During the fifty years since the island’s independence in 1960, Cyprus has been 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 because of the open character 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 number of different opportunities. A key driving force has been the openness and the responsiveness to international markets and a successful partnership between the private and public sectors. The government invested in infrastructure essential for growth, and the private sector exploited exogenous opportunities. The onset of the global financial crisis in 2008 has also affected the Cypriot economy. It has managed to reverse the growth path, affecting mostly the construction and tourism sectors. The continued difficult global economic situation, with the second wave of crisis, led to a deterioration of public finances.
The major trading partners of Cyprus are the EU member-states, especially Greece, the United Kingdom, Germany and Russia.
The economy of Cyprus can generally be characterised as small, open and dynamic, with services constituting its engine power. The services sector is the fastest growing area and accounted for more than 80% of GDP in 2013.
The private sector, which is dominated by small and medium-sized enterprises, has a leading role in the production process. 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.
Cyprus has a number of comparative advantages that have contributed towards the island becoming an important international business and shipping centre:
Cyprus Economic Indicators
The excessive exposure of the Cyprus economy to the Greek economy and the consequent abrupt restructuring of the Cypriot banking sector, the continued negative external environment and the fiscal consolidation measures, have negatively affected the growth of the economy in 2013. Nevertheless, the recession in 2013 (-5.4%) was significantly lower than the initial estimates by the program partners and the forecasts by international rating agencies and large organizations. From the demand side, the decline in private consumption and investment was less than expected especially towards the end of the year. From a sectoral standpoint, the relatively good performance in the tourism sector and the relative preservation of activities of professional services, due to the comparative advantages that Cyprus has, helped to curb the recession.
In the labour market, the unemployment rate in 2013 increased significantly to 15.9% as a result of the economic downturn. Particularly alarming is the level of unemployment among young people (about 40%) and long-term unemployed which, negatively affects the growth and sustainability of public finances. The unemployment rate has been contained to some extent due to the measures enforced by the Government to reduce the number of foreigners in the labour market and earnings reduction.
For 2013, inflation stood at 0.4%, 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.
In terms of public finances, the 2013 budgetary targets were achieved with considerable scope (budget deficit of -5.4%) due to prudent budget execution, as well as milder recession. However, public debt increased significantly (111.5% of GDP), reflecting the sharp decline in nominal GDP as well as the recapitalization needs of the banking sector.
In relation to the banking sector, the progress made is significant, since it shows signs of stabilizing. Cypriot banks are fully capitalized, while in the Cooperatives, mergers have been made fully according to the schedule. Also, restrictions on movement of capital in the internal market have been relaxed to a great extent. However, the challenges the banking sector is facing remain substantial. Addressing the high level of non-performing loans remains the key challenge.