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The Cyprus Economy
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Main Economic Indicators
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2007 |
2008 |
2009 |
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Nominal GDP (in € mln) |
15.879,1 |
17.247,8 |
16.946,5 |
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Rate of growth of real GDP (%) |
5,1 |
3,6 |
-1,7 |
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Per capita GDP in PPS, (EU-27=100) |
93 |
96 |
98 |
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Rate of Inflation HICP (%) |
2,2 |
4,4 |
0,2 |
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Unemployment Rate (%) |
3,9 |
3,7 |
5,3 |
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Employment Growth (%) |
2,8 |
2,7 |
-0,8 |
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Fiscal Position (% of GDP) |
3,4 |
0,9 |
-6,0 |
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Public Debt (% of GDP) |
58,3 |
48,4 |
58,0 |
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Public Debt (in € mln) |
9.261,5 |
8.346,7 |
9.826,3 |
Currency
On 1 January 2008 the Republic of Cyprus joined the euro area and in so doing introduced
the euro as its official currency, replacing the Cyprus pound. Thus, euro banknotes and
coins are the country’s legal tender and the Cyprus pound ceased to be legal tender as
from 1 February 2008.
The euro banknotes are exactly the same in all euro area countries. The euro coins have
a side which is common to all euro area countries and a national side with country-specific
designs. As with banknotes, euro coins can circulate in all euro area countries irrespective of the issuing country.
Basic Economic Characteristics
The economy of Cyprus can generally be characterised as small, open and dynamic, with
services constituting its engine power. Since the accession of Cyprus to the European
Union on 1 May 2004, its economy has undergone significant economic and structural
reforms that have transformed the economic landscape. Ιnterest rates have been
liberalised, while price controls and investment restrictions have been lifted. Moreover,
other wide-ranging structural reforms have been promoted, covering the areas of
competition, the financial sector and the enterprise sector. Full liberalisation of the foreign direct investment regime in Cyprus has also been implemented. Moreover, a tax reform
was implemented in 2002, which significantly lowered the tax rates.
The services sector is the fastest growing area and accounted for about 80 percent of
GDP in 2009. This development reflects the gradual restructuring of the Cypriot economy
from an exporter of minerals and agricultural products in the period 1961-73 and an
exporter of manufactured goods in the latter part of the 1970s and the early part of the
1980s, to an international tourist, business and services centre during the 1980s, 1990s
and the 2000s. The secondary sector (manufacturing) accounted for around 18%
of GDP in 2009. The primary sector (agriculture and fishing) is continuously shrinking
and only reached 2,4% of GDP in 2009.
The economy of Cyprus is open, as shown by the share of total imports and exports to
GDP being around 104 percent in 2008. However, the percentage shrunk to around 89
percent in 2009, due to the impact of the international economic crisis. The major trading
partners of Cyprus are the EU member-states, especially Greece and the United Kingdom,
which are two countries which have been greatly affected by the crisis.
The private sector, which is dominated by small and medium-sized enterprises, has a
leading role in the production process. On the other hand, the government’s role is mainly
to support the private sector and regulate the markets in order to maintain conditions of
macroeconomic stability and a favourable business climate, via the creation of the
necessary legal and institutional framework and secure conditions of fair competition.
During the last years, Cyprus has exhibited rising living standards, as shown by the high
level of real convergence with the EU. The per capita GDP in PPS stood at around 98
percent of the average for the EU27 in 2009. However, the unfolding international
economic crisis, which has deepened intensely since September 2008, has had a major
impact on world growth and on the EU. Cyprus has so far weathered the storm reasonably
well and is relatively less affected by the crisis, compared to other European economies.
This can be partly explained by the strong and healthy banking system of Cyprus, which
had very limited exposure to toxic products. In numbers, GDP growth decelerated to -1,5%
in 2009, where the average GDP growth in the EU was -4%.
The crisis primarily affected the construction, real estate and tourism sectors of Cyprus.
Given the deceleration of the economy, the government adopted a number of fiscal
measures to support the real economy in line with the wider European effort for economic
recovery. The measures are targeted towards the tourism and construction sector, which
are the areas hit the hardest.
The global economic crisis has also affected the labour market in Cyprus. In numbers,
the unemployment rate reached around 5,3 percent in 2009, compared to 3,7% in
2008. The “Prevention–Action Plan” promoted jointly by the Ministry of Labour and Social
Insurance and the Human Resources Development Authority in response to the crisis,
primarily focused on labour market measures, which included the provision of training
programmes and job placements for the unemployed, recent graduates, and those with
weak job security during the economic downturn with the aim to mitigate the pressure
on the labour market.
Over the last years, public finances have been improved, reaching a surplus of 0,9%
of GDP in 2008. However, public finances deteriorated markedly in 2009, and the reason
for this being the temporary fiscal stimulus measures adopted by the government to
mitigate the negative impact of the crisis on the Cyprus economy and the significant
deceleration of the economy. As a consequence, fiscal deficit was -6% of GDP and
public debt increased to around 58% in 2009.
Key Policy Objectives
The overriding objective of the economic policy of the government is to enhance longterm
growth and the standard of living of all citizens, maintain macroeconomic stability,
implement structural reforms which improve the functioning of the market mechanism
and ensure that the government sector provides services to the public adequately and
efficiently.
Monetary and Exchange Rate Policy
Cyprus’ accession to the euro area on 1 January 2008 had the immediate result of losing
its monetary policy autonomy. The Central Bank of Cyprus has become part of the
European System of Central Banks (ESCB), which, together with the European Central
Bank (ECB), conducts monetary policy for the whole euro area, based on conditions
prevailing in this region.
Fiscal Policy
Fiscal policy is geared towards consolidating public finances, with a view to reducing
further public debt and thus addressing the long-term sustainability of public finances.
Particular emphasis is placed on the need to curtail current expenditure and restructure
public spending, in favour of capital expenditure, research and education, which can boost
the economy’s growth potential. Emphasis is also attached to targeted social spending.
The fiscal policy is based on four key pillars:
• The implementation of a Medium-Term Budgetary Framework (MTBF), which will
institutionalise expenditure rules, give more independence to spending ministries and, at
the same time, increase their accountability for achieving important quantifiable targets.
• The reform of the social welfare system, in favour of those who are in greater need.
• The modernisation of the public sector, which will result in leaner and more productive
public services.
• The improvement of tax collection, within the present system, by focusing on tackling
tax evasion and improving tax administration.
Structural Reforms
The promotion of structural reforms will enable Cyprus to develop a robust and flexible
economy, exhibiting the desired resilience to external shocks, while enhancing the
efficiency of the market mechanism and raising the production potential of the economy.
The programme of structural reforms, outlined in detail in the Lisbon National Reform
Programme, aims at boosting productivity and competitiveness that will deliver high
growth and living standards for the citizens of Cyprus.
Ongoing reforms are the following:
• Reforms in the labour market, aiming at boosting the supply of labour among females
and addressing the high gender pay gap, increasing employability and labour force
adaptability —particularly through lifelong learning— and raising the employment level.
The enhancement of physical and human capital is also a key factor in increasing productivity and boosting the economy’s potential growth since the development of human capital is especially important in an economy, dominated by the services sector.
• Furthermore, reforms are being carried out, aimed at strengthening competition,
especially in the professional services sector, improving the overall business climate,
streamlining the regulatory framework and cutting red tape.
• Reform of the social security and of the healthcare provision systems which are crucial
for tackling the long-term sustainability of public finances.
• Implementation of policies aimed at upgrading the physical infrastructure and
improving the functioning of network industries will be intensified, taking into account
environmental concerns. A number of infrastructure projects will be speeded up in
particular as part of the EU-led initiative to boost demand in view of the weakening
economic activity especially in the construction sector.
Challenges
A number of challenges must be addressed in the coming years, such as the improvement
of productivity which, so far, has not been impressive.
In addition, the heavy administrative burden of regulations must be reduced, the use of
modern technology and equipment must be further encouraged and more resources must
be devoted to research, development and innovation.
Cyprus also faces a major challenge of achieving short-term fiscal consolidation (given
the deterioration of the public finances due to the global economic crisis) and long-term
sustainability, in view of the budgetary impact of an ageing population. The projected
demographic changes, with the old-age dependency ratio doubling over the coming
decades in the EU and Cyprus, have led to growing concerns regarding the long-term
sustainability of the public finances.
Moreover, as a result of the global economic crisis, Cyprus faces a number of challenges
in the tourism and construction sector, given that these areas depend to a large extent
on foreign demand. The government has adopted specific measures to support these two
sectors, but further measures are envisaged to be adopted, such as the enrichment of
the tourist product, through the building of new marinas and golf courses.
For further information and updates please refer to:
Central Bank: www.centralbank.gov.cy
Ministry of Finance: www.mof.gov.cy
Planning Bureau: www.planning.gov.cy
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