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Cyprus: Country and Foreign Investment

Economy and Currency

The Greek Cypriot economy is reasonably stable, with a high proportion of GNP (around 40%) based on tourism. Around 3m visitors come to the island annually, 65% from the EU, although tourist revenue came under pressure as a result of 9/11 and sharp rises in Cyprus prices. More than half of the tourists are British. The Government's successful encouragement of the offshore sector has led to the development of a European-standard commercial and financial infrastructure, although there is now no distinction between domestic and offshore companies. International links are particularly strong in the shipping and banking sectors.

In an interview with Bloomberg in January 2011, Athanasios Orphanides, Governor of the Central Bank of Cyprus, said that the country's banking sector "is sound," and has been so throughout the financial crisis. "It is well capitalised. Moody's acknowledges that the capitalisation and liquidity position of the banking sector are in good order. The strict prudential supervision framework we have always had, has served us well," he said, adding that macroprudential measures taken before the crisis "helped protect the banking sector from an exuberant real estate market."

"In July 2007, before the turbulences began, the Central Bank tightened loan to value ratios on real estate loans in order to contain the risks associated with exposure to that sector," Orphanides said. "That decision made our system more resilient and this is an example of prudential supervision action we took in Cyprus that is now discussed as part of a toolkit that should be considered more broadly in Europe."

However, with Cypriot banking assets totaling over 8 times GDP, and with significant exposure to Greece, by the summer of 2011, it was becoming apparent that all was not well with the economy as the eurozone crisis threatened to engulf the island.

On August 1, Cyprus's largest commercial bank, the Bank of Cyprus, called on the Cypriot government to make radical decisions to reduce the budget deficit and quash speculation that Cyprus will require an EU-funded bailout. In a bold public statement aimed at spurring the government into action, the Bank of Cyprus warned of alarming trends in Cypriot bond yields, which could put at risk Cyprus's ability to finance its debt, despite support from cash-rich domestic banks.

“Indecisiveness, disagreements or plain talk without substance are punished; bold actions are rewarded," the bank stated. "[The Bank of Cyprus] has the capital and the ability to support the state’s policies, provided they are characterized by effectiveness and vision; provided they get the country out of the crisis, leading it to progress and prosperity on the basis of a modern European economy - free of perceptions that corrode [Cyprus's] competitiveness."

"Each day of inaction increases problems and risks, which is why we must act today, not tomorrow," the Bank warned.

Despite some progress on reining in the budget deficit, which is expected to fall from 5.3% of GDP in 2010 to 4% in 2011, the Cypriot economy was rocked by the July 11 explosion of a munitions cache which damaged Cyprus's largest power station, causing nationwide blackouts and disruption to business, and saddling the government with an estimated EUR3bn in clean-up costs.

In October 2011, the International Monetary Fund said that the significant deterioration in Cyprus's public finances requires a "strong and immediate policy response" to restore confidence in the territory's international finance centre, according to a report from the International Monetary Fund (IMF), which predicted a 7% deficit for 2011.

Accordingly, in the latter half of 2011, the Cypriot parliament approved a number of austerity measures including higher taxes on personal incomes, savings interest and property, and a new annual fee on companies.

Growth averaged almost 4% until 2009 when the economy contracted by 1.9%. There was a moderate rebound in 2010 when GDP growth of 1.1% was recorded, but the IMF expects that the economy flatlined in 2011.

GDP per capita at purchasing power parity was US$29,100 in 2011 (est).

Inflation and unemployment are both under control, at 3.3% and 5.1% respectively in 2011.

The cost of living is approximately 65% of the EU average. The low crime rate, good housing conditions, excellent climate and plentiful international air links make Cyprus a desirable place to live.

The currency, until January 1, 2008, was the Cyprus Pound. In 2008, the country joined the eurozone, alongside Malta.

The island's EU accession has of course led to the complete removal of exchange controls, and the Cyprus Central Bank allowed local residents to open foreign currency accounts from March 1, 2002.

In October 2011, Standard and Poor’s lowered Cyprus’s long-term credit rating by a notch to ‘BBB’ from ‘BBB+’, with a negative outlook, citing ‘credit risk’, exposure to Greek assets, and its dependence on the performance of its financial services centre.

 

 

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