Economy of Cyprus

Economy in the government-controlled area

Cyprus has an open, free-market, service-based economy with some light manufacturing. Internationally, Cyprus promotes its geographical location as a "bridge" between East and West, along with its educated English-speaking population, moderate local costs, good airline connections, and telecommunications.

Since gaining independence from the United Kingdom in 1960, Cyprus has had a record of successful economic performance, reflected in strong growth, full employment conditions and relative stability. The underdeveloped agrarian economy inherited from colonial rule has been transformed into a modern economy, with dynamic services, industrial and agricultural sectors and an advanced physical and social infrastructure. The Cypriots are among the most prosperous people in the Mediterranean region, with GDP per capita surpassing $26,000 in 2014.

Their standard of living is reflected in the country's "very high" Human Development Index, and Cyprus is ranked 23rd in the world in terms of the Quality-of-life Index. However, after more than three decades of unbroken growth, the Cypriot economy contracted in 2009. This reflected the exposure of Cyprus to the Great Recession and European debt crisis. In recent times, concerns have been raised about the state of public finances and spiralling borrowing costs. Furthermore, Cyprus was dealt a severe blow by the Evangelos Florakis Naval Base explosion in July 2011, with the cost to the economy estimated at €1–3 billion, or up to 17% of GDP.

The economic achievements of Cyprus during the preceding decades have been significant, 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 wealth-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 Nicosia International Airport, in the buffer zone, were additional setbacks.

The success of Cyprus in the economic sphere has been 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 labor force. Moreover, the economy benefited from the close cooperation between the public and private sectors.

In the past 30 years, the economy has shifted from agriculture to light manufacturing and services. The services sector, including tourism, contributes almost 80% to GDP and employs more than 70% of the labor force. Industry and construction account for approximately one-fifth of GDP and labor, while agriculture is responsible for 2.1% of GDP and 8.5% 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 was 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 underlined 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 diversify the economy. Declining competitiveness in tourism and especially in manufacturing are expected to act as a drag on growth until structural changes are effected. Overvaluation of the Cypriot pound prior to the adoption of the euro in 2008 had kept inflation in check.

Trade is vital to the Cypriot economy—the island is not self-sufficient in food and until the recent offshore gas discoveries had few known natural resources—and the trade deficit continues to grow. Cyprus must import fuels, most raw materials, heavy machinery, and transportation equipment. More than 50% of its trade is with the rest of the European Union, especially Greece and the United Kingdom, while the Middle East receives 20% of exports. In 1991, Cyprus introduced a value-added tax (VAT), which is at 19% as of 13/01/2014. Cyprus ratified the new world trade agreement (General Agreement on Tariffs and Trade, GATT) in 1995 and began implementing it fully on 1 January 1996. EU accession negotiations started on 31 March 1998, and concluded when Cyprus joined the organization as a full member in 2004.

Investment climate

The Cyprus legal system is founded on English law, and is therefore familiar to most international financiers. Cyprus's legislation was aligned with EU norms in the period leading up to EU accession in 2004. Restrictions on foreign direct investment were removed, permitting 100% foreign ownership in many cases. Foreign portfolio investment in the Cyprus Stock Exchange was also liberalized. In 2002 a modern, business-friendly tax system was put in place with a 12.5% corporate tax rate, the lowest in the EU. Cyprus has concluded treaties on double taxation with more than 40 countries, and, as a member of the Eurozone, has no exchange restrictions. Non-residents and foreign investors may freely repatriate proceeds from investments in Cyprus.

Role as a financial hub

In the years following the dissolution of the Soviet Union it gained great popularity as a portal for investment from the West into Russia and Eastern Europe. More recently, there have been increasing investment flows from the West through Cyprus into Asia (particularly China and India), South America and the Middle East. In addition, businesses from outside the EU use Cyprus as their entry-point for investment into Europe. The business services sector remains the fastest growing sector of the economy, and had overtaken all other sectors in importance. CIPA has been fundamental towards this trend. As of 2016, CySEC (the Financial Regulator), regulates many of the worlds biggest brands in retail forex as they generally see it as an efficient way to get an EU operating license and industry know-how.

Oil and gas

In 2011, Noble Energy estimated that a pipeline to Leviathan gas field could be in operation as soon as 2014 or 2015. Surveys suggest more than 100 trillion cubic feet (2.831 trillion cubic metres) of reserves lie untapped in the eastern Mediterranean basin between Cyprus and Israel - almost equal to the world's total annual consumption of natural gas.

Role as a shipping hub

Cyprus constitutes one of the largest ship management centers in the world; around 50 ship management companies and marine-related foreign enterprises are conducting their international activities in the country while the majority of the largest ship management companies in the world have established fully fledged offices on the island. Its geographical position at the crossroads of three continents and its proximity to the Suez Canal has promoted merchant shipping as an important industry for the island nation. Cyprus has the tenth-largest registered fleet in the world, with 1,030 vessels accounting for 31,706,000 dwt as of 1 January 2013.

Tourism

Tourism is an important factor of the island state’s economy, culture, and overall brand development. With over 2 million tourist arrivals per year, it is the 40th most popular destination in the world. However, per capita of local population it ranks 6th. The industry has been honored with various international awards, spanning from the Sustainable Destinations Global Top 100, VISION on Sustainable Tourism, Totem Tourism and Green Destination titles bestowed to Limassol and Paphos in December 2014. The island beaches have been awarded with 57 Blue Flags. Cyprus became a full member of the World Tourism Organization when it was created in 1975. According to the World Economic Forum's 2013 Travel and Tourism Competitiveness Index, Cyprus' tourism industry ranks 29th in the world in terms of overall competitiveness. In terms of Tourism Infrastructure, in relation to the tourism industry Cyprus ranks 1st in the world. The Cyprus Tourism Organization has a status of a semi-governmental organisation charged with overseeing the industry practices and promoting the island worldwide.

Trade

In 2008 fiscal aggregate value of goods and services exported by Cyprus was in the region of $1.53 billion. It primarily exported goods and services such as citrus fruits, cement, potatoes, clothing and pharmaceuticals. At that same period total financial value of goods and services imported by Cyprus was about $8.689 billion. Prominent goods and services imported by Cyprus in 2008 were consumer goods, machinery, petroleum and other lubricants, transport equipment and intermediate goods.

Cypriot trade partners

Traditionally Greece has been a major export and import partner of Cyprus. In fiscal 2007, it amounted for 21.1 percent of total exports of Cyprus. At that same period it was responsible for 17.7 percent of goods and services imported by Cyprus. Some other important names in this regard are UK and Italy.

Eurozone crisis

In 2012, Cyprus became affected by the Eurozone financial and banking crisis. In June 2012, the Cypriot government announced it would need €1.8 billion of foreign aid to support the Cyprus Popular Bank, and this was followed by Fitch down-grading Cyprus's credit rating to junk status. Fitch said Cyprus would need an additional €4 billion to support its banks and the downgrade was mainly due to the exposure of Bank of Cyprus, Cyprus Popular Bank and Hellenic Bank (Cyprus's 3 largest banks) to the Greek financial crisis.

In June 2012 the Cypriot finance minister, Vassos Shiarly, stated that the European Central Bank, European commission and IMF officials are to carry out an in-depth investigation into Cyprus' economy and banking sector to assess the level of funding it requires. The Ministry of Finance rejected the possibility that Cyprus would be forced to undergo the sweeping austerity measures that have caused turbulence in Greece, but admitted that there would be "some negative repercussion".

In November 2012 international lenders negotiating a bailout with the Cypriot government have agreed on a key capital ratio for banks and a system for the sector's supervision. Both commercial banks and cooperatives will be overseen by the Central Bank and the Ministry of Finance. They also set a core Tier 1 ratio - a measure of financial strength - of 9% by the end of 2013 for banks, which could then rise to 10% in 2014.

In 2014, Harris Georgiades pointed that exiting the Memorandum with the European troika required a return to the markets. This he said, required “timely, effective and full implementation of the program.” The Finance Minister stressed the need to implement the Memorandum of understanding without an additional loan.

In 2015, Cyprus was praised by the President of the European Commission for adopting the austerity measures and not hesitating to follow a tough reform program.

In 2016, Moody's Investors Service changed its outlook on the Cypriot banking system to positive from stable, reflecting the view that the recovery will restore banks to profitability and improve asset quality. The quick economic recovery was driven by tourism, business services and increased consumer spending. Creditor confidence was also strengthened, allowing Bank of Cyprus to reduce its Emergency Liquidity Assistance to €2.0 billion (from €9.4 billion in 2013). Within the same period, Bank of Cyprus Chairman Josef Ackermann urged the European Union to pledge financial support for a permanent solution to the Cyprus dispute.

Economy of Northern Cyprus

The economy of Northern Cyprus is about one-fifth the size of the economy of the government-controlled area, while GDP per capita is around half. Because the 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 mainly revolves around the agricultural sector and government service, which together employ about half of the work force.

The tourism sector also contributes substantially into the economy. Moreover, the small economy has seen some downfalls because the Turkish lira is legal tender. To compensate for the economy's weakness, Turkey has been known to provide significant financial aid. In both parts of the island, water shortage is a growing problem, and several desalination plants are planned.

The economic disparity between the two communities is pronounced. Although the economy operates on a free-market basis, the lack of private and government investment, shortages of skilled labor and experienced managers, and inflation and the devaluation of the Turkish lira continue to plague the economy.

Trade with Turkey

Turkey is by far the main trading partner of Northern Cyprus, supplying 55% of imports and absorbing 48% of exports. In a landmark case, the European Court of Justice (ECJ) ruled on 5 July 1994 against the British practice of importing produce from Northern Cyprus based on certificates of origin and phytosanitary certificates granted by the de facto authorities. The ECJ decided that only goods bearing certificates of origin from the internationally recognized Republic of Cyprus could be imported by EU member states. The 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 second-largest trading partner of Northern Cyprus, with a 24.7% share of total imports and 35% share of total exports.

The most important exports of Northern Cyprus are citrus and dairy products. These are followed by rakı, scrap and clothing.

Assistance from Turkey is the mainstay of the Turkish Cypriot economy. Under the latest economic protocol (signed 3 January 1997), Turkey has undertaken to provide loans totalling $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 Turkish new lira in 2005, exerted downward pressure on the Turkish Cypriot standard of living for many years.

The 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.