CYPRIOTS HAVE EXPERIENCED A SUBSTANTIAL improvement in their living
standards since World War II. Cyprus benefited from the war, and in
succeeding decades its economy grew at rates that matched those of other
countries that profited from the general West European boom that began
in the 1950s and lasted up to the first oil price increase of 1973.
Cypriot per capita income increased steadily through this period; the
economy diversified and ceased to be that of a Third World colony. This
success was achieved despite widespread turmoil stemming from shaking
off British rule in the 1950s and intercommunal warfare during the
1960s.
Cyprus was affected in 1973 and 1979 by the first and second oil
price increases, for it was almost completely lacking in domestic
sources of energy. However, energy-related economic disruption was
negligible compared with the effects of the Turkish invasion of 1974,
which ended in the de facto partition of the Republic of Cyprus. The
island's economy disintegrated as a third of its inhabitants fled their
homes and livelihoods and many farming, manufacturing, and commercial
relationships were shattered. Thereafter, the island's Greek Cypriot and
Turkish Cypriot communities lived separated from one another. Each
sought to recreate a functioning economy.
Greeks Cypriots were the more successful. Republic of Cyprus planners
adopted an aggressive program of constructive deficit spending, economic
incentives, and targeted investments that led the Greek Cypriot economy
to reach pre-1974 levels within a few years. This was an astonishing
accomplishment in that the island's partition had cost the republic much
of its agricultural and manufacturing assets.
The 1980s saw healthy growth and low unemployment. Tourism swelled,
and by 1990 more than a million tourists, mostly from Western Europe,
visited the republic each year. Housing them caused much construction
and an explosion in the value of property along the coast. Manufacturing
and trade were encouraged and grew. The destruction of Beirut permitted
the republic to become a regional center for services and finance. As
the 1990s began, Greek Cypriots were upgrading their tourist trade and
aiming at a more diversified and sophisticated manufacturing sector.
Leaders of the republic's economy hoped to take advantage of the
republic's able and motivated work force and a strong and flexible
commercial tradition.
The Turkish Cypriot economy also grew. Facing many obstacles and
beginning at a lower point, however, its successes were smaller, and at
the beginning of the 1990s Turkish Cypriots enjoyed a per capita income
about one-third that of Greek Cypriots. Economic obstacles included the
lack of a commercial tradition, a less well-trained work force, and
rampant inflation largely imported from Turkey. However, perhaps the
most serious economic hurdle Turkish Cypriots had to surmount was their
state's lack of international recognition. Its absence deprived them of
some international aid and made foreign connections difficult. Despite
these difficulties, however, Turkish Cypriots could look with some
optimism toward the future. Tourism expanded rapidly in the late l980s
and brought in vital foreign exchange. The overall economy had
diversified to some extent. Agriculture was more efficient and employed
a smaller share of the work force. The service sector had increased in
importance. Analysts expected, however, that the Turkish Cypriot economy
would likely continue to need Turkish assistance for the foreseeable
future.
REPUBLIC OF CYPRUS
From independence in 1960 until the Turkish occupation of the north
in 1974, the economy of Cyprus performed well overall, and the gross
domestic product (GDP) increased at an average annual rate of about 7
percent in real terms. However, the Turkish Cypriot community did not
share in this growth, living in its scattered agricultural enclaves
under conditions like those of less developed countries.
The Turkish invasion and occupation of the northern 37 percent of the
island severely disrupted the economy of the Republic of Cyprus.
Fragmentation of the market, a massive displacement of people (about a
third of the island's population), and loss of important natural
resources had devastating effects. The government responded with the
first and second emergency economic action plans, for 1975-76 and
1977-78. The pre-1974 policy of balanced budgets was replaced by
expansionary fiscal and monetary policies aimed at stimulating economic
activity. Incentive plans to encourage private economic activity were
implemented, as were housing and employment programs for refugees who
had fled areas seized by the Turks.
These efforts proved phenomenally successful. The economy expanded at
a 6 percent rate in real terms between 1974 and 1978, and by 1978
unemployment stood at about 2 percent, compared with 30 percent at the
end of 1974. This growth continued through the 1980s. In 1988 the per
capita gross national product (GNP) in current prices was about US$7,200
or C�3,597, compared with C�537.9 in 1973.
The economy of the Republic of Cyprus changed as it grew in size and
complexity. The primary sector lost ground, as it had in the decades
before the Turkish invasion. Agriculture declined from more than 20
percent of GDP at the end of the 1960s to only about 7 percent by the
end of the 1980s, although it employed about 15 percent of the labor
force. Mining, vital in the 1950s as a source of exports, became
insignificant.
Manufacturing increased at double-digit rates during much of the
1980s. At the end of the decade, it accounted for 15.2 percent of GDP,
the second largest share, after the service sector's, and was the second
largest source of employment. Manufacturing depended on exports, most to
the Middle East and the European Economic Community (EEC). However,
rising labor costs and relatively low quality products stood in the way
of future industrial growth. Construction provided just under 10 percent
of GDP in 1989 and was the fourth largest private employer. Construction
had declined in importance since the second half of the 1970s, when much
housing for refugees was built and work began on constructing the
tourist facilities that were important to the south's economy.
The service, or tertiary, sector was the dominant sector in the Greek
Cypriot economy after the late 1970s. In 1988 it accounted for 50.2
percent of GDP. The sector's most dynamic component was trade,
restaurants, and hotels (or tourism), which supplied 20.8 percent of the
GDP and employed 22.3 percent of the labor force in 1988. The gigantic
increase in the number of tourists--from 165,000 in 1976 to 1,376,000 in
1989--was the main cause of this subsector's growth. Tourism was also an
important source of foreign exchange, exceeding the income from the
export of domestic goods from 1985 through 1988.
The other branches of the service sector--transportation, storage,
telecommunications, finance, insurance, real estate, and business
services--also experienced steady growth and improvement. Another
dynamic component of the sector, important to Cyprus's future economic
growth, was offshore enterprises, which conducted diverse businesses
abroad from a base in southern Cyprus. Attracted by generous tax
concessions, the island's strategic location between Europe and the
Middle East, and stable political conditions, many foreign businesses
established themselves in the republic. By 1990 more than 5,000 permits
for offshore enterprises had been issued.
The government played an active and successful role in planning after
1974. This planning was indicative in nature. That is, the government
set goals for the economy and limited its direct participation to
improving the nation's infrastructure and supporting and guiding the
private sector. These activities were costly, however, and resulted in
large and expanding budget deficits. By the end of 1987, the total
deficit of the 1975-87 period amounted to C�640.6 million.
Another problem was a consistently unfavorable trade balance. In most
years, however, expanding surpluses in the invisibles account, mainly
from tourist receipts, nearly offset the trade deficits. At the
beginning of the 1990s, it was not yet clear what effect the 1988
Customs Union Agreement with the EEC would have on this deficit. Many
Cypriots saw the agreement as an opportunity. Access to the community's
market of 320 million people might prove beneficial, provided that the
manufacturing sector, consisting of small labor-intensive firms, was
restructured and modernized. Undoubtedly, the economy would face more
intense competition in the 1990s, but its main asset, a versatile and
educated human capital, could make the difference again as it had often
done in the past.
Cyprus - Development of the Economy since Independence
Cyprus faced a number of structural problems when it gained
independence in 1960. Agriculture, the dominant sector, was subject to
fluctuating weather conditions and characterized by low productivity.
The island's small manufacturing sector centered on small family firms
specializing in handicrafts. Tourism was limited to a few hill resorts.
The main exports were minerals. The country's infrastructure was that of
a Third World country.
These problems and the prevailing view that the market system alone
would not be able to provide the basis for major structural changes and
for intensive infrastructure building led to the conclusion that
economic planning was necessary. The government adopted a system of
indicative planning, setting goals for the economy and seeking to
encourage and support the private sector's efforts to reach those goals
through legislation and monetary and fiscal policies. In addition, the
state spent substantial resources to improve the country's physical and
institutional infrastructure. Planners believed such measures would be
sufficient for the island's dynamic private sector to function well and
reach by itself the selected goals, with minimal government
participation in the day-to-day operations of the economy. Indicative
planning was managed by the Planning Bureau under the Ministry of
Finance. The bureau, aided by expert advice from abroad, formulated
three fiveyear development plans before the Turkish invasion in 1974,
four emergency economic action plans after 1974, and a revised five-year
plan for 1989 to 1993.
The first five-year plan, for 1962 to 1966, aimed at achieving higher
incomes, full employment, price stability, an improved balance of
payments, and greater economic equality between rural and urban areas.
The plan provided for a sizeable public investment expenditure, C�62
million, on development projects for roads, ports, airport facilities,
irrigation projects, and telecommunications and electricity systems. The
Agricultural Research Institute was established in 1962 to improve the
quality of agriculture, and the Central Bank of Cyprus was created in
1963 to ensure that an appropriate volume of credit was available to the
private sector. This first plan achieved remarkable success, most
obviously in agricultural production.
The second five-year plan, for 1967 to 1971, moved beyond the
fundamental approach of the first plan, seeking to provide the social
and legal structures needed by a more advanced economy. It also gave the
business community a more active role in planning. The third five-year
plan, for 1972 to 1976, stressed regional planning, to promote more even
economic growth throughout the island. This plan also concerned itself
with the social and cultural aspects of development. The Cyprus
Development Bank was established to provide medium- and long-term loans
for development projects, as well as technical and administrative
assistance. The Higher Technical Institute and the Hotel and Catering
Institute were established to provide specialized training.
The success of these plans was shown by the great gains the Cypriot
economy made in the first fourteen years of independence. Although
agriculture had become much more productive, the secondary and tertiary
sectors had shown even greater productivity as Cyprus became a more
developed nation. The primary sector's share of GDP declined from 26.3
percent in 1960 to 17 percent in 1973, while the secondary and tertiary
sectors' shares expanded, respectively, from 19.5 to 25 percent and from
54.2 to 58 percent. In addition, the productivity of these two latter
sectors was considerably higher than that of the primary sector.
The economy was devastated by the 1974 Turkish invasion and the
subsequent occupation of the northern 37 percent of the island. Serious
problems included a large number of refugees (about a third of the
populations of both communities), fragmentation of the island's market,
and the loss by the government-controlled area of land containing raw
materials, agricultural resources, and important infrastructure
facilities such as the Nicosia International Airport and Famagusta, the
island's largest port. The need for reconstruction and development was
critical. To meet this challenge, a series of emergency economic action
plans for two-year periods was instituted.
The first and second emergency economic action plans, covering the
period from 1975 to 1978, aimed mainly at aiding the refugees, then
living in camps, by establishing a housing program for them. The plans
also directed the government to stimulate the economy by adopting
expansionary fiscal and monetary policies. The results were positive.
The economy expanded by about 6 percent per year, and the unemployment
rate declined to about 2 percent in 1978. Increased domestic consumption
and rising oil prices, however, produced some overheating of the
economy; the inflation rate reached 7.4 percent in 1978. Despite this
problem, the achievement of housing the refugees and getting the economy
going again with fewer resources in such a brief period of time was
considered almost miraculous.
The third Emergency Economic Action Plan, covering 1979 to 1981 (the
last of the two-year plans), aimed at countering the overheating of the
economy by adopting a restrictive monetary policy. The main goal of the
fourth Emergency Economic Action Plan, covering 1982 to 1986, was to
balance economic expansion with monetary stability. These goals were
reached. Retail price inflation fell from 13.5 percent in 1980 and 10.8
percent in 1981 to 5 or 6 percent in the next few years and 1.2 percent
in 1986. High growth rates with low unemployment continued.
Overall, the economy of Cyprus performed relatively well in the three
areas of economic growth, full employment, and monetary stability
between 1976 and the late 1980s. Between 1976 and 1986, GDP grew at an
average annual rate of 8.4 percent in real terms. Per capita GNP in
current prices increased from C�537.9 in 1973 to C�3,597 in 1988, or
US$7,200, one of the highest in the Mediterranean area. Unemployment
averaged 3.2 percent per year, and price increases 6.3 percent per year,
during the 1976-88 period. The price increases of 1980 and 1981 pushed
the average up, and the increases of the late 1980s were substantially
lower (2.8 percent in 1987 and 3.8 percent in 1989). Government support
of the private sector, through tax incentives, loan guarantees for
export-oriented industries, grants and loans to agriculture and small
industries, training programs for the manufacturing sector, and the
substantial improvement of the infrastructure, contributed greatly to
this success.
Analysts believed that the 1990s would challenge the economy. The
Customs Union Agreement with the EEC could be disastrous if
manufacturing were not fundamentally restructured. The high tariffs that
had protected manufacturing for decades would be dismantled in the 1990s
under the terms of the agreement. The republic's seemingly permanent
trade deficit would have to be substantially reduced if it were not to
damage the economy in the long term. Agriculture would also be affected;
some of its branches, mainly cereals and livestock, which enjoyed direct
or indirect subsidies, might fall to foreign competition. The service
sector would grow in importance. Tourism, which could not expect further
growth in quantity, would have to bring in more receipts by improving
the quality of its product. Financial services and offshore enterprises
would likely increase in importance.
Cyprus - The Government Sector of the Economy
The government accounted for about 12 to 13 percent of GDP during the
1980s. The need to stimulate the economy after the division
of the island in 1974 caused the government to abandon the old policy of
balanced budgets and to adopt expansionary fiscal and monetary policies.
The results were large and widening budget deficits paid for by
borrowing at home and abroad. Domestic public debt rose from C�7.5
million in 1976 to C�161.5 million in 1988. Public and publicly
guaranteed foreign debt increased from C�61.8 million in 1976 to C�602.5
million in 1988. The total public and publicly guaranteed domestic and
foreign debt rose from C�760.8 million in 1987 to C�764 million (38.7
percent of GDP) in 1988. The foreign debt service ratio (total service
payments as a percentage of exports of goods and services) was 11.8 in
1987 and 10.8 in 1988. Domestic borrowing only was used to cover the
budget deficit in 1988. Thus, there was a decline in government foreign
borrowing in 1988 to C�602.5 million, compared to C�617.5 million in
1987. Still, the burden of servicing the foreign debt continued to be
significant. For instance, servicing the external debt was more than
half the revenue from exports of domestically produced goods in 1987.
Furthermore, it was anticipated that the tariff reductions that would
result from the Customs Union Agreement with the EEC would produce
revenue losses, raising the fiscal deficit to C�126 million in 1992,
compared with C�73.5 million in 1987. As a consequence, both public and
foreign debts were expected to increase. The president of Cyprus, George
Vassiliou, forecast a rise in the per capita public debt from C�2,107
in 1987 to C�3,563 in 1992 and a rise in the total foreign debt to C�1,082
million in 1992.
Given the government's ever-present fiscal deficit, there were
concrete proposals at the beginning of the 1990s for the introduction of
a value added tax (VAT) to improve the state's finances. The Republic of Cyprus lacked
a broad-based consumption tax, and a VAT would generate much revenue.
The income tax system was also to be overhauled, to reduce tax evasion.
A specific look at government public finances shows that the Republic
of Cyprus maintained three types of budgets: the Ordinary Budget, which
included expenditures for government operations and other current
expenses; the Development Budget, which included development programs;
and the Special Relief Fund, which covered state aid for the housing and
care of refugees.
The Ordinary Budget
The major sources of revenue of the Ordinary Budget included direct
taxes; indirect taxes; loan proceeds; sales of goods and services;
interest, dividends, rents, and royalties; and foreign grants. Revenue
in 1987 from direct taxes was C�107 million, or 27 percent of the total
revenue for the Ordinary Budget; revenue from indirect taxes was C�151.3
million, or 38.2 percent; and proceeds from loans were C�68 million, or
17.2 percent. These three main sources of revenue brought in 82.4
percent of the total revenue of the Ordinary Budget.
The major expenditures of the Ordinary Budget were salaries, fees,
and allowances; public debt charges; and subventions and contributions
and subsidies. Salaries, fees, and allowances accounted for 33.9 percent
of total expenditures in 1987; public debt charges, 30.7 percent;
subventions and contributions, 9.4 percent; and subsidies, 6.1 percent.
The Ordinary Budget showed deficits of C�17.9 million in 1985, C�12.5
million in 1986, C�32.1 million in 1987, and C�28.7 million in 1988.
The Development Budget
There was no revenue in the Development Budget during the period
1976-87. If there had been public savings (i.e., excesses of current
revenues over current expenditures) in the Ordinary Budget, they could
have provided the means to finance all or a part of the investment and
other development expenditures. However, for most of the years of the
1976-87 period, there were no public savings. Thus, the Development
Budget had to rely on domestic and foreign borrowing to cover its
expenditures. The major expenditure items of the Development Budget were
investment, capital transfers, and land acquisition. Another sizeable
item was expenditures for wages and salaries. Investment expenditures
amounted to C�46 million in 1988. Investment expenditures in the period
1985-88 were mainly to finance the Southern Conveyor Project, the
Khrysokhou Irrigation Project, the Nicosia-Limassol Highway, several
other major roads, and Larnaca Airport. For this reason, construction
activity absorbed most of the investment expenditures between 1985 and
1988. Investment's share of the total development expenditures was 60.22
percent in 1985, 76.19 percent in 1986, 75.1 percent in 1987, and 67.74
in 1988.
The Special Relief Fund
The revenues of the Special Relief Fund were C�21.5 million in 1987.
Expenditures were C�21.5 million. The fund showed a surplus in the
period 1985-88. The main sources of revenue were direct taxes (a special
contribution), indirect taxes (a temporary refugee levy on imports), and
foreign grants. The main expenditures of the fund in 1988 included
investment, C�10 million; current transfers, C�7.6 million; capital
transfers, C�4.2 million; and wages and salaries, C�1.4 million.
Cyprus - Employment and Labor Relations
The south's successful economy kept unemployment rates low. During
the 1980s, unemployment rose above 3.3 percent only once, in 1987, when
it reached 3.7 percent. In 1988 unemployment was 2.8 percent.
Unemployment rates were also low in the years just before the Turkish
invasion of 1974, averaging about 1 percent. The invasion and division
of the island disrupted the economy, and in the government-controlled
area unemployment averaged 16.2 percent in 1975 and 8.5 percent in 1976.
During 1977 the rate fell to 3 percent, a rate typical for the south's
economy during the 1980s.
The south's economy frequently had to contend with a shortage of
workers and in some years was forced to import workers from abroad to
meet the needs of various sectors, especially the tourist industry. This
shortfall reflected the changing employment patterns of the economy as a
whole. The only population group that consistently had
difficulty finding employment was composed of university graduates.
Their discontent sometimes resulted in demonstrations and demands that
the civil service be expanded.
In 1973 about 37.5 percent of those gainfully employed were members
of labor unions. Union membership increased greatly between 1974 and
1977, reaching 62 percent at the end of 1977. This trend continued, and
in 1988 labor unions represented more than 80 percent of the work force.
The most prominent unions in the government-controlled area were the
left-wing Pan-Cyprian Federation of Labor (Pankypria Ergatiki
Omospondia--PEO) with about 70,000 members at the end of the 1980s, and
the right-wing Cyprus Workers' Confederation (Synomospondia Ergaton
Kyprou--SEK) with about 50,000 members. Third in importance was the
civil servants' labor union, with a membership of about 13,000.
Employers were organized in various associations represented in the
Cyprus Employers' and Industrialists' Federation.
Terms and conditions of employment were negotiated either directly
between employee and employer or through collective bargaining between
trade unions and employers' organizations. The government's policy was
to remain largely uninvolved in these negotiations unless a deadlock had
been reached or its participation had been requested, when it acted
through its Industrial Relations Section, a part of the Ministry of
Labor and Social Insurance. This section routinely acted to prevent
laboremployer discord by providing both groups with guidance and
information about good industrial relations. As a result, the number of
working days lost to strikes was among the lowest in the Western world
relative to the size of the work force.
In the 1980s, wages rose faster than prices. A part of the wage
increase was brought about through wage indexation, with automatic
quarterly wage increases equal to about half the inflation rate. Even at
this rate, however, wage increases could be troublesome for the economy.
In 1988, for example, average wages and salaries increased 4.5 percent
in real terms, but exceeded the productivity gain of 3.5 percent. The
relative scarcity of labor and rising labor costs affected the economy
in the 1980s and were expected to continue to do in the 1990s.
Cyprus - Agriculture
When Cyprus achieved independence in 1960, the backbone of its
economy was agriculture, mostly small farms, and sometimes even
subsistence farms. During the 1960s, irrigation projects made possible
vegetable and fruit exports; increasingly commercialized farming was
able to meet the demands for meat, dairy products, and wine from the
British and United Nations troops stationed on the island and from the
growing number of tourists.
In the early 1970s, Cypriot farms, still overwhelmingly small
owner-run units, furnished about 70 percent of commodity exports and
employed about 95,000 people, or one-third of the island's economically
active population. Given the expansion of the manufacturing and service
sectors, however, agriculture's importance was declining, and in the
first half of the 1970s its share of GDP amounted to 18 percent.
The de facto division of the island in 1974 left the Turkish Cypriot
community in the north in possession of agricultural resources that
produced about four-fifths of the citrus and cereal crops, two-thirds of
the green fodder, and all of the tobacco. The south retained nearly all of the island's grapegrowing areas
and deciduous fruit orchards. The south also possessed lands producing
roughly three-fourths of the valuable potato crop and other vegetables
(excluding carrots), half the island's olive trees, and two-thirds of
its carob trees. In addition, the south retained two-thirds of the
livestock population.
The Turkish occupation caused a large-scale uncoordinated exchange of
the agricultural work force between the northern and southern zones. The
resulting substantial agricultural unemployment was countered by
government actions that included financial assistance on easy terms to
farmers. By 1978 the number of persons working in agriculture in the
government-controlled area amounted to about 47,000, or 23 percent of
the working population. Thereafter, however, agriculture's portion of
the work force declined to 20.7 percent in 1979 and 15.8 percent in
1987. Its contribution to the economy also declined; from 17.3 percent
of GDP in 1976 to 10.7 percent in 1979 and 7.7 percent in 1988. This
share was important to the south's economy, however, and in 1988 value
added in agriculture, at constant 1985 prices, was C�112.7 million.
Agriculture's share of the national economy could be expected to
decline still further in the 1990s, as the Greek Cypriot economy became
even more dominated by the service sector. The island's favorable
climate and its location near its leading market, Western Europe,
however, meant that farming would remain an important and stable part of
the overall economy. Government irrigation projects, subsidies, and tax
policies encouraged farming's existence, as did research in new crops
and new varieties of ones already in cultivation.
The Ministry of Agriculture and Natural Resources oversaw efforts to
improve agriculture, fishing, and forestry. Subordinate to this ministry
and assisting it were, among others, the Agricultural Research
Institute, the Veterinary Service, the Meteorological Service, the
Department of Water Development, the Department of Forests, and the
Department of Geological Survey.
In addition to macroeconomic considerations, the government
encouraged agriculture because it provided rural employment, which
maintained village life and relieved urban crowding. Small-scale
agricultural activity prevented some regions from losing much of their
population. Part-time agricultural work also permitted urban residents
to keep in contact with their villages and gave them supplemental
income.
Cyprus - Water Resources
Three categories of landownership existed in Cyprus during the
Ottoman period: private, state, and communal. This division continued to
characterize landholding in the Greek Cypriot area in 1990. Most land
was privately owned. The largest private landowner was the Church of
Cyprus, whose holdings before the Turkish invasion included an estimated
5.8 percent of the island's arable land.
Unrestricted legal ownership of private land dated only from 1946,
when the British administration enacted a new land law that superseded
the land code in effect under the Ottomans, in which all agricultural
land belonged to the state. Those who worked the land were in effect
hereditary tenants, whose right to the land was usufructuary. Land could
be transmitted from father to son, but could not be disposed of
otherwise without official permission.
The Immovable Property (Tenure, Registration, and Valuation) Law of
1946 established the present-day legal basis for landholding. All former
state lands that had been properly acquired by individuals were declared
to be private property; private property as defined in the former
Ottoman land code also continued to be private property. Communal land
remained the property of villages or towns, and all unoccupied and
vacant land not lawfully held (most forest land, for example) became
state land.
Both Greek and Turkish inheritance practices required the division of
an estate among the surviving heirs. At the time of the 1946 law,
fragmentation of land was already great, many holdings did not have
access roads, and owners frequently possessed varying numbers of plots
that might be separated by distances of several kilometers.
Despite the 1946 law, however, fragmentation of plots continued. The
1946 census showed 60,179 holdings averaging 7.2 hectares. By 1960 the
number of holdings had risen to 69,445, an increase of 15.4 percent, and
the average holding had decreased to 6.2 hectares. By 1974 the average
holding was an estimated 5 hectares. Holdings were seldom a single piece
of land; most consisted of small plots, an average of ten per holding in
1960. In some villages, the average number of plots was 40, and extremes
of 100 plots held by a single farmer were reported.
The government enacted the Land Consolidation Law of 1969 to resolve
the problem of land tenure. The law established the Central Land
Consolidation Authority, with the power to buy and also acquire
compulsorily land and other property, which it could sell or use for
land consolidation. The authority's board included members of several
ministries and departments and also representatives of the farmers. At
the village level, committees of government representatives and local
farmers coordinated and supervised the local program.
Land consolidation consisted of merging fragmented holdings. Dual and
multiple holdings were to be eliminated, and plots smaller than the
minimums listed in the 1946 land law were to be expropriated.
Government-owned land could be used to enlarge holdings; recipients
could purchase the land at current market prices, paying in installments
at low interest rates. A farmerowner who lost land in the redistribution
process was to receive land having the same value as his former holding.
The land consolidation program also involved the construction of a
service road network to connect all plots to larger roads.
By the end of 1988, twenty-eight land consolidation projects had been
completed, and thirty-one projects were underway. Where projects had
been completed, minute plots were almost completely eliminated, the
average size of plots increased by 100 percent, and the number of plots
declined by about 70 percent.
Cyprus - Agricultural Cooperatives
Crop production was by far the most important component of
agriculture. In 1988 it contributed 71 percent of total value added in
agriculture, compared with 19 percent for livestock. Ancillary
production contributed 6 percent; the shares of fishing and forestry
were 3 and 1 percent, respectively.
A wide range of crops were grown on Cyprus. Cereals (wheat and
barley), legumes, vegetables (carrots, potatoes, and tomatoes), fruit
and other tree crops (almonds, apples, bananas, carobs, grapes,
grapefruit, lemons, melons, olives, oranges, and peaches).
Crops were rainfed or irrigated. Wheat and barley were rainfed or
dryland crops, as were carobs, olives, fodder, and wine grapes. Crops
that required irrigation included vegetables, citrus fruits, deciduous
fruits, bananas, and table grapes. These irrigated crops accounted for
half of agricultural production.
Cereals, mainly wheat and barley, grew mostly on the Mesaoria, the
island's central plain. Production fluctuated widely, depending on
rainfall. Wheat's importance relative to barley declined steadily during
the 1980s, the result of greater subsidies paid for the raising of
barley. Despite the subsidies and a doubling of barley production, only
part of the domestic need for cereals was met, and substantial imports
were necessary.
Market vegetables grew in many areas around the island. The potato
was the most important of these crops, far outstripping tomatoes,
carrots, water and sweet melons, cucumbers, and others in both weight
and value. In fact, the potato was the most important agricultural
product in the late 1980s, during which more than 80 percent of its
production was exported. In 1987 the potato earned 10 percent of the total
value of domestic exports, more than any other item except clothing.
Because the Cypriot potato was harvested twice, in winter and in early
spring, it had a competitive advantage in the European market. Britain
was the largest consumer. A shortage of suitable land and a need for
irrigation meant that the potato's importance for Cypriot agriculture
would likely decline in the 1990s, but it would remain one of the
sector's main supports.
Citrus production was another irrigated crop that was important for
exports; about 75 percent of production was consumed abroad. Groves of
oranges, lemons, grapefruit, and tangerines were located along the
coasts. Unlike potato production, that of citrus fruits was expected to
expand greatly in the 1990s, and one estimate foresaw a yield of 350,000
tons by the turn of the century, compared with 169,000 tons in 1989.
Viniculture and the production of wine have been major economic
activities for centuries in Cyprus. Most vineyards are located in the
southwestern part of the island on the slopes of the Troodos Mountains
in the Paphos district and in hilly areas in the Limassol district. Some
grapes were grown for table consumption, but about four-fifths of the
harvest was used for wine, two-thirds of it exported. In 1989 the grape
harvest amounted to 212,000 tons, and wine production was 34.1 million
liters. The most commonly grown grapes were the xymisteria and mavro
varieties. Systematic efforts were undertaken by the government to
improve the quality of Cypriot grapes, and different kinds of wine were
manufactured to increase exports, mainly to Europe.
Deciduous tree crops common to temperate climates, including olives,
apples, pears, peaches, carobs, and cherries, were also grown. These
crops required some cool weather during the year, and the orchards were
almost entirely in mountainous areas. Almond trees, which do not need
cool weather, were widespread on the plains. Olives were easily the most
important export item of these tree crops.
Cyprus - Livestock and Poultry
Fishing has been of small importance to Cyprus throughout history.
The intermittent nature of the rivers inhibits natural propagation of
freshwater fish, and the surrounding waters are generally deficient in
the nutrients and associated plankton essential to the growth of a large
marine fish population.
The Turkish invasion resulted in the loss of some of the better
fishing areas. By the second half of the 1980s, loans and subsidies from
the Department of Fisheries had secured the existence of a fishing fleet
of several hundred small vessels, and annual catches exceeded those
preceding 1974. In 1989 the catch totaled 2,600 tons at live weight.
The 1980s also saw saltwater and freshwater fish farms come into
operation. Much of their production was exported. An experimental fish
farm was scheduled to open in the 1990s at Meneou, near Larnaca.
Forestry played a very small role in the Greek Cypriot economy. In
the period 1986-1988, its value added was 0.01 percent of the
agricultural total in all three years.
Nearly all of the south's forests were owned by the state, which had
long managed an active and sophisticated program for their care and
improvement. The Turkish invasion of 1974 damaged the island's forests
extensively, but by the 1980s reforestation projects had repaired much
of the harm. The College of Forestry, established by the British in the
colonial period, enjoyed an international reputation for excellence.
Cyprus - Mining and Quarrying
At independence the manufacturing sector consisted almost entirely of
small, family-owned enterprises, most with fewer than five workers.
Production consisted mainly of consumer goods and items for the
construction industry, all for the local market. Obstacles to the
development of larger establishments were the limited domestic market, a
generally low level of income, a lack of available capital, and a
shortage of skilled labor.
During the period of the second five-year plan (1967-71), steps were
taken by the government to encourage industrial development. Import
duties on raw materials were reduced or abolished, and tariffs were
imposed to protect domestic industry. Generous depreciation allowances
and tax remissions were granted. In addition, training centers were set
up for management, technical personnel, and workers. Industrial parks
were established in Nicosia, Limassol, and Larnaca. Government policy
generally left manufacturing to private enterprise, but in some cases,
such as the petroleum refinery at Larnaca, the government made direct
investments.
During the plan period, some seventy larger manufacturing plants were
constructed. These plants included a petroleum refinery, biscuit and
margarine factories, fruit- and meat-canning plants, a brewery, an
edible oil plant, paper products factories, textile and hosiery mills,
pharmaceutical plants, and metal fabricating plants. A 1972 census of
industrial production, covering Greek Cypriot establishments plus
estimates for the Turkish Cypriot community, showed that more than
four-fifths of the 7,612 plants in manufacturing (excluding cottage
industries) still had 1 to 4 employees; only about thirty establishments
had more than 100. These larger establishments, however, accounted for
81.4 percent of the value added by manufacturing. Despite this change,
manufacturing as a whole remained largely geared to the local market,
the principal exception being canned goods, most of which were exported.
The Turkish occupation resulted in a major division of the island's
manufacturing sector, because one-third of the larger enterprises were
located in the north. Another immediate effect was disruption of the
domestic market. The division also cut off the sources of some raw
materials and intermediate goods.
The sharp general drop in incomes in the south after mid-1974 forced
the manufacturing industry to reorient production toward exports. A
principal objective of the first Emergency Economic Action Plan
(1975-1976) was the reactivation of manufacturing with emphasis on the
development of such labor-intensive industries as clothing and footwear
aimed at the export market. This effort also included measures to
reestablish in the Greek Cypriot area the operations of entrepreneurs
who had fled the Turkish Cypriot zone. During this plan period, 200 new
or reopened plants went into production, and at the end of the period
more than 130 additional ones were under construction.
The Greek Cypriot government took other steps to create an export
climate attractive to industrial entrepreneurs. Raw material and
machinery imports were duty-free, a guarantee scheme was established for
bank credits for exports, and a tax allowance was granted on foreign
exchange earnings from exports. Trade centers were also set up abroad,
and there was participation in foreign trade exhibitions. Some
indication of the success of the overall effort was seen in the tripling
of exports of manufactured goods from C�22.5 million in 1975 to C�66.5
million in 1978. By the late 1970s, manufacturing was very close to
wholesale and retail trade in its contribution to GDP, and there were
some 1,320 manufacturing enterprises covering a broad range of
industrial activity.
During the decade of 1979-88, the contribution of manufacturing to
GDP at current prices nearly tripled. Manufacturing's share of GDP, however, declined
slightly during this period, beginning in 1984. The decline moved
manufacturing into second place, after the category of wholesale and
retail trade, restaurants, and hotels.
The principal industrial products were food, beverages, and tobacco;
textiles, wearing apparel, and leather; wood and wood products; paper
and paper products; printing and publishing; chemicals and toiletries,
petroleum, rubber, and plastic products; nonmetallic mineral products,
such as cement; and metal products, machinery, and equipment.
The three subsectors of food, beverages, and tobacco; textiles,
wearing apparel, and leather; and chemicals and toiletries, petroleum,
rubber, and plastic products represented 65.4 percent of the total gross
industrial output in 1979, and in 1987 they represented 64.7 percent. In
1987 the relative share in industrial output of food, beverages and
tobacco was 27.4 percent; of textiles, wearing apparel, and leather 23.2
percent; and of chemicals and toiletries, chemical, petroleum, rubber,
and plastic products 14 percent. During the period 1979-87, the two most
important subsectors for exports were food, beverages, and tobacco and
textiles, wearing apparel, and leather. In 1987 they accounted for 21.6
and 54.2 percent of total industrial exports, respectively.
Industrial output came to depend on exports. The Arab Middle East was
a key market for industrial production, but the EEC purchased 39.3
percent of exported manufactures in 1987. These two markets and the
protected domestic market absorbed about 90 percent of manufactured
products.
The traditional markets for Cypriot manufactured goods could not be
regarded as secure at the beginning of the 1990s. The Arab Middle East
markets were often highly volatile, for both political and economic
reasons, and the European market had also become increasingly
competitive. A main threat to Cypriot exports in these areas were Asian
manufacturers with lower labor costs and higher quality goods. The
domestic market was also increasingly threatened because the terms of
the Customs Union Agreement with the EEC required the country to
gradually dismantle its highly protective tariff system. (In the late
1980s, for example, Cypriot tariffs on clothing imports from the EEC
were over 80 percent.)
In meeting these mounting challenges, Cypriot manufacturers were
striving to raise the quality of their production, improve marketing,
and contain labor costs through productivity gains as tariffs came down.
The government continued its longstanding policy of encouraging
manufacturing by improving the infrastructure and creating industrial
parks and free industrial zones. It also identified new industries and
products suitable for future development. Because of the number of small
labor-intensive plants with well-qualified workers adept at learning new
technologies, the government recommended that these plants adopt the
principle of "flexible specialization," with modern design
techniques, quick turn-around times, and computer-controlled machinery,
to meet the rigors of the global market of the 1990s.
Cyprus - Energy Resources
Cyprus had an unfortunate energy situation. The island had no known
deposits of mineral fuels, and the lack of rivers that flowed year-round
made significant generation of hydroelectric power impossible. The
island did have a great amount of sunlight, however, and in the
government-controlled sector about 35 percent of houses were fitted with
rooftop solar panels for heating water. By 1990 Cyprus was one of the
world's foremost users of solar energy. The only other domestic source
of energy was firewood.
Petroleum, all of it imported, supplied about 95 percent of the
island's energy. Oil imports consumed about 50 percent of foreign
exchange earnings in some years. Imported crude was processed by the
Larnaca refinery of the Cyprus Petroleum Refinery Ltd. In 1989 this
refinery had a capacity of 17,000 barrels a day, or 800,000 tons a year.
Major users imported their own heavy fuel oil directly via oil terminals
at Larnaca, Dhekelia, to the east of Larnaca, and Moni, near Limassol.
The largest single user of petroleum, consuming about 35 percent of
the total, was the Electricity Authority of Cyprus (EAC), a public
corporation founded in 1952. The EAC was responsible for nearly all of
the island's generation, transmission, and distribution of electric
power. The "Turkish Republic of Northern Cyprus"
("TRNC") had no significant power plants and received its
electricity from the EAC. As of 1990 it had not paid for any of this
power.
In 1989 the EAC produced 1.84 gigawatt-hour from three oilfired
thermal stations, two at Dhekelia (one old plant with a capacity of 42
megawatts, used only in emergencies, and a new plant with a capacity of
240 megawatts), and one at Moni, near Limassol, with a capacity of 180
megawatts. EAC also had a few small standby diesel plants. A number of
industrial operations had their own generating facilities. At the
beginning of the 1990s, there were plans to construct a coal-fired power
plant at Vasilikos to reduce petroleum dependency, but environmental
concerns may prevent its being built.
Cyprus - Construction
Increased economic activity from the late 1960s, stimulated in part
by the second five-year plan, resulted in a rapid growth of
construction, including new urban and rural housing, commercial
establishments, industrial facilities, tourist accommodations, and
government infrastructure projects. The sector's growth rate averaged
17.5 percent per year in current terms between 1968 and 1972 and rose to
24.8 percent in 1973. Construction workers numbered 25,000 to 28,600 in
the 1968-73 period and constituted about one-tenth of the island's
gainfully employed work force.
The construction industry was hard hit by the Turkish invasion and
occupation; construction by the private sector ceased almost completely.
In 1975 the construction work force numbered only about 8,900, or 6.2
percent of persons gainfully employed in the south.
Commercial construction revived in 1976, when the industry, in
response to government policy decisions and actions, began to build
housing for nearly 200,000 refugees, many of whom were living in tents
and makeshift shacks. This construction boom lasted until 1981. The boom
was further energized by events in the Middle East, which caused many
businesses to move their headquarters or offices from Lebanon to Cyprus.
Rapidly expanding tourism also stimulated construction of new
facilities, as did industrial plant construction. After the refugees
were housed, the government began its program of building housing for
low-income groups as part of a new, wider concept of government social
responsibility. An especially strong year in the boom period was 1979,
when the construction industry expanded 36.3 percent and made up 13.4
percent of the GDP in 1979.
The construction industry experienced much lower growth rates in the
1980s. In the 1985-87 period, it actually shrank in real terms, and some
Cypriot contractors were obliged to go abroad to find work. The industry
remained an important part of the economy, however, with regard to both
its contribution to the GDP and the employment it provided. In 1987, a
representative year, dwellings absorbed about half of total construction
investment, nonresidential buildings about a quarter, and hotel
infrastructure (such as roads, bridges, dams, irrigation works, and
telecommunication and electrical transmissions lines) the rest.
Important spurs to the construction industry were the Housing Finance
Corporation and the Land Development Corporation, government entities
created to enable middle- and low-income people to acquire their own
houses. During the late 1980s, these organizations provided low-cost
loans and managed the construction of several hundred houses a year (in
1989 eighty-two housing units in Nicosia alone). The goal for 1990 was
to construct 575 units in the whole of the Republic of Cyprus.
Cyprus - Trade, Restaurants, and Hotels
Since the late 1970s, the largest and most dynamic component of the
service sector has been that of wholesale and retail trade, restaurants
and hotels (tourism). It grew at double-digit rates between 1979 and
1988, except for 1986. Its contribution to the GDP in current terms
quadrupled between 1979 and 1988. By the late 1980s, with about 50,000
workers, it had also become the largest source of employment.
Tourism gained importance in this subsector during the 1980s, but had
not overtaken trade. Trade (wholesale and retail) contributed C�76.7
million, in current terms, to GDP in 1979 (79.56 percent of the sector)
and C�217.3 million (55.4 percent) in 1988. Restaurants and hotels
(tourism) contributed C�19.7 million in 1979 (20.43 percent of the
total sector) and C�174.6 million (44.55 percent) in 1988. The value
added to GDP by trade nearly tripled in current prices between 1979 and
1988, and that of restaurants and hotels (tourism) increased about nine
times.
Tourism was seriously disrupted by the Turkish invasion of 1974. Only
47,000 tourists came to the island in 1975, down from 264,000 in 1973.
However, under the influence of the emergency economic action plans of
1976-78, 1979-81, and 1982-86, earnings from tourism increased at least
20 percent for eleven straight years, and the number of tourists who
visited the Republic of Cyprus went from 165,000 in 1976 to 1,376,000 in
1989. Foreign currency earnings from tourism amounted to almost C�500
million in 1989. Earnings were so significant that tourism was a greater
source of foreign exchange than the export of domestic goods from 1986
through 1989.
Most of the tourists who came to the government-controlled areas were
middle-income Europeans. For many years, British visitors were the most
numerous and made up about one-third of the total. Swedes were the
second largest group in the late 1980s, closely followed by Germans.
Most tourists came for stays of about ten days and arrived during the
warm months, despite efforts by the Cyprus Tourism Organisation (CTO) to
achieve a more even seasonal distribution of visits. In the late 1980s,
the CTO began to be successful in increasing conference tourism as a
step toward this goal.
By the late 1980s, efforts were underway to raise the quality rather
than quantity of tourism because the south's ability to receive more
tourists had reached a saturation point. A one-year ban on licenses for
new hotels in coastal areas was announced in March 1989 to check
unplanned development. The volume of demand had surpassed the available
infrastructure to support it, with resulting problems of traffic
congestion, water shortages, and inadequate sewerage capacity.
Future growth was to depend on attracting wealthier tourists, who
would spend more money during their stays. This aim was to be
accomplished by turning away from simple sun-and-sea tourism and
developing higher quality hotels with facilities such as golf courses,
marinas for yachting, and casinos. Emphasis was also to be placed on
building mountain resorts and developing the island's archaeological
sites for sightseeing.
Cyprus - Foreign Trade and the Balance of Payments
Cyprus's trade balance has been consistently unfavorable since before
independence. Given its large and expanding trade deficit, the Republic
of Cyprus was fortunate to have a large and growing surplus in its
invisibles account, enough even to offset the trade deficit in 1987 and
1988. The major factors contributing to this surplus were
tourist receipts, receipts from transfers, and income from other goods
and services (such as foreign military expenditures, in Cyprus, embassy
expenditures, and foreign exchange from offshore enterprises). Tourist
receipts expanded from C�232 million in 1985 to C�386 million in 1988.
Income from other goods and services increased from C�173.3 million in
1985 to C�208.2 million in 1988.
Cyprus experienced its first overall balance-of-payments deficit
after independence in 1973. During the 1980s, the influx of capital in
the form of loans and investments was sufficient to give the country a
positive balance of payments in all years except 1985 and 1988, despite
the usually negative current account balance.
The foreign exchange reserves of the Republic of Cyprus at the end of
1988 reached C�571.8 million, an improvement over the reserves of C�501.2
million at the end of 1987. These reserves were estimated to be
sufficient to cover about nine months of imports.
Even though the trade balance was chronically unfavorable, exports
had greatly increased since the Turkish occupation in 1974. Exports of
goods and services rose by an average of 20.7 percent annually (in
current prices) during the 1975-86 period; they increased 16.5 percent
in 1987 and 10.5 percent in 1988.
The main domestic exports had been agricultural exports, especially
citrus fruits and potatoes, and manufactured products, most importantly
clothing, footwear, chemicals, and machinery. Agricultural exports
amounted to 24.7 percent of total domestic exports in 1985 but declined
to 20.5 percent in 1988; manufactured exports were 71.7 percent of the
total in 1985 and rose to 77.4 percent in 1988.
The European Economic Community (EEC) continued to be the main market
for the republic's exports, absorbing 42.7 percent of total domestic
exports in 1986, some 45 percent in 1987, and 47 percent in 1988. Among
the EEC countries, the top customer continued to be Britain, with a
share of 50.4 percent in 1988, followed by Greece with a share of 19.5
percent. The other major block of countries to which the republic's
exports continued to do well were the Arab countries. In 1986 this group
took 42.2 percent of total domestic exports, in 1987 38.6 percent, and
in 1988 36.7 percent.
The Republic of Cyprus was dependent on imports for many raw
materials, consumer goods, transportation equipment, capital goods, and
fuels. Total imports increased from C�177.8 million in 1976 to C�1.130
billion in 1989. The seemingly permanent trade deficits amounted to C�365.8
million in 1987, C�476.6 million in 1988, and C�668.6 million in 1989.
In 1989 consumer goods were 18.8 percent of total imports; intermediate
goods (raw materials), 41.6 percent; capital goods, 9.5 percent;
transport equipment, 20.4 percent, and fuels 9.6 percent.
Most of the republic's imports came from the EEC: 60.7 percent in
1986 and 54.5 percent in 1988. Britain was the largest source of imports
among the EEC countries, accounting for 22.1 percent of imports from the
group in 1986 and 25.5 percent in 1988. Italy, the Federal Republic of
Germany (West Germany), and Greece had the next three largest shares.
Other major trading areas that provided imports to the republic were
Eastern Europe (5.2 percent of total imports in 1986 and 7.1 percent in
1988) and the Arab countries (7.2 percent in 1986 and 4.8 percent in
1988). The rest of the world provided 26.8 percent of imports in 1986
and 33.5 percent in 1988; Japan accounted for 34.7 percent of this
group's exports in 1988, and the United States 13.6 percent.
The balance of payments record of the Republic of Cyprus indicated
the economy's vulnerability in the early 1990s. Imports continued to
outpace exports, resulting in ever-expanding trade deficits. This
situation would have been worse if it were not for the high protection
afforded the domestic market. Although the Customs Union Agreement with
the EEC, which became effective in January 1988, abolished all import
duties on Cypriot industrial exports to the EEC countries, the real test
for Cypriot manufacturing was expected in the second half of the 1990s,
when all tariffs on EEC industrial and agricultural exports to Cyprus
were to be phased out. EEC duties on Cyprus's agricultural exports to
the EEC will also be phased out by then. Although some exceptions were
allowed, the agreement would require free trade with the main Cypriot
export market.
The Customs Union Agreement was the outcome of long negotiations.
After Britain's entry into the EEC, Cyprus signed an association
agreement, to become effective in June 1973 and to cover a ten-year
period. According to the terms of the agreement, Cyprus received
preferential access to the British market in return for a 35 percent
reduction of tariffs on EEC goods, phased in over five years. A
follow-up phase of the agreement, covering 1978 to 1983, would have led
to a full customs union. The Turkish occupation interrupted the natural
progress of this agreement. Cyprus was still allowed to export most of
its industrial goods to the EEC without tariffs, but rules of origin
restrictions applied, as did some restrictions on agricultural exports.
The Customs Union Agreement posed a major challenge to the highly
protected manufacturing sector of Cyprus, revealing its competitive
weaknesses. Only a restructuring of the sector by increasing the size of
its units, reducing its labor-unit costs, improving its productivity,
and strengthening the marketing of products to new markets would allow
it to prosper. At the beginning of the 1990s, the sector's restructuring
was under way, and the government had established the Council for the
Promotion of Exports to make Cypriot products better known abroad.
