Review of Cyprus Economy

REVIEW OF CYPRUS ECONOMY

Cyprus is a small, services oriented (services account for approximately 76% of GDP) free market economy with a record of successful economic performance Ð'- Rapid growth, full employment conditions, low inflation & external and internal stability. In terms of per capita income, currently estimated at US $ 18,500, Cyprus is classified among the high income countries. It has good business and financial services, modern telecommunications, an educated labor force and a sound legal system. Cyprus' geographical location, tax incentives, and modern infrastructure also make it a natural hub for companies looking to do business with the Middle East, Europe, the former Soviet Union and North Africa.

Cyprus' entry into the EU in May 2004 marked the crowning point of protracted efforts over the years of its most important political and economic policy objective. As regards the economy, the harmonization process has transformed the whole economic structure of Cyprus and full accession is expected to bring a number of positive results. At the same time, EU membership is a challenge to the business community to strive for increased competitiveness and the upgrading of quality of products & services.

Economic growth in 2003 remained at the same levels as the previous year with the economy growing by 2% in real terms, mainly due to the containment of tourist demand. The low rate of economic growth for a second year in a row was reflected in the labour market with a small increase of the unemployment rate to 3.5%. Inflation was up to 4.1% from 2.8% in 2002 as a result of higher consumer taxes, particularly on petrol and an increase in VAT. The fiscal deficit rose to 6.3% from 4.6% of GDP, overshooting the Maastricht convergence criteria of 3%.

The agricultural sector grew by 1.5% and its contribution to GDP remained unchanged at 3.9%. Manufacturing shrank by 2% and its contribution to GDP slipped to 9.4%.

The construction sector posted a growth of 4% and its contribution to GDP climbed to 8% as a result of increased investment in private and public construction projects.

The hotel and restaurant sector shrank by 3.9% as tourist arrivals and revenues both fell. This sector's contribution to GDP fell to 8.2%. Wholesale & retail trade grew by 0.5% (approximately 13% of GDP) while the financial sector also made only marginal gains contributing 6.3% to GDP. The remaining tertiary sectors saw growth, particularly property management as well as health and social welfare.

Tourist arrivals in 2003 fell by 4.76% to 2.303 million. The drop was attributed to the negative climate in the region because of conflict and threats of terrorist attacks and to the further slowdown in rates of growth in Cyprus' main markets.

BI-LATERAL COMMERCIAL TIES

In recent years, Israel has become one of the major trading partners of Cyprus. The volume of trade between the two countries has increased considerably and there is strong potential for further increase in the coming years.

Total imports from Israel

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