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Cyprus

REPUBLIC OF CYPRUS

From independence in 1960 until the Turkish occupation of the north in 1974, the economy of Cyprus performed well overall, and the gross domestic product (GDP--see Glossary) increased at an average annual rate of about 7 percent in real terms. However, the Turkish Cypriot community did not share in this growth, living in its scattered agricultural enclaves under conditions like those of less developed countries (see The Republic of Cyprus , ch. 1).

The Turkish invasion and occupation of the northern 37 percent of the island severely disrupted the economy of the Republic of Cyprus. Fragmentation of the market, a massive displacement of people (about a third of the island's population), and loss of important natural resources had devastating effects. The government responded with the first and second emergency economic action plans, for 1975-76 and 1977-78. The pre-1974 policy of balanced budgets was replaced by expansionary fiscal and monetary policies aimed at stimulating economic activity. Incentive plans to encourage private economic activity were implemented, as were housing and employment programs for refugees who had fled areas seized by the Turks.

These efforts proved phenomenally successful. The economy expanded at a 6 percent rate in real terms between 1974 and 1978, and by 1978 unemployment stood at about 2 percent, compared with 30 percent at the end of 1974. This growth continued through the 1980s. In 1988 the per capita gross national product (GNP--see Glossary) in current prices was about US$7,200 or Cú3,597 (for value of the Cyprus pound--see Glossary), compared with Cú537.9 in 1973.

The economy of the Republic of Cyprus changed as it grew in size and complexity. The primary sector lost ground, as it had in the decades before the Turkish invasion. Agriculture declined from more than 20 percent of GDP at the end of the 1960s to only about 7 percent by the end of the 1980s, although it employed about 15 percent of the labor force. Mining, vital in the 1950s as a source of exports, became insignificant.

Manufacturing increased at double-digit rates during much of the 1980s. At the end of the decade, it accounted for 15.2 percent of GDP, the second largest share, after the service sector's, and was the second largest source of employment. Manufacturing depended on exports, most to the Middle East and the European Economic Community (EEC--see Glossary). However, rising labor costs and relatively low quality products stood in the way of future industrial growth. Construction provided just under 10 percent of GDP in 1989 and was the fourth largest private employer. Construction had declined in importance since the second half of the 1970s, when much housing for refugees was built and work began on constructing the tourist facilities that were important to the south's economy.

The service, or tertiary, sector was the dominant sector in the Greek Cypriot economy after the late 1970s. In 1988 it accounted for 50.2 percent of GDP. The sector's most dynamic component was trade, restaurants, and hotels (or tourism), which supplied 20.8 percent of the GDP and employed 22.3 percent of the labor force in 1988. The gigantic increase in the number of tourists--from 165,000 in 1976 to 1,376,000 in 1989--was the main cause of this subsector's growth. Tourism was also an important source of foreign exchange, exceeding the income from the export of domestic goods from 1985 through 1988.

The other branches of the service sector--transportation, storage, telecommunications, finance, insurance, real estate, and business services--also experienced steady growth and improvement. Another dynamic component of the sector, important to Cyprus's future economic growth, was offshore enterprises, which conducted diverse businesses abroad from a base in southern Cyprus. Attracted by generous tax concessions, the island's strategic location between Europe and the Middle East, and stable political conditions, many foreign businesses established themselves in the republic. By 1990 more than 5,000 permits for offshore enterprises had been issued.

The government played an active and successful role in planning after 1974. This planning was indicative in nature. That is, the government set goals for the economy and limited its direct participation to improving the nation's infrastructure and supporting and guiding the private sector. These activities were costly, however, and resulted in large and expanding budget deficits. By the end of 1987, the total deficit of the 1975-87 period amounted to Cú640.6 million.

Another problem was a consistently unfavorable trade balance. In most years, however, expanding surpluses in the invisibles account, mainly from tourist receipts, nearly offset the trade deficits. At the beginning of the 1990s, it was not yet clear what effect the 1988 Customs Union Agreement with the EEC would have on this deficit. Many Cypriots saw the agreement as an opportunity. Access to the community's market of 320 million people might prove beneficial, provided that the manufacturing sector, consisting of small labor-intensive firms, was restructured and modernized. Undoubtedly, the economy would face more intense competition in the 1990s, but its main asset, a versatile and educated human capital, could make the difference again as it had often done in the past.

Data as of January 1991


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