ECONOMY

ECONOMY*
(* 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 and light manufacturing to services. Currently, agriculture makes up only 2.4% of the GDP and employs 8.2% of the labor force. Industry and construction contribute 18.3% and employ 20.5% of the labor force. The services sector, including tourism, contributes 79.3% to the GDP and employs 71.1% of the labor force. In recent years, the services sector, and financial services in particular, have provided the main impetus for growth, while tourism has been declining in importance. 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. Trade is vital to the Cypriot economy and most goods are imported. The trade deficit increased in 2008, reaching $9.1 billion. Cyprus must import fuels, most raw materials, heavy machinery, and transportation equipment. More than 67% of its imports come from the European Union, particularly Greece, Italy, and the United Kingdom, while 1.7% come from 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 3.6% from 2000 to 2008. In the last couple of years (2007 and 2008) growth has remained fairly strong at around 4.4% and 3.8%. Cyprus is the only country in the Eurozone expecting positive growth in 2009, although it is forecast to remain barely above zero (0.3%) due to the global financial and economic turmoil. Cyprus’ prudent Central Bank and conservative bankers have shielded it from the excesses of other financial centers. Inflation soared to 4.4% in 2008 but is expected to drop to around 0.9% in 2009 as the domestic economy slows down. Cyprus continued to have one of the lowest unemployment rates in the EU during 2009 at around 4.7%, although this is considerably higher than the 3.8% recorded in 2008. Public finances have been in a fairly good shape in recent years, with an almost balanced budget (1.0% surplus in 2008, and an estimated 0.8% deficit in 2009) and relatively low public debt (49.3% of GDP in 2008 and on its way down).

These developments helped pave the way for the Euro, which replaced the Cyprus Pound as Cyprus' national currency as of January 1, 2008. Joining the Eurozone was a major accomplishment for the Cypriot economy, resulting in such benefits as 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. The final conversion exchange rate between the Cypriot pound and the Euro was one Euro per 0.585274 Cyprus pounds. The following website offers additional information on the mechanics of Cyprus's adoption of the Euro: http://www.euro.cy/

Investment Climate
In the run-up to EU accession (May 1, 2004), Cyprus dismantled most investment restrictions, attracting increased flows of Foreign Direct Investment (FDI), particularly from the EU. 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 2008," Cyprus ranks among the world's leading countries per capita in terms of attracting 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 2008, the inflow of FDI reached $1.85 billion, compared with $2.17 billion in 2007. The geographic origin of new investment in 2008 was primarily the EU, with 49.0% of the total, followed by non-EU countries in Europe. In terms of sectoral allocation, incoming FDI in 2007 (the latest year available) went to the following sectors: manufacturing 1%; construction 3.0%; trade and repairs 24.9%; transport and communication 3.7%; financial intermediation 14.8%; real estate and business activities 47.6%; and other services 4.6%.

The flow of U.S. investment in Cyprus reached $16.0 million in 2008 or 1.0% of Cyprus' total inward FDI. The stock of U.S. investment in the island was $379 million at the end of 2008. Recent projects involving U.S. investment collaborations with Cyprus include several well-known U.S. foods and drink-related franchises, an agreement between a U.S. university medical center and a well-known Cyprus group of companies for the creation of a specialized hospital in Cyprus, major investments in energy exploration and infrastructure, and a significant agreement between U.S. universities and corporations with the Cyprus Institute in the fields of science and technology among others.

Additional information on foreign direct investment can be obtained from the Cyprus Investment Promotion Agency website: http://www.cipa.org.cy.

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. Cyprus adopted the Euro on January 1, 2008.

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.

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 $176.8 million in 2008 (exports of $188.5 million versus imports of $11.7 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; passenger cars; and edible fruit and nuts. 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 2008, the inflow of services (from the United States to Cyprus) was $446.0 million, against an outflow (from Cyprus to the United States) of $307.7 million, according to Republic of Cyprus statistics.

Turkish Cypriot Economy
The EU acquis communautaire has been temporarily suspended in the northern part of the island due to the unresolved political situation. The currency used is the New Turkish Lira, although Euros are widely accepted. 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 13.2% in 2006, 13.5% in 2005, 15.4% in 2004, and 11.4% in 2003. This growth was fueled largely by a construction boom, which ended abruptly amid renewed controversy over the legitimacy of property titles in the north, following a much-publicized court case and decision (issued on December 18, 2008) by the European Court of Justice (the Orams case). In 2007, the economy grew by just 1.5%, followed by negative growth of 1.9% in 2008. Tourism and tertiary education are two very important sectors. The economy in recent years has been buoyed by the employment of around 6,000 Turkish Cypriots in the Greek Cypriot economy where wages are significantly higher, and by the relative stability of the Turkish Lira (prior to 2008). In 2008, the services sector accounted for 77.0% of GDP, industry and construction accounted for 18.0% of GDP, and agriculture 5.0%, 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 68% of imports and absorbing around 58% of exports (2007 figures). In another landmark case, the European Court of Justice ruled in 1994 against the British practice of importing produce from the area based on certificates of origin and phytosanitary certificates granted by "TRNC" authorities. This 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 $12.9 million in 2006 (or 19% 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 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 (comprising only 0.09% of the Greek Cypriot community’s trade, and 11.8% of the Turkish Cypriot community’s trade in February 2009).

The EU continues to be the second-largest trading partner of the area administered by Turkish Cypriots, with a 16.0% share of total imports and 16.0% share of total exports. Total imports increased to $1.5 billion in 2007, while total exports increased to $83.7 million. Imports from the U.S. reached $16.0 million in 2007, while exports to the U.S. were nil.

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 stock Turkish assistance to Turkish Cypriots since 1974 is estimated to have exceeded $4 billion.

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

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