The economy of Cyprus can generally be characterised as small, open and dynamic, with services constituting its engine power. Since the accession of the country to the European Union on 1 May 2004, its economy has undergone significant economic and structural reforms that have transformed the economic landscape. Interest rates have been liberalised, while other wide-ranging structural reforms have been promoted, covering the areas of competition, the financial sector and the business sector.
The tertiary sector (services) is the biggest contributor to GVA, accounting for about for about 84,5% in 2013. This development reflects the gradual restructuring of the Cypriot economy from an exporter of minerals and agricultural products in the period 1961-73 and an exporter of manufactured goods in the latter part of the 1970s and the early part of the 80s, to an international tourist, business and services centre during the 1980s, 1990s and the 2000s. The secondary sector (manufacturing) accounted for around 12,6% of GVA in 2013. The primary sector (agriculture and fishing) is continuously shrinking and only reached 2,8% of GVA in 2013.
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 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.
Before 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, the international economic crisis has had a major impact on the economy, as reflected in the main economic indicators. The exposure of the Cyprus banks to the Greek market and the possession of a substantial number of Greek Government Bonds played a major role in the sharp increase in the cost of borrowing from international markets and the subsequent request for support from Troika.
More importantly, the decision of the Eurogroup in 2013 to impose a haircut on uninsured deposits in the two largest Cypriot banks had a significant negative impact on one of the main drivers of the Cyprus economy, the banking sector. The abrupt and sudden shrinking of the banking sector and the loss of wealth by depositors is unavoidably affecting the real economy.
The agreement with Troika for a macroeconomic adjustment Programme (Memorandum of Understanding – MoU) is envisaged to bring back economic stability. The Programme is an ambitious one, aiming at achieving 4% of GVA primary balance by 2018. The adjustment Programme is already under implementation and has been positively assessed by the Troika. The Government of the Republic of Cyprus is fully committed and determined to continue the strict implementation of the Memorandum of Understanding. The Programme addresses challenges in three main areas, namely fiscal issues, banking and structural issues.
It is noted that the recession of the Cyprus economy in 2013 was less pronounced than originally anticipated. The performance of public finances has also exceeded expectations, mainly attributed to the containment of public expenditure.
It is emphasised that despite the negative developments in the banking sector, stemming from the Eurogroup decisions, the underlying reasons that have played a significant role in establishing Cyprus as an international business centre, such as its strategic location, the sophisticated infrastructure, the highly educated workforce, the favourable tax system are still present. One of the main strategic pillars of economic policy of this Government is to maintain those advantages and further improve the competitiveness of the economy. The key is the implementation of structural reforms included in the MoU and also in the EU2020 Agenda.
It is also noted that the recent natural gas explorations that have taken place in the Exclusive Economic Zone of Cyprus have revealed rich reserves of natural gas, which will have significant revenue implications for Cyprus in the medium term. The Government is in the process of exploring options of best conduct regarding economic policy surrounding the exploration, discovery and exploitation of natural gas in Cyprus.