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Cyprus - Economy (Notes)

(* Section refers to the government-controlled area unless otherwise specified.)

Cyprus has an open, free-market, services-based economy with some light manufacturing. Cyprus' accession as a full member to the European Union as of May 1, 2004, has been an important milestone in its recent economic development. The Cypriots are among the most prosperous people in the Mediterranean region. Internationally, Cyprus promotes its geographical location as a 'bridge' between three continents, 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. Currently, agriculture makes up only 3.2% of the GDP and employs 7.1% of the labor force. Industry and construction contribute 19.2% and employ 20.8% of the labor force. The services sector, including tourism, contributes 77.6% to the GDP and employs 72.1% of the labor force. As in recent years, the services sector, and tourism in particular, provided the main impetus for growth. Manufactured goods account for 58.3% of domestic exports, while potatoes and citrus constitute the principal export crops. The island has few proven natural resources. This may change, however, as in March 2007, the Government of Cyprus launched a licensing round to explore for possible offshore oil and gas reserves off its southern coast. Trade is vital to the Cypriot economy and most goods are imported. The trade deficit increased in 2006, reaching $5.7 billion. Cyprus must import fuels, food, most raw materials, heavy machinery, and transportation equipment. More than 68% of its trade in goods is with the European Union, particularly with Greece, Italy and the United Kingdom, compared to less than 2% with the United States

GNP growth rates have gradually begun to decline as the Cypriot economy has matured over the years. The average rate of growth went from 6.1% in the 1980s, to 4.4% in the 1990s to 3.5% from 2000 to 2006. In the last couple of years (2005 and 2006) growth has remained fairly strong at around 3.8%. Unemployment, at 3.8% of the total labor force in 2006, has remained fairly low, while inflation has been kept in check, declining to 2.2% in 2006 from 2.6% in 2005.

The economic outlook remains bright for Cyprus in 2007. Economic growth is projected to reach 3.6% in 2007, marginally lower than the 3.8% recorded the year before. Cyprus has managed to tame its fiscal deficit (down to 1.5% of GDP by the end of 2006) and its public debt (64.7% of GDP), and continues to keep inflation under control, meeting all the relevant Maastricht (EU convergence) criteria to adopt the Euro on January 1, 2008. In July 2007, the EU made the final decision to formally invite Cyprus to join the Eurozone in January 1, 2008. For a small country like Cyprus, adopting the Euro is expected to offer significant economic benefits, including a higher degree of price stability, lower interest rates, reduction of currency conversion costs and exchange rate risk, and increased competition through greater price transparency.

Cyprus plans to allow both the Euro and the Cyprus pound to circulate on the island for a period of one month after January 1, 2008. Commercial banks will exchange Cyprus pound banknotes and coins free of charge until June 30, 2008. The Central Bank will exchange national coins free of charge until the end of 2009 and national banknotes until the end of 2017. Dual pricing in Cypriot pounds and Euros will be mandatory from September 1, 2006 until July 31, 2008. The final conversion exchange rate between the Cypriot pound and the Euro has been set at one Euro per 0.585274 Cyprus pounds. The following website offers additional information on the mechanics of Cyprus's adoption of the Euro:

Investment Climate
Cyprus, a full EU member since May 1, 2004, has a liberal climate for investments. On October 1, 2004, the Republic of Cyprus lifted most investment restrictions concerning non-EU residents, completing earlier reforms (introduced in January 2000) concerning EU investors. Through this decision, the Republic of Cyprus has lifted most capital restrictions and limits on foreign equity participation/ownership, thereby granting foreign investors the same rights and benefits as national investors.

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' geographic 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, the European Union, and North Africa. As a result, Cyprus has developed into an important regional and international business center. According to the latest United Nations Conference on Trade and Development (UNCTAD) 'World Investment Report 2006,' Cyprus ranks among the world's leading countries per capita in terms of attracting foreign direct investment (FDI). Non-EU investors (both natural and legal persons) may now invest freely in Cyprus in most sectors, either directly or indirectly (including all types of portfolio investment in the Cyprus Stock Exchange). The only exceptions concern primarily the acquisition of property and, to a lesser extent, restrictions on investment in the sectors of tertiary education, banking, and mass media.

In 2005, the inflow of FDI reached U.S. $1.17 billion, compared with U.S. $1.08 billion in 2004. Most of the new investment in 2005 (58.9%) originated from the EU, particularly from Greece, the U.K., and Germany. Another 35.3% came from non-EU countries in Europe and 4.2% from the Americas. In terms of sectoral allocation, incoming FDI in 2005 went to the following sectors: mining and quarrying 1.7%; manufacturing 3.6%; construction 6.9%; real estate and business activities 32.9%; trade 25.3%; and other services 26.4%.

U.S. investors may benefit from Cyprus's abolition of EU-origin investment restrictions, provided they operate through EU subsidiaries. The inflow of U.S. FDI in Cyprus in 2005 reached U.S. $8.4 million, compared with U.S. $85.4 million in 2004. U.S. investment in Cyprus was unusually high in 2004 due to a large (U.S. $60.9 million), one-off project in business and management consultancy services. U.S. investment in 2005 was focused on mining and quarrying. A further breakdown of direct investment from the U.S. is unavailable as it is considered confidential by the Central Bank of the Republic of Cyprus. Projects involving U.S. investment in recent years have included a well-known U.S. coffee retailing franchise, a university, an information technology firm, an equestrian center, a hair products manufacturing unit, a firm trading in health and natural foodstuffs, and a financial services company.

Additional information, with graphs, on foreign direct investment statistics can be obtained from:

European Union (EU)
Along with the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia, the Republic of Cyprus entered the EU on May 1, 2004. The EU acquis communautaire is suspended in the area administered by Turkish Cypriots pending a Cyprus settlement. Export Opportunities
Best prospects for U.S. firms generally lie in services, high technology sectors, such as computer equipment and data processing services, financial services, environmental protection technology, medical and telecommunications equipment, desalination and water purification equipment and services, and tourism development projects such as casinos, marinas, and golf courses. Moreover, alternative energy sources and the energy sector in general, are attracting an increasing amount of attention, while the possible existence of natural gas and petroleum reserves off the southern and eastern coast of Cyprus opens up new prospects. U.S. food franchises and apparel licensors are also finding fertile ground for expansion in Cyprus.

The Government of Cyprus, through the Ministry of Commerce, announced its plans to license 11 offshore blocks for exploration and exploitation of oil and natural gas within its Exclusive Economic Zone (EEZ). The first licensing round officially opened to interested companies on February 15, 2007 and will close on August 16, 2007 (although this is subject to change). It is too early to determine the extent of the possible reserves. Unsubstantiated press reports, however, suggest that there may be as high as six to eight billion barrels of natural gas/petroleum deposits with an estimated value of U.S. $400 billion.

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. The U.S. runs a significant trade surplus with Cyprus, on the order of $100.6 million in 2006 (exports of $111.0 million versus imports of $10.5 million--according to Republic of Cyprus statistics).

Principal U.S. goods exports to Cyprus include office machines and data processing equipment; electrical appliances; optical, measuring, and medical equipment; tobacco and cigarettes; passenger cars; and wheat. Principal U.S. imports from Cyprus consist of dairy products, fresh fish, and mineral substances.

Bilateral business ties also encompass a healthy exchange in services. In 2006, the inflow of services (from the United States to Cyprus) was $552.8 million, against an outflow (from Cyprus to the United States) of $335.9 million, according to Republic of Cyprus statistics.

Turkish Cypriot Economy
The economy of the Turkish Cypriot-administered area is dominated by the services sector including the public sector, trade, tourism and education, with smaller agriculture and light manufacturing sectors. The economy operates on a free-market basis, although it continues to be handicapped by the political isolation of Turkish Cypriots, the lack of private and public investment, high freight costs, and shortages of skilled labor. Despite these constraints, the Turkish Cypriot economy turned in an impressive performance from 2003 to 2006, with estimated growth rates of 7.8% in 2006, 10.6% in 2005, 15.4% in 2004, and 11.4% in 2003. Over the same period, GDP per capita more than doubled; according to unofficial Turkish Cypriot statistics it reached $11,802 by the end of 2006. This growth has been buoyed by the relative stability of the Turkish Lira, the employment of around 5,000 Turkish Cypriots in the Greek Cypriot economy where wages are significantly higher, and by a boom in the education and construction sectors. In 2006, the services sector accounted for nearly two-thirds of GDP, industry and construction accounted for 22.5% of GDP, and agriculture 8.4%, according to Turkish Cypriot statistics. The partial lifting of travel restrictions between the two parts of the island in April 2003 has allowed movement of persons--over 12 million crossings to date--between the two parts of the island with no significant interethnic incidents.

Turkey remains, by far, the main trading partner of the area administered by Turkish Cypriots, supplying 65% of imports and absorbing around 50% 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 the area based on certificates of origin and phytosanitary certificates granted by 'TRNC' authorities. The ECJ 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 $13.8 million in 2003 (or 28% of total exports). In August 2004, new EU rules allowed goods produced or substantially transformed in the area administered by Turkish Cypriots to be sold duty-free to consumers in the government-controlled area and through that area to the rest of the EU. To qualify, goods must also meet EU sanitary/phytosanitary requirements. Animal products are excluded from this arrangement. In May 2005, Turkish Cypriot authorities adopted a new regulation 'mirroring' the EU rules and allowing certain goods produced in the government-controlled areas to be sold in the area administered by Turkish Cypriots. (However, suppliers cannot legally transport imported products over the green line in either direction.) Despite these efforts, direct trade between the two communities remains limited.

The EU continues to be the second-largest trading partner of the area administered by Turkish Cypriots, with a 22% share of total imports and 27% share of total exports. Total imports increased to $1.3 billion in 2006, while total exports decreased slightly to $65 million. Imports from the U.S. reached $9.3 million in 2006, while exports to the U.S. were less than $70,000.

Assistance from Turkey is crucial to the Turkish Cypriot economy. Under the latest economic protocol (signed in 2006), Turkey undertakes to provide Turkish Cypriots financial assistance totaling 1.875 billion New Turkish Lira (YTL--roughly $1.34 billion) over a three-year period (600 million YTL in 2007, 625 million YTL in 2008 and 650 million YTL in 2009). Turkey also provides millions of dollars annually in the form of low-interest loans to mostly Turkish entrepreneurs in support of export-oriented industrial production and tourism. Total Turkish assistance to Turkish Cypriots since 1974 is estimated to have exceeded $4 billion.

Facts at a Glance: Geography - People - Government - Economy - Communications - Transportation - Military - Climate - Current Time - Ranking Positions - Cyprus Pound Exchange Rates
Notes and Commentary: People - Economy - Government and Political Conditions - Foreign Relations - Relations with U.S.

Facts at a Glance
Current Time
Ranking Positions
Cyprus Pound Exchange Rates

Notes and Commentary
Government and Political Conditions
Foreign Relations
Relations with U.S.

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