During the fifty years since the island’s independence in 1960, Cyprus has gradually transformed from a mostly closed economy, based on agriculture and mining, into a service-based, export-oriented economy. Much of this transformation was achieved due to the opening up of key sectors of the economy.
For most of the period since independence, the Cyprus economy has performed remarkably well. It has weathered significant external shocks and has taken advantage of a series of opportunities. A key driving force has been the economy’s adaptability, compatibility and the responsiveness to international market trends as well as the successful partnership between the private and public sectors. The government invested in infrastructure essential for growth, and the private sector exploited external opportunities. The onset of the global financial crisis in 2008 has also affected the Cyprus economy. It has managed to reverse the growth momentum, affecting severely construction and tourism sectors resulting in a significant deterioration of public finances. The continued difficult global economic situation, with the second wave of the crisis, led to the collapse of the banking sector of Cyprus.
The major trading partners of Cyprus are the EU member-states, especially Greece, the United Kingdom, Germany and Russia.
The Cyprus economy can generally be characterised as small, open and dynamic, with services constituting its engine power. The services sector is the fastest growing and accounted for more than 80% of GDP in 2017.
On the one hand, 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 markets in order to maintain conditions of macroeconomic stability and a favourable business climate, via the maintenance of the necessary legal and institutional framework and secure conditions of fair competition.
Cyprus has a number of comparative advantages that have contributed towards the island becoming an important international business and shipping centre:
Cyprus Economic Indicators
Prior to the emergence of the global economic crisis, Cyprus had enjoyed a track record of satisfactory economic growth, low unemployment and relatively stable macroeconomic conditions. However, these good economic conditions were partly the result of excessive credit expansion and unsustainable consumption levels in the economy, which led to the creation of severe macroeconomic imbalances. In addition, the inadequate regulatory and supervisory framework of the financial sector and the significant exposure of Cyprus banks to the Greek economy and to the Greek sovereign bond market at the time, have contributed to the collapse of the financial sector and the Cyprus economy. The result of these imbalances was the loss of access to the international capital markets in June 2011. Consequently, the Republic of Cyprus submitted in June 2012 an official request to European Stability Mechanism (ESM) and the International Monetary Fund for financial assistance.
The agreement reached on a Memorandum of Understanding in March 2013 opened the way to a financial assistance programme for a three-year period which, in itself contributed to the gradual stabilisation of the Cyprus economy and the steady recovery in confidence levels. In March 2016, Cyprus successfully exited its three-year Economic Adjustment Programme and is now subject to post-programme surveillance (PPS) until at least 75% of the financial assistance received has been repaid.
In 2017, the Cyprus economy for a third consecutive year, recorded a positive growth rate of 3.9% following growth rates of 3.4% in 2016 and 2% in 2015. Robust economic activity levels are anticipated to be maintained in the following years.
Unemployment also fared better than expected as it peeked at around 16% in 2014, despite projections of more than 20% of the labour force during the crisis period. A concerning issue however is the high rate of youth unemployment, as well as the long-term unemployment. Despite this, youth unemployment has been on a declining path since 2013 falling to 24.7% in 2017 from 29.1% in 2016. Also, long-term unemployment has been on a declining path from 2015 falling to 4.5% in 2017 from 5.8% in 2016. In 2017, the overall unemployment rate fell to 11.1% from 12.9% the year before and is expected to continue on a downward trend.
For 2017, CPI inflation stood at 0.5%, i.e. low inflation environment, as well as the EU as a whole. In the case of Cyprus, the low inflation largely reflects the adjustment of the labour market and price developments considered necessary to improve productivity and regain competitiveness to restore the economy to growth.
As regards public finances, targets have been met with considerable margins both in 2016 and 2017. In 2017, the budget balance recorded a surplus of 1.8% of GDP from a surplus of 0.3% of GDP in 2016.
In relation to the banking sector, the progress made is significant, since it shows signs of stabilizing. However, the challenges the banking sector is facing remain substantial. Addressing the high level of non-performing loans remains the key challenge.