Cyprus: Economy

Section refers to the government-controlled area unless otherwise specified

Cyprus has an open, free-market, services-based economy with some light manufacturing. Cyprus' accession as a full member to the European Union as of May 1, 2004, has been an important milestone in its recent economic development. The Cypriots are among the most prosperous people in the Mediterranean region. Internationally, Cyprus promotes its geographical location as a "bridge" between three continents, along with its educated English-speaking population, good airline connections, and telecommunications.

In the past 20 years, the economy has shifted from agriculture and light manufacturing to services. Currently, agriculture makes up only 2.4% of the GDP and employs 7.3% of the labor force. Industry and construction contribute 17.9% and employ 20.6% of the labor force. The services sector, including tourism, contributes 79.6% to the GDP and employs 72.1% of the labor force. In recent years, the services sector, and financial services in particular, have provided the main impetus for growth, while tourism has been declining in importance. Manufactured goods account for 58.3% of domestic exports, while potatoes and citrus constitute the principal export crops. The island has few proven natural resources, although it is now gearing up to begin exploration for natural gas off its southern coast. Trade is vital to the Cypriot economy and most goods are imported. The trade deficit narrowed considerably in 2009 due to decreased economic activity, reaching $6.8 billion. Cyprus must import fuels, most raw materials, heavy machinery, and transportation equipment. More than 71.0% of its imports come from the European Union, particularly Greece, Italy, and the United Kingdom, while 1.6% come from the United States.

As the effects of the global crisis hit Cyprus, the Cypriot economy contracted considerably by 2.0% in 2009, compared to positive growth of 3.9% in 2008. The recession ended in early 2010 but growth remained anemic at around 0.2% for the year, lagging behind the EU average. In November 2010, Standard and Poor's downgraded Cyprus' sovereign credit rating from A+ to A, with a negative outlook. The economic outlook for 2011 calls for modest growth of around 1.3%, driven by services and banking. Public finances have recorded a sharp deterioration over the last two years. The government's accounts went from a 0.5% surplus in 2008 to a 6.1% deficit in 2009 -- well above the 3.0% reference value under the Maastricht Treaty. As a result, the European Commission has placed Cyprus under the Excessive Deficit Procedure (EDP). The government has devised a plan to nurse public finances back to health by 2012 but this is contingent on securing cross-party support for austerity, and revenue-boosting measures. Total public debt also recorded a marked deterioration, going from 48.3% in 2008, to 58.0% in 2009, to around 61.0% in 2010. Amidst the turmoil, the banking sector on the island is holding up quite well, largely thanks to conservative banking practices domestically and a prudent Central Bank. Inflation was contained to 0.3% in 2009 (lowest since 1965), but unemployment shot up to 6.2% (highest since 1976 for Cyprus, although still moderate by EU standards) and kept on increasing to over 7.0% in 2010.

Cyprus has been a successful member of the Eurozone since January 1, 2008, when it replaced the Cyprus Pound with the Euro. Joining the Eurozone was a major accomplishment for the Cypriot economy, resulting in such benefits as a higher degree of price stability, lower interest rates, reduction of currency conversion costs and exchange rate risk, and increased competition through greater price transparency. The final conversion exchange rate between the Cypriot pound and the Euro was one Euro per 0.585274 Cyprus pounds. The following website offers additional information on the mechanics of Cyprus's adoption of the Euro: http://www.euro.cy/

Investment Climate
In the run-up to EU accession (May 1, 2004), Cyprus dismantled most investment restrictions, attracting increased flows of foreign direct investment (FDI), particularly from the EU. Cyprus has good business and financial services, modern telecommunications, an educated labor force, good airline connections, a sound legal system, and a low crime rate. Cyprus' geographic location, tax incentives and modern infrastructure also make it a natural hub for companies looking to do business with the Middle East, Eastern Europe, the former Soviet Union, the European Union, and North Africa. As a result, Cyprus has developed into an important regional and international business center. According to the United Nations Conference on Trade and Development (UNCTAD), Cyprus is ranked among the High Potential- High Performers for FDI growth for 2007-2010. The World Economic Forum's Competitiveness Index, ranked Cyprus 40th among 139 economies in 2010-11. The Heritage Foundation and the Wall Street Journal, 2010 Index of Economic Freedom ranked Cyprus 24th freest economy in the world. Transparency International also ranked Cyprus among the top 31 countries on transparent procedures in 2008. . Non-EU investors (both natural and legal persons) are free to invest in Cyprus in most sectors, either directly or indirectly (including all types of portfolio investment in the Cyprus Stock Exchange). The only exceptions concern primarily the acquisition of property and, to a lesser extent, restrictions on investment in the sectors of tertiary education, banking, and mass media.

In 2009, the inflow of FDI (including “brass plate” companies) reached U.S. $6.0 billion. About 90.0% of this investment came from the broad region of Europe, including 36.6% from the Russian Federation. In terms of sectoral allocation, incoming FDI in 2009 went to the following sectors: financial intermediation 58.1%; trade and repairs 23.7%; and real estate and business activities 15.7%.

The flow of U.S. investment in Cyprus reached U.S. $101.3 million in 2009, or 1.7% of Cyprus' total inward FDI. The stock of U.S. investment in the island was U.S. $248.8 million at the end of 2009. Projects involving U.S. investment in recent years have included real estate and various business activities, including a well-known U.S. coffee retailing franchise, a university, an information technology firm, an equestrian center, a hair products manufacturing unit, a firm trading in health and natural foodstuffs, an oil field products manufacturer, and a financial services company. U.S. investors may benefit from Cyprus’s abolition of EU-origin investment restrictions, provided they operate through EU subsidiaries.

Additional information on foreign direct investment can be obtained from the Cyprus Investment Promotion Agency website: http://www.cipa.org.cy.

European Union (EU)
Along with the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia, the Republic of Cyprus entered the EU on May 1, 2004. The EU acquis communautaire is suspended in the area administered by Turkish Cypriots pending a Cyprus settlement. Cyprus adopted the Euro on January 1, 2008.

Export Opportunities
Best prospects for U.S. firms generally lie in services, high-technology sectors, such as computer equipment and data processing services, financial services, environmental protection technology, medical and telecommunications equipment, desalination and water purification equipment and services, and tourism development projects such as casinos, marinas, and golf courses. Moreover, alternative energy sources and the energy sector in general, are attracting an increasing amount of attention, while the possible existence of natural gas and petroleum reserves off the southern and eastern coast of Cyprus opens up new prospects. U.S. food franchises and apparel licensors are also finding fertile ground for expansion in Cyprus.

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 and organizes other events to promote U.S. products throughout the year. The U.S. runs a significant trade surplus with Cyprus, on the order of $114.4 million in 2009 (exports of $134.3 million versus imports of $19. million, according to Republic of Cyprus statistics).

Principal U.S. goods exports to Cyprus include office machines and data processing equipment; electrical appliances; optical, measuring, and medical equipment; passenger cars; and edible fruit and nuts. Principal U.S. imports from Cyprus consist of dairy products, fresh fish, and mineral substances.

Bilateral business ties also encompass a healthy exchange in services. In 2009, the inflow of services (from the United States to Cyprus) was $402.2 million, against an outflow (from Cyprus to the United States) of $283.3 million, according to Republic of Cyprus statistics.

Turkish Cypriot Economy
The EU acquis communautaire has been temporarily suspended in the northern part of the island due to the unresolved political situation. The currency used is the Turkish Lira, although Euros are widely accepted. The economy of the Turkish Cypriot-administered area is dominated by the services sector including the public sector, trade, tourism, and education, with smaller agriculture and light manufacturing sectors. The economy operates on a free-market basis, although it continues to be handicapped by the political isolation of Turkish Cypriots, the lack of private and public investment, high freight costs, and shortages of skilled labor. Despite these constraints, the Turkish Cypriot economy turned in an impressive performance from 2003 to 2006, with estimated growth rates of 13.2% in 2006, 13.5% in 2005, 15.4% in 2004, and 11.4% in 2003. This growth was fueled largely by a construction boom, which ended abruptly amid renewed controversy over the legitimacy of property titles in the north, following a much-publicized court case in which the United Kingdom Court of Appeal on January 19, 2010 affirmed an earlier ruling by the European Court of Justice. The global financial crisis has hit the Turkish Cypriot economy hard; leading to negative growth rates of 6.3% in 2009, and 3.4% in 2008. Tourism and tertiary education are two very important sectors. The Turkish Cypriot economy benefits by the employment of around 6,000 Turkish Cypriots in the Greek Cypriot economy where wages are significantly higher, and by the relative stability of the Turkish Lira (prior to 2008). In 2008, the services sector accounted for 77.0% of GDP, industry and construction accounted for 18.0% of GDP, and agriculture 5.0%, according to Turkish Cypriot statistics. The partial lifting of travel restrictions between the two parts of the island in April 2003 has allowed movement of persons--around 18.0million crossings to date--between the two parts of the island with no significant interethnic incidents.

Turkey remains, by far, the main trading partner of the area administered by Turkish Cypriots, supplying 68% of imports and absorbing around 58% of exports (2007 figures). In another landmark case, the European Court of Justice ruled in 1994 against the British practice of importing produce from the area based on certificates of origin and phytosanitary certificates granted by "TRNC" authorities. This 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 $12.9 million in 2006 (or 19% of total exports). In August 2004, new EU rules allowed goods produced or substantially transformed in the area administered by Turkish Cypriots to be sold duty-free to consumers in the government-controlled area and through that area to the rest of the EU. To qualify, goods must also meet EU sanitary/phytosanitary requirements. Animal products are excluded from this arrangement. In 2005, Turkish Cypriot authorities adopted a new regulation "mirroring" the EU rules and allowing certain goods produced in the government-controlled areas to be sold in the area administered by Turkish Cypriots. (However, suppliers cannot legally transport imported products over the green line in either direction.) Despite these efforts, direct trade between the two communities remains limited (comprising only 0.09% of the Greek Cypriot community’s trade, and 11.8% of the Turkish Cypriot community’s trade in February 2009).

The EU continues to be the second-largest trading partner of the area administered by Turkish Cypriots, with a 16.0% share of total imports and 16.0% share of total exports. Total imports increased to $1.5 billion in 2007, while total exports increased to $83.7 million. Imports from the U.S. reached $16.0 million in 2007, while exports to the U.S. were nil.

Assistance from Turkey is crucial to the Turkish Cypriot economy. Under the economic protocol signed in 2006, Turkey undertook to provide Turkish Cypriots financial assistance totaling 1.875 billion New Turkish Lira (YTL--roughly $1.34 billion) over a three-year period (600 million YTL in 2007, 625 million YTL in 2008, and 650 million YTL in 2009). Turkey also provides millions of dollars annually in the form of low-interest loans mostly to Turkish entrepreneurs in support of export-oriented industrial production and tourism. The total amount of Turkish assistance to Turkish Cypriots since 1974 is estimated to be more than $4 billion.

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