Economical overview
Cyprus's economy is split in a northern
Turkish Cypriot and a southern Greek Cypriot. In the
south, the economy is based on the service sector, in
particular on an extensive tourism industry. Over two
million tourists visit southern Cyprus every year.
Northern Cyprus is financially dependent on assistance
from Turkey. Important industries are citrus
cultivation, trade and casino operations.
Cyprus, following the independence of the British in
1960, underwent rapid economic development. However, the
actual division of the island, which followed Turkey's
invasion of northern Cyprus in 1974, opened an economic
divide between the south and the north. In northern
Cyprus there were the most fertile soils and most citrus
crops, most of the industrial and tourist facilities and
the island's most important port, Gazimağusa (Famagusta).
But the business community was technically and
commercially dominated by the Greek Cypriots. When they
concentrated in southern Cyprus, mass tourism was
directed around there.
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Countryaah.com:
Major imports by Cyprus, covering a full list of top products imported by the country and trade value for each product category.
New hotels were built together with industries and
housing for a few hundred thousand refugees. Agriculture
was modernized to feed the extended population. The
Greek Cypriots also received much assistance from Greece
and other donors. In the late 1970s, southern Cyprus
partly took over the war-affected Beirut's role as the
Middle East trading center. Cyprus gained a growing
market in the Arab world.
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Abbreviationfinder.org: Check this abbreviation website to find three letter ISO codes for all countries in the world, including CYP which represents the country of Cyprus.
Light shaded finance business
Growth slowed down during the 1980s but gained a new
boost in the 1990s, when Russian capital was invested in
the island's banks following the dissolution of the
Soviet Union. Finance and insurance business grew, and
through favorable tax laws, Southern Cyprus developed
into a center for offshore trade at the intersection of
Europe, Africa and Asia.
In 2000, there were more than 40,000 “offshore”
companies registered, that is, finance companies that
were attracted to establish themselves on the island
(offshore) through favorable taxes and banking secrecy.
Offshore companies have long paid much lower tax than
local companies, but since 2002 10 percent tax applies
to all companies, which is also one of the lowest levels
in the EU.
The offshore industry has a reputation for being used
for so-called money laundering (illegal income is
"washed clean" through a series of financial
transactions). Cypriot banks have also been suspected of
such activities. Especially since the dissolution of the
Soviet Union in 1991, they have attracted huge sums from
newly rich Russian "oligarchs"; money that they have not
always acquired in a completely legal way. Arab
dictators are also believed to have concealed
substantial sums in the Cypriot banks.
As a result of the large investments, the Cypriot
banks grew disproportionately in relation to the overall
national economy. During the first year of the 2000s,
banks' assets were about seven times larger than the
Greek Cypriot state's GDP, making the country
dangerously dependent on banks. The banks' desire to
expand their operations outside of the restricted
domestic market led to them starting to buy large
amounts of Greek government bonds and lend money to
Greek companies.
The finance bubble is bursting
While the economic situation was still looking
bright, Cyprus was approved for entry into the euro
zone, thereby giving up the opportunity to steer clear
of economic difficulties through its own fiscal policy.
On 1 January 2008, the Cypriot pound was exchanged for
the euro. The new coins received text in both Greek and
Turkish.
During the global crisis year 2008, the machinery
began to crackle. When Greece's economic problems
developed into an emergency crisis in 2009-2010, it led
to heavy losses for the Cypriot banks. They were forced
under pressure from the EU to write down the value of
their Greek government bonds by up to 80 percent. The
banks also placed large claims on private Greek
companies that they would probably never be able to
receive. Also, Cypriot companies risked not being able
to repay their loans as they were also affected by the
crisis in Greece, the largest trading partner.
In the autumn of 2011, the International Monetary
Fund (IMF) urged the Cypriot government to try to curb
the ever-growing budget deficit. Foremost, the IMF
pointed to wage costs in the public sector, equivalent
to 15.4 percent of GDP, which is highest in the euro
zone.
Two crisis packages adopted by Parliament in the fall
of 2011 were met by strikes. Among other things, wages
in the public sector were frozen and taxes were raised
on higher incomes. VAT was increased from 15 to 17
percent. Property values collapsed.
On the brink of state bankruptcy
In 2011 and 2012, US credit rating agencies rated the
Cypriot banks as near-bankrupt. As a result of the
banking crisis, Cypriot government securities were
downgraded to "junk status" in the spring of 2012, when
the government's political opportunities to get the
country out of the crisis were considered small. Just a
week before Cyprus was to become EU President for the
first time, the government was forced to ask the Union
for an emergency loan. By then, Russia had already come
to the rescue with a loan of EUR 2.5 billion. As Russian
loans are not linked to demands for far-reaching
austerity and tightened budgetary discipline, they were
not seen with the utmost gentle eyes of the EU.
The European Commission urged the Government of
Cyprus to continue to reduce government spending,
including by reforming and streamlining the healthcare
sector and the pension system. The government was also
urged to tighten tax collection, reform wages so that
wages better match actual productivity and to try to
broaden the country's economic base.
During the lengthy negotiations between Cyprus and
the "troika" of lenders (EU Commission, European Central
Bank ECB and IMF), disagreement prevailed over what
reforms Cyprus should implement. The Cypriot government
defended itself against the requirement to privatize a
number of wholly or partially state-owned commercial
companies. The pension system also caused major problems
in the negotiations.
Cypriot government debt rose faster in 2012 than in
any other EU country, second only to Spain, and was 85.8
percent of GDP at the end of the year, according to the
EU statistics agency Eurostat. One year earlier, the
debt burden was 71.1 percent of GDP.
Emergency assistance and remediation
Despite the relatively modest size of the Cypriot
economy, the country's request for assistance caused
great concern within the EU, as the loan amount it was
deemed to need would lead to an unmanageably high debt
burden. To this end, it was considered essential in the
EU to reduce the disproportionately large Cypriot
financial sector, but how this would go was a sensitive
issue. Particularly from Germany, there was resistance
to lending money to a business that was suspected of
protecting taxpayers and money launderers.
In March 2013, a settlement was finalized regarding a
rescue package. The EU and the IMF pledged a € 10
billion loan, while Cyprus pledged to cut its budget
deficit, reduce the banking sector and raise taxes. For
the first time during the euro crisis, private
individuals were directly responsible for some of the
costs of the restructuring of the economy by imposing a
one-off tax on all bank accounts. Cyprus also agreed to
raise the corporate tax rate from 10 to 12.5 percent. In
the long run, the settlement also required
privatizations of semi-state companies. In total, the
package was estimated to give the Cypriot state the
approximately € 17 billion it was deemed to need to
avoid bankruptcy.
Under considerable pressure from the ECB, which set a
time limit for when it would stop keeping the major
Cypriot banks alive through emergency emergency loans,
the government was also forced to settle with the EU and
the IMF on a new plan to clean up the banking sector.
Savers with less than 100,000 euros in their bank
accounts were spared, while those with larger account
holdings could expect to lose up to 60 percent of their
money. This was expected to mean a blow to large parts
of the Cypriot business sector and probably lead to an
end to the country's position as an international
financial center. Russia refused to help the Cypriot
state, but also said no to compensate the many Russian
citizens who would get large savings confiscated.
Economic recovery
Just a few weeks later, a deeper analysis of the
country's economic situation showed that the € 17
billion rescue plan was insufficient. The need was
written up to about SEK 23 billion.
The fact that GDP fell by 6 percent in 2013, instead
of the forecast's 8.7 percent, was interpreted as the
economic remediation work had been more successful than
expected and that the figures could soon turn up again.
When the restrictions on cash withdrawals from the banks
were gradually abolished in 2014, private individuals'
withdrawals increased rapidly, and the money went to
private consumption. It stimulated GDP but largely
revealed a continuing doubt on the Cypriot banks.
The crisis in Ukraine, where the Crimean peninsula
was annexed by Russia in 2014, was also feared to have
serious consequences for the recovery through reduced
tourism from both countries and reduced Russian
investment. One Russian company, whose owners suffered
from US sanctions, canceled the plans for major
investments in the Cypriot energy sector. During the
year, both the construction and the finance industry
declined.
In 2015, certain bright spots began to be discerned
in the Greek Cypriot economy. Not least, tourism-related
industries turned slightly upwards, as did the
manufacturing industry and the construction sector.
However, a cloud of concern was the continued high
unemployment rate (16 percent in 2014). In 2016, the
economic upturn continued and Cyprus was able to leave
the aid program during the year. For the first ten
months of 2017, the country showed a budget surplus of
almost half a billion euros. The € 10 billion emergency
loan that Cyprus was forced to take from the EU and the
IMF in 2013 was now repaid.
Northern Cyprus economy
Northern Cyprus's economy is based on agriculture,
tourism, a small industry and extensive assistance from
Turkey. Since the southern Cyprus border was partially
opened in April 2003, the service sector, mainly trade,
has increased in importance.
The service sector, with tourism and trade included,
contributes almost four-fifths of GDP and employs about
an equal share of the workforce. Of the approximately
1.2 million tourists who visited the area in 2013, more
than 920,000 tourists came from the mainland.
Northern Cyprus mainly exports food, live animals and
industrial goods. By far the largest exporting country
is Turkey.
Agriculture accounts for 5 to 6 percent of GDP and
provides formal employment to 4 percent of the
workforce. The Turkish Cypriot farmers mainly grow
citrus fruits, vegetables, potatoes and cereals.
Northern Cyprus must import water from Turkey to avoid
drought.
Industry contributes one-sixth of GDP and close to
one-fifth of formal employment.
Internationally isolated
Following the Turkish invasion of northern Cyprus in
1974, the Greek Cypriots continued to block the northern
part of the island. The trade boycott received
widespread international support and hit hard on the
Turkish Cypriot economy. When the EU court in 1994
illegally declared imports from northern Cyprus, it was
a severe blow to the citrus growers, who had sold
four-fifths of their harvest to the UK. Instead, they
were forced to sell most of the crop cheaply via Turkey
to Eastern Europe.
Traders and restaurant owners in the north
experienced a marked economic upturn when the southern
border was partially opened. At the same time, the Greek
Cypriots announced that the trade blockade to northern
Cyprus would be largely abolished. Thousands of Turkish
Cypriots got to work in the south and were able to
commute daily across the border.
Casino and nightclub tourism
Nearly a quarter of Northern Cyprus residents lost
money or were otherwise affected by the banking crash in
the summer of 2000. The authorities were then forced to
take over six bankrupt banks. Turkey refused to push for
extra funding. Instead, Turkey tried to persuade the
Turkish Cypriots to implement austerity measures similar
to those recommended by the IMF for Turkey. Turkey's own
financial crisis from autumn 2000 and a few years ahead
hit hard on northern Cyprus. Promised grants were
withheld while Turkey negotiated with the IMF and in the
meantime the grants fell in line with the Turkish
currency.
When all the casinos in Turkey were closed in 1998,
large parts of the business were transferred to Northern
Cyprus. Most gamblers are tourists from Turkey, but
there are also suspicions that foreign criminals are
"laundering" money at these casinos.
Northern Cyprus has offered foreign students, mainly
Turks from the mainland, university education since the
1990s. It has been about as profitable as the casino and
nightclub tourism.
Cyprus's EU membership
Ahead of Cyprus's entry into the EU in 2004, the
European Commission announced that funds earmarked for
implementing the reunification that did not end there
would instead be used to support Northern Cyprus. The
decision was interpreted as a reward for the Turkish
Cypriots voting for reunification (see Modern History).
However, the pledges from the EU and the outside world
were not fully realized, partly because the Greek
Cypriots used their EU membership to block some efforts.
Nevertheless, Northern Cyprus's economy continued to
grow rapidly in 2004–2006. The opening of the border had
resulted in a construction boom as well as an influx of
money from visiting Greek Cypriots and foreigners.
However, the construction boom was soon curbed by legal
disputes over land ownership. From 2007, growth slowed
down and the area's dependence on Turkish support
remains high.
FACTS - FINANCE
GDP per person
$ 28,159 (2018)
Total GDP
US $ 24 470 million (2018)
GDP growth
3.9 percent (2018)
Agriculture's share of GDP
1.7 percent (2018)
Manufacturing industry's share of GDP
4.7 percent (2018)
The service sector's share of GDP
72.6 percent (2018)
Inflation
0.7 percent (2019)
Government debt's share of GDP
102.5 percent (2018)
Currency
Euro
Assistance per person
$ 26 (1996)
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