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