Economy To Bottom Out in 2010 - IMF

Cyprus' economy is projected to bottom out in 2010 and give way to a mild recovery in 2011 and stronger growth in following years, said the International Monetary Fund (IMF) in its preliminary conclusions for the year.

However, the "sizeable increase in unemployment along with declining consumer borrowing and the negative confidence shock will weigh on private consumption; investment will be subdued due to continued weakness in the property market and construction sector; and public consumption will be restrained due to the need for fiscal consolidation," said the report.

The IMF expects growth to be around zero or slightly below in 2010, and said that the foremost policy challenge for Cyprus is to reverse the large structural fiscal deficit that has emerged in recent years.

"The deficit was driven by rapid growth in public sector wages and employment as well as the expansion of social spending, much of which was not well-targeted to help the poorest portions of the population," said the IMF.

Meanwhile, "the end of the real estate boom has caused an enduring loss of associated revenues, which will not return to previous levels even as the economy resumes growth," said the IMF.

The IMF urged the government to take bold measures to reduce the deficit, including the "launching of a gradual reduction in public sector employment and foregoing general increases in public sector wages."