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Economy of Cyprus

Economic affairs in Cyprus are dominated by the division of the country into the southern area controlled by the Cyprus Government and the northern Turkish Cypriot-administered area.

The Greek Cypriot economy is prosperous but highly susceptible to external shocks. In 2008 it was classified by the IMF amongst the 32 advanced economies of the world. Erratic growth rates in the 1990s reflect the economy's vulnerability to swings in tourist arrivals, caused by political instability on the island and fluctuations in economic conditions in Western Europe. From 1 January 2008, the country entered the Eurozone and adopted the euro and monetary policy will be dictated by the European Central Bank. The irrevocable fixed exchange rate of CYP 0.585274 per EUR 1.00 was set.

The Turkish Cypriot economy has about one-fifth the population and one-third the per capita GDP of the south. Because the Turkish-Cypriot de facto administration is recognized only by Turkey, it has had much difficulty arranging foreign financing, and foreign firms have hesitated to invest there. The economy remains heavily dependent on agriculture and government service, which together employ about half of the work force. Moreover, the small, vulnerable economy has suffered because the Turkish lira is legal tender. To compensate for the economy's weakness, Turkey provides direct and indirect aid to tourism, education, industry, etc.

In both sectors, water shortage is a growing problem, and several desalination plants are planned.

Economy in the Government-controlled sector

Cyprus has an open, free-market, service-based economy with some light manufacturing. The Cypriots are among the most prosperous people in the Mediterranean region. Internationally, Cyprus promotes its geographical location as a "bridge" between West and East, along with its educated English-speaking population, moderate local costs, good airline connections, and telecommunications.

Throughout the post-Independence period, Cyprus has had a record of successful economic performance, reflected in rapid growth, full employment conditions and external and internal stability. The underdeveloped economy, inherited from Colonial Rule in 1960, has been transformed into a modern economy, with dynamic services, industrial and agricultural sectors and advanced physical and social infrastructure.

Cyprus is classified among the high-income countries, with a per capita income of CY£9,477 in 2004 . It has a standard of living that is even higher than some other European Union member-states and the performance of the economy compares favourably with that of most other EU countries. Cyprus holds 16th place worldwide in terms of per capita income. The average annual rate of growth in the past five years was about 3.8%, while inflation stood at 2.9% and unemployment at 3.4% over that period.

These achievements appear all the more striking, bearing in mind the severe economic and social dislocation created by the Turkish invasion of 1974 and the continuing occupation of the northern part of the island by Turkey. The Turkish invasion inflicted a serious blow to the Cyprus economy and in particular to agriculture, tourism, mining and quarrying: 70 percent of the island’s rich producing resources were lost, the tourist industry lost 65 percent of its hotels and tourist accommodation, the industrial sector lost 46 percent, and mining and quarrying lost 56 percent of production. The loss of the Port of Famagusta, which handled 83 percent of the general cargo, and the closure of the Nicosia International Airport, in the buffer zone, were additional blows.

The success of Cyprus in the economic sphere is attributed, inter alia, to the adoption of a market oriented economic system, the pursuance of sound macroeconomic policies by the government as well as the existence of a dynamic and flexible entrepreneurship and a highly educated labour force. Moreover, the economy benefited from the close cooperation between the public sector and the social partners.

In the past 20 years, the economy has shifted from agriculture to light manufacturing and services. The service sector, including tourism, contributes 70% to the GDP and employs 62% of the labor force. Industry and construction contribute 24% and employ 25% of labor. Manufactured goods account for approximately 69% of domestic exports. Agriculture is responsible for 6% of GDP and 12% of the labor force. Potatoes and citrus are the principal export crops.

After robust growth rates in the 1980s (average annual growth was 6.1%), economic performance in the 1990s has been mixed: Real GDP growth was 9.7% in 1992, 1.7% in 1993, 6.0% in 1994, 6.0% in 1995, 1.9% in 1996 and 2.3% in 1997. This pattern underlines the economy's vulnerability to swings in tourist arrivals (i.e., to economic and political conditions in Cyprus, Western Europe, and the Middle East) and the need to restructure the economy. Declining competitiveness in tourism and especially in manufacturing will act as a drag on growth until structural changes are effected. Overvaluation of the Cypriot pound has kept inflation in check in recent years (3.5% in 1997) and is forecast to continue to do so in the foreseeable future. Economic prospects are good over the long term, and real growth in 1998 is expected to reach 3.0%.

Trade is vital to the Cypriot economy--the island is not self-sufficient in food and has few natural resources--and the trade deficit continues to grow. Exports rose by 1.3% in 1997, while imports rose by 2.2%, resulting in a trade deficit of $2.1 billion (2.7% higher than the previous year). Cyprus must import fuels, most raw materials, heavy machinery, and transportation equipment. More than 50% of its trade is with the European Union (especially the UK); the Middle East receives 20% of exports. Cyprus signed an Association Agreement with the European Union (EU) in 1972, which resulted in the establishment of a Customs Union between the two sides. Cyprus applied for full EU membership in 1990 and has since linked the Cyprus pound to the European Currency Unit (ECU). EU accession negotiations started on March 31, 1998. In 1991, Cyprus introduced a Value Added Tax (VAT), which is currently 15% in line with the EU minimum. Cyprus ratified the new world trade agreement (General Agreement on Tariffs and Trade, GATT) in 1995 and began implementing it fully on January 1, 1996.

On May 1 2004, Cyprus became a full member of the EU.

The economic benefits of EU accession to Cyprus, as a whole, are quite substantial. Cyprus goods and services will have access to a huge single market consisting of some of the most advanced countries in Europe. Cyprus’ participation in the Union’s internal market, an area where free movement of goods, services, persons and goods is ensured, will lead in the long term to a more efficient allocation of factors of production towards activities in which Cyprus possesses comparative advantages. This will have positive repercussions on growth and employment.

Cyprus will have a share in the growth and development of the EU economy. It will attract investment from the EU in activities in which Cyprus possesses comparative advantages, thus accelerating the transformation of Cyprus into a regional business centre. Moreover Cyprus will benefit from increased EU financial assistance.

In the new age of globalisation and world economic integration, in an era marked by a technological revolution, which encompasses all sectors of the economy, the key to success is competitiveness coupled with high quality manufactured goods and services and the ability to adjust quickly to the ever changing preferences of the consumers.

Cyprus has the fourth-largest ship registry in the world, with 2,758 ships and 25.5 million gross registered tons (GRTs). It is an open registry and includes ships from more than 43 countries, including Greece, Germany, and Russia.

Export opportunities

Cyprus has been liberalizing its trade regime by eliminating import quotas and licenses and lowering tariffs on most products as a result of its obligations under the new world trade agreement and its Customs Union agreement with the European Union. As a result, U.S. products are becoming more competitive in Cyprus and prospects for further expansion of bilateral trade ties are excellent.

Government computerization and telecommunications development, two of the priorities of the government's 5-year development plan (1994-1998), provide excellent opportunities for U.S. exports. Sales of computer-assisted design systems, new capital equipment for textile, clothing, footwear production, medical equipment, environmental equipment, and services are also expected to grow. U.S. pressure resulted in the adoption of a new copyright law in 1994 and a new patent law in 1998.

Investment climate

In February 1997, the government revised its policy on foreign direct investment, permitting 100% foreign ownership in certain cases. Regulations on foreign portfolio investment in the Cyprus Stock Exchange also have been liberalized. Additionally, Cyprus passed a modern banking law in July 1997, incorporating all the provisions and directives of the EU for the prudential supervision of credit institutions.

Cyprus has concluded treaties on double taxation with 26 countries, including the U.S., and has removed exchange restrictions on current international transactions. Non-residents and foreign investors may freely repatriate proceeds from investments in Cyprus.

Offshore sector

The 1,049 full-fledged offshore companies--which are located in Cyprus but conduct business abroad only--qualify for various tax- and duty-free concessions. Foreign exchange earnings from offshore companies rose to $346 million in 1997. There are about 40 U.S.-owned firms in Cyprus; about half operate exclusively on an offshore basis.

U.S. firms are mainly engaged in the regional marketing of computers, computer graphics, telecommunications, printing equipment, household products, and soft drinks. Since 1994, re-entry visa provisions have been streamlined and 3-year work permits have been introduced for offshore employees.

Trade between Cyprus and the United States

The U.S. embassy in Nicosia sponsors a popular pavilion for American products at the annual Cyprus International State Fair, hosts the Commercial Awards dinner, and organizes other events to promote U.S. products throughout the year. Total U.S. exports to Cyprus were about $700 million in 1997 (compared with $670 million in 1996), making the U.S. Cyprus' number-one supplier of total imports for the third year in a row. Exports include American tobacco and tobacco products, automatic data processing and other machinery, and cereals. Principal U.S. imports from Cyprus consist of clothing, footwear, steel tubes and pipes, dairy products, and various food items.

Turkish Cypriot economy

The economic disparity between the two communities is pronounced. Although the Turkish Cypriot area operates on a free-market basis, the lack of private and governmental investment, shortages of skilled labor and experienced managers, plus inflation and the devaluation of the Turkish lira (which the Turkish Cypriots use as their currency) continue to plague the economy.

Turkey is, by far, the main trading partner of the "T.R.N.C.," supplying 55% of imports and absorbing 48% of exports. In a landmark case, the European Court of Justice (ECJ) ruled on July 5, 1994, against the British practice of importing produce from Northern Cyprus based on certificates of origin and phytosanitary certificates granted by "T.R.N.C." authorities. The ECJ decision stated that only goods bearing certificates of origin from the Government of Cyprus could be recognized for trade by EU member countries. That decision resulted in a considerable decrease of Turkish Cypriot exports to the EU: from $36.4 million (or 66.7% of total Turkish Cypriot exports) in 1993 to $24.7 million in 1996 (or 35% of total exports) in 1996. Even so, the EU continues to be the "T.R.N.C.'s" second-largest trading partner, with a 24.7% share of total imports and 35% share of total exports.

Assistance from Turkey is the mainstay of the Turkish Cypriot economy. Under the latest economic protocol (signed January 3, 1997), Turkey undertakes to provide Turkish Cypriots loans totaling $250 million for the purpose of implementing projects included in the protocol related to public finance, tourism, banking, and privatization. Fluctuation in the Turkish lira, which suffered from hyperinflation every year until its replacement by the New Turkish Lira in 2005, exerted downward pressure on the Turkish Cypriot standard of living for many years.

The Turkish Cypriot de facto authorities have instituted a free market in foreign exchange and permit residents to hold foreign-currency denominated bank accounts. This encourages transfers from Turkish Cypriots living abroad.

Statistics

GDP: Greek Cypriot area: purchasing power parity - $21.38 billion (2007 est); Turkish Cypriot area: purchasing power parity - $1.865 million (2006 est.)

GDP - real growth rate: Greek Cypriot area: 3.9% (2nd Trimester 2008)

Year GDP
in billions of USD PPP
% GDP Growth
2002 14.397 2.1
2003 14.953 1.9
2004 15.764 3.7
2005 16.745 3.8
2006 17.772 4.0

Turkish Cypriot area: -2% (2007 est.)

GDP - per capita: Greek Cypriot area: purchasing power parity - $15,400 Turkish Cypriot area: purchasing power parity - $11,800 (2006 est.)

GDP - composition by sector: Greek Cypriot area: agriculture 2.7%, industry 19.2%, services 78% Turkish Cypriot area: agriculture 8.6%, industry 22.5%, services 69.1% (1998)

Population below poverty line: NA%

Household income or consumption by percentage share:
lowest 10%: NA%
highest 10%: NA%

Inflation rate (consumer prices): Greek Cypriot area: 4.6% (Jan-July 2008 est.) Turkish Cypriot area: 11.4% (2006 est.)

Labor force: Greek Cypriot area: 393,000 (2007 est.) Turkish Cypriot area: 95,030 (2007 est.)

Labor force - by occupation: Greek Cypriot area: services 71%, industry 20.5%, agriculture 8.5% (2007 Est.) Turkish Cypriot area: services 56.5%, industry 29%, agriculture 14.5% (2007 est.)

Unemployment rate: Greek Cypriot area: 3.7% (July 2008 est.) Turkish Cypriot area: 9.4% (2005 est.)

Budget:
revenues: Greek Cypriot area - $9.996 billion (2007 est.) Turkish Cypriot area - $2.5 billion (2006 est.) Aid from Turkey amounts to $400 million.
expenditures: Greek Cypriot area - $9.304 billion Turkish Cypriot area - $2.5 billion

Industries: Greek Cypriot area - tourism, food and beverage processing, cement and gypsum production, ship repair and refurbishment, textiles, light chemicals, metal products, wood, paper, stone, and clay products Turkish Cypriot area - foodstuffs, textiles, clothing, ship repair, clay, gypsum, copper, furniture

Industrial production growth rate: Greek Cypriot area: 3.8% (2007 est.) Turkish Cypriot area: -0.3% (2007 est.)

Electricity - production: Greek Cypriot area: 4.618 billion kWh (2006) Turkish Cypriot area: 998.9 million kWh (2005)

Electricity - production by source:
fossil fuel: 100%
hydro: 0%
nuclear: 0%
other: 0% (1998)

Electricity - consumption: Greek Cypriot area: 4.135 billion kWh Turkish Cypriot area: 797.9 million kWh (2005)

Electricity - exports: 0 kWh (1998)

Electricity - imports: 0 kWh (1998)

Agriculture - products: Greek Cypriot area - citrus, vegetables, barley, grapes, olives, vegetables; poultry, pork, lamb, dairy, cheese Turkish Cypriot area - citrus fruit, dairy, potatoes, grapes, olives, poultry, lamb

Exports: Greek Cypriot area: $1.489 billion f.o.b. (2007 est.) Turkish Cypriot area: $68.1 million, f.o.b. (2007 est.)

Exports - commodities: Greek Cypriot area: citrus, potatoes, pharmaceuticals, cement, and clothing Turkish Cypriot area: citrus, dairy, potatoes, textiles

Exports - partners: Greek Cypriot area: Greece 21.1%, UK 14.3%, Germany 6.6% (2006) Turkish Cypriot area: Turkey 40%; direct trade between the area administered by Turkish Cypriots and the area under government control remains limited (2006)

Imports: Greek Cypriot area: $7.786 billion f.o.b. (2007 est.) Turkish Cypriot area: $1.2 billion, f.o.b. (2007 est.)

Imports - commodities: Greek Cypriot area: consumer goods, petroleum and lubricants, intermediate goods, machinery, transport equipment Turkish Cypriot area: vehicles, fuel, cigarettes, food, minerals, chemicals, machinery

Imports - partners: Greek Cypriot area: Greece 17.7%, Italy 10.2%, UK 9.6%, Germany 9.4%, Israel 6.5%, France 5.4%, China 5.3%, Netherlands 4.1% (2006) Turkish Cypriot area: Turkey 60%; direct trade between the area administered by Turkish Cypriots and the area under government control remains limited (2006)

Debt - external: Greek Cypriot area: $27.69 billion (31 December 2007 est.) Turkish Cypriot area: $NA (Turkey has forgiven most past aid)

Stock of direct foreign investment - at home: Greek Cypriot area: $13.18 billion (2007 est.) Turkish Cypriot area: $NA

Stock of direct foreign investment - abroad: Greek Cypriot area: $5.324 billion (2007 est.) Turkish Cypriot area: $NA

Economic aid - donor: Greek Cypriot area - $25.9 million (2006) Turkish Cypriot area - $NA

Economic aid - recipient: Greek Cypriot area - $15 million (2006) Turkish Cypriot area - under a July 2006 agreement, Turkey plans to provide the area administered by Turkish Cypriots 1.875 billion YTL ($1.3 billion) over three years (600 million YTL in 2006, 625 million YTL in 2007 and 650 million YTL in 2008);

Currency: Greek Cypriot area: 1 euro = 100 cent since 1 January 2008
previously 1 Cypriot pound = 100 cents;
Turkish Cypriot area: 1 Turkish lira (TL) = 100 kurus

Reserves of foreign exchange and gold: Greek Cypriot area: $6.507 billion (31 December 2007 est.) Turkish Cypriot area: $NA

Exchange rates: Cypriot pounds per US$1 - 0.5688 (January 2000), 0.5423 (1999), 0.5170 (1998), 0.5135 (1997), 0.4663 (1996), 0.4522 (1995); Turkish liras (TL) per US$1 - 545,584 (January 2000), 418,783 (1999), 260,724 (1998), 151,865 (1997), 81,405 (1996), 45,845.1 (1995)

Fiscal year: calendar year

References

See also

http://www.mof.gov.cy/mof/mof.nsf/All/34A66FCDB5445A7CC225749600269B00/$file/Δελτίο%20Οικονομικής%20Ανασκόπησης,%20Ιούλιος%202008.pdf
https://www.cia.gov/library/publications/the-world-factbook/geos/cy.html
http://www.pio.gov.cy/mof/cystat/statistics.nsf/All/A3A9BD31D74B66FFC22574B4002CC026?OpenDocument&sub=1&e=

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