In a comprehensive report, the Finance Ministry predicts that the economy’s prospects are expected to continue to gradually improve though substantial risks still exist, mostly related to the banking sector whose prospects are crucial to recovery.

The report, named Economic Developments 2014 and Prospects 2015-2017, considered the state budget for 2015, which was submitted to parliament. The government expects 2015 to record modest growth of around 0.4 per cent, 1.6 per cent in 2016 and 2.0 per cent the year after.

“According to the baseline scenario, in the medium term, the prospects of the Cypriot economy are expected to continue to gradually improve,” the report said.

The state expects to collect some €5.9 billion in 2015 while expenditure will reach €6.6 billion. The main sources of revenue are direct and indirect taxes, expected to reach around €4.9 billion in 2015 or 83% of total revenues. The rest concerns sale of goods and services, as well as transfers, estimated at €999 million. Revenues from direct taxation as a percentage of GDP will remain at the same levels as this year at 14% – while indirect taxes will make up 17.1% of GDP compared with 16.8% in 2014.

Inflation is expected to reach 0.9% in 2015, and will continue to grow to 1.3% and 1.5% in 2016 and 2017 respectively. Unemployment is expected to peak at around 17% in 2015 and fall to 15.8% the following year and 14.4% in 2017. Personnel expenditure will see a 2.5% reduction in 2015 due to a freeze in recruitment and the elimination of vacant positions. Pensions and retirement bonuses will also drop by 4% due to a slowdown in early retirements compared with previous years.

However, there will be a high up in operational expenses at 9.6% or around €1 billion compared with €942 million in 2014. The rise is mainly due to VAT returns, procurement of pharmaceuticals, and higher spending on lighting and heating.