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

III. POLITICAL ENVIRONMENT

Nature of Political Relationship with the United States

The United States and Cyprus enjoy an excellent bilateral relationship. The most prominent is the U.S. effort to assist Cyprus find a way to heal the island's political division. There is broad cooperation between the two governments on a host of issues. One key area of cooperation is in combating money laundering, where Cyprus has made strides in meeting international banking standards.

Major Political Issues Affecting Business Climate

Political events in 1974 resulted in a de facto division of Cyprus into a Government-controlled area in the South -- Greek Cypriot (population about 661,500) -- and a Turkish Cypriot area in the North (population about 204,200). Since 1983, the Turkish Cypriots have declared the northern area to be the "Turkish Republic of Northern Cyprus" ("TRNC") -- an entity recognized only by Turkey. Approximately 30,000 Turkish troops are stationed there. The following parts of this section, as well as the rest of the report, however, cover only the part of the island controlled by the internationally recognized Republic of Cyprus. The United Nations Force in Cyprus (UNFICYP) polices a buffer zone between the Greek Cypriot and Turkish Cypriot communities. Except for occasional demonstrations or incidents along the buffer zone (which resulted in five deaths in 1996), there has been no violent conflict since 1974. At present, there is essentially no movement of goods, persons, or services between the two parts of the island. Foreign products sold in the North (including many U.S. products) are handled by agents in Turkey or trading companies in the Turkish Cypriot community. The ports and airports of the Turkish Cypriot community are considered illegal by the government of the Republic of Cyprus. As a result, visitors who enter Cyprus from the "TRNC" are not allowed to visit the part of the island in the South. The U.S. plays a significant role in supporting the U.N. Secretary General's efforts to negotiate a political solution to the Cyprus problem.

Political System, Schedule for Elections, and Major Parties

Cyprus is a democratic and independent Republic with a presidential system of government. The elected President of the Republic (who serves for five years) appoints the Council of Ministers, which is the main executive instrument of the Republic. Ministers are responsible for the initiation of legislation and administration of matters falling within their domain. Legislative power lies in the hands of the House of Representatives, which consists of 56 elected members (who serve for five years).

Presidential elections held in February 1998 brought Glafcos Clerides and the political right to power for a second consecutive term.

In the parliamentary elections of May 26, 1996, the right-wing Democratic Rally (DISY) remained the largest political party, supported by roughly 34.0 percent of the electorate. Second in strength was the island's oldest political party, communist AKEL, which commanded 33.0 percent support. Next came the centrist Democratic Party (DIKO) with 16.0 percent, followed by socialist party, EDEK, with just over 8.0 percent and the left-of-center Free Democrats, with under 4.0 percent. Traditionally, the Greek Cypriot Orthodox Church has also played an important role in Greek Cypriot politics, although its influence has waned considerably in recent years.

The President of the House of Representatives, Spyros Kyprianou, is the country's second-ranking government official and becomes Acting President in the absence of President Clerides.

Closer ties with the EU

The Republic of Cyprus applied for full EU membership on July 4, 1990 and began formal accession negotiations with the EU on March 31, 1998. The island's political problem presents the greatest challenge for both sides in this accession course. In view of this reality, the Government of Cyprus has been working to eliminate as many other potential sticking points as possible. A far-reaching and intensive campaign, involving virtually all Cypriot ministries, has been in progress in recent years, aimed at harmonizing the Cypriot economy with that of the EU to the greatest possible extent.

The earnestness of the government's efforts can be seen in the rapid, extensive, and fundamental steps taken so far. The harmonization effort involves virtually all government ministries and departments and is coordinated by the Planning Bureau. The government's target is to harmonize completely with the EU over the next three or four years (by January 1, 2003).

Some of the important changes which have already taken place include completion of the Customs Union agreement (which entails zero tariffs on most EU products and adoption of the EU's Common Customs Tariff for most products from third countries); adoption of a modern banking law in 1997 and a modern patents law in 1998; more liberal provisions on competition; lifting of import permit requirements; and abolition of price controls on many categories of products sold in Cyprus. These changes have resulted in increased competition and are putting pressure on Cyprus' manufacturing and agriculture sectors.

In short, the whole economic structure of Cyprus is being transformed as a result of the drive for harmonization. This effort challenges traditional ways of doing business in almost all areas and has a considerable financial cost as well. It is difficult to pin down a number but Cyprus' chief EU accession negotiator, former President Vassiliou, recently estimated the cost of Cyprus' drive for EU harmonization at 946 million Euros or USD 1.01 billion.

It should be noted that since January 1, 1999, the Cyprus Pound (CP) has been pegged to the Euro. The central CP-Euro exchange rate is one CP to 1,7086 Euros, with a fluctuation band of plus or minus 2.25 percent. This margin will expand to plus or minus 15.0 percent after the Central Bank of Cyprus abandons the current policy of administratively fixing the exchange rate of the CP in favor of a market-based determination of the value of the CP.

Asked to assess Cyprus' progress towards accession, the head of the EU's negotiating team for Cyprus' accession, Leopold Maurer, said on June 22, 1999 that Cyprus was "the first pupil in its class of six candidate countries." Cyprus has finished the screening stage of the negotiations and has so far completed a third of the 29 chapters for negotiation. These chapters are: Science and Research; Education and Training; Culture and Audiovisual Policy; Industrial Policy; Small- and Medium-Sized Enterprises; Statistics; Consumers and Health Protection; Company Law; Customs Union; and External (Commercial) Relations. Additionally, Cyprus has submitted positions on most other chapters, even though these remain open. These include: Common Foreign and Security Policy; Fisheries; Competition Policy; Free Movement of Goods; Free Movement of Capital; Economic and Monetary Union; Energy; and Social Policy and Employment.

Still, some of the most difficult challenges still lie ahead for Cyprus. For example, European officials have often pointed out that Cyprus will have to abolish the interest rate ceiling and foreign exchange control. Cyprus also must liberalize protected state monopolies in air transport, telecommunications, and other sectors. Another hurdle to be overcome, concerns the favorable tax treatment Cyprus grants to international business companies. Cyprus will try to obtain derogations for this sector but, even if it succeeds, these derogations will probably have a limited duration.