  of 
occupational  pensions.  The  other  fiscal  packages,  adopted  later  in  2011,  impact  on  the  year 
2012 and thereafter. 

At the moment of the Commission services' 2011 Autumn Forecast, the structural deficit, as 
measured by the cyclically-adjusted balance net of one-offs, would rise to almost 6% of GDP 
in 2011, up from 5¾% of GDP in 2010. This clearly falls short of the average annual fiscal 
effort recommended by the Council of at least 1½% of GDP (Table 2). However, taking into 
account  the  additional  measures  adopted  since  the  publication  of  the  Commission  services' 
2011 Autumn Forecast, the average annual fiscal effort in 2011-2012 is estimated at 1¾% of 
GDP, which is higher than the 1½ of GDP average annual fiscal effort recommended in the 
Council Recommendation.  

Table 2: Comparison of fiscal efforts, change in the structural balance  
(% of GDP) based on the Commission services' 2011 Autumn Forecast 

Average annual change 
of structural balance 
2011 

Average annual change 
of structural balance  
2011-2012 

Additional 
average annual 
effort needed to 
correct the 
excessive deficit 

Average annual 
fiscal effort 
recommended by 
the Council 

Deadline for 
correction 

Uncorrected  Corrected  Uncorrected  Corrected 

-0.2 

-0.2 

0.7 

0.8 

1.9 

at least 1½% in 
2011-2012 

2012 

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Notes:  
- The additional average annual effort (i.e. on top of measures already included in the 2011 Autumn Forecast) is 
calculated for the period from 2011 until the deadline for correction (2012).  
-  The  uncorrected  average  annual  change  in  the  structural  balance  is  the  estimated  change  in  the  structural 
balance  from  the  Commission  services'  2011  Autumn  Forecast.  The  corrected  average  annual  change  in  the 
structural balance is the uncorrected average annual change in the structural balance plus a correction factor 
capturing  the  effect  of  revisions  to  potential  output  growth  between  the  projections  at  the  time  of  the  EDP 
recommendations  and  the  Commission  services’  2011  Autumn  Forecast  (see  European  Commission  (2004) 
Public  Finances  in  EMU  –  2004,  European  Economy,  Brussels;  and  European  Commission  (2006)  Public 
Finances in EMU – 2006, European Economy, Brussels). 
Source: Commission services. 

Deficit projections for 2012-13 

3.2. 
For 2012, the Budget Law4 targets a deficit of 2.8% of GDP, and for 2013 of 2.1% of GDP, 
on the basis of an estimated deficit of 6.5% of GDP, in 2011. The 2012 Budget Law includes 
four  successive  consolidation  packages.  The  first  consolidation  package,  adopted  on  26 
August  2011,  is  explained  above.  The  second  package  aims  at  an  additional  estimated 
consolidation impact of about 3% of GDP in 2012, of which 2.1 of GDP are measures on the 
expenditure  side  and  mostly  permanent  in  nature.  The  second  package  contains  a  better 
targeting of social transfers and a hike of the VAT rate from 15% to 17%, together accounting 
for consolidation of almost 2% of GDP. In December 2011, the government presented a third 
consolidation package with additional measures for a two-year period. The bulk of this third 
package is a freeze of emoluments, including pensions, in the broader public sector for two 
years,  implying  a  downward  level  shift  on  the  public  wage  bill.  Moreover,  it  includes  a 
temporary contribution on gross earnings of private sector employees and pensioners based on 
a scaled contribution rate (of up to 3.5%), and an increase in the tax rate on deemed dividend 
distribution  from  17%  to  20%.  Overall,  this  third  package  is  estimated  to  yield  additional 
consolidation  of  about  ¼%  of  GDP  in  2012  and  ¾%  of  GDP  in  2013.  Following  the 
Parliamentary  adoption  of  the  three  packages,  the  national  authorities  have  revised 
downwards  their  deficit  target  to  2.5%  of  GDP  in  2012  and  1.5%  in  2013.  The  target  of  a 
balanced budget in 2014 is reaffirmed.  

4 

The 2012 Budget Law was adopted by the Parliament on 16 December 2011. 

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Table 3: Comparison of budgetary developments and projections 

2010 
Outturn 

2011 

COM AF 2011 

National 
projections 

National 
projections 

2012 

COM AF 2011 

2013 
COM AF 2011 

%GDP  %GDP  %ch  %GDP  %ch  %GDP  %ch  %GDP  % ch  %GDP  % ch 
4.1 
41.5 

40.1 

40.1 

41.0 

40.7 

40.0 

5.3 

3.3 

2.7 

1.9 

15.5 

11.1 

9.0 
0.1 

41.0 

41.1 

5.3 

15.4 

10.8 

9.6 
0.1 

3.8 

1.5 

11.2 
47.1 

15.2 

10.7 

9.4 
0.1 

2.7 

0.1 

9.7 
76.3 

16.0 

11.4 

9.7 
0.1 

40.8 

3.3 

40.1 

2.0 

41.6 

42.0 

5.2 

63 

3.5 

41.7 

5.1 

5.8 

1.0 

39.6 

4.8 

6.8 

8.3 

4.9 
0.0 

5.3 

-2.8 

-6.2 

14.9 

11.2 

9.6 
0.1 

40.2 

0.3 

8.2 

4.8 
2.4 

2.7 

14.9 

11.2 

9.6 
0.1 

40.2 

40.6 

-0.1 

40.4 

4.5 

-10.0 

4.5 

46.4 

47.2 

6.0 

46.8 

5.2 

44.4 

-3.1 

45.1 

-1.2 

44.8 

4.1 

4.1 

4.1 
4.0 

4.1 

3.5 

4.1 

3.6 

-5.3 

-6.5 

-6.7 

-2.8 

-4.9 

-4.7 

Total current revenue 
of which 
Taxes on production and 
imports  
Current taxes on income 
and wealth 
Social contributions 
Capital revenue 
1. TOTAL 
GOVERNMENT 
REVENUES 
Total current 
expenditure 
Total capital 
expenditure 
2. TOTAL 
GOVERNMENT 
EXPENDITURE 
Net lending (+) or net 
borrowing (-) 

- primary balance 
General government 
debt 
Sources: Commission services' 2011 Autumn Forecast (COM AF 2011); National projections of the Ministry of Finance – November 2011 

68.4 

61.5 

66.0 

64.9 

67.0 

-3.1 

-4.0 

-4.3 

-2.2 

0.0 

-1.9 

70.9 

Finally,  on  the  day  of  budget  adoption,  the  Parliament  voted  additional  last-minute 
amendments, amounting to a cut of about 8% in selected government expenditure categories 
with an expected consolidation effect of about ½% of GDP in 2012. This reduced further the 
national  target  of  the  budget  deficit  to  around  2%  of  GDP,  thus  well  below  the  required 
correction by 2012, as set in the Council recommendation. 

Table 4: Main budgetary measures for 2012 

Revenue 

Expenditure 

• 

• 

• 

• 

• 

Increase  of  the  standard  VAT  rate  from  15%  to 
17%, from 1 March 2012 (0.7% of GDP). 
Introduction of a levy to all companies (0.1% of 
GDP). 
Increase  of  the  tax  rate  on  deemed  dividend 
distribution from 15% to 20% (0.1% of GDP). 
Increase  of  withholding  tax  on  interest  accrued 
on  deposits  of  local  banks  from  10%  to  15% 
(0.2% of GDP). 
Introduction of a temporary contribution on gross 
earnings  of  private  sector  employees  and 
pensioners for a period of two years from 0% to 
3.5% (0.1% of GDP). 

•  Revision  of  scales  used  for  applying  the  tax 
coefficients on immovable property, until the re-
evaluation  of  land  prices  from  1980’s  prices  to 
current prices. (0.1% of GDP). 

•  Targeting  of  all  social  schemes  based  mainly 
on  income  and  economic  criteria  (-1.1%  of 
GDP) 

• 

•  Last-minute budget amendments, amounting to 
a  cut  of  about  8%  in  selected  government 
expenditure  categories  and  the  withholding  of 
certain budget items worth about €100 million 
(-0.5% of GDP).  
Increased contribution of 3% on gross earnings 
of  broader  public  sector  employees  for  public 
pensions (-0.2% of GDP).  
Introduction  of  a  temporary  contribution  on 
gross  earnings  of  broader  public  sector 
employees  and  pensioners  for  a  period  of  two 
years from 0% to 3.5% (-0.1% of GDP). 
Increase  of  the  rate  of  contribution  in  the 
Widows and Orphans Fund by 1.25 p.p. to 2% 
on gross earnings (-0.1% of GDP).  

• 

• 

•  Reduction  of  the  number  of  personnel  in  the 
broader  public  sector  by  5,000  over  the  next 
five  years  (one  recruitment  for  every  four 
retirees) (-0.1% of GDP) 

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•  Reduction  of  overtime  pay  by  an  additional 

20% in 2012 (-0.1% of GDP). 

Other supporting measures are:  
•  Legislation to support the banking sector. 
•  Medium-Term Budgetary Framework for years 2012 -2014, setting expenditure ceilings per government 

department. 
Incentives for SMEs to boost growth and development 

• 

Note:  Budgetary  impact  as  reported  in  the  budget  and  additional  information  provided  by  the  national  authorities.  A 
positive sign implies that revenue / expenditure increases. 

The  Commission  services'  2011  Autumn  Forecast  projected  a  deficit  of  4.9%  of  GDP  for 
2012, on the basis of an estimated budget deficit outturn of 6.7% of GDP for 2011, based on a 
comparable real GDP growth forecast to the one of the Cypriot authorities (0.3% vs. 0.5%). 
However, the 2011 Autumn Forecast included only measures adopted by the cut-off date. In 
particular,  while  it  incorporated  the  first  consolidation  package,  it  did  not  take  into  account 
from  the  second  package  the  targeting  of  social  transfers  and  a  hike  of  the  VAT  rate  from 
15% to 17%. The third consolidation package was not envisaged at the time. Furthermore, the 
2011  Autumn  Forecast  incorporated  a  more  prudent  assessment  of  revenue  prospects, 
assuming a less tax-rich growth composition, and possible overruns on the expenditure side, 
especially of current primary expenditure in view of past trends on key items such as the wage 
bill and social transfers. As a result, the structural balance was expected to improve by about 
1½% of GDP in 2012.  

Based on the customary no-policy-change assumption, the 2013 deficit was projected at 4.7% 
of GDP. The slight improvement is due to savings on the public wage bill from cuts to public 
sector employment.  

After adoption by Parliament of the legal acts relating to the targeting of social transfers and 
the hike of the VAT rate from 15% to 17% (i.e. from the 'second' consolidation package), the 
Commission's assessment of the budgetary outlook changes as follows. Taken at face value, 
these two measures would have led to a revision of the government deficit from 4.9% of GDP 
to 3% of GDP in 2012 and from 4.7% of GDP to 2.7% of GDP in 2013. However, given the 
very present risks of negative repercussions to growth from (i) the size of consolidation and 
the  deterioration  of  the  external  environment  and  (ii)  notably  a  squeeze  of  both  public  and 
private  consumption,  the  impact  of  these  two  measures  is  estimated  to  be  less  than  what  is 
anticipated  by  the  national  authorities.  As  a  result,  the  Commission  services  budgetary 
projections,  taking  into  consideration  the  Budget  Law  with  only  the  two  consolidation 
packages, could have been revised downwards to 3.4% of GDP in 2012 and to 3.2% of GDP 
in 2013, at best. 

Taking into account, at face value, the consolidation measures included in the third package, 
the Commission services’ projection for 2012 and 2013 would have been revised downwards 
to  3.1%  of  GDP  and  2.2%  respectively.  Again  though,  there  are  downside  risks  to  the 
estimated impact of these measures, relating notably to the trend in public sector employment 
and the fight of tax evasion which put the full effectiveness of these measures into question. . 

The adopted last-minute budget amendments (fourth consolidation package) confirm Cyprus' 
efforts to comply with the Council's recommendation to correct the excessive deficit by 2012. 
This extra fiscal effort amounts to about ½% of GDP in 2012. Taking this into account, the 

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Commission  services'  deficit  projections  would  now  be  revised  down  to  2.7%  of  GDP  for 
2012  and  1.8%  of  GDP  for  2013  (Table  4).  Thus,  there  now  appears  to  be  a  safety  margin 
(0.3%)  to  hedge  against  the  aforementioned  implementation  risks.  In  conclusion,  the 
Commission considers that Cyprus has taken effective action to correct the excessive budget 
deficit in a timely and sustainable manner. 

Table 4: Comparison of budgetary projections, including impact of measures taken post 
Commission services' 2011 Autumn Forecast, general government balance (% of GDP) 

2010 
-5.3 

2011 
-6.7 
-6.5 
-6.7 

COM AF 2011  
National authorities 
COM Jan 2012 
Notes: COM AF 2011 – Commission services' 2011 Autumn Forecast; 
projections by the national authorities dated as of 19/12/2011; COM Jan 
2012 – Commission services' assessment taking into account the measures 
adopted by the Parliament in the 2012 Budget and consolidation packages of 
26/08/2011 and 14/12/2011.  

2012 
-4.9 
>-2.5 
-2.7 

2013 
-4.7 
>-1.0 
-1.8 

Sources: National authorities and Commission services 

3.3 

Debt Developments  

According  to  the  national  projections  as  depicted  in  the  budget  for  2012,  gross  general 
government  debt  is  projected  to  peak  at  67%  of  GDP  in  2012  from  an  estimated  66.0%  in 
2011, due to fiscal deterioration and subdued nominal GDP developments. Thereafter, it is set 
to move to a declining trend due to an increasing primary surplus.  

With weak growth and an increasing deficit, the Commission services' 2011 Autumn Forecast 
projected the debt-to-GDP ratio to remain on a rising trend and from 61.5% of GDP in 2010 
to  reach  almost  71%  by  2013.  Debt  projections  include  the  impact  of  the  guarantees  to  the 
EFSF, bilateral loans to Greece and the participation in the capital of the ESM as planned by 
the cut-off date of the forecast.  

Beyond  2013,  and  under  the  assumption  of  no  further  policy  changes  on  top  of  the 
Commission services' 2011 Autumn Forecast, the debt ratio would be on an increasing path 
and  reach  90%  of  GDP  by  2020.  By  contrast,  an  additional  annual  structural  fiscal 
consolidation  of  0.5  pp.  of  GDP  from  2014  onwards  until  the  Medium-Term  Budgetary 
Objective (MTO) – in the case of Cyprus a balanced budget in structural terms - is reached 
would limit the rise in the debt ratio, reaching 77% of GDP in 2020. The consolidation effort 
currently pursued by the Cypriot authorities aims at achieving a balance budget by 2014.  

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   EN