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Country Commercial Guides FY 2000: Cyprus Report prepared by U.S. Embassy Nicosia, released July 1999 Note*

I. EXECUTIVE SUMMARY

This Country Commercial Guide (CCG) presents a comprehensive look at Cyprus' commercial environment, using economic, political and market analysis. The CCGs were established by recommendation of the Trade Promotion Coordinating Committee (TPCC), a multi-agency task force, to consolidate various reporting documents prepared by the U.S. business community. Country Commercial guides are prepared annually at U.S. embassies through the combined efforts of several U.S. Government agencies.

Cyprus' small, services-based economy recorded strong growth, declining inflation, and low unemployment in 1998. Specifically, growth reached 5.0 percent (from 2.5 percent in 1997), inflation fell to 2.2 percent (from 3.6 percent in 1997), and unemployment remained at the traditionally-low level of 3.3 percent. As in previous years, services (especially tourism) provided the main impetus for growth. Additionally, and in contrast to the previous two years, agriculture and manufacturing performed quite well in 1998.

By contrast, a growing fiscal deficit and deteriorating balance of payments constituted the Cypriot economy's two most noticeable weak areas in 1998. The public finance sector deteriorated further in 1998, with the deficit growing from 5.3 percent of GDP in 1997 to 5.5 percent in 1998 and moving further away from the Maastricht target of 3.0 percent. As a result, public debt continued to rise at a pace causing strong concern, reaching 60.0 percent of GDP from 56.6 percent. A package of fiscal measures designed to increase state revenue and reverse this trend is currently pending before the House of Representatives.

Despite a healthy increase in invisible receipts, fueled by increased earnings from tourism, the current account deficit increased considerably, from 4.0 percent of GDP to 6.7 percent, because of a large increase in the trade deficit. With total exports declining by 13.9 percent and total imports increasing by 6.0 percent, the trade deficit reached a record USD 2.5 billion (up 17.1 percent from 1997).

Cyprus has good business and financial services, modern telecommunications, an educated labor force, good airline connections, a sound legal system, and a low crime rate. Cyprus' geographical location, tax incentives, and modern infrastructure also make it a natural hub for companies looking to do business with the Middle East, Eastern Europe, the former Soviet Union and North Africa. As a result, Cyprus has a thriving international business sector. A more liberal regime for foreign investments and portfolio investment has been in place since 1997, complementing a modern Banking Law passed in the same year. Intellectual property is well protected with a modern copyright legislation (passed in 1994) and a modern patent law (passed in 1998).

Exports from the U.S. to Cyprus (including goods for re-export to third countries) have almost quadrupled in the last decade, from USD 128.9 million in 1989 to USD 460.5 million in 1998. This helped keep the U.S. at the top of the list of Cyprus' leading suppliers of imports for the fourth year in a row, with a 12.5 percent share of the market in 1998. Roughly two-thirds of U.S. origin goods exported to Cyprus in 1997 (about USD 305.9 million) were American cigarettes, the vast majority of which were re-exported to Eastern European countries.

Best prospects for U.S. goods in Cyprus include government and semi-government tenders in telecommunications equipment, medical equipment for a major new hospital, computer services, and desalination plants. Local municipalities are working on long-term plans for sewerage projects and plans for new highways and marinas are also underway. The island's private sector also has a growing appetite for U.S.-made office machines, computer software and data processing equipment. With the changes in Cypriot tariff regime, many other opportunities are opening up for exporters.

Full membership in the EU is one of the Government's foremost political and economic policy objectives. Cyprus, one of six countries scheduled for the EU's next enlargement, began accession negotiations with the EU on March 31, 1998. In view of this prospect, the Government has embarked on an extensive and far-reaching effort to harmonize Cypriot laws, standards and regulations with those of the EU. Although much progress has been made, Cyprus still has to address some of the thorniest issues on the road to harmonization, such as interest rate liberalization, abolition of state monopolies in air transport, and telecommunications, and the treatment of international business companies.

The political events of 1974 led to a de facto division of Cyprus into the South and an area in the North which declared itself in 1983 the "Turkish Republic of Northern Cyprus" ("TRNC"). This latter area is recognized only by Turkey. This report covers only the part of the island controlled by the internationally-recognized Republic of Cyprus.

Country Commercial Guides are available for U.S. exporters from the National Trade Data Bank on CD-ROM or through the Internet. Please contact STAT-USA at 1-800-STAT-USA for more information. Country Commercial Guides can be accessed via the World Wide Web at http://www.stat-usa.gov, http://1997-2001.state.gov, and http://www.mac.doc.gov. They can also be ordered in hard copy or on diskette from the National Technical Information Service (NTIS) at 1-800-553-NTIS. U.S. exporters seeking general export information/assistance and country-specific commercial information should contact the U.S. Department of Commerce, Trade Information Center by phone at 1-800-USA-TRADE.