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Despite growth in recent years, the economy of the “TRNC” remains fragile and
the sustainability of the convergence process without due reform and
restructuring is questionable. For sustained investment and growth, far-reaching
reforms are certainly required in the private and public sectors, in banking and
finance and in the workings of a market economy. This paper presents an
overview of the “TRNC” economy, develops the appropriate policy framework and
sets clear strategic objectives for growth and efficiency.
1
An overall assessment
is that growth and developmental objectives can be better met within the
framework of a unified Cypriot economy, which is part of the European and
international economy.
*
University of Nicosia, 46 Makedonitissas Ave. P.O. Box 24005, CY-Nicosia, Cyprus. Tel.+357-22841600,
E-mail: theophanous.a@unic.ac.cy
**
University of Nicosia, 46 Makedonitissas Ave. P.O. Box 24005, CY-Nicosia, Cyprus. Tel.+357-22841600,
E-mail: i.tirkides@cytanet.com.cy
***
University of Piraeus, 40 Karaoli and Dimitriou, GR-18532 Piraeus, Attica, Greece. Tel/Fax:+330-210-
7216033, E-mail: pelagidi@unipi.gr
* We would like to thank Alpay Durduran and M. Rasıh Keskiner for their valuable contribution to this paper.
1
This paper draws from the book A. Theophanous and Y. Tirkides (Eds), Accession to the Eurozone and the
Reunification of the Cyprus Economy, Intercollege Press, Nicosia 2006 and especially from chapters I and VI.
- 2 -
1. Introduction
Ever since the Turkish invasion of 1974, the occupied northern part of Cyprus has
remained almost totally dependent on Turkey economically as well as politically.
2
However, in the last few years and especially after April 23, 2003 the
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’
’ ("TRNC") has been able to have more
contacts with the outside world as well as more openings. We should be
reminded that on April 23, 2003 the regime of the "TRNC" announced the
unilateral partial lifting of obstacles to crossing the green line. This led to further
changes. One week later the government of the Republic of Cyprus announced
measures for the support of the Turkish Cypriots. One year later, with the results
of the referenda, Turkey and the Turkish Cypriot leadership claimed the moral
high ground and demanded what they describe as the “the end of the isolation of
the Turkish Cypriots”.
3
Since 2004 there has also been an unprecedented usurpation of Greek-Cypriot
properties in the northern part of Cyprus. At the same time, the role of Turkey in
the "TRNC" continues to be dominant. Turkey controls all governmental and
institutional agencies. The Turkish Lira became legal tender since the early years
following the invasion effectively establishing a monetary union with Turkey,
which meant that Turkey’s economic and monetary problems would easily
transfer to the "TRNC". As a result the economy of the "TRNC" suffered from
problems of currency instability and high inflation during the 2000-2001
economic crisis in Turkey. Concomitantly, high interest rates choked long-term
investments, which in turn limited the prospects and potential for economic
growth.
2
Ch. P. Ioannides, In Turkey’s Image: The Transformation of Occupied Cyprus into a Turkish Province,
Aristide D. Caratzas, New Rochelle NY 1991.
3
The Turkish side supports that the Turkish Cypriots are subjected to an isolation by the Greek Cypriots. On
the other hand, Greek Cypriots stress that they not only theoretically but also practically have supported the
advancement of the standard of living of Turkish Cypriots as well as their reintegration in the Republic of
Cyprus. To the extent that there is isolation this is an outcome of the occupation of the northern part of
Cyprus by Turkey.
- 3 -
Economic activity in the northern part of Cyprus has accelerated following
developments in relation to UN-sponsored efforts for a lasting solution and the
failure of the Anan Plan in 2004. Resurgence in tourist and construction activity,
post-2003, led to an acceleration of growth and a noticeable improvement in
living standards. This was simultaneously associated with a reduction in the
existing gap with the economy of the government-controlled area.
4
However, the sustainability of this process would require well-designed
macroeconomic and financial policies, a restructuring of the private and public
sectors as well as substantial assistance from outside sources. In the absence of
such steps the current economic boom may not be sustainable.
There is no doubt that the northern part of the island holds vast economic
potential under the right set of circumstances. A combination of policies toward
harmonization with the European acquis and further economic integration of the
northern part with the government-controlled areas, and by extension with the
EU, will open up enormous possibilities. Without political normalization on the
island, however, there are limits to the degree of economic expansion that can
materialize in the northern part.
5
In order to embark on a sustained path toward economic convergence in living
standards with the government-controlled areas it is necessary to create the right
macroeconomic and financial environment that will in turn foster the efficient
operation of the market economy.
6
The ability to attract and sustain direct
investments both from the government-controlled areas and elsewhere, including
4
According to the President of the Turkish-Cypriot Chamber of Commerce the ratio of income per capita in
the northern part in 2006 was 1:2. See Conference Proceedings, F. Mullen (Ed.) “Economic Perspectives in
Cyprus: the path towards Reunification”, PRIO Cyprus Center, 2007, p. 18 22 November 2006.
5
Such normalization is hard to imagine, in the near term at least. This is because for a comprehensive
settlement the consent of Turkey is required. With EU-Turkish relations not precisely defined, drastic
developments on the Cyprus question are not the most probable outcome in the near future.
6
For an in-depth discussion of the macroeconomic and financial framework for sustained growth in the
“TRNC” and issues of policy coordination see M. Watson, and V. Herzberg, Wolfson Cyprus Group
Conference, "Sustainable Economic Development in Cyprus: Towards Economic Convergence and
Reunification – The Case of the Northern Part of Cyprus (Macroecononomic and Financial Frameworks)", May
2005, pp. 1-21.
- 4 -
the EU, is critical. In this regard, and given the synergies that exist with the
economy in the government-controlled areas, it is hard for the Greek Cypriots to
envision the development of the northern part to their exclusion through political
means.
The improvement in the monetary landscape in Turkey in recent years had
spillover effects in the “TRNC”. The stabilization of the Turkish Lira and falling
interest rates meant that the monetary environment in the northern part of
Cyprus had also improved considerably with positive implications for economic
activity.
It is important to stress that developments since the partial lifting of obstacles to
free movement on April 23, 2003 as well as accession of the Republic of Cyprus
to the EU had a major economic impact. Thousands of Greek Cypriots have been
visiting the northern part of Cyprus as well as a growing number of tourists. This
proved to have provided a major boost to the Turkish Cypriot economy.
Moreover, by the end of 2005, more than 10,000 Turkish Cypriots were employed
either on a fulltime or part-time basis in the area under the control of the
Republic of Cyprus.
7
2. Economic Overview and Current Position
A narrow economic base, a large “public sector”, unstable monetary conditions
and widespread corruption were the main causes of poor economic performance
in the “TRNC” for a considerable period of time. Whilst structural problems
continue to persist -and need to be addressed properly for sustainable
development-economic activity after April 2003 has been unprecedented and
living conditions have improved considerably as a result. Between 2001 and
2005, for instance, GDP in constant prices increased by more than 50%. At the
7
See Ministry of Finance of the Republic of Cyprus, The Economy in the Occupied Part of Cyprus: An
Assessment, Nicosia, June 2006 and W. Noë and M. Watson, “Convergence and Reunification in Cyprus:
Scope for a Virtuous Circle”, ECFIN Country Focus, vol. 2, no. 3, 2005, pp. 1-7.
- 5 -
same time, per capita income in current prices expressed in US dollars, more
than doubled, rising by 145%. The unemployment rate, based on official
statistics, remained low whilst inflation dropped dramatically from 77% in 2001
to 2.7% in 2005 (Table 1).
Table 1 – Main Economic Indicators
1980 1990 2000 2001 2003 2005
GNP (1977 Prices Million TL) 4,248.4 6,977.4 9,037.9 8,545.9 10,177.1
13,327.0
% change on previous year
0.9
5.7
-
0.6
-
5.4
11.4
13
.5
Base 1977=100
111.5
183.1
237.2
224.3
267.1
349.7
Base 2001=100 ------ ------ ------
100.0
119.1
155.9
GNP (Million $)
233.6
591.0
1,039.9
908.8
1,283.7
2,327.8
% change on previous year
1.1
38.9 7.9 -
12.6
36.4
31.9
Base 1977=100 111.6
282.2
496.6
434.0
613.0
1,111.7
GNP Per Capita ($) 1,561.0 3,447.0 4,978.0 4,303.0 5,949.0
10,567.0
% change on previous year
0.3
37.2 6.7 -
13.6
34.9
30.5
Base 1977=100
108.1
238.7
344.7
298.0
412.0
731.8
Base 2001=100 ------ ------ ------
100.0
138.3
245.6
GNP pr capita in constant TL 28,396.5
40,691.9
43,267.1
40,465.3
47,162.1
60,497.8
% change on previous year
0.2
4.3
-
1.7
-
6.5
10.2
12.4
Base 1977=100
108.1
154.8
164.6
154.0
179.5
230.2
Base 2001=100 ------ ------ ------
100.0
116.5
149.5
Inflation Rate (%) 93.0 69.4 53.2
76.8
12.6
2.7
Budget Deficit (Million $) 20.9 31.9 136.7
146.1
176.9
185.3
as % of GNP (in $)
8.9
5.4
13.1
16.1
13.8
8.0
Net Tourism Revenues (Million $) 24.0
224.8
198.3
93.7
178.8
328.8
as % of GNP (in $) 10.3 38.0 19.1
10.3
13.9
14.1
Base 1977=100 79.5
744.4
656.6
310.3
592.1
1,088.7
Number of Unemployed 1,789.0
849.0
1,166.0 1,500.0 1,375.0
1,090.0
Foreign Trade Balance (Million $) -49.9 -
316.0
-374.5 -
237.4
-427.0
-1,187.4
as % of GNP (in $) -21.4 -53.5 -36.0 -
26.1
-33.3
-
51.0
Export / Import(%) 47.1 17.2 11.9
12.7
10.6
5.4
Source: State Planning Organization, “TRNC”/own calculations.
Real growth was negative in 2000 and 2001 as a result of sharp declines in
tourist activity and revenues. Growth recovered in 2002 and accelerated sharply
in 2003-2005 amidst political developments that provided the biggest opportunity
for a solution to the Cyprus problem as well as by the post-April 23, 2003 events.
Specifically, GNP in constant 1977 prices in TL (Turkish Lira) rose by 11.4% in
2003, by 15.5% in 2004 and by 13.5% in 2005. Similarly, tourist activity
recovered in 2002 in dollar revenue terms and accelerated sharply in 2003-2005.
Much of the impetus to growth since 2003 came from tourist activity, from
- 6 -
investments in tourist and residential construction and considerable contributions
from direct and indirect linkages with the government-controlled area.
Per capita income remained fairly stable for a number of years in nominal dollar
terms and rose to about US$5,949 in 2003 compared with about $20,000 in the
government controlled area of the Republic of Cyprus. Per capita income in
nominal dollars spiked upwards in the subsequent period almost doubling by
2005 to $10,567. In 2005 the respective per capita income in the government
controlled area of the Republic of Cyprus was about $23,000. Recent increases
notwithstanding, per capita income remains considerably lower compared to that
in the government-controlled areas.
Inflation had been high and fluctuating for a considerable period of time but
dropped steeply in the period 2002-2005. Specifically, price inflation dropped to
2.7% in 2005 from about 77% in 2001 reflecting largely stabilizing developments
in Turkey following the financial crisis in 2000/2001 (Table 1). The
implementation of the IMF stabilization programme in Turkey had been successful
in reining in inflationary pressures, lowering interest rates and encouraging
foreign direct investments. The currency stabilized as a result. These
developments were also reflected in relevant variables in the economy of the
“TRNC”. But whilst inflation had dropped sharply, real interest rates remain high.
The budget deficit remains considerably high as a percentage of GNP, having
reached 24% in 2002 before dropping to 14% in 2003 and 8% in 2005. At the
same time the trade balance shows high and sustained deficits that usually are in
excess of 30% of dollar GNP (Table 1). Invisible receipts, capital movements and
foreign aid and loans from Turkey finance the trade shortfall.
Developments post 2003, have been spectacular but volatility remains an issue
and it is still early to consider the environment as stable. Institutional weakness,
limited trade openness, a large public sector and underdeveloped financial
- 7 -
markets only compound the problem. Below we undertake a more detailed
analysis.
3. Sector Developments and the Structure of the Economy
Growth in recent years has been universal with only few exceptions; mainly in
the stagnating financial sector. Contribution to growth was particularly strong in
construction, trade, and business and professional services. Linkages with the
economy of the government-controlled areas provided additional impetus.
From a longer-term perspective economic activity gradually shifted away from
agriculture and manufacturing toward services, particularly trade and tourism,
transport and communication, and business and personal services. Public services
remain an important contributory sector to overall economic activity but their
importance has been declining in recent years as the private sector was growing
more vigorously. It is also important to note that the tertiary education, which is
not separately recorded in GNP statistics, remains an important growth area as
we discuss in the balance of payments section further below.
8
The current output structure of the economy and evolution over time is
summarised in Tables 2 – 4 below. We discuss, highlighting the main trends and
developments.
8
W. Noë and M. Watson, “Convergence and Reunification in Cyprus: Scope for a Virtuous Circle”, op. cit., p.
3.
- 8 -
Table 2 – Sector Developments Constant prices of 1977 (TL m)
2000 2001 2002 2003 2004 2005 2006P
Primary sectors
713.5
828.4
985.3
1,057.5 1,147.2 1,179.5 1,177.9
Agriculture
619.7
770.7
921.3
989.7
1,069.4 1,081.3 1,083.0
Crop Production
336.5
442.4
57
7.5
601.0
657.4
618.1
596.6
Livestock Production
283.2
328.3
343.8
388.7
412.0
463.2
486.4
Forestry
42.9
12.7
15.7
13.1
26.1 31.1 30.4
Fishing
50.9
45.0
48.3
54.7
51.7 67.1 64.5
Industry 1,937.4
1,694.6
1,851.9 2,174.0 2,351.3 2,635.7 3,162.8
Quarrying
31.2
27.0
29.0
36.1
39.2 43.5 52.7
Manufacturing
884.0
822.8
869.6
932.9
1,028.0 1,080.9 1,136.3
Electricity - Water
180.8
175.2
177.3
190.0
215.2
240.3
255.7
Construction
841.4
669.6
776.0
1,015.0 1,068.9 1,271.0 1,718.1
Services 5
,762.8
5,526.5
5,706.1 6,076.8 6,899.6 7,847.9 8,341.1
Trade - Tourism 1,474.6
1,246.4
1,420.0 1,597.9 2,004.8 2,420.9 2,476.3
Wholesale and Retail Trade
1,186.4
991.8
1,110.5
1,272.9
1,618.5 2,021.9 2,132.4
Hotels and Restaurants
288.2
254
.6
309.5
325.0
386.3
399.0
343.9
Transport and Communication
1,113.6
1,108.2
1,149.4
1,197.9
1,303.3 1,487.8 1,558.5
Financial Institutions
529.6
434.3
390.3
416.3
414.9
432.4
445.0
Ownership and Dwellings
461.7
475.8
485.1
496.8
508.9
526.0
549.4
Business and Personal Services
700.0
800.1
807.0
853.3
1,074.9 1,280.0 1,504.1
Public Services
1,483.3
1,461.7
1,454.3
1,514.6
1,592.8 1,700.8 1,807.8
Total industry output 8,413.7
8,049.5
8,543.3 9,308.310,398.1
11,663.1
12,681.8
Import Duties 6
04.5
486.2
519.0
710.5
1,043.2 1,353.1 1,355.6
GDP 9,018.2
8,535.7
9,062.3
10,018.8
11,441.3
13,016.2
14,037.4
Net Factor Income from Abroad
19.7
10.2
70.8
158.3
298.3
310.8
326.5
GNP 9,037.9
8,545.9
9,133.1
10,177.1
11,739.6
13,327.0
14,364.0
Source: State Planning Organization “TRNC”
- 9 -
Table 3 – Sector Developments in real growth index
Base: 1977=100
Base: 2000=100
2000 2005
2002
2003
2004
2005
2006P
Primary sectors 115.2 190.5
138.1
148.2
160.8
165.3
165.1
Agriculture 104.3 182.0
148.7
159.7
172.6
174.5
174.8
Crop Production 74.2
136.2
171.6
178.6
195.4
183.7
177.3
Livestock Production
201.9
330.1
121.4
137.3
145.5
163.6
171.8
Forestry 1,021.4
740.5
36.6
30.5 60.8
72.5
70.9
Fishing
242.4
319.5
94.9
107.5
101.6
131
.8
126.7
Industry 373.9 508.7
95.6
112.2
121.4
136.0
163.2
Quarrying
350.6
488.8
92.9
115.7
125.6
139.4
168.9
Manufacturing
278.7
340.8
98.4
105.5
116.3
122.3
128.5
Electricity - Water
463.6
616.2
98.1
105.1
119.0
132.9
141.4
Construction 549.9 830.7
92.2
120.6
127.0
151.1
204.2
Services 239.1 325.7
99.0
105.4
119.7
136.2
144.7
Trade - Tourism
184.1
302.2
96.3
108.4
136.0
164.2
167.9
Wholesale and Retail Trade
169.2
288.3
93.6
107.3
136.4
170.4
179.7
Hotels and Restaurants 289.1
400.2
107.4
112.8
134.0
138.4
119.3
Transport and Communication
432.6
578.0
103.2
107.6
117.0
133.6
140.0
Financial Institutions
458.9
374.7
73.7
78.6 78.3
81.6
84.0
Ownership and Dwellings
129.9
148.0
105.1
107.6
110.2
113.9
119.0
Business and Personal Services
546.4
999.2
115.3
121.9
153.6
182.9
214.9
Public Services
197.1
226.0
98.0
102.1
107.4
114.7
121.9
Total industry output 237.2 328.8
101.5
110.6
123.6
138.6
150.7
GDP 238.9 344.8
100.5
111.1
126.9
144.3
155.7
GNP 237.2 349.7101
.1
112.6
129.9
147.5
158.9
Source: State Planning Organization “TRNC”/own calculations
- 10 -
Table 4 – Distribution of sector output in total (constant prices)
1980
1990
2000
2003
2004
2005
2006P
Primary sectors
19.0
9.9 8.5
11.4
11.0
10.1
9.3
Agriculture
18.4
9.2 7.4
10.6
10.3
9.3 8.5
Crop Production 14.5
6.3
4.0
6.5
6.3
5.3
4.7
Livestock Production
4.0
2.9
3.4
4.2
4.0
4.0
3.8
Forestry
0.0
0.1
0.5
0.1
0.3
0.3
0.2
Fishing
0.5
0.7
0.6
0.6
0.5
0.6
0.5
Industry
18.2
22.6
23.0
23.4
22.6
22.6
24.9
Quarrying
0.2
0.4
0.4
0.4
0.4
0.4
0.4
Manufacturing 13.4
12.5
10.5 10.0
9.9
9.3
9.0
Electricity - Water
1.3
1.8
2.1
2.0
2.1
2.1
2.0
Construction 3.3 7.9 10.0
10.9
10.3
10.9
13.5
Services
62.8
67.5
68.5
65.3
66.4
67.3
65.8
Trade - Tourism 18.8
20.7
17.5 17.2
19.3
20.8
19.5
Wholesale and Retail Trade 16.0
18.2
14.1 13.7
15.6
17.3
16.8
Hotels and Restaurants
2.8
2.5
3.4
3.5
3.7
3.4
2.7
Transport and Communication
6.9
12.3
13.2 12.9
12.5
12.8
12.3
Financial Institutions
3.7
4.8
6.3
4.5
4.0
3.7
3.5
Ownership and Dwellings
7.9
5.9
5.5
5.3
4.9
4.5
4.3
Business and Personal Services
3.7
4.0
8.3
9.2
10.3
11.0
11.9
Public Services 21.8
19.8
17.6 16.3
15.3
14.6
14.3
Total industry output 100.0
100.0
100.0
100.0
100.0
100.0
100.0
Source: State Planning Organization “TRNC”/own calculations
Table 2 records value added statistics by sector of economic activity in Gross
National Product in constant prices of 1977. Table 3 constructs real growth
indices taking 1977 and 2000 as alternative base years. Table 4 computes
distribution ratios of sector output in total industry output in constant prices.
These statistics in combination provide useful insights into the current situation.
The share of agriculture in total industry output declined from 18.4% in 1980 to
8.5% in 2006. This was due mostly to a relative decline of crop production, which
accounted for 4.7% of industry output in 2006 compared with 14.5% in 1980.
Even though growth of agricultural production increased by 75% since 2000, the
relative contribution to GDP growth dropped significantly in the period. Evidently
this was due to the relative growth of other sectors of the economy.
Likewise, manufacturing also suffered a relative decline in terms of its
contribution to growth. Specifically, the share of manufacturing in total industry
- 11 -
output declined from 13.4% in 1980 to 9% in 2006. Manufacturing output
increased modestly in the period after 2000.
In total the share of primary and industry output excluding construction, declined
from 33.9% in 1980 to 20.7% in 2006. Whilst there has been a steep decline in
relative terms, the corresponding contribution to growth remains considerable.
In contrast the growth contribution of construction activity and services increased
considerably.
Construction value added more than doubled since 2000 and was particularly
strong in recent years rising by 35% in 2006 alone. As a result the corresponding
share in output rose from 3.3% in 1980 to 13.5% in 2006 constituting the most
important source of growth in GDP. Specifically, about half of the growth in the
year emanated from construction activity.
9
Services in total registered a growth of 45% between 2000 and 2006 whilst their
respective share in total industry output rose from 62.8% in 1980 to 65.8% in
2006. Growth was particularly strong in trade, business and personal services,
and transport and communication.
Value added in wholesale and retail trade rose by 80% between 2000 and 2006
where it had lagged considerably other sectors in the period prior to 2000. The
corresponding share in total industry output dropped from 18.2% in 1990 to
13.7% in 2003 and rose to 16.8% in 2006.
Value added in business and personal services, which include education, was an
area of considerable growth throughout the period after the invasion. Sector
value added more than doubled between 2000 and 2006 after having risen by
more than 5 times in real terms between 1977 and 2000. Likewise the
9
Sector contribution to GDP growth is calculated as sector growth times the previous year’s output share of
the particular sector, in this case construction activity.
- 12 -
corresponding share in total industry output rose from 3.7% in 1980 to 11.9% in
2006 accounting for about a quarter of GDP growth in the same year (Tables 3
and 4).
Value added in transport and communication rose by 40% between 2000 and
2006 after rising by more than four times between 1977 and 2000. The
corresponding share in total industry output rose from 6.9% in 1980 to 12.3% in
2006. However, contribution to growth has been modest in recent years since
sector growth was relatively modest in comparison with the major growth sectors
(Tables 3 and 4).
Tourism as measured by value added in hotels and restaurants picked up in
2004-2005 as a result of increasing arrivals and related revenues but declined
considerably in 2006. In total, sector value added almost tripled between 1977
and 2000 but grew by a modest 20% between 2000 and 2006. Sector value
added dropped by more than 13% in 2006 and the respective contribution to
growth turned negative following two years of rapid advance. Tourism remains a
relatively small and volatile sector in the “TRNC”. However, whilst the share of
hotels and restaurants in total industry output remains low accounting for 2.7%
in 2006, the importance of tourism in general is far greater. Net tourist revenues
represented 14% of GNP in 2005 (Table 1).
The financial sector has been mired in considerable problems in the late 1990s
and it is only in the more recent years that it has started to stabilize. Whilst the
financial sector had risen by almost five times between 1977 and 2000, growth
has been negative for a considerable part in the latter half of the 1990s and early
part of the 2000s. Value added declined by more than 20% between 2000 and
2004 before rising modestly in 2005 and 2006. The corresponding share in total
industry output dropped from 6.3% in 2000 to 3.5% in 2006 (Tables 3 and 4).
The Turkish-Cypriot regime, offered incentives to foreign companies to locate in
- 13 -
the “TRNC” on an offshore basis;
10
the offshore company law was passed in 1993
and in the period that followed to 1999, offshore activity was brisk. High interest
rates and lack of adequate regulatory supervision culminated in the banking crisis
of 1999.
Irrespective of the positive growth pattern in the last few years, economic activity
in the northern part of Cyprus will in the long run depend on sustained openness
and linkages with the economy of the government-controlled area and the rest of
the world.
4. Employment and Population Changes
Population in the "TRNC", has been growing steadily and any emigration that was
taking place was more than counterbalanced by immigration from Turkey.
Despite considerable emigration of Turkish Cypriots the total population has been
increasing since the invasion resulting in a fundamental demographic
transformation. It also seems that increasing employment of Turkish Cypriots in
the government controlled area leads to further immigration from Turkey.
10
It should be noted that given the status of the “TRNC”, the relevant legal framework was extremely weak.
This was one of the reasons for the financial crisis as well as for the money laundering activities that are
systematically reported.
- 14 -
Table 5 – Population and the Labor Market
1980 1990 2000 2002 2003 2004 2005
Employment 52,531.0 71,525.0 89,327.0 93,114.0 98,860.0 104,873.0
109,090.0
% change
on previous
year 7.4 2.1 2.1 3.0 6.2 6.1 4.0
Base
1977=100
117.3 159.7 199.4 207.9 220.7 234.1 243.5
Base
2000=100 0.0 0.0 100.0 104.2 110.7 117.4 122.1
Number of
Unemployed 1,789.0 849.0 1,166.0 1,535.0 1,375.0 1,814.0 1,090.0
Unemployment
Rate (%)
3.3 1.2 1.3 1.6 1.4 1.7 1.0
Labor force 54,320.0 72,374.0 90,493.0 94,649.0 100,235.0
106,687.0
110,180.0
% change
on previous
year 6.6 2.2 2.3 3.0 5.9 6.4 3.3
Base
1977=100
117.7 156.9 196.2 205.2 217.3 231.3 238.8
Base
2000=100 0.0 0.0 100.0 104.6 110.8 117.9 121.8
Unemployment
rate 3.3 1.2 1.3 1.6 1.4 1.7 1.0
Population 149,610.0
171,469.0
208,886.0
213,491.0
215,790.0
218,066.0
220,289.0
Annual
Population
Growth (%) 0.7 1.3 1.1 1.1 1.1 1.1 1.0
Base
1977=100 103.2 118.3 144.1 147.2 148.8 150.4 151.9
Base
2000=100 0.0 0.0 100.0 102.2 103.3 104.4 105.5
Source: State Planning Organization “TRNC”/own calculations
The level of employment and the size of the labor force have grown in tandem
throughout the period following the Turkish invasion. Considering the base
indices for population, the labor force, and the level of employment in the
economy it follows that population growth lagged behind rising by 52% since
1977 compared with 143% and 138% respectively for the employment level and
the labor force (Table 5). Whilst population has been growing mainly through net
immigration, the labor force has been growing also through increases in the labor
participation rate.
- 15 -
There is also a growing body of illegal workers in the “TRNC” as evidenced in a
declining number of elementary school pupils. Whereas the number of
elementary school pupils was 17,963 in 1987, their numbers declined to 15,635
in 2000 and to 15,482 in 2002.
11
These figures are evidence that the stable part
of the population who have families and have settled in the "TRNC" are only a
part of the whole population which suggests a growing body of illegal workers.
These people remain unaccounted for until the next a census as it happened in
fact in 2000 and 2006.
12
However, the problem is not only with illegal workers. Big businesses from
Turkey have also established operations in the “TRNC”. Most of the casinos now
in operation belong to Turkish mainland interests. Economically, gambling casinos
contribute very little because they operate in such a manner that the money
involved either never comes to Cyprus from Turkey or any that does is
immediately transferred back to Turkey.
Considering employment by sector of economic activity a number of interesting
results are noted. Agriculture for instance has been the only declining sector in
terms of employment volumes. Whereas agricultural employment comprised 38%
of total employment in 1980, the respective employment share declined to 11%
by 2006. Employment in agriculture declined in absolute terms falling to an index
level of 69.5 in 2005 from 100 in 1977. These changes have been in line with the
changing structure of the economy in the same period (Tables 7 and 8).
11
A. Theophanous and Y. Tirkides, “The Cyprus Economy in Perspective: an Analysis of Growth and
Structure” in A. Theophanous and Y. Tirkides, Accession to the Eurozone and the Reunification of the Cyprus
Economy, pp. 70-73.
12
Ibid. Furthermore, see S. Bahcheli, “Census reveals soaring population in north”, The Cyprus Mail, 7 May
2006.
- 16 -
Table 6 – Employment by sector of economic activity
2000
2001
2002
2003
2004 2005 2006P
Agriculture 15,236
14,931
14,632
14,339
13,765
13,077
12,423
Industry 22,819
22,819
24,677
28,667
29,798
31,008
33,179
Quarrying 1,105
1,105
1,146
1,287
1,343
1,417
1,567
Manufacturing 6,234
6,234
6,364
6,534
6,777
6,903
7,031
Electricity – Water 1,376
1,376
1,381
1,413
1,473
1,528
1,559
Construction 14,104
14,104
15,786
19,433
20,205
21,160
23,022
Services 51,272
52,616
53,805
55,854
61,310
65,005
67,797
Trade – Tourism 9,630
9,630
10,520
11,088
12,505
13,474
13,683
Wholesale and Retail Trade 6,000
6,000
6,325
6,742
7,568
8,420
8,629
Hotels and Restaurants 3,630
3,630
4,195
4,346
4,937
5,054
5,054
Transport and Communication
8,104
8,104
8,310
8,550
9,067
9,952
10,280
Financial Institutions 2,397
2,397
2,397
2,509
2,509
2,583
2,635
Business and Personal Services
13,057
14,401
14,494
15,089
17,914
18,735
20,019
Public Services 18,084
18,084
18,084
18,618
19,315
20,261
21,180
Total Employment 89,327
90,366
93,114
98,860
104,873
109,090
113,399
Source: State Planning Organization “TRNC”
P = provisional
Table 7 – Employment by sector of economic activity: index
Base:
1977=100
Base: 2000=100
2000 2005 2002 2003 2004 2005 2006P
Agriculture 81.0
69.5
96.0
94.1
90.3
85.8
81.5
Industry 317.9
432.0
108.1
125.6
130.6
135.9
145.4
Quarrying 222.3
285.1
103.7
116.5
121.5
128.2
141.8
Manufacturing 174.5
193.3
102.1
104.8
108.7
110.7
112.8
Electricity – Water 183.7
204.0
100.4
102.7
107.0
111.0
113.3
Construction 597.6
896.6
111.9
137.8
143.3
150.0
163.2
Services 272.7
345.8
104.9
108.9
119.6
126.8
132.2
Trade – Tourism 313.0
437.9
109.2
115.1
129.9
139.9
142.1
Wholesale and Retail Trade n.a.
n.a.
105.4
112.4
126.1
140.3
143.8
Hotels and Restaurants n.a.
n.a.
115.6
119.7
136.0
139.2
139.2
Transport and Communication 440.9
541.5
102.5
105.5
111.9
122.8
126.9
Financial Institutions 296.3
319.3
100.0
104.7
104.7
107.8
109.9
Business and Personal Services n.a.
n.a.
111.0
115.6
137.2
143.5
153.3
Public Services 138.3
154.9
100.0
103.0
106.8
112.0
117.1
Total Employment 199.4
243.5
104.2
110.7
117.4
122.1
126.9
Source: State Planning Organization “TRNC”/own calculations
- 17 -
Table 8 – Distribution of Employment by sector of economic activity
1980
1990
2000
2003
2004
2005
2006P
Agriculture 38.1
26.7
17.1
14.5
13.1
12.0
11.0
Industry 16.6
21.6
25.5
29.0
28.4
28.4
29.3
Quarrying 1.1
1.3
1.2
1.3
1.3
1.3
1.4
Manufacturing 7.6
8.3
7.0
6.6
6.5
6.3
6.2
Electricity – Water 1.7
1.7
1.5
1.4
1.4
1.4
1.4
Construction 6.2
10.4
15.8
19.7
19.3
19.4
20.3
Services 45.2
51.7
57.4
56.5
58.5
59.6
59.8
Trade – Tourism 7.5
9.7
10.8
11.2
11.9
12.4
12.1
Wholesale and Retail Trade 0.0
7.2
6.7
6.8
7.2
7.7
7.6
Hotels and Restaurants 0.0
2.5
4.1
4.4
4.7
4.6
4.5
Transport and Communication 5.4
8.0
9.1
8.6
8.6
9.1
9.1
Financial Institutions 2.3
2.8
2.7
2.5
2.4
2.4
2.3
Business and Personal Services 0.0
8.8
14.6
15.3
17.1
17.2
17.7
Public Services 30.0
22.3
20.2
18.8
18.4
18.6
18.7
Total Employment 100.0
100.0
100.0
100.0
100.0
100.0
100.0
Source: State Planning Organization “TRNC”/own calculations
As already discussed manufacturing activity has been lagging; this is also
reflected in the employment figures. The volume of employment in the
manufacturing sector increased by 12.8% between 2000 and 2006 whilst the
share in total employment dropped from 7.6% in 1980 to 6.2% in 2006 (Tables 7
and 8).
Labor absorption has been concentrated primarily in the growth sectors of
construction, trade and tourism and business and personal services. Specifically,
employment in the construction sector increased by 63% between 2000 and
2006 whilst the corresponding share in total employment rose from 6.7% in 1980
to 20.3% in 2006. Trade and Tourism increased their corresponding volume of
employment by 42% in the same period whilst their share in total employment
rose from 7.5% in 1980 to 12.1% in 2006. Likewise in the business and personal
services, the level of employment rose by 53% between 2000 and 2006 with the
corresponding share in total employment rising to 17.7% in 2006 from 7.3% in
1980 (Tables 7 and 8).
- 18 -
According to official statistics the “public services” sector stagnated in recent
years. The corresponding share in total employment dropped from 22.7% in
1983 to 18.7% in 2006. At the same time the volume of employment increased
by 12% between 2000 and 2006 compared with a corresponding increase of 27%
for total employment.
13
Before the recent census of April 2006 the Turkish settlers, according to
estimates, numbered in excess of 130,000, and formed the majority of the
population in the "TRNC". Accordingly, the settlers have acquired a more
fundamental role in shaping the social and cultural character in the occupied
areas. Thus, what distinguishes the "TRNC" from the Greek Cypriots living in the
government-controlled areas is not only the level of economic development or
ethnic differences; social and cultural factors come increasingly in-between.
In parallel with the waves of settlers coming to the island, Turkish Cypriots have
been emigrating since 1974. Whereas Turkish Cypriots numbered 120,000 in
1974, today their population is estimated at around 90,000, at best. The mixed
population of the "TRNC" was estimated at about 220,000 people excluding some
36,000 Turkish soldiers. However, the latest census of 2006 has shown a steep
increase in population to 264,172 from 200,587 in 1996.
14
This increase is largely
attributable to large numbers of immigrant workers. Even before the April 2006
census the composition of the population divided roughly 60 to 40 between
settlers and Turkish Cypriots respectively. The continuous contraction of the
Turkish-Cypriot population and the massive inflow of Turkish settlers, seen in
proportion, constitute a massive demographic transformation. It is ironic to
conclude that the Turkish Cypriots in whose name Turkey invaded the island in
1974 are now a minority in the northern part of Cyprus.
13
W. Noë and M. Watson, “Convergence and Reunification in Cyprus: Scope for a Virtuous Circle”, op. cit., p.
2. On the other hand though, it should be acknowledged that employment in the broader “public sector” is
much higher. See relevant section (5.1 Public Finance) below.
14
See S. Bahceli, “Census reveals soaring population in north”, The Cyprus Mail, 7 May 2006. This may also
explain in part the extraordinary increase in the number of elementary school children noted above.
- 19 -
The "TRNC" faces a problem of corruption which is no surprise taking into account
the extent to which corruption is so prevalent in Turkey. The occupied area
constitutes an instrument for money laundering by Turkish interests. It is also no
coincidence that the "TRNC" is one of the most militarized regions in the world
today. The proportion of military to civilian population is at least one to six.
Before April 2003, with the economy of the occupied territory in a state of
perpetual crisis, defiance of the regime was increasing. The situation led many
Turkish Cypriots to emigrate lessening their presence and role in the affairs of the
"TRNC". But the post-April 23, 2003 situation and subsequent developments
reversed this negative outlook; nevertheless, this is not enough to overcome
fundamental economic problems including issues of legitimacy. There is still a
long way to go before full normalization and modernization.
5. The Macroeconomic Balance
The investment rate achievable in the "TRNC" is limited by the rate of domestic
savings. Specifically the savings rate in the “TRNC” never exceeded 20% of GDP,
and fluctuated considerably over the years even taking into account aid from
Turkey. But private saving has been rising over time partly reflecting the long
history of volatility and uncertainty. At the same time consumption has been
declining, creating a considerable amount of slack in the economy. Private
investment on the other hand started to accelerate as from 2002 onwards but
continues to be low in relation to GNP. It is noted that private investment rose to
16% of GDP in 2006 which is an all time high for the “TRNC”. It should be
stressed that in the post-2003 period there has been a major change in almost all
economic indicators and variables.
- 20 -
5.1 Public Finance
In the area of public finance the size of the wider public sector remains relatively
large and its role in the economy continues to be dominant. This tends to sustain
considerable distortions in the economy that ultimately limit the growth potential.
The growth of the public sector has come about as a consequence of low
investment and limited economic activity by the private sector. The broad
“public” sector employs around 40% of the economically active population.
15
However, this has started to change after 2003, as the economy was expanding
more rapidly and local budget revenues increased substantially.
Table 9 – Balance of State Revenues and Expenditures:
Share in GNP (%)
1980
1990
2000
2003
2004
2005
2006P
BUDGET REVENUES 23.8
29.2
44.4
54.2
51.3
49.1
44.9
Local Revenues 11.4
25.2
28.0
31.5
37.7
33.2
30.6
Tax Revenues 8.0
21.4
19.4
17.8
20.4
20.2
20.0
Direct Taxes 2.6
10.7
11.4
8.9
9.6
7.7
7.5
Indirect Taxes 5.4
10.7
8.0
8.9
10.9
12.5
12.4
Other Income 3.4
3.8
5.8
6.0
6.1
6.8
4.4
Fund Revenues n.a.
n.a.
2.8
7.7
11.1
6.1
6.3
Foreign Aid and Credits 12.5
3.9
16.4
22.7
13.7
15.9
14.3
Foreign Aid 3.7
3.3
9.9
8.6
7.1
6.6
7.4
Republic of Turkey 3.5
3.2
9.9
8.5
7.1
6.6
7.4
Other 0.2
0.1
0.0
0.1
0.0
0.0
0.0
Credits 8.8
0.6
6.5
14.1
6.6
9.3
6.9
Republic of Turkey 8.8
0.6
6.5
14.1
6.6
9.3
6.9
EXPENDITURES 24.0
33.9
51.0
53.9
50.7
47.7
45.8
Current Expenditures 13.8
16.0
19.8
17.5
17.5
18.2
18.4
Personnel Expenditures 11.2
13.4
17.4
15.0
15.1
15.4
16.0
Other Current Expenditures
2.6
2.6
2.5
2.6
2.5
2.8
2.4
Transfers 6.1
11.8
21.9
26.6
24.8
22.3
19.2
Social Transfers 3.8
9.4
13.6
11.7
11.6
n.a.
n.a.
Other Transfers 2.2
2.4
8.3
14.9
13.2
n.a.
n.a.
Defence 1.9
1.3
3.7
3.6
3.1
2.5
2.6
Investments 2.3
4.8
5.5
6.1
5.2
4.7
5.6
BALANCE OF BUDGET -0.2
-4.8
-6.6
0.4
0.6
1.4
-0.9
Source: State Planning Organization “TRNC”/P = provisional
15
See A. Theophanous and Y. Tirkides, “The Cyprus Economy in Perspective: an Analysis of Growth and
Structure” in A. Theophanous and Y. Tirkides, Accession to the Eurozone and the Reunification of the Cyprus
Economy, op. cit., p. 72.
- 21 -
Table 10 – Balance of State Revenues and Expenditures: % Distribution
1980
1990
2000
2003
2004
2005
2006P
BUDGET REVENUES 100.0
100.0
100.0
100.0
100.0
100.0
100.0
Local Revenues 47.7
86.5
63.0
58.1
73.4
67.5
68.2
Tax Revenues 33.4
73.5
43.7
32.8
39.8
41.2
44.5
Direct Taxes 10.7
36.8
25.8
16.3
18.6
15.7
16.8
Indirect Taxes 22.7
36.7
17.9
16.5
21.2
25.5
27.7
Other Income 14.2
13.0
13.1
11.0
11.9
13.9
9.8
Fund Revenues n.a.
n.a.
6.2
14.2
21.7
12.4
13.9
Foreign Aid and Credits 52.3
13.5
37.0
41.9
26.6
32.5
31.8
Foreign Aid 15.5
11.3
22.2
15.8
13.8
13.5
16.6
Republic of Turkey 14.5
10.9
22.2
15.7
13.8
13.4
16.6
Other 0.9
0.4
0.0
0.1
0.0
0.0
0.0
Credits 36.9
2.2
14.7
26.1
12.9
19.0
15.3
Republic of Turkey 36.9
2.2
14.7
26.1
12.9
19.0
15.3
EXPENDITURES 100.0
100.0
100.0
100.0
100.0
100.0
100.0
Current Expenditures 57.5
47.2
38.9
32.6
34.6
38.1
40.1
Personnel Expenditures 46.8
39.4
34.0
27.8
29.7
32.2
34.8
Other Current Expenditures
10.7
7.8
4.8
4.7
4.9
5.9
5.2
Transfers 25.3
34.8
43.0
49.4
48.9
46.7
41.9
Social Transfers 16.0
27.6
26.7
21.7
22.9
n.a
n.a.
Other Transfers 9.2
7.2
16.2
27.6
26.0
n.a.
n.a.
Defence 7.7
3.8
7.3
6.7
6.2
5.3
5.7
Investments 9.5
14.2
10.9
11.4
10.3
9.9
12.3
Source: State Planning Organization “TRNC”/P = provisional
An examination of the public accounts reveals certain disquieting facts. Whilst the
income tax base is narrow rendering revenues volatile and unstable, expenditure
needs are relatively large and remain skewed toward transfers and public wages.
The result is a large imbalance sustaining considerable distortions in the economy
which is only mitigated by substantial flows from Turkey in the form of foreign aid
and credits.
On the revenue side foreign aid and credits from Turkey accounted for 31.8% of
total revenues in 2006 or 14.3% of GNP. Foreign aid and credits has been
fluctuating over time but remains the single most significant source of revenue
for the state (Tables 9 and 10).
- 22 -
Tax revenue accounted for 44.5% of total revenues in 2006 or 20% of GNP
whereas the importance of indirect taxes has been increasing. Specifically, the
share of indirect taxes in total revenue increased from 17.9% in 2000 to 27.7%
in 2006. At the same time the share of direct taxes declined from 25.8% to
16.8% in the same period. Interestingly, the share of fund revenue in total
revenue rose from 6.2% in 2000 to 13.9% in 2006 (Tables 9 and 10).
Expenditures on the other hand are heavily skewed toward public sector wages
(personnel expenditures) and public transfers. Specifically, public sector wages
accounted for 34.8% of total expenditures or 16% of GNP in 2006. Likewise
public transfers accounted for 42% of total expenditures or 19.2% of GNP in
2006. Transfers have increased sharply in recent years. Public sector wages are
high in relation to the private sector. Given the size of the public sector this
divergence in terms of pay narrows the tax base considerably.
With the revenue side inherently limited and the expenditure side relatively high
the deficit when foreign aid and credits are excluded, is too steep. The fiscal
deficit is currently financed entirely by foreign aid and credits from Turkey.
Despite the fact that the “public” sector has been responsible for the construction
of the infrastructure the sheer size of the sector, and especially growing
transfers, suggest considerable distortions sustained in the product and labor
markets. It is thus imperative to reform and modernize the “public” sector.
Sustained and rising economic activity would provide a good opportunity to
achieve this desirable reform.
Fiscal reform requires the restructuring of the budget in order to remove the
inherent consumption bias in favor of private sector investment and growth.
Reform will necessarily have to include the tax system, transfers and current
spending, public investments and the “state-owned” enterprise sector. Current
expenditures will necessarily have to be reduced to allow resources to be
- 23 -
channeled into public infrastructure investments. The extensive subsidy and
support system will have to be eliminated in order to foster a more competitive
market structure. The importance of the “state-owned” enterprise sector will
have to be revisited in a context of a ‘more regulation and control’ role for the
public sector.
Reform in the “public” sector is necessary in order to increase the private sector,
to foster competitiveness and ultimately to raise productivity in the entire
economy. Without these changes the private economy will be trapped in a ‘slow
growth and low productivity’ vicious circle.
5. 2 The Financial Sector
The importance of the financial sector in supporting private investment and
growth cannot be overstated. Banks and financial institutions perform the critical
function of channeling private savings to the corporate sector for investment and
growth. The financial sector would depend on price signals to be able to perform
its role, which in turn requires a liberalized market in which the government
itself, state owned enterprises and the private company sector compete for
scarce funds on equal terms.
Unresolved property issues currently hinder the process of credit growth, by the
absence of loan skills and by the presence of a large “state-owned” enterprise
sector. Unresolved property issues emanating from the stalemate surrounding
the Cyprus problem hinder the process of credit growth because property cannot
be used for collateral purposes, thus reducing the supply of funds to the private
sector.
Credit risk management is essential especially where credit expansion is rapid
and asset prices are rising. This would certainly require the upgrade of credit risk
analysis skills and the strengthening of prudential supervision. Banking reform
- 24 -
will also be needed in the area of loans to the “publicly” owned enterprises and
with regard to capital-adequacy requirements.
5.3 External Balance
An examination of the balance of payments of the economy of the "TRNC", is
quite revealing. The economy is import dependent with the ratio of exports to
imports of goods at 5.4% in 2005 (Table 1). As a result, the trade balance
traditionally shows a large-deficit position which reached 51% of GNP in 2005
(Table 11).
At the same time the surplus in the invisibles balance is quite substantial
amounting to 39% of GNP in 2005 which allows for the financing of the larger
part of the trade deficit. Net tourist receipts have risen considerably in recent
years to 16.3% and 14.1% of GNP in 2004 and 2005 respectively. Net tourist
receipts show considerable fluctuation over time, which has also been the result
of corresponding fluctuation in GNP and the dollar exchange rates (Table 11).
Other services, mainly tertiary education services also contribute significantly
towards the surplus in the invisibles account. Specifically other services were
25% of GNP in 2005 and show a relatively more stable pattern in relation to net
tourist revenues. The contribution of tertiary education is substantial in value
added terms. It should be noted that initially a major objective of promoting the
education sector was political.
16
At the same time, however, important
socioeconomic benefits have accrued.
17
An additional source contributing to the
invisibles surplus is income from foreign investments reflecting mainly high yields
in Turkey. Lastly, remittances from abroad and commuting workers employed in
16
The tertiary education sector supported by Turkey (basically for political reasons) since the late seventies,
presents an impressive pattern of growth so much so that today it accounts for about 15% of GNP. The
academic institutions in the northern part of Cyprus attract a sizeable population of students, the vast
majority from Turkey. At the same time these academic institutions try to build their connections with
international academic institutions and, as such, are in a position to also propagate political positions.
17
Ibid. See also W. Noë and M. Watson, “Convergence and Reunification in Cyprus: Scope for a Virtuous
Circle”, op. cit., p. 3.
- 25 -
the government-controlled areas of the Republic also constitute an important
contributor to the invisibles surplus.
Table 11 – Balance of Payments ($US m)
1980
1990
2000
2003
2004
2005
Current Account Balance -21.7
-16.4
-32.8
19.4
-14.1
-276.3
Foreign Trade Balance -47.4
-316.0
-374.5
-427.0
-791.1
-1.187.4
Exports 47.6
65.5
50.4
50.8
62.0
68.1
Imports 95.0
381.5
424.9
477.8
853.1
1.255.5
Invisibles Balance 25.7
299.6
341.7
446.4
777.0
911.1
Tourism (Net) 24.0
224.8
198.3
178.8
288.3
328.8
Other Invisibles (Net) 1.7
74.8
143.4
267.6
488.7
582.3
Capital Movements Balance 25.1
25.2
46.7
225.5
254.7
283.2
Foreign Aid and Loans by Turkey 25.6
22.5
105.5
178.7
175.3
217.2
Other Foreign Aid 3.2
2.1
---
---
---
---
Imports By Waiver
1
38.1
169.9
---
---
---
---
Other Short Term Capital Movements (Net) -41.8
-169.3
-58.8
46.8
79.4
66.0
General Balance 3.4
8.8
13.9
244.9
240.6
6.9
Change In Reserves (- Increase, +
Decrease)
-1.1
-6.5
22.5
-281.0
-322.0
-53.0
Net Errors and Omissions -2.3
-2.3
-36.4
36.1
81.4
46.1
In % of GNP
Current Account Balance -9.3
-2.8
-3.2
1.5
-0.8
-11.9
Foreign Trade Balance -20.3
-53.5
-36.0
-33.3
-44.8
-51.0
Exports 20.4
11.1
4.8
4.0
3.5
2.9
Imports 40.7
64.6
40.9
37.2
48.3
53.9
Invisibles Balance 11.0
50.7
32.9
34.8
44.0
39.1
Tourism (Net) 10.3
38.0
19.1
13.9
16.3
14.1
Other Invisibles (Net) 0.7
12.7
13.8
20.8
27.7
25.0
Capital Movements Balance 10.7
4.3
4.5
17.6
14.4
12.2
Foreign Aid and Loans by Turkey 11.0
3.8
10.1
13.9
9.9
9.3
Other Foreign Aid 1.4
0.4
---
---
---
---
Imports By Waiver* 16.3
28.7
---
---
---
---
Other Short Term Capital Movements (Net) -17.9
-28.6
-5.7
3.6
4.5
2.8
General Balance 1.5
1.5
1.3
19.1
13.6
0.3
Change In Reserves (- Increase, +
Decrease) -0.5
-1.1
2.2
-21.9
-18.2
-2.3
Net Errors and Omissions -1.0
-0.4
-3.5
2.8
4.6
2.0
Memorandum Items
GNP (Million $) 233,6
591,0
1,039.9
1,283.7
1,765.2
2,327.8
Source: State Planning Organization “TRNC”/P = provisional
* Due to new Money and Foreign Exchange Law of 1997 imports waiver account is not considered
after 1997
- 26 -
Employment of Turkish Cypriots in the government-controlled areas is
considerable and to the extent that it is sustainable (no reason why it should not
be) it will tend to constitute a stable source of income. As such it will tend to
have a more sustained impact on spending patterns.
Based on the available data, the balance in the current account fluctuated from a
small deficit of 1.9% of GNP in 2001, to a surplus of 1.5% of GNP in 2003 but
reverted to a substantial deficit of 11.9% of GNP in 2005 as a result of a steep
increase in imports of goods.
According to the same data sources, sizeable aid from Turkey in the form of
grants and credits more than offsets any shortfall in the current account to thus
generate a substantial surplus in the balance of payments. Specifically, grants
and credits from Turkey amounted to US$217 million in 2005 or 9.3% of GNP.
Obviously the economy in the "TRNC" displays a high degree of dependence on
foreign aid and loans, which can pose problems of incentives and accountability
in the public sector. It is also a fact that foreign aid flows remain erratic, which
does not tend to favor long-term planning and investment.
6. The Economy of the “TRNC” in Perspective
In sharp contrast to developments in the government-controlled areas, the
economy of the occupied territories lags considerably behind. Per capita income
was almost four times higher in the government controlled areas in the first
quarter of 2003. Developments in the period 2003-2005 however, have led to a
considerable change. Per capita income is now approaching 50% of the
corresponding income in the areas under the control of the Republic of Cyprus.
However, it is important to understand that continued growth will not be
sustainable without due reform and modernization.
- 27 -
The economic well being of the island for both the Greek Cypriots and the Turkish
Cypriots cannot be seen in isolation of their common future in a united Cyprus.
The economy of the "TRNC" picked up considerably following the contraction of
2001-02. However, in order to raise living standards in the north sustainably, to
bridge the gap with the economy in the government-controlled areas, and
ultimately with the EU, would require well-designed macroeconomic and financial
policies, a restructuring of the private and public sectors as well as substantial
assistance from outside sources. Moreover, it will require the economic
integration of Cyprus as a whole.
It is important to realize however that effective coordination of the reform
programme is critical. Measures and policies addressing the problems inherent in
the public sector, banking and finance and the balance of payments must take
place simultaneously and in proper sequencing to be reinforcing for one another
and not to impede the process of reform.
Reform cannot and must not be designed without taking into account the
possibility for a final settlement of the Cyprus problem. The requirements of the
acquis communautaire must likewise influence the reform process. The economic
prospects of the northern part of Cyprus must not be seen in isolation from the
parameters imposed by the requirements of a solution and by the European
acquis.
7. Conclusions
The ultimate reunification of Cyprus and the integration of its economy will be a
long and arduous process that can be facilitated if cooperation and interaction
can take place on a continuous basis. It will also be of extreme importance if
economic policy and restructuring in the northern part be guided by the acquis
communautaire in which case the Republic of Cyprus can provide valuable
assistance.
- 28 -
Ever since the Turkish invasion of 1974 and until April 2003, the northern part of
Cyprus remained almost totally dependent on Turkey economically as well as
politically. A monetary and customs union with Turkey effectively exists whereby
the Turkish Lira constitutes legal tender. The result of this has been that Turkey’s
economic and monetary problems easily transfer to the "TRNC", as in the 1999
crisis.
Economic growth accelerated sharply from 2003 onwards following the partial
lifting of obstacles to free movement on April 23, 2003 as well as political and
socioeconomic developments following the April 24, 2004 referenda and the
accession of the Republic of Cyprus to the EU on May 1, 2004. Growth emanated
from construction
18
and tourist activity with important contributions from the
multidimensional linkages with the government-controlled areas. Agriculture and
transport services made important contributions. Employment of Turkish Cypriots
in government-controlled areas is considerable, estimated at around 10.000
(including part-timers) in 2006. To the extent that this is sustainable it will tend
to constitute a stable source of income. It will also have a more sustained impact
on spending patterns and by extension on general economic activity.
In this context per capita income rose sharply, and the gap with the government-
controlled area, although still substantial, has been steadily declining. However,
the economy remains fragile and the sustainability of the convergence process,
without due reform and restructuring, is questionable.
Economic activity tends to exhibit a high degree of volatility, which is not
conducive to encouraging investment activity and constitutes a fundamental
reason for poor economic performance. A narrow economic base, institutional
weakness, limited trade openness, a large “public” sector and underdeveloped
financial markets curtail economic activity.
18
Greek Cypriots have raised the issue that the bulk of construction activity takes place in Greek-Cypriot
properties unlawfully.
- 29 -
At the same time, the budget deficit remains exceptionally high as a percentage
of GNP, when foreign aid and credits from Turkey are excluded. A narrow income
tax base renders the revenue side highly unstable. Expenditures are large, and
skewed toward transfers and public consumption. The result is a large imbalance
sustaining considerable distortions in the economy. The fiscal deficit is currently
financed entirely by foreign aid and loans, mainly from Turkey. It is thus
imperative to reform and modernize the “public” sector.
An examination of the balance of payments is quite revealing. The economy is
lightly import-dependent and the ratio of exports to imports of goods is
extremely low. As a result, the trade balance features an exceptionally large and
chronic deficit relative to GNP.
The surplus in the invisibles balance on the other hand is substantial and allows
for the financing of the larger part of the trade deficit. Net tourist receipts vary
and income, mainly from tertiary education services, contributes significantly
towards the surplus in the invisibles account. An additional source contributing to
the invisibles surplus is income from foreign investments reflecting mainly high
yields in Turkey. Lastly, remittances from abroad and commuting workers
employed in the government-controlled areas of the Republic of Cyprus also
constitute an important contributor to the invisibles surplus. Accordingly, sizeable
aid from Turkey in the form of grants and credits more than offset any shortfall in
the current account and generate a substantial surplus in the balance of
payments.
The (mixed) population of the "TRNC" is estimated at about 220,000 people
excluding the 36,000 or so Turkish soldiers. The composition of the population
divides roughly 60% to 40% between settlers and Turkish Cypriots respectively.
However, according to Turkish-Cypriot sources the last census, which took place
on April 30, 2006, indicated that the population had reached 264,172. The
contraction of the Turkish-Cypriot population and the massive inflow of Turkish
- 30 -
settlers, seen in proportion, constitute a massive demographic transformation.
Increasing employment of Turkish Cypriots in the government controlled areas
also leads to further immigration from Turkey.
Accordingly, the settlers have acquired a (more) fundamental role in shaping the
social and cultural character of the northern part of the island. Thus, what divides
the "TRNC" with the Greek Cypriots living in the government-controlled areas is
not only the level of economic development or ethnic differences: social and
cultural factors come increasingly in-between.
Considering the employment situation it becomes clear that the services sectors
have been absorbing considerable resources in recent years. The previously
dominating agricultural sector declined in importance and its share of
employment declined accordingly. Productivity in the agricultural sector is very
low and the contribution of agriculture to GDP remains relatively low. At the
same time the “government” sector remains an important employer in the
economy. The “central government” accounted for 19% of total employment in
2006. However, it is estimated that employment in the broad “public sector” is
considerably higher.
There is no doubt that the northern part of the island entails great economic
potential and there are important synergies with the economy in the
government-controlled areas. However, without normalizing the prevailing
political situation, further economic advancement will be difficult to achieve. Far-
reaching reform is certainly needed in the private and public sectors, in banking
and finance and in the workings of a market economy.
Fiscal reform requires the reduction of the deficit and the restructuring of the
budget in order to remove the inherent consumption bias in favor of private
sector investment and growth. Reform will necessarily have to include the tax
system, transfers and current spending, public investments and the state-owned
- 31 -
enterprise sector. The extensive subsidy and support system will have to be
gradually eliminated in order to foster a more competitive market structure. The
importance of the “state” owned enterprise sector will have to be revisited in a
context of a more regulation-and-control role for the “public” sector.
A large “state” owned enterprise sector, an undeveloped financial system and
unresolved property issues currently hinder the process of credit growth.
Liberalization of the financial system is a necessary precondition for the efficient
allocation of scarce resources. Unresolved property issues emanating from the
stalemate surrounding the Cyprus problem hinder the process of credit growth
because property cannot be used for collateral purposes. This reduces the supply
of funds to the private sector. Moreover, the issue of legitimacy creates
multidimensional problems and issues.
It is important to realize that effective coordination of the reform program is
critical. Measures and policies addressing the problems inherent in the public
sector, banking and finance and the balance of payments must take place
simultaneously and in proper sequencing. However, reform cannot and must not
be designed without taking into account the possibility of a final settlement of the
Cyprus problem. The requirements of the acquis communautaire must likewise
influence the reform process. The economic prospects in the northern part of
Cyprus must not be seen in isolation from the parameters entailed in the
requirements of a solution and the European acquis.
