Cyprus expects to see a marginally positive rate of economic growth next year, but its debt and deficit levels are set to increase.

The Mediterranean state does not plan to introduce new taxes next year but it will be a "crucial" year with challenges,  Finance Minister Charilaos Stavrakis said in a budget address to parliament.

"Cypriot citizens and businesses will continue to have the benefit of the lowest taxes in Europe," the minister said last week.

The island republic, a member of the eurozone for two years, lagged its peers in showing signs of stress from global economic turmoil, tipping into recession in the second quarter of 2009 on a slump in construction and a decline in tourism.

"Adverse external economic conditions combined with structural problems of the Cypriot economy point to a preliminary forecast of a marginally positive growth rate (in 2010)," Stavrakis said.

The European Union expects Cyprus' economy to contract by 0.7% in 2009 before returning to slight growth of 0.1% next year.

The country's central bank has issued revised 2009 forecasts for an economic contraction of 1.3% from a June forecast of 0.4% growth. It said it expected a return to growth of 0.3% in 2010.

"Developments in the Cypriot economy are particularly difficult and require very delicate handling," Central Bank Governor Athanasios Orphanides, a Governing Council member of the European Central Bank, told a panel discussion.

The fact that Cyprus is expected to show a widening deficit in 2010 and 2011 while returning to moderate growth suggested deeper-rooted problems in the economy, Orphanides said. The EU expects the island to show a 3.5% deficit in 2009, rising to 5.7% in 2010 and 5.9% in 2011.

According to Stavrakis the deficit is expected to grow in 2010, but he offered no forecast. In January-October, it stood at 2.7% of gross domestic product and was set to significantly deteriorate in November and December, he said.

Next year's budget has a 2.2-billion-euro financing gap. Stavrakis said authorities would try to cut the cost of the state payroll, stop tax evasion, and revamp benefit schemes. The public debt was also set to rise next year from an estimated 54% of GDP in 2009.

Cyprus represents about 0.2% of the eurozone economy. Its budget does not cover the northern third of the divided island, which is a breakaway Turkish Cypriot state.

Parties in the centre-left governing coalition have a comfortable majority in the 56-member parliament. The budget, which provides for spending of 7.2 billion euros on revenue of 5.7 billion, is expected to be approved by Dec. 17.

Source: Reuters, Balkans.com Business News