After EU accession in May 2004, the Republic of Cyprus set itself an ambitious target of joining the eurozone in January 2008 and is now well on the way to satisfying the demands of the Stability and Growth Pact.
GDP growth edged close to 4% in 2005 and, with the help of expenditure cuts and more tax revenues, the fiscal deficit fell to an estimated 2.5% of GDP compared with 4.1% in 2004, thus satisfying the Maastricht rules for the first time since 2001. Cyprus is on track to reduce the fiscal deficit to 2% this year and has a target of 0.5% for 2009. And public debt, which is forecast to fall to 67% of GDP by the end of this year, is also heading in the right direction, towards the Maastricht ceiling of 60%.
This healthy set of figures has been achieved alongside a repositioning of the Cyprus economy, which is putting itself forward as a regional gateway into the EU, with a strong focus on the services sector. Cyprus has a long track record as a centre for trade, shipping and banking.
EU accession removed the offshore status of foreign banks located in Cyprus but most have stayed on. The government is promoting the island as a regional financial services centre and is working on legislation in areas such as mutual funds to give an added impetus to growth.
Emphasis is also being placed on the healthcare and education sectors, with the development of new universities to attract more foreign students.
Tourism and shipping
Two large long-established sectors are also being repositioned. Ship management and ownership is growing, with changes to the Cyprus Registry to differentiate it from open registers elsewhere in the world. And the tourism industry is being given a makeover. There is a strategy to go upmarket and attract higher-spending visitors, with golf courses and winter training facilities for professional athletes to complement the summer package tourists.
The economy may look rosy but it is a very different story on the political front. The island of Cyprus remains divided, as it has been since the Turkish invasion in 1974. Recent attempts at re-unification via a federation with the Turkish-controlled north on the basis of a United Nations plan brokered by Kofi Annan have foundered. There have been some signs of progress, such as the opening of more border crossings at the UN-controlled Green Line, and a growing number of both Greek and Turkish Cypriots travelling back and forth each day. Despite this, trade between the two parts of the island remains minimal and fraught with controversy.
For its part, Turkey continues with a trade embargo that prevents Greek Cypriot vessels from stopping at Turkish ports, and the Republic of Cyprus government is pressing hard for the EU to block Turkey’s accession unless it is lifted. Many other thorny issues are yet to be resolved, not least of which involves compensation for real estate lost by Turkish Cypriots who fled the south in 1974 and Greek Cypriots who left the north.
In April, Greek foreign minister Dora Bakoyianni visited Nicosia for talks with Greek Cypriot president Tassos Papadopoulos and promised to help press the case of the Republic of Cyprus within the EU. However, there is little optimism that relations with Turkey will improve anytime soon. Stalemate is the word most commonly heard when the problems are discussed.
A solution to the political division would undoubtedly provide an added economic boost to the south but, in the meantime, the Republic of Cyprus is pressing ahead with economic growth plans that do not depend on a rapprochement with the north.
“Cyprus is an excellent location for both the EU market and companies wanting to penetrate the Middle East market,” says Andreas Sofocleous, director of trade at the Ministry of Commerce, Industry and Tourism. “We have the lowest corporate tax rate in the EU and we have signed 40 double taxation treaties with countries in eastern Europe and across the Middle East. That creates a mechanism for companies to use Cyprus as a base for investment in third countries.”
Cyprus has moved on from traditional labour-intensive industries, such as clothing or shoe manufacturing, and within the EU is more interested in the issues involving the service sector than in recent EU actions involving cheap imports from China, for example. “We would like to see the EU pressing countries around the world to open their markets to services,” Mr Sofocleous says.
One of the big issues facing companies at present is the tight labour market, with unemployment at 3.2%. The effort to attract new EU nationals, such as Poles and citizens of the Baltic states, has been only partially successful. Many workers from new EU countries are more likely to go to the UK or Ireland, perhaps because of pertinent language skills. Once Bulgaria joins the EU, however, some Cypriot employers hope that they will have a supply of workers who may be attracted to Cyprus on a more permanent basis.
“We have a problem finding new employees and we cannot solve this just with EU nationals, so we are recruiting from other counties,” says Michael Pilikos, director-general of the Employers and Industrialists Federation.
Cyprus’s workforce is heavily unionised, with more than 80% of workers having some sort of union representation. This can have its advantages in a tight labour market because wages are set. The current problem is not that employers are bidding up wages in a free-for-all, but rather a shortage of staff.
In such an environment, the Cyprus government is supporting the development of high-tech, non-labour-intensive industries. As part of this process, it is setting up a variety of programmes to help local companies to start up. The Technology-Incubating Programme seeks to link talent, technology, capital and know-how effectively to accelerate the development of new companies and speed up the commercialisation of new technology. Grants of up to C£120,000 (E208,778) are made over two years.
There are plans for a Cyprus Technology Park and interest from the Middle East is being encouraged, with the intention of giving the park a role in the IT and biotech industries of the whole region. Also, the Harvard School of Public Health and the Cyprus International Institute for the Environment and Public Health have signed an agreement to assist researchers both locally and regionally to address environmental and public health needs, and bring in scientists from around the world. This joint venture will eventually be located in the Cyprus Technology Park. The site for the park has already been set aside near the town of Limassol. “We are evaluating tenders from consulting firms and studying the incentives for high-tech companies offered by Cyprus versus incentives from other countries,” says George Michaeloudes, director of commerce and industry (technology) at the Ministry of Commerce, Industry and Tourism.
In September 2007, the new Technical University of Cyprus will start running degree courses and will eventually have some faculties located in the park. Various local private colleges are applying for licences to award university degrees, too, which will add to the attractiveness of Cyprus for foreign students.
Alongside the efforts involving IT and biotech, Cyprus is making efforts to develop one of its traditional industries: shipping. The Cyprus Registry has had to adjust to operating within the EU, after many years of being seen as a flag of convenience. The registry ranks ninth globally, with almost 2000 vessels registered with a gross tonnage of 23 million.
Traditional clients are European owned and managed ships, with the majority Greek owned, and many German and north European companies. Cyprus’s aim is to grow the registry with an emphasis on quality not quantity. However, the development of the registry is complicated by the Turkish embargo. No ship flying the Republic of Cyprus flag can call at any Turkish port. In addition, ships with a connection to Cyprus, either by ownership or management, may not directly approach Turkish ports from Cyprus. And Turkey reserves the right to ban any vessel with ownership or management connections to Cyprus entering one of its ports.
In the 1970s, Cyprus was a major transshipment centre but was hit hard by the upheaval following the 1974 Turkish invasion and subsequently by the putting in place of the embargo in 1987. It once had a throughput of almost 500,000 container boxes each year, 60% of which were for transit, but that figure has dwindled as some big shippers left for countries such as Italy or Greece.
“We have become fully compliant with EU regulations, for example on security – as the southern corner of the EU, our ports must be secure,” says Yiannakis Kokkinos, general manager at Cyprus Ports Authority. “Today we have a throughput of 333,000 boxes with minimal transit trade. But the ancillary services are in place and there is steady investment in ports infrastructure, so that if the Turkish embargo is lifted the Cypriot ports can grow rapidly.”
Harbours are being dredged and deepened, and new cranes and tugboats are being introduced into service. Limassol port is having its container-handling facilities extended and a new passenger terminal is due to be completed in 2008.
Meanwhile, Larnaca port, which used to be a busy trade transit hub but dwindled after the Turkish embargo was introduced, is being redeveloped as a predominantly passenger port. The project will be implemented via a design/build/finance/operate/transfer structure to create a state-of-the-art passenger port.
All this activity should result in strong growth for Cyprus as a centre for ship ownership and management, although the Turkish embargo remains a big problem. Cyprus has been pressing hard for Turkey to lift the embargo as part of its negotiating process towards EU membership.
“Ships flying the Cyprus flag are not allowed to call at Turkish ports. A shipowner with new buildings who might be looking for a 10-year charter may not want a flag with any restrictions, so they go somewhere else,” says Andreas Constantinou, senior surveyor of Cyprus ships at the Department of Merchant Shipping.
“Lifting the embargo is a win-win situation,” he says, pointing out that by excluding the Cypriot fleet, the pool of vessels that can call at Turkish ports is smaller, which means less competition and higher freight charges for Turkish companies.
However, the issue of the embargo and the more general state of relations between Cyprus and Turkey remain problematic, and there is uncertainty about whether the embargo will be lifted. In the meantime, the Department of Merchant Shipping is focusing its efforts on improving the quality of the Cyprus Registry. A stricter registration procedure has been applied in recent years and extensive surveys of ships applying for registration under the Cyprus flag are undertaken, in an effort to eliminate substandard vessels.
There has been a marked reduction in reported maritime accidents involving Cyprus ships and the detention rate of ships flying the Cyprus flag has also steadily declined. This has resulted in the Cyprus flag being removed from the Paris Memorandum of Understanding blacklist. “Image-wise, a ship owner choosing which flag to fly will be more interested in a quality register,” says Mr Constantinou.
The shipping industry will remain important to Cyprus, even as it develops in other areas, such as high technology, research and education.
Government initiatives in both industry and services are already having a positive impact and creating an environment of buoyant economic growth and stronger government finances.
The latest moves by the rating agencies show a positive outlook for Cyprus, which would like to move from single A (with peers such as South Korea, Chile and Czech Republic) up into the double A territory alongside countries such as Hong Kong and Slovenia. Fitch Ratings has Cyprus at single A plus, with positive outlook, so that goal is in sight as public finances continue to improve and the economy moves towards higher-value-added activities.