Cyprus Economy Facts

by ebizdir · Published January 30, 2023 · Updated February 22, 2023

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.

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.

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. Check findjobdescriptions to learn more about 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.