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Cyprus The Government Sector
The government accounted for about 12 to 13 percent of
GDP
during the 1980s (see
table 10, Appendix). The need to
stimulate
the economy after the division of the island in 1974
caused the
government to abandon the old policy of balanced budgets
and to
adopt expansionary fiscal and monetary policies. The
results were
large and widening budget deficits paid for by borrowing
at home
and abroad. Domestic public debt rose from C£7.5 million
in 1976 to
C£161.5 million in 1988. Public and publicly guaranteed
foreign
debt increased from C£61.8 million in 1976 to C£602.5
million in
1988. The total public and publicly guaranteed domestic
and foreign
debt rose from C£760.8 million in 1987 to C£764 million
(38.7
percent of GDP) in 1988. The foreign debt service ratio
(total
service payments as a percentage of exports of goods and
services)
was 11.8 in 1987 and 10.8 in 1988. Domestic borrowing only
was used
to cover the budget deficit in 1988. Thus, there was a
decline in
government foreign borrowing in 1988 to C£602.5 million,
compared
to C£617.5 million in 1987. Still, the burden of servicing
the
foreign debt continued to be significant. For instance,
servicing
the external debt was more than half the revenue from
exports of
domestically produced goods in 1987.
Furthermore, it was anticipated that the tariff
reductions that
would result from the Customs Union Agreement with the EEC
would
produce revenue losses, raising the fiscal deficit to
C£126 million
in 1992, compared with C£73.5 million in 1987. As a
consequence,
both public and foreign debts were expected to increase.
The
president of Cyprus, George Vassiliou, forecast a rise in
the per
capita public debt from C£2,107 in 1987 to C£3,563 in 1992
and a
rise in the total foreign debt to C£1,082 million in 1992.
Given the government's ever-present fiscal deficit,
there were
concrete proposals at the beginning of the 1990s for the
introduction of a value added tax
(VAT--see Glossary) to
improve
the state's finances. The Republic of Cyprus lacked a
broad-based
consumption tax, and a VAT would generate much revenue.
The income
tax system was also to be overhauled, to reduce tax
evasion.
A specific look at government public finances shows
that the
Republic of Cyprus maintained three types of budgets: the
Ordinary
Budget, which included expenditures for government
operations and
other current expenses; the Development Budget, which
included
development programs; and the Special Relief Fund, which
covered
state aid for the housing and care of refugees.
Data as of January 1991
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