Cyprus will remain in recession in 2012, its finance minister said on Monday, with economic output retreating by up to 1.5 percent in the euro zone member state which recently sought a bailout. Vassos Shiarly, Cyprus's finance minister, also said lower growth was feeding into higher deficits, which by the latest projection was anticipated to hit 4.5 percent of gross domestic product in 2012.
At present, he said, Cyprus's 17 billion euro economy was expected to contract "between 1 and 1.5 percent" this year. Authorities had earlier projected growth flatlining. "This is not a situation which affects just Cyprus and it is unavoidably leading to an economic contraction," Shiarly told journalists, referring to a Europe-wide downturn. "It is important to bring order to our public finances for us to create conditions fostering growth." The projected fiscal shortfall is a massive jump from promises of a deficit of no more than 3 percent earlier in the year.
Shiarly said he expected about one point would be shaved off the deficit forecast with fiscal consolidation measures generating savings of between 150 and 200 million euros. But those measures have been delayed considerably either by the government wanting a consensus among the island's powerful labour unions on issues like pensions reform, or from a hostile opposition-controlled parliament rejecting government tax bills. Cyprus, the euro zone's third smallest economy, has struggled to keep its head above water since its exclusion from international capital markets a year ago and massive exposure of its two largest banks to Greece.
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