Magazine article Washington Report on Middle East Affairs

Having Overcome 1974 Upheaval, Cyprus Now Boasts Healthy Economy, Anticipates EU Membership

Magazine article Washington Report on Middle East Affairs

Having Overcome 1974 Upheaval, Cyprus Now Boasts Healthy Economy, Anticipates EU Membership

Article excerpt


Like most of his colleagues, Sofronis Eteocleous, economic director for the Cyprus Ministry of Finance, works in what were meant to be temporary quarters, but which have been home to most government agencies in Nicosia since 1974. These modest offices attest to the choices that confronted the Republic of Cyprus in the face of some 400,000 refugees -- homeless and jobless overnight -- as well as the sudden loss of the country's key tourist, manufacturing and agricultural areas, and the revenues they generated. Fancy -- not to mention permanent -- offices for government bureaucrats was not an item high on the list of priorities.

It is because of those priorities, however, that today the per capita income in Cyprus is higher than that of Greece or Portugal, both of them members of the European Union, and that the Republic of Cyprus, which currently accounts for only 60 percent of the island's total area and has had to virtually rebuild its economy in the past quarter-century, ranked 27th worldwide on the 1999 United Nations Human Development Index.

Last year the economy of Cyprus grew at a rate of 5 percent, representing a strong recovery from 1996-97's unstable consumer and investment climate, Eteocleous told the Washington Report. The forecast for 1999 is a growth rate of 4 percent, and first-quarter indicators were encouraging, he said.

The economic director described the economy of Cyprus as "small, open and service-oriented," with imports and exports about equal, and services accounting for 73.5 percent -- and growing -- of the country's gross domestic product. The bulk of service sector activity is in tourism, "a mainstay for jobs and [hard] currency," Eteocleous said.

In 1998 some 2,265,000 tourists visited Cyprus. With a population of 750,000, this means that there were 3.4 tourists per Cypriot -- a ratio difficult to ignore in theory or in fact! Most visitors are from Europe, with slightly more than 40 percent from the U.K., reflecting what Eteocleous generously described as the two countries' "traditional links" (otherwise known as colonialism). Other tourists come from Russia and Israel, and there is increasing representation from eastern Europe as well.

Another component of the service sector are offshore companies, which by definition are wholly owned by non-residents and may not sell their products in Cyprus. (For example, McDonald's could set up an "offshore" administrative office in Cyprus to oversee its European or Middle East operations, as opposed to a local Cypriot-owned McDonald's franchise.)

According to Dr. George Georgiou, an officer with the Central Bank of Cyprus' International Business Sector, Cyprus benefits directly from the offices physically located there, which pay rent, employ Cypriot workers, hire lawyers and accountants, etc. Other offshore companies, equally legal, may consist of no more than a post office box or brass plate on a door.

Dr. Georgiou said offshore companies historically constitute "a way to attract foreign investment after a period of economic difficulty" -- in his country's case, the events of 1974. He enumerates among Cyprus' attractions to offshore investors the country's low taxes (4.25 percent for foreign investors vs. the local rate of 25 percent), its European environment and lifestyle, advanced infrastructure and telecommunications services, and the ready availability of educated, bilingual workers. Unlike countries which specialize in offshore industries -- Bermuda in insurance, for example, or Bahrain and Luxembourg in banking -- Cyprus has not targeted any one sector for its offshore enterprises.

Looming over the horizon, however, is the European Union which, as Dr. Georgiou puts it, "takes a dim view of low taxation." EU membership could well have an adverse impact on Cyprus' offshore businesses. While acknowledging this probability, the Cypriot banker maintains that, being an "important component of the economy, the offshore sector cannot cease to function overnight. …

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