05 May 2000

Cyprus on the fast track for EU membership by 2003

Easter came a week later for the Greek Orthodox world this year

By Patrick Comerford

Easter came a week later for the Greek Orthodox world this year. Last weekend, the churches of Nicosia were overflowing for three days, with crowds spilling on to the streets for the traditional services, processions, fireworks and bonfires.

Church bells rang out throughout the old walled city, mingling with the amplified call to prayer from the minarets of the mosques a few short metres away, on the other side of the buffer zone that divides Cyprus and its capital.

Tourists could be forgiven for thinking that this is a solidly traditional society for which little has changed since the Turkish invasion in 1974. But the Republic of Cyprus has seen successive, dramatic changes in its economy in less than a generation, putting it on the fast track for EU membership by the year 2003.

The Turkish invasion dealt a major blow to the island's economy. For example, up to 92 per cent of the tourist economy was concentrated in the invaded area. The two principal resorts, Kyrenia and Famagusta, were captured. After the invasion, there were few developed beach resorts in the government-controlled two-thirds of the island and the economy had to be rebuilt from scratch.

Small farms, the export of early crops such as new potatoes and citrus fruits, and small, light industries, including clothing and footwear, provided the base for a new start.

Since then, however, Cyprus has been transformed, with the rebuilding of the tourist sector, and in recent years the growth of the service sector, particularly offshore banking and facilities.

In the 1950s, agriculture was the mainstay of the economy; but today it contributes only 4.5 per cent of GNP, mainly through cash crops such as early potatoes and citrus fruits. Industrial output as a percentage of GNP has been declining each year and now stands at 11 per cent. With full employment and a labour shortage, the government is trying to shift industry away from labour-intensive manufacturing areas, such as clothing and footwear.

Labour in Cyprus ‘is scarce and expensive’, says Mr Antis Nathanael of the Cyprus Chamber of Commerce and Industry, and the government needs to give incentives for industrial restructuring and investment in new technology. The models of the Republic and Israel are being cited for the development of hitech industries, although he is sceptical, saying: ‘I don’t think it’s going to be successful”.

Today, the services sector, including tourism and offshore banking, accounts for 75 per cent of the economy, according to Mr Georgios Georgiou, the planning bureau’s senior officer for economic relations with the EU. This is the sector “driving the economy of Cyprus”, says Mr Nathanael.

Both tourism and off-shore banking have built their success on the island's obvious assets: the sun, business skills and easy access to the Middle East. With up to 2.5 million visitors predicted this year, tourism is expected to bring in one billion Cypriot pounds (€2.2 billion) this year.

Other growth areas in the services sector include third-level education and private medical services, attracting customers and clients from neighbouring states in the Middle East and North Africa.

But the surprising growth area has been the international business provided by offshore companies.
At first, offshore companies were attracted to Cyprus after the Lebanese civil war forced many businesses to leave Beirut. More than 40,000 offshore activities are registered on the island, bringing in Cyp£400 million in annual revenue. The majority are name plates, but more than 2,000 actually operate in Cyprus.

According to Dr George Georgiou of the international business department of the Central Bank of Cyprus, there is no one identifiable specialisation, and they include a variety of companies, such as banking, trading, printing, ship management and marketing.

Mr Nathanael points out that “international businesses”, as he prefers to call the offshore sector, have located on the island “not because it is beautiful, which it is”, but because of the facilities provided by Cypriot banks, the large pool of well-trained and skilled lawyers and accountants, easy access to the Middle East and the former Soviet Union, an increasing number of double-taxation agreements, and the success of the new Cyprus Stock Exchange.

Other factors include the fact that English is widely spoken, the island is “relatively crime-free”, a relatively low cost of living, and, according to Dr Georgiou, the island has excellent infrastructures, including telecommunications.

Both Dr Georgiou and Mr Nathanael dismiss allegations that the stock exchange and the offshore sector have been used to launder money from questionable sources in Russia.

Dr Georgiou wants to maintain the offshore sector for as long as possible and believes Cyprus “is not prepared to abandon the whole sector, not even in the medium-run”. In the long-run, he accepts some changes will have to be made, but points out: “It is too important a sector for us to give up just like that.”

He points to other offshore locations that have benefited member-states, naming the Republic and Luxembourg, along with Gibraltar, Madeira and Trieste. He believes tax harmonisation may be a far more sensitive issue, but says: “We may not even see this in my lifetime.”

Cypriot membership would be no cost to the EU, according to the island's chief negotiator and former president, Mr George Vassiliou.

As Cyprus moves rapidly towards EU accession, the public debt, the continuing division of the island and the potential costs of reunification appear to be the main concerns for business in Cyprus, according to Mr Vassiliou.

The government plans to raise VAT from 8 to 10 per cent to reduce the public debt, and Dr Georgiou says the government is committed to raising VAT to 15 per cent.

Mr Vassiliou argues that a special levy on stock exchange transactions could easily produce the 1 per cent of GDP required to bring the debt under 3 per cent.

Mr Georgiou expects the current three-year programme will reduce the deficit to 2 per cent by 2002, leaving Cyprus ready for accession the following year.

However, the continuing division of the island could be a more difficult problem to wipe out.

This news feature was published in ‘The Irish Times’ on Friday 5 May 2000

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