The Cyprus Economy

The Cyprus economy has performed remarkably well for most of the fifty years period since its independence in 1960. It has weathered significant external shocks and has taken advantage of a number of different opportunities. A key driving force has been the openness and the responsiveness to international markets and a successful partnership between the private and public sectors. The government invested in infrastructure essential for growth, and the private sector exploited exogenous opportunities such as the crisis in Lebanon, and the expanding markets in the Arab World, Eastern Europe and Russia. Economic policies have been overall appropriate, though sometimes uneven, providing a supportive framework of exchange rate and financial stability and expansionary fiscal policy when appropriate, all these resulting in reasonable price stability, strong employment growth and rising living standards. Major events, such as the prospect of entering the World Trade Organisation (WTO), the European Customs Union, the EU and the Eurozone were intelligently used to anchor important and long-debated reforms. Good industrial relations and economic migration underpinned a relatively manageable wage growth, and when wage growth outpaced productivity the transformation to a service economy accelerated. For the Cyprus economy, the years between 1999 and 2004, signalled a period of harmonisation and the abolition of several distortions for the efficient functioning of the markets, such as interest rate and capital movements liberalisation and the opening of the market in the utilities sectors to competition. On May 1st, 2004, Cyprus became a full member of the European Union. In May 2005, the Cyprus pound joined ERM II, and on 10th July 2007 the EU Council of Finance Ministers approved Cyprus adoption of the euro as from 1 January 2008 and decided that the Cyprus pound exchange rate vis-a-vis the euro will be fixed at the central parity of €1=CY£ 0,585274. Hence, Cyprus became a member of the Eurozone on 1st January 2008. The onset of the global financial crisis in 2008, reversed the growth path, affecting mostly the construction and tourism sectors. The Government followed expansionary fiscal policy in order to mitigate the impact of the crisis, focusing on the affected sectors. The continued difficult global economic situation, with the second wave of crisis, led to a deterioration of public finances, which in connection with the previous expansion, led to excessively high fiscal deficits and unsustainable public finances.

Fiscal consolidation became the primary objective, which took effect in a series of fiscal consolidation packages and the formation of a particularly tight budget, primarily focusing on the expenditure side with measures of permanent character, addressing the structural problems that arose. At the same time, the global economic crisis revealed additional structural problems, particularly with regard to the competiveness of the economy, which must be addressed. However, it is widely accepted that structural changes are slow in having an impact on the real economy. The Government, recognizing the need for an immediate growth boost, has already started to implement a series of development measures.These measures focus on encouraging employment, attracting foreign investment, support tourism, encouraging land development and green growth, facilitating the financing of SME’s and stimulating investment. Finally, natural gas explorations that have recently taken place in the Exclusive Economic Zone of Cyprus have revealed significant reserves of natural gas which are estimated to have significant revenue implications. The Government is currently in the process of a second round of licensing for the offshore explorations of hydrocarbons and is exploring options of best conduct regarding economic policy surrounding the exploration, discovery and exploitation of natural gas in Cyprus.

The Provision of services –backbone of Cyprus economy

The tertiary sector of services is considered as the backbone of the Cyprus economy, account¬ing for more than 80% of GDP in 2011. This reflects the gradual evolution of the economy from an exporter of minerals (mainly copper and asbestos) and agricultural products during 1960-73, an exporter of manufacturing products (mainly clothing) at the end of the 1970s, to an international business, tourist and service centre in the 1980s – today. The primary sector (agriculture and fishing) is continuously shrinking and only reached 2,4% of GDP in 2011.

An open economy

The economy of Cyprus is open, as shown by the share of total imports and exports to GDP being around 90% in 2011. The major trading partners of Cyprus are the EU member-states, especially Greece and the United Kingdom. Cyprus’s major imports are raw materials, consumer and capital goods, transport equipment and fuel, while major exports are pharmaceutical products, cement, cigarettes, paper products, plastic products, potatoes, citrus fruit, wines, and furniture.

Real growth, Inflation and Unemployment Rate

According to statistical information from the Central Bank of Cyprus, the Cyprus GDP, Inflation Rate and Unemployment rate for the last 4 years are:

Indicator 2008 2009 2010 2011
Real GDP Growth (annual % change) 3.6 -1.9 1.1 0.5
Inflation Rate (%) 4.7 0.3 2.4 3.3
Registered Unemployed (%) 2.9 4.3 5.5 6.7

Source: Cyprus Ministry of Finance, Central Bank of Cyprus

High per capita income

According to the International Monetary Fund (IMF), Cyprus’s real per capita income has reached above 80% average EU 25 income level when adjusted for purchasing power.

Global Competitiveness

Global Competitiveness Index 2012-2013
  Score Global Ranking
Switzerland 5.72 1
Sweden 5.53 4
UK 5.45 8
Israel 5.02 26
Ireland 4.91 27
Spain 4.60 36
Czech Republic 4.51 39
Poland 4.46 41
Italy 4.46 42
Turkey 4.45 43
Malta 4.41 47
Slovenia 4.34 56
Cyprus 4.32 58
Hungary 4.30 60
Jordan 4.23 64
Slovak Republic 4.14 71

Cyprus was ranked number 58 out of 144 countries by the World Economic Forum «Global Competitiveness Report 2012 - 2013». The report «assesses the ability of countries to provide high levels of prosperity to their citizens. This in turn depends on how productively a country uses available resources. Therefore, the Global Competitiveness Index measures the set of institutions, policies, and factors that set the sustainable current and mediumterm levels of economic prosperity.»

*  Sourses: Cyprus Investment Promotion Agency (CIPA, www.cipa.org.cy), www.aboutcyprus.org

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