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GDP (2002): $9.9 billion.
Annual real growth rate (2002): 2.2%.
Per capita GDP income (2002): Greek Cypriots--$14,499; Turkish Cypriots--about $4,610.
Agriculture and natural resources (4.6% of GDP): Products--potatoes and other vegetables, citrus fruits, olives, grapes, wheat, carob seeds. Resources--pyrites, copper, asbestos, gypsum, lumber, salt, marble, clay, earth pigment.
Industry and construction (19.3% of GDP): Types--mining, cement, construction, utilities, manufacturing, chemicals, non-electric machinery, textiles, footwear, food, beverages, tobacco. Services and tourism (76.1% of GDP): Trade, restaurants, and hotels 23.3%; transport 11.2%; finance, real estate, and business 20.6%; government, education, and health 16.3%; and community and other services 4.8%.
Trade (2002): Exports--$926 million: citrus, grapes, wine, potatoes, clothing, footwear. Major markets--EU (especially the U.K. and Greece), Middle East, Russia. Imports--$3.8 billion: consumer goods, raw materials for industry, petroleum and lubricants, food and feed grains. Major suppliers--Greece, Italy, Germany, U.K. (U.S. trade surplus--projected for 2002: $237 million.)
Cyprus has an open, free-market, serviced-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.
In the past 20 years, the economy has shifted from agriculture to light manufacturing and services. The service sector, including tourism, contributes 75.7% to the GDP and employs 70.7% of the labor force. Industry and construction contribute 19.3% and employ 21.3% of labor. Manufactured goods account for approximately 63.6% of domestic exports. Agriculture and mining is responsible for 4.9% of GDP and 8.0% of the labor force. Potatoes and citrus are the principal export crops.
The average rate of growth in the 1990s was 4.4%, compared with 6.1% in the 1980s. In 2002, economic growth dropped to 2.2%, compared with 4.0% in 2001 and 5.1% in 2000. In 2002, unemployment accelerated to 3.4% of GDP, from 3.0% the year before. Inflation also recorded an increase to 3.0% from 2.0% in 2001. As in recent years, the services sectors, and tourism in particular, provided the main impetus for growth. Economic activity in manufacturing remained about the same in 2002,while agricultural activity recorded a small increase.
Trade is vital to the Cypriot economy--the island is not self-sufficient in food and has few natural resources. The trade deficit increased by 4.0% in 2002, reaching $3.1 billion.
Cyprus must import fuels, most raw materials, heavy machinery, and transportation equipment. More than 50% of its trade is with the European Union, particularly with the United Kingdom.
Growth in 2003 is expected to remain around 2.0%-2.5%, largely due to the unstable environment prevailing internationally. Unemployment is expected to edge up to 3.5% in 2003, while inflation is forecast to reach 5.0%. Despite efforts to cut government spending and enhance revenue, the fiscal deficit is forecast to reach 4.0% of GDP in 2003, compared with 3.5% in 2002, remaining above Maastricht targets.
Cyprus adopted a new copyright law in 1994 and a new patent law in 1998. In 1997, the government introduced a more liberal regime for foreign investments and portfolio investment, complementing a modern banking law passed in the same year. At the same time, the government liberalized regulations for foreign portfolio investment in the Cyprus Stock Exchange.
Additionally, it has abolished investment restrictions for EU investors as of January 7, 2000. This has resulted in a healthy increase in investment over the last 2 years, particularly from the EU. The inflow of approved foreign investment in 2001 reached $74.1 million, compared with $85.7 million in 2000 and $56.6 million in 1999. Cyprus has 15 bilateral agreements for the encouragement and reciprocal protection of investments with the following countries: Armenia, Belgium, Bulgaria, Belarus, China, Egypt, Greece, Hungary, India, Israel, Lebanon, Poland, Russia, Romania, and Seychelles. Another 40 bilateral investment agreements are currently under negotiation. Cyprus does not have a bilateral investment protection agreement with the United States.
Cyprus also has entered into bilateral double tax treaties with 40 countries, including one with the United States. The main purpose of these treaties is the avoidance of double taxation of income earned in any of these countries. Under these agreements, a credit is usually provided for tax levied by the country in which the taxpayer resides for taxes levied in the other treaty country. The effect of these arrangements is normally that the taxpayer pays no more than the higher of the two rates.
International Business Center
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' geographical 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 and North Africa. As a result, Cyprus has developed into an important regional center for many International Business Companies (IBCs) conducting their offshore affairs from the island.
In 2001 the Central Bank issued 5,858 permits to nonresidents for new IBCs (compared with 5,713 permits in 2000). About 79% of new IBC registrations came from the EU, and another 11% from North America. IBCs in Cyprus, including shipping companies, generated foreign exchange earnings of U.S. $454 million in 2001, an increase of 9.3% over 2000. Cyprus first started developing its offshore business sector in 1976. Since then, nonresidents have established nearly 50,000 IBCs, only about one-third of which are currently active. The Central Bank systematically deletes companies that are inactive or fail to submit annual accounts. Of the active IBCs, a total of 1,098 maintain fully fledged offices on the island, at least 30 of which are from the United States, including two oil companies, two computer companies, and several accounting firms.
In June/July 2002 the House passed tax reform legislation abolishing tax discrimination afforded to offshore companies by the end of 2005, in line with Cyprus' commitments to the EU and OECD. Under the new regime, corporate tax on profits for IBCs will rise from 4.25% to 10.0%--the same as for local companies--which may compromise future growth prospects for the sector.
Ties with the European Union (EU)
Cyprus is scheduled to join the European Union on May 1, 2004. Cyprus signed an association agreement with the 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 began formal accession negotiations with the EU on March 31, 1998. Preparations for EU membership mobilized both the government and private sectors in Cyprus to undertake extensive and far-reaching structural reforms to harmonize Cypriot laws, standards, and regulations with those of the EU. This effort has transformed the economic structure of Cyprus, resulting in a significantly more open economy, comparable to the economies of EU member states.
At the Copenhagen Summit in mid-December 2002, the leaders of EU member countries approved Cyprus's membership. Cyprus continues its preparations for accession on May 1, 2004, the planned accession date. The EU Commission issued a comprehensive monitoring report on November 5, 2003. Some of the challenges still around the corner for Cyprus include completing liberalization of utilities, including telecommunications and power generation, and redirecting the economy away from its heavy reliance on the tourism sector.
On January 1, 1996, Cyprus began full implementation of the Uruguay Round agreement. Under this agreement, the Government of Cyprus eliminated quantitative restrictions and other nontariff barriers to trade, allowing improved access to the Cypriot market. Cyprus is a full member of the World Trade Organization.
Additionally, completion of the first phase of the EU-Cyprus Customs Union agreement on January 1, 1998, liberalized the island's trade regime further, allowing most goods to be traded between Cyprus and the EU with a zero tariff rate. Under the same agreement, Cyprus also has adopted the EU's Common Customs Tariff (CCT) for most products from third (non-EU) countries.
Significantly, the preference now given to EU products under the CCT is less than the preference Cyprus gave to EU countries under its previous tariff regime. These developments have helped make U.S. exports to Cyprus more competitive in recent years.
Best prospects for U.S. products and services in Cyprus include government and semi-government tenders in telecommunications equipment, air traffic control systems, medical equipment for a major new hospital, computer services, and construction of airports and marinas. Local municipalities are working on long-term plans for sewerage projects and for new highways. By far the most recent visible U.S. commercial success story in Cyprus was the decision in 2001 of Cyprus Airways to lease four new Boeing 737-800 aircraft, valued at more than $200 million, for its subsidiary Eurocypria. The island's private sector also has a growing appetite for U.S.-made office machines, computer software, and data processing equipment. Recent changes in the tariff regime have opened up many other opportunities for exporters to 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. Total U.S. exports to Cyprus are expected to decline to around $250 million in 2002, from $368.7 million in 2001. Principal U.S. exports to Cyprus include tobacco and cigarettes, office machines and data processing equipment, electrical equipment, passenger cars and wheat. Principal U.S. imports from Cyprus consist of portland cement, clothing, hunting rifle cartridges, canvas, dairy products, and fresh fish.
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, plus inflation and the devaluation of the Turkish lira--which the Turkish Cypriots widely use as their currency--continue to plague the economy.
Since the April 23, 2003 relaxation of restrictions on travel across the buffer zone there have been more than 1.5 million crossings in both directions. Greek Cypriot spending in the north provided a short-term boost to the Turkish Cypriot economy. This initial influx has tapered off, however, as both the number of trips per month and the average spending per trip by Greek Cypriots has declined. Travel by Turkish Cypriots to the south continues, and Turkish Cypriot business are increasingly concerned that they are losing sales to purchases in the south by Turkish Cypriots. Despite initial expectations, the relaxation of travel restrictions has not yet resulted in measurable commercial trade between the two communities, largely due to barriers to trade resulting from the continued division of the island.
Turkey is, by far, the main trading partner of the TRNC, supplying 64% of imports and absorbing 57% 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 TRNC 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 $21.8 million in 2001 (or 35% of total exports) in 2001. Even so, the EU continues to be the TRNC's second-largest trading partner, with a 23% share of total imports and 35% share of total exports. Additionally, the economic crisis in Turkey has had a negative impact on TRNC foreign trade in the last 2 years. Total imports increased to $293 million in 2002 (from $272 million in 2001), while total exports increased to $48 million (from $35 million in 2001).
Assistance from Turkey is the mainstay of the Turkish Cypriot economy. Under the latest economic protocol (signed January 2001), Turkey undertakes to provide Turkish Cypriots loans and financial assistance totaling $350 million for the purpose of implementing projects included in the protocol related to public finance, tourism, banking, and privatization. Turkey also has agreed to provide a supplementary amount of $160 million to entrepreneurs in the form of low-interest loans with the purpose of supporting export-oriented industrial production and tourism. Fluctuation in the Turkish lira continues to exert downward pressure on the Turkish Cypriot standard of living.
Turkish Cypriot authorities have instituted a free market in foreign exchange and authorize residents to hold foreign-currency denominated bank accounts. This encourages transfers from Turkish Cypriots living abroad.