Economy of Cyprus
Encyclopedia
Economic affairs in Cyprus
are dominated by the division of the country into the southern area, controlled by the internationally recognized government of the Republic of Cyprus, and Turkish-occupied northern Cyprus.
Classified by the World Bank
as a high-income economy, Cyprus was included by the International Monetary Fund
in its list of advanced economies
in 2001. Erratic growth rates in the 1990s reflected the economy's vulnerability to swings in tourist arrivals, caused by political instability on the island and fluctuations in economic conditions in Western Europe. On 1 January 2008, the country entered the eurozone
and adopted the euro as its official currency, replacing the Cypriot pound
at an irrevocable fixed exchange rate of CYP 0.585274 per EUR 1.00.
, 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 reaching $30,000. 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 global recession and European sovereign 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 has few 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 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 1 January 1996.
EU accession negotiations started on 31 March 1998, and concluded when Cyprus joined the organization as a full member in 2004.
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
.
Cyprus has concluded treaties on double taxation with 26 countries, and has removed exchange restrictions on current international transactions. Non-residents and foreign investors may freely repatriate proceeds from investments in Cyprus.
of Turkish-occupied northern Cyprus is about one-fifth the size of the economy of the government-controlled area, while GDP per capita is around one-third. 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.
Turkey is by far the main trading partner of the Turkish-occupied area, 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.
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.
Cyprus
Cyprus , officially the Republic of Cyprus , is a Eurasian island country, member of the European Union, in the Eastern Mediterranean, east of Greece, south of Turkey, west of Syria and north of Egypt. It is the third largest island in the Mediterranean Sea.The earliest known human activity on the...
are dominated by the division of the country into the southern area, controlled by the internationally recognized government of the Republic of Cyprus, and Turkish-occupied northern Cyprus.
Classified by the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
as a high-income economy, Cyprus was included by the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
in its list of advanced economies
Developed country
A developed country is a country that has a high level of development according to some criteria. Which criteria, and which countries are classified as being developed, is a contentious issue...
in 2001. Erratic growth rates in the 1990s reflected the economy's vulnerability to swings in tourist arrivals, caused by political instability on the island and fluctuations in economic conditions in Western Europe. On 1 January 2008, the country entered the eurozone
Eurozone
The eurozone , officially called the euro area, is an economic and monetary union of seventeen European Union member states that have adopted the euro as their common currency and sole legal tender...
and adopted the euro as its official currency, replacing the Cypriot pound
Cypriot pound
The pound, also known as the lira , was the currency of Cyprus, including the Sovereign Base Areas in Akrotiri and Dhekelia, until 31 December 2007, when the Republic of Cyprus adopted the euro...
at an irrevocable fixed exchange rate of CYP 0.585274 per EUR 1.00.
Economy in the government-controlled area
Cyprus has an openOpen economy
An open economy is an economy in which there are economic activities between domestic community and outside, e.g. people, including businesses, can trade in goods and services with other people and businesses in the international community, and flow of funds as investment across the border...
, free-market
Market economy
A market economy is an economy in which the prices of goods and services are determined in a free price system. This is often contrasted with a state-directed or planned economy. Market economies can range from hypothetically pure laissez-faire variants to an assortment of real-world mixed...
, service-based
Service economy
Service economy can refer to one or both of two recent economic developments. One is the increased importance of the service sector in industrialized economies. Services account for a higher percentage of US GDP than 20 years ago...
economy with some light manufacturing
Manufacturing
Manufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale...
. Internationally, Cyprus promotes its geographical location as a "bridge" between East
Eastern world
__FORCETOC__The term Eastern world refers very broadly to the various cultures or social structures and philosophical systems of Eastern Asia or geographically the Eastern Culture...
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
Mediterranean Sea
The Mediterranean Sea is a sea connected to the Atlantic Ocean surrounded by the Mediterranean region and almost completely enclosed by land: on the north by Anatolia and Europe, on the south by North Africa, and on the east by the Levant...
region, with GDP per capita reaching $30,000. Their standard of living
Standard of living
Standard of living is generally measured by standards such as real income per person and poverty rate. Other measures such as access and quality of health care, income growth inequality and educational standards are also used. Examples are access to certain goods , or measures of health such as...
is reflected in the country's "very high" Human Development Index
Human Development Index
The Human Development Index is a composite statistic used to rank countries by level of "human development" and separate "very high human development", "high human development", "medium human development", and "low human development" countries...
, and Cyprus is ranked 23rd in the world in terms of the Quality-of-life Index
Quality-of-life index
The Economist Intelligence Unit’s quality-of-life index is based on a unique methodology that links the results of subjective life-satisfaction surveys to the objective determinants of quality of life across countries...
.
However, after more than three decades of unbroken growth, the Cypriot economy contracted in 2009. This reflected the exposure of Cyprus to the global recession and European sovereign 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
Evangelos Florakis Naval Base explosion
The Evangelos Florakis Naval Base explosion was the worst peacetime military accident ever recorded in Cyprus. The incident occurred on 11 July 2011, when 98 containers of explosives that were being stored for 2½ years in the sun on the Evangelos Florakis Naval Base near Zygi self-detonated.The...
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
Turkish invasion of Cyprus
The Turkish invasion of Cyprus, launched on 20 July 1974, was a Turkish military invasion in response to a Greek military junta backed coup in Cyprus...
of 1974 and the continuing occupation of the northern part of the island by Turkey
Turkey
Turkey , known officially as the Republic of Turkey , is a Eurasian country located in Western Asia and in East Thrace in Southeastern Europe...
. The Turkish invasion inflicted a serious blow to the Cyprus economy and in particular to agriculture, tourism
Tourism in Cyprus
Tourism occupies a dominant position in the economy of Cyprus.* In 2006 it was expected to contribute 10.7% of GDP.* in real terms it generated CYP£2,598.2 mn ....
, 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
Famagusta
Famagusta is a city on the east coast of Cyprus and is capital of the Famagusta District. It is located east of Nicosia, and possesses the deepest harbour of the island.-Name:...
, which handled 83 percent of the general cargo, and the closure of Nicosia International Airport, in the buffer zone
United Nations Buffer Zone in Cyprus
The United Nations Buffer Zone in Cyprus runs for more than along what is known as the Green Line and has an area of . The zone partitions the island of Cyprus into a southern area effectively controlled by the government of the Republic of Cyprus , and the northern area...
, 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 has few 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
Greece
Greece , officially the Hellenic Republic , and historically Hellas or the Republic of Greece in English, is a country in southeastern Europe....
and the United Kingdom, while the Middle East receives 20% of exports. In 1991, Cyprus introduced a Value Added Tax
Value added tax
A value added tax or value-added tax is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the "value added" to a product, material or service, from an accounting point of view, by this stage of its...
(VAT), which is currently 15% in line with the EU minimum. Cyprus ratified the new world trade agreement (General Agreement on Tariffs and Trade
General Agreement on Tariffs and Trade
The General Agreement on Tariffs and Trade was negotiated during the UN Conference on Trade and Employment and was the outcome of the failure of negotiating governments to create the International Trade Organization . GATT was signed in 1947 and lasted until 1993, when it was replaced by the World...
, 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.
Cyprus has the fourth-largest ship registry
Cyprus Merchant Marine
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 of Cyprus...
in the world, with 2,758 ships and 25.5 million gross registered tons
Gross Register Tonnage
Gross register tonnage a ship's total internal volume expressed in "register tons", one of which equals to a volume of . It is calculated from the total permanently enclosed capacity of the vessel. The ship's net register tonnage is obtained by reducing the volume of non-revenue-earning spaces i.e...
(GRTs). It is an open registry and includes ships from more than 43 countries, including Greece
Greece
Greece , officially the Hellenic Republic , and historically Hellas or the Republic of Greece in English, is a country in southeastern Europe....
, Germany, and Russia
Russia
Russia or , officially known as both Russia and the Russian Federation , is a country in northern Eurasia. It is a federal semi-presidential republic, comprising 83 federal subjects...
.
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 have also 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, and has removed exchange restrictions on current international transactions. Non-residents and foreign investors may freely repatriate proceeds from investments in Cyprus.
Economy in the Turkish-occupied area
The economyEconomy of Northern Cyprus
The economy of Northern Cyprus is dominated by the services sector , which includes the public sector, trade, tourism and education. Industry contributes 22% of GDP and agriculture 9%. The economy operates on a free-market basis, with a significant portion of administration costs funded by Turkey...
of Turkish-occupied northern Cyprus is about one-fifth the size of the economy of the government-controlled area, while GDP per capita is around one-third. Because the de facto administration is recognized only by Turkey
Turkey
Turkey , known officially as the Republic of Turkey , is a Eurasian country located in Western Asia and in East Thrace in Southeastern Europe...
, 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
Turkish lira
The Turkish lira is the currency of Turkey and the de facto independent state of the Turkish Republic of Northern Cyprus. The lira is subdivided into 100 kuruş...
is legal tender
Legal tender
Legal tender is a medium of payment allowed by law or recognized by a legal system to be valid for meeting a financial obligation. Paper currency is a common form of legal tender in many countries....
. 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
Desalination
Desalination, desalinization, or desalinisation refers to any of several processes that remove some amount of salt and other minerals from saline water...
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.
Turkey is by far the main trading partner of the Turkish-occupied area, supplying 55% of imports and absorbing 48% of exports. In a landmark case, the European Court of Justice
European Court of Justice
The Court can sit in plenary session, as a Grand Chamber of 13 judges, or in chambers of three or five judges. Plenary sitting are now very rare, and the court mostly sits in chambers of three or five judges...
(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.
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
Hyperinflation
In economics, hyperinflation is inflation that is very high or out of control. While the real values of the specific economic items generally stay the same in terms of relatively stable foreign currencies, in hyperinflationary conditions the general price level within a specific economy increases...
every year until its replacement by the Turkish new lira
Turkish new lira
The new Turkish lira was the currency of Turkey and the de facto independent state of the Turkish Republic of Northern Cyprus between 1 January 2005 and 1 January 2009 which was a transition period for the removal of six zeroes from the currency. The new lira was subdivided into 100 new kurush...
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.
See also
- Cypriot poundCypriot poundThe pound, also known as the lira , was the currency of Cyprus, including the Sovereign Base Areas in Akrotiri and Dhekelia, until 31 December 2007, when the Republic of Cyprus adopted the euro...
- Economy of EuropeEconomy of EuropeThe economy of Europe comprises more than 731 million people in 48 different states. Like other continents, the wealth of Europe's states varies, although the poorest are well above the poorest states of other continents in terms of GDP and living standards. The difference in wealth across...
- List of Ministers of Finance of the Republic of Cyprus