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Structure of the Economy

Introduction – Main Economic Indicators and basic Characteristics of the Economy

Main Economic Indicators 2002 - 2008

The Cypriot economy is a small, robust and fairly flexible economy, and has shown itself able to adapt to rapidly changing circumstances. Intertemporally, the Cypriot economy is characterised by a very satisfactory rate of growth (the average growth of GDP between the years 2003-2007 amounting to 3.6% and the projections for the average GDP growth for the years 2008-2008 showing a rise to 4%), decreasing unemployment (with an average unemployment between 2003-2007 at a rate of 4.6% and estimated unemployment levels for the years 2008-2011 at 3.8%)and internal and external macroeconomic stability. As a result, Cyprus has achieved an enviable level of real convergence with the advanced economies, with a per capita GDP in 2002, expressed in purchasing power standards, standing at 89.6% of the EU 27 average, gradually increasing to 93.7% in 2007. Inflation indications give a similar picture with the average inflation between the years 2002-2007 amounting to 2.5% and the estimations for 2008-2011 showing a decrease at a level of 2.1%.

Basic Characteristics

In brief, the basic characteristics of the Cyprus economy are the following:

■ The dominant role of the private sector in the production process. The role of the State is a supportive one, and concentrates mainly in:
  □ maintaining conditions of macroeconomic stability and a favourable business climate by creating the necessary legal and   institutional framework
  □ securing conditions of fair competition;
  □ creating modern economic and social infrastructure, utilising, inter alia, the new instruments of public private partnership;
  □ ensuring conditions of social cohesion.

■ The small size of the domestic market.
■ The small size of enterprises.
■ The small size of the labour force.
■ The openness of the economy, with both the volume of exports and imports rising between the years 2002-2009.
■ The predominance and increasing importance of the services sectors, which accounted for 78.5% ofGDPin2008.

■ Partial dependence on the tourism sector, whose total contribution, derived from the value added created, either directly through the purchases of goods and services of tourists in various sectors of economic activity or indirectly, through the intersectoral linkages, amounted to 15-20% of GDP in the period 1990-2008.

Structure of the Economy

Structure of Production

The predominant and continuously expanding share of the services sectors (approximately 77.0% of GDP in 2002 to 2009) at the cost of both the primary sectors of economic activity, agriculture and mining and quarrying and the secondary sectors of manufacturing and construction.

The sectors of financial services, business and real estate and renting activities, educational and health services, also exhibited an increasing trend in their share to GDP. This development was the result of the utilisation of the comparative advantages of Cyprus as far as the supply of high quality of services are concerned, both in the domestic market and in the external market, as well as the high income elasticity which characterises these services.

The share of public administration and defence to GDP exhibited intertemporally a slight increasing trend; it remained, however, at low levels by international comparison.

The agricultural sector’s share to GDP has been decreasing (10% in 1980, to an estimated 2.2 % estimation for 2009), a development that constitutes an international phenomenon, and is attributed to the relatively low-income elasticity of demand for agricultural products, the urbanisation trend and the reallocation of productive resources from agriculture to other more profitable economic activities. In the case of Cyprus, a constraining factor to the growth of the agricultural sector was also the Turkish invasion and the occupation of a large portion of fertile land, the water scarcity for irrigation, a problem which has become more intense in the past few years, the land fragmentation into small units, which prevents the use of advanced technology and the use of agricultural land for tourist development and other uses. In parallel, agricultural production faced intense competition during the 1990s due to the trend towards gradual liberalisation of world trade of agricultural products.

The contribution of the manufacturing sector to GDP also exhibited a falling trend since the early 1980s (18,2% in 1980, 9.5% in 2002 and 7.6% in 2008). The sector is characterised by chronic problems of competitiveness, due, inter alia, to the small size of the majority of manufacturing units, which negatively affects their capacity to utilise advanced technology and modern methods of management, production and marketing.

Structure of Exports

Domestic exports have experienced an increase of 13% in 2007 and this is mainly attributed to the strengthening of trade relations between Cyprus and European countries mainly due to the entry of the Republic in the EU.
The EU member countries and particularly Britain, Germany, Greece and Italy continue to be the most important trading partners of Cyprus, absorbing 62% of domestic exports in 2007. Middle East countries absorb about 11% and the remaining Asian markets 10% of domestic exports.

An important income comes from re-exports. In 2007 the income from re-exports amounted to 578 million Euros. The largest proportion of re-exports is absorbed by EU countries (51%). An important percentage was also absorbed by Middle East countries (12% in 2007).

Structure of Imports

The total imports of goods in 2007 have experienced an increase by approximately 15%. Consumer goods and raw materials constitute the largest part of imports, amounting to 29% of the total.

The largest proportion of imports comes from EU countries. (68% of total imports in 2007). Imports from Middle East countries account to 9.1% of total imports and from the remaining Asian countries comes a 12.2% of imports in 2007.

Statistical Data about the Economy is provided by the Ministry of Finance and Statistical Data about Trade is provided by the Trade Service of the Ministry of Commerce, Industry and Tourism.

Conclusion - The changing structure of the Cyprus Economy

The changing structure of the Cyprus economy is reflected in a parallel change in the structure of exports of goods and services. Characteristic of these changes is the rise in the exports of services, which accounts for more than 80% of all revenues from the export of goods and services, compared to around 50% in 1980. Moreover, the share of the tertiary sector amounts to 78.5% of GDP in 2008 showing the gradual restructuring of the Cypriot economy from an exporter of minerals and agricultural products, mainly copper, asbestos and citrus fruits in the 1960’s and early 70’s to an exporter of manufactured goods, mainly clothing and footwear, in the latter part of the 1970s and the early part of the 80s, to an international tourist, business and services center during the 1980s and onwards.

The continuing upward trend of the share of the tertiary sectors of services to GDP reflects the comparative advantages of Cyprus in these sectors (see section “Why choose Cyprus for Business” of our Website for more details) especially the high levels of professionalism and quality of services offered.

Banking System

The Central Bank of Cyprus

The Central Bank of Cyprus was established in 1963 as an autonomous institution in accordance with the Central Bank of Cyprus Law 1963.  Since July 2002, the Central Bank has been governed by the Central Bank of Cyprus Law 2002. This law ensures the independence of the Bank and compatibility with the relevant provisions both of the Treaty establishing the European Community and of the Statute of the European System of Central Banks and of the European Central Bank. The pertinent constitutional provisions have been amended so as to ensure central bank independence as prescribed by the European Union acquis communautaire. More specifically, the Law establishes the institutional and financial independence of the Bank and the independence of the members of its decision-making bodies when carrying out the tasks conferred upon them.

In addition, the Law specifies that the primary objective of the Bank is to ensure price stability, as stipulated in the Treaty establishing the European Community and in the Statute of the European System of Central Banks and of the European Central Bank. The Law explicitly prohibits the financing of the government, local authorities, public corporations or public undertakings by the Central Bank.

Under the Central Bank of Cyprus Law, the main tasks of the Bank are the:

(a) definition and implementation of monetary policy (including credit policy)
(b) conduct of exchange rate policy, within the framework of the exchange rate policy formulated by the Council of Ministers after the opinion expressed by the Bank
(c) holding, keeping and management of official international reserves
(d) supervision of banks
(e) promotion, regulation and oversight of the smooth operation of payment and settlement systems
(f) provision of services or performance of the tasks of banker and financial agent of the government, and
(g) participation as a member in international monetary and economic organisations.

Monetary Policy of the Central Bank

Cyprus joined the euro area on 1 January 2008 and as a result the setting of interest rates is now the responsibility of the European Central Bank (ECB).  The primary objective of the ECB is to ensure price stability, which means keeping inflation rates below, but close to, 2%.

In order to regulate the supply of money and credit in the economy, the Eurosystem has at its disposal the following set of monetary policy instruments:

· Open market operations
· Standing facilities
· Minimum reserves

The Banking System

Cyprus has a well-developed banking system, which offers a wide range of services catering for the needs of businesses and individuals. Cyprus’ banking system comprises the Central Bank of Cyprus, domestic banks and international banking units.  It also encompasses the co-operative credit institutions, which are supervised by the Co-operative Societies’ Supervision and Development Authority.

The Central Bank of Cyprus is the licensing authority for the conduct of banking business and for the supervision of banks.  In the exercise of its supervisory role, the Central Bank is guided by the recommendations of the Basel Committee on Banking Supervision and the regulatory framework of the European Union.  In July 2003, the Banking (Amendment) Law 2003 was enacted by the House of Representatives for purposes of full compliance and harmonisation with the acquis communautaire.

In recent years banks have expanded their activities beyond traditional banking and their services include insurance, leasing, hire purchase finance, factoring, mutual fund management, investment and consulting as well as custody and asset management services.  Developments in technology and the opening of markets have contributed to a more competitive environment. Banks have responded by upgrading their technological infrastructure and launching new products and services through electronic means or electronic access, using alternative distribution channels such as the Internet, call centers, etc.

In addition to the domestic banks, there are several international banking units, which have been authorised by the Central Bank to operate from within Cyprus.  They are required, however, to confine their activities primarily to the provision of services to non-residents and in currencies other than the Cyprus pound.  Since January 2001, these institutions have been permitted to grant medium and long-term loans in foreign currencies to residents.

International Banking

Since 1 May 2004, when Cyprus became a member of the European Union, all banks licensed by the competent authorities of European Union countries have been allowed to establish branches in Cyprus or provide banking services on a cross border basis without requiring a license from the host supervisory authority i.e. the Central Bank of Cyprus («single passport» principle).

Applicant banks originating from third / non-European Union countries are expected to be institutions enjoying a good reputation internationally with an established track record of growth and profitability. Banking business licences will be granted only to banks licenced in jurisdictions where in the opinion of the Central Bank of Cyprus, proper licencing and banking supervision are exercised and whose banking supervisory authorities subscribe to all the recommendations / principles embodied in the various papers issued by the Basel Committee on Banking Supervision. Applicant banks should also originate from jurisdictions which enjoy a stable economic and political environment. In addition, applicant banks should, inter alia, have a widespread and transparent ownership and, preferably, be listed on a recognized stock exchange, enjoy high ratings by a recognized credit assessment institution, have a strong capitalization and have no significant concentration in lending and deposits or related party business.

Establishing a Business in Cyprus

The Central Bank is currently responsible for authorising the acquisition by non-residents of equity in legal entities registered in Cyprus. Non-residents wishing to participate in Cypriot legal entities that are not quoted on the Cyprus Stock Exchange should apply through an appropriate professional (lawyer or accountant) practising in Cyprus. Applications are classified into one of the three main categories: Direct Investment, International Business Companies, Ship Ownership and Related Activities.

Anti - Money Laundering Measures

Anti – money Laundering measures

Cyprus enacted the appropriate legislation and has taken effective regulatory and other measures by putting in place suitable mechanisms for the prevention and suppression of money laundering and terrorist financing activities.  Moreover, Cyprus is committed to apply all the requirements of international treaties and standards in this area and, specifically, those deriving from the European Union Directives.

On 13/12/2007 the House of Representatives enacted “The Prevention and Suppression of Money Laundering Activities Law” (hereinafter to be referred to as “the Law”) by which the former Laws on the Prevention and Suppression of Money Laundering Activities of 1996-2004 were consolidated, revised and repealed. Under the current Law, which came into force on 1 January 2008, the Cyprus legislation has been harmonised with the Third European Union Directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing (Directive 2005/60/ΕC).

The present Law, as the previous one, designates the Central Bank of Cyprus as the competent   supervisory authority for persons engaged in banking activities and money transfer business. Under this framework, the Central Bank of Cyprus has the responsibility of supervising and monitoring the compliance of banks and money transfer businesses with the provisions of the Law for the purpose of preventing the use of the financial system for money laundering and terrorist financing activities.

Since 1997 and by virtue of the powers vested to it under the Law, the Central Bank of Cyprus issued several Directives to banks and money transfer businesses which determine the practice and procedures that should be implemented by those entities for the effective prevention of money laundering and terrorist financing so as to achieve full compliance with the requirements of the Law.

In April 2008, the Central Bank of Cyprus has issued a revised Directive to the banks, in accordance with the provisions of the Law of 2007, requiring the introduction of new revised policies and procedures, as well as the upgrading and enhancement of the measures and systems for the effective prevention of money laundering and terrorist financing in line with the FATF standards and the Directives of the European Union in this sector.  It is emphasized that the Law explicitly states that Central Bank of Cyprus’ Directives are binding and compulsory to all persons to whom they are addressed.

Furthermore, since 1997, a special Unit for Combating Money Laundering has been set up at the Attorney General’s Office, which is responsible for the receipt and analysis of suspicious transaction reports and money laundering investigations. Ιn the course of money laundering investigations, the above Unit may apply to the Court and obtain an order for the disclosure of information addressed to any person, including banks, who may be in possession of information related to the investigation as well as orders for the freezing and confiscation of funds and property suspected to be derived from money laundering.

The anti-money laundering measures taken in Cyprus have been repeatedly evaluated, in the last few years, by international organisations such as the Moneyval Committee of the Council of Europe and the FATF.

The Council of Europe (Moneyval Committee) assessed three time the Cyprus’s anti-money laundering system in April, 1998, September, 2001 and April 2005. All subsequent evaluation reports concluded that Cyprus has implemented in a generally sound and comprehensive manner measures against money laundering and terrorist financing in line with international standards and has put in place a very comprehensive legal framework to that effect.

The latest report assessed and rated Cyprus, with very good results, for its level of compliance against the 49 Recommendations of the Financial Action Task Force against money laundering and terrorist financing.

Cyprus’s anti-money laundering system was subject to review by the FATF in the context of the latter’s initiative to identify “non-cooperative countries and territories” in the international fight against money laundering. In its official report published in June 2000, the FATF also recognised that the anti-money laundering system of Cyprus is in line with international standards and excluded Cyprus from the published list of “non-cooperative countries and territories”.

Moreover, in July 2001, the Internal Revenue Service of the United States of America, officially approved Cyprus’s “Know-Your-Customer” rules which form a basic part of Cyprus’s anti-money laundering system. As a result of the above approval, banks in Cyprus, which may be acquiring US Securities on behalf of their customers, are eligible to enter into a “withholding agreement” with the Internal Revenue Service and become qualified intermediaries.

This information is provided by the Central Bank of Cyprus.

Why Choose Cyprus For Business

Cyprus enjoys a number of comparative advantages that mainly derive from:

· its strategic geographical location at the crossroads of three continents; Cyprus can be the bridge for business between the EU and the Balkans, Middle East and Asia and Africa,

· its favorable business climate, which is directly related to the prevalence of conditions of macroeconomic stability,

· the high level of education in the island; Cyprus has a well-educated labour force which enjoys a competitive, as compared to international standards, level of remuneration,

· the island’s modern infrastructure; the state of the infrastructure in transport, energy and telecommunications provides the right supporting environment for business. Cyprus also enjoys a modern legal, accounting and financial system,

· the close economic and political relations Cyprus has developed with its neighbouring countries,

· its membership in the European Union; the membership offers benefits related to the free movement of trade, workers and capital. Moreover membership is a catalyst for long term economic growth and enhances competitiveness and thus innovation, higher output and productivity in all sectors of the economy,

· the introduction of the Euro; greater international clout, stable prices, a common identity, ease of travel are among the multiple advantages offered by the Euro,

· the satisfactory living conditions for foreigners, as well as

· a generally favorable tax regime; Cyprus is committed to the OECD to eliminate harmful tax practices and has already complied with the EU Code of Conduct for Business Taxation. Corporate taxation is as low as 10% and the network of agreements for the avoidance of double taxation extensive; network currently covers more than 33 states including Canada, Germany, France, Italy, Kuwait, Greece, China and Russia.

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