Cyprus

Politics:

• Analysis

  Cyprus politics: Quick View - No end in sight for the Cyprus problem

  Event

  The Turkish Cypriot request to the UN secretary-general, Ban Ki-moon, on September 29th to discuss natural gas exploration and exploitation under UN auspices and to transport gas via pipeline to Turkey fell on deaf ears among the Greek Cypriots, who announced the establishment of a national oil and gas company on October 4th.

  Analysis

  After drilling one exploratory well in Block 12 of the (de facto Greek Cypriot) Republic of Cyprus's Exclusive Economic Zone (EEZ) in September 2011, US-based Noble Energy announced in December that it has discovered an estimated "gross mean" of 7trn cu feet of natural gas. Negotiations with the bidders for the second licensing round (for the remaining 12 blocks) could start in mid-October.

  The Turkish Cypriots (backed by Turkey) have failed to convince the international community of their argument that as co-founders of Republic of Cyprus in 1960, the Turkish Cypriots have "equal and inherent rights" to natural resources. However, the US and others have made it clear that they expect natural resources to be shared after a settlement and have argued that both sides stand to gain more by exploiting natural resources together after a solution. Without the option of exporting via Turkey's large domestic and international transmission network, Greek Cypriots have chosen the more expensive option of building a small liquefied natural gas (LNG) plant at an officially estimated cost of EUR6bn-8bn, or nearly 40% of GDP. However, financing might prove difficult in the context of a junk-rated sovereign, uncertainty about the future direction of global natural gas prices after new discoveries of shale gas and the poor economies of scale of a small LNG plant.

  As long as the natural gas issue remains off the negotiating table, there is little prospect of the Cyprus problem ever being resolved. Rhetoric has already hardened on both sides since the de facto suspension of negotiations in late March. Nicos Anastasiades, the leader of the opposition Democratic Rally (Disy), and the likely winner in the February 2013 presidential election, earned the support of the more hardline Democratic Party (Diko) with promises that will severely limit his room for manoeuvre if negotiations do restart. Moreover, he seems more likely to focus attention initially on the economy, while perhaps hoping that the Turkish Cypriot leader, Dervish Eroglu, is ousted in the presidential election due in 2015.

  October 05, 2012

• Background

  Cyprus: Political forces at a glance

  Present government: The Republic of Cyprus (ROC) has a presidential system of government. The president, Demetris Christofias, of the Progressive Party of the Working People (Akel), was elected in February 2008. Akel is in coalition with the Democratic Party (Diko). The small Movement of Social Democrats (Edek) quit in early 2010 owing to disagreements with Mr Christofias about his stance in the negotiations to solve the decades-long division of the island. Since the Turkish invasion of 1974, the remit of the (Greek Cypriot) government of the Republic of Cyprus only extends to the area in the south of the island, but is recognised internationally as the legitimate government of the whole island (except by Turkey). The Turkish Cypriot north is administered by the government of the self-declared Turkish Republic of Northern Cyprus (TRNC, recognised only by Turkey), which has a semi-presidential system. The president-elect of the TRNC is Dervish Eroglu of the right-wing National Unity Party (UBP), who defeated the pro-settlement Mehmet Ali Talat in the presidential election on April 18th.

  Political parties forces at a glance: parliamentary election results and seats
  	1985		1991		1996		2001		2006
  	% of	No. of	% of	No. of	% of	No. of	% of	No. of	% of	No. of
  	vote	seats	vote	seats	vote	seats	vote	seats	vote	seats
  Progressive Party of the Working People (Akel)	27.4	15	30.6	18	33.0	19	34.7	20	31.1	18
  Democratic Rally (Disy)(a)	33.6	19	35.8	20	34.5	20	34.0	19	30.3	18
  Democratic Party (Diko)	27.7	16	19.5	11	16.4	10	14.8	9	17.9	11
  Movement of Social Democrats (Edek), formerly known as Social Democratic Movement (Kisos)	11.0	6	10.9	7	8.1	5	6.5	4	8.9	5
  European Party (Evroko)(b)	-	-	-	-	-	-	-	-	5.8	3
  New Horizons	-	-	-	-	-	-	3.0	1	-	-
  Fighting Democrats (Adik)	-	-	-	-	-	-	2.2	1	-	-
  Ecologists Movement	-	-	-	-	-	-	2.0	1	2.0	1
  United Democrats (Edi)(c)	-	-	-	-	3.7	2	2.6	1	1.6	0
  Independents & others	0.3	0	3.2	0	4.3	0	0.2	0	2.4	0
  Total	100.0	56	100.0	56	100.0	56	100.0	56	100.0	56
  (a) In 1991 and 1996 Disy allied with the Liberals, which Disy absorbed in 1998. (b) A merger of New Horizons, Adik and others. (c) Edi absorbed two other smaller parties after the 1996 election.
  Sources: Press and Information Office; Press reports.

  Download text file (csv format)

  Next elections: The next parliamentary election in the Republic of Cyprus is due in May 2011 and the next presidential election is due in February 2013. The next parliamentary election in the TRNC is due in April 2014 and the next presidential election in April 2015.

  May 04, 2010

• Structure

  Cyprus: Political structure

  Official name

  Republic of Cyprus; the government is the internationally recognised government of the island, but its writ does not run in the north, which has been occupied since 1974 by Turkish troops (around 36,000 in 2007); in 1983 the Turkish Cypriot administration declared the northern territory to be an independent state called the Turkish Republic of Northern Cyprus (TRNC), which is recognised only by Turkey. Reference to the TRNC or "Turkish Cypriot zone" in this report does not imply recognition as a sovereign state by the Economist Intelligence Unit. Unless clearly indicated, economic statistics in this report refer to the economy in the area controlled by the government of the Republic of Cyprus

  Legal system

  Based on the constitution of 1960

  Legislature

  Unicameral House of Representatives elected for a five-year term by direct universal suffrage; at present, only 56 members-all Greek Cypriot-sit in the legislature; an additional three special representatives of the Maronite and Armenian minorities are elected in a separate vote

  National elections

  February 2008 (presidential) and May 2011 (legislative); next election is due in February 2013 (presidential)

  Head of state

  Directly elected president with executive powers, who serves a five-year term; the office is currently held by Demetris Christofias (Akel), who replaced Tassos Papadopoulos (Diko) after the February 2008 presidential election

  Executive

  Council of Ministers appointed by the president, who convenes and presides over its meetings; ministers may not sit in the House of Representatives, but may introduce bills

  Main political parties

  Progressive Party of the Working People (Akel, communist); Democratic Rally (Disy); Democratic Party (Diko); Movement of Social Democrats (Edek, formerly known as the Social Democratic Movement-Kisos); United Democrats (Edi). The government formed in 2008 comprised representatives of Akel, Diko, Edek and independents. Edek withdrew from the coalition in February 2010 and Diko in July 2011, leaving Akel as a minority government.

  Principal ministers

  Agriculture, natural resources & environment: Sofoclis Aletraris (independent)

  Commerce, industry & tourism: Neoclis Sylikiotis (Akel)

  Communications & public works: Efthemios Flourentzou (independent)

  Defence: Demetris Eliades (independent)

  Education & culture: Giorgos Demosthenous (independent)

  Finance: Vassos Shiarly (independent)

  Foreign affairs: Erato Kozakou-Marcoullis (independent)

  Government spokesman: Stefanos Stefanou (Akel)

  Health: Stavros Malas (United Democrats)

  Interior: Eleni Mavrou (Akel)

  Justice & public order: Loucas Louca (independent)

  Labour & social security: Sotiroulla Charalambous (Akel-affiliated)

  Central Bank governor

  Panicos Demetriades

  October 12, 2012

• Outlook

  Cyprus: Key developments

  Outlook for 2013-17

  • The Economist Intelligence Unit puts the chance of the current negotiations reaching a settlement of the Cyprus problem at only 20%. There is a risk of escalating tension with Turkey over hydrocarbons exploration.
  • Nicos Anastasiades, the leader of the opposition Democratic Rally (Disy), is likely to be the winner of the presidential election in February 2013, having earned the support of the more hardline Democratic Party (Diko).
  • The government has now officially applied for a bail-out from the European Financial Stability Facility (EFSF), following the meltdown of some of the country's major banks.
  • This bail-out will come with strict conditions, affecting both the public and the financial sector. Severe austerity measures are bound to be forced onto the government's agenda in the coming months.
  • The government budget deficit should fall to 4.3% of GDP in 2012 from an estimated 6.3% in 2011, but will exceed the government's 2.5% target, owing to the economic contraction. We expect it to remain above 3% of GDP until 2017.
  • We expect real GDP to contract by 2% in 2012, after growth of an estimated 0.5% in 2011, owing to a contraction in government consumption and a weak European environment. Growth will remain low thereafter.
  • Growth will be bolstered by investment in natural-gas exploitation towards the end of the forecast period. The impact on the current account will initially be negative, as the country will have to import investment material.
  • Despite a small reduction in the current-account deficit in 2012 and 2013, investment in gas exploitation infrastructure will keep the deficit at high levels throughout the forecast period.

  Review

  • The troika of creditors-the European Commission, IMF and European Central Bank (ECB)-reportedly asked for EUR1bn in spending cuts before Cyprus can tap an estimated EUR11bn from the European Financial Stability Facility (EFSF).
  • Provisional data from the Statistical Service of the Republic of Cyprus (Cystat) indicate a trade deficit of EUR422m in July, 7% larger than a year earlier, as a result of import growth outpacing export growth.
  • Tourist arrivals reached 363,573 in August, a 7.9% increase from the same period of 2011, mainly resulting from a rise in tourist arrivals from Russia.
  • Opinion polls ahead of the presidential election in February 2013 suggest that this will be won by Mr Anastasiades, leader of the centre-right Disy, who is running with the support of the centrist Diko.

  October 12, 2012

Economy:

• Background

  Cyprus: Country fact sheet

  Fact sheet

  Annual data	2011a	Historical averages (%)	2007-11
  Population (m)	0.8	Population growth	1.0
  GDP (US$ bn; market exchange rate)	24.7b	Real GDP growth	1.7
  GDP (US$ bn; purchasing power parity)	23.8b	Real domestic demand growth	1.5
  GDP per head (US$; market exchange rate)	30,173	Inflation	2.6
  GDP per head (US$; purchasing power parity)	29,022	Current-account balance (% of GDP)	-10.9
  Exchange rate (av) €:US$	0.72b	FDI inflows (% of GDP)	8.6
  a Economist Intelligence Unit estimates. b Actual.

  Download the numbers in Excel

  Background: The (Greek Cypriot) government of the Republic of Cyprus is the internationally recognised government of the island, but its writ does not run in the north, which since 1974 has been occupied by Turkish troops (currently around 25,000). The self-declared Turkish Republic of Northern Cyprus (TRNC) in the north is recognised only by Turkey. Decades of efforts to reunite the island, including a new attempt begun in 2008, have so far failed.

  Political structure: Based on 1960 constitution. A unicameral House of Representatives is elected for a five-year term; it currently has 56 Greek Cypriot members and three special representatives of Maronite, Armenian and Latin minorities. The president, with executive powers, is directly elected for a five-year term and appoints the cabinet (Council of Ministers). The incumbent is Demetris Christofias, who hails from the Progressive Party of the Working People (Akel). After losing its two coalition partners Akel is now a minority government. The largest opposition party is the Democratic Rally (Disy), which broadly supports the search for a settlement. However, the historical rivalry between Disy and Akel makes co-operation difficult.

  Policy issues: The division of the island often distracts attention from other important policy issues. The main focus of economic policy in 2012-16 will be fiscal consolidation after a combination of higher spending and slower economic growth led to a sharp rise in the budget deficit in 2009-11 and recapitalisation of the banks, which recorded big losses on Greek government loans. The exploitation of the gas fields discovered in 2011 will constitute a major focus for the government, as it will have a significant impact on Cyprus's economy over the medium and long term.

  Taxation Tax rates are low. Dividend taxation for resident companies lifts the effective rate to almost 20%. The standard value-added tax (VAT) rate was raised in 2012 from 15% to 17%. Some goods and services are exempt or subject to reduced rates. The employers' and employees' social insurance contribution rate was raised in April 2009 to 6.8% of gross wages and will rise every five years by 0.5%. The government currently pays 4.3%. The self-employed pay 12.6%.

  Foreign trade: As a service-dominated economy, Cyprus runs a large deficit on trade in goods. The main domestic exports are pharmaceutical products, citrus fruits, cheese and potatoes, while the main domestic imports are food, cars and oil. Tourism receipts have declined in recent years, only partly offset by an increase in business services exports.

  Major domestic exports 2010	% of total	Major domestic imports 2010	% of total
  Manufactured goods	63.0	Consumer goods	30.3
  Processed agricultural products	16.5	Intermediate goods	27.2
  Raw agricultural products	15.2	Fuel and lubricant	18.8
  Industrial products of mineral origin	4.3	Transport equipment	12.9
  Leading markets 2011	% of total	Leading suppliers 2011	% of total
  Greece	22.3	Greece	21.0
  UK	8.6	Israel	10.2
  Germany	4.8	UK	9.0
  Italy	3.1	Italy	8.1

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  October 22, 2012

• Structure

  Cyprus: Economic structure

  Data and charts: Annual trends charts

  
  

  

  October 12, 2012

• Outlook

  Cyprus: Country outlook

  Cyprus: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: The main concern for political stability in Cyprus stems from the decades-old division of the island into two parts, essentially a Greek Cypriot south and a Turkish Cypriot north. Repeated efforts to end the division have failed and the island remains heavily militarised (some 30,000-40,000 Turkish troops are stationed in the north). After about four years of negotiations and surveys showing continued deep mutual mistrust between the two sides, it appears that the main obstacle to a solution is that the political price of reunification, namely sharing power, is simply too high for two communities that have spent decades governing apart. However, both the international community and Cypriot politicians have invested so much political capital in persuading voters that a single, power-sharing "bi-zonal, bi-communal" federal state is the only model, and that they cannot countenance other options. Formal partition remains anathema for Greek Cypriots and the territorial adjustment that would probably have to accompany partition is still deeply unpopular among Turkish Cypriots, who now have an interest in sharing natural gas revenue. Therefore, although the Economist Intelligence Unit has no expectation that the Cyprus problem will be resolved, we also do not expect either side to walk away from the negotiating table. The UN-sponsored talks will be on hold until after the presidential election, but we believe that the UN will be forced to revive the negotiations not long thereafter, possibly to address tension between Cyprus and Turkey over oil and gas exploration. This issue has renewed a territorial dispute, as both sides claim their rights to exploit the offshore gas fields. Our baseline scenario, therefore, is for ongoing negotiations, without a resolution.

  ELECTION WATCH: The Greek Cypriot leader and president of the Republic of Cyprus, Demetris Christofias, confirmed that he will not run for a second term at the next election, set to take place in February 2013. The leader of the main opposition Democratic Rally (Disy), Nicos Anastasiades, has been designated to stand. In a move to gain the full support of his own party, which comprises a mix of moderates and hardliners, he has said that he will not act as chief negotiator in future talks to resolve the Cyprus problem. This stance allowed him to secure the backing of the Democratic Party (Diko), the third-largest party and traditional "kingmaker", which also takes a hard line on the Cyprus problem.

  INTERNATIONAL RELATIONS: The Cyprus problem will continue to create difficulties for Turkish-EU relations and the cohesion of NATO. It has also caused tension with Russia and Greece, both traditional Greek Cypriot allies that now have large commercial interests in Turkey, including in the oil and gas sectors. The Greek Cypriots are bolstering relations with Israel, with a view to co-operation on gas exploitation. Given the poor Turkish-Israeli relations and the Turkish Cypriots' announcement that they will pursue hydrocarbons exploration offshore, there is a risk of escalating tension in the eastern Mediterranean.

  POLICY TRENDS: The Cypriot government officially applied to access the European Financial Stability Facility (EFSF), the EU's bail-out fund, on June 25th, and could need about EUR11bn, equivalent to more than 60% of GDP. The main challenges for the government will be to deal with the conditions attached to this support, which are likely to be a mix of fiscal consolidation and structural reforms to stabilise the financial sector. High exposure to Greek sovereign debt and to the Greek economy generally has led to the meltdown of the main Cypriot banks. Given their relative size in the Cypriot economy, the Cypriot financial stability fund is not large enough to restore the capital ratios of Greek Cypriot banks to the level recently demanded by the European Banking Authority (EBA). As Cypriot banks lost more than EUR4bn in Greece's debt restructuring earlier this year and remain highly exposed to Greek public and private debt, they will need about EUR5bn of fresh capital, according to the Ministry of Finance. The EBA's final assessment showed shortfalls of EUR730m for Bank of Cyprus and EUR1.1bn for Cyprus Popular Bank (formerly known as Marfin Popular Bank). Earlier this year, the government acquired shares worth EUR1.8bn from Cyprus Popular Bank. Given the state's new financing and refinancing needs in the coming years (estimated at about EUR6bn until end-2015), a total of about EUR11bn is likely to be agreed.

  ECONOMIC GROWTH: We forecast a recession in 2012, with GDP contracting by 2%, owing to a range of measures that together probably amount to a 5-percentage-point real cut in public-sector spending, a rise in value-added tax (VAT), recession in leading euro zone countries and the adverse effects on Cypriot banks of the banking crisis in Greece. Assuming that external conditions stabilise, GDP in Cyprus is forecast to contract by only 0.5% in 2013, before returning to growth afterwards. Investment related to natural-gas exploitation will provide an upward spur to GDP growth in the second half of the forecast period.

  INFLATION: Inflation (EU harmonised measure) averaged 3.5% in 2011, up from 2.6% in 2010, primarily owing to the introduction of VAT on food and medicines, higher tariffs for tobacco and surcharges on electricity after the destruction of the main power plant in July 2011. Further increases in electricity tariffs and a rise of 2 percentage points in VAT in March 2012 will offset lower inflationary pressure owing to weak demand, and we therefore expect inflation (EU harmonised measure) to average 3.1% in 2012, before easing in 2013. A weak euro is likely to prevent inflation from falling further during 2014. Inflation in Cyprus is expected to remain well above the euro area average throughout the forecast period. This reflects weak competition in retailing and vulnerability to oil prices--more than 90% of electricity is produced from oil and dependence on private transport is high.

  EXCHANGE RATES: Although not our central forecast, there is a high risk that several countries will be forced to leave the euro in 2012-13. Such fears have caused flight from euro assets and partly explain the volatility of the single currency in the past year, which depreciated from above US$1.40:EUR1 in August 2011 to a two-year low of US$1.21:EUR1 in late July, before recovering to US$1.30:EUR1 by late September. Even assuming that it survives in its present form, the euro will remain volatile in response to shifting risk appetites, protracted economic weakness and lower reserve accumulation by China. We expect it to average US$1.26:EUR1 in 2013 and US$1.25:EUR1 in 2014-17, but sharp movements either way are a significant risk.

  EXTERNAL SECTOR: We forecast that the current-account deficit will remain large in the coming years despite result of weak domestic demand. After an unusually strong year for tourism in 2011, owing to diversion of business from destinations in the Middle East, the services surplus will fall in 2012, especially given the difficulties in the banking sector, which will affect financial services exports. High interest payments on debt will also increase the income deficit. We therefore expect the current-account deficit to narrow to just above 9% of GDP in 2012, and to continue to fall gradually during the rest of the forecast period. In the past, the deficit has been covered by "net other investment" on the financial account, which mainly comprises bank deposits. These have remained fairly stable despite concerns about exposure to Greece, but this might change as a result of the Cypriot bail-out or if Greece were to exit the euro. The exploitation of natural gas should have a positive effect on the trade balance in the longer term, but it will increase imports for investment in the meantime.

  October 04, 2012

• Forecast

  Cyprus: Country forecast summary

  Country forecast overview: Highlights

  • The Economist Intelligence Unit puts the chances of finding a solution to the decades-old division of Cyprus during the forecast period at only 20%. The current negotiations appear to have reached deadlock, but because all parties to the talks will find it difficult to walk away, our baseline scenario is for talks to continue without resolution, with a pause until after the presidential election. Nicos Anastasiades, the leader of the opposition Democratic Rally (Disy), is likely to be the winner of the presidential election in February 2013, having earned the support of the more hardline Democratic Party (Diko).
  • Given Turkey's waning hopes of EU membership, the steady deterioration in Turkish-Israeli relations and Turkish objections to hydrocarbons exploration offshore of Cyprus, escalating tension in the eastern Mediterranean is a risk.
  • We expect the budget deficit to fall only moderately in 2012, to little above 4% of GDP, thereby missing the government's 2.8% target, mainly because we expect an economic contraction in 2012. The contagion from Greece, among other factors, led at least two of the banks to require a bail-out from the government. As a consequence, the government had to apply for EU support as well. Negotiations are under way, with a particular focus on the conditions attached to the bail-out, which are likely to entail spending cuts and tax rises.
  • We expect real GDP to contract by 2% in 2012 and 0.5% in 2013, owing to a squeeze on public-sector incomes, an increase in value-added tax (VAT), recession in key euro zone countries and the adverse effects of the sovereign crisis in Greece on two of the largest Cypriot banks. Assuming that external conditions stabilise, growth is forecast to accelerate gradually from 1.4% in 2014, helped predominantly by investment in the exploitation of natural gas.
  • Inflation (national measure) is expected to fall from 3.3% in 2011 to 2.9% in 2012. Inflation did not fall further owing to further increases in electricity tariffs and a 2-percentage-point rise in VAT during March 2012. A fall is expected in 2013 as inflationary pressures ease. Inflation in Cyprus is, however, forecast to remain well above the euro area average throughout 2012-16.
  • We expect the current-account deficit to decrease from an estimated 10.3% in 2011 to 9.2% in 2012, as lower oil prices offset weaker service export growth and higher interest payments, before stabilising at a still high level from 2014 as gas-related investment draws in imports. In the past, the deficit has been covered by "net other investment", which mainly comprises bank deposits. These have remained fairly stable despite concerns about exposure to Greece, but this might change if Greece were to exit the euro.

  

  October 22, 2012

View detailed map

Country Briefing

Land area

9,251 sq km, of which 3,355 sq km is controlled by the Turkish Cypriot administration, 151 sq km is in the UN-monitored buffer zone (Green Line) and 254 sq km constitute the Sovereign Base Areas under the jurisdiction of the UK

Population

Total population of the Greek Cypriot south of the Republic of Cyprus was 778,700 at the end of 2006; estimates for the north range from 88,900 Turkish Cypriots plus 160,000 Turkish settlers (Republic of Cyprus authorities figures for 2006) to 256,644 (Turkish Cypriot administration figures for 2006)

Main towns

Population in '000 (end-2006 estimates)

Nicosia (Lefkosia) district (capital): 307

Limassol (Lemesos) district: 224

Larnaca district: 130

Paphos district: 75

Ammochostos (Free Famagusta) district: 43

Climate

Mediterranean

Weather in Nicosia (altitude 160 metres)

Hottest month, July, 22-37°C (average daily minimum and maximum); coldest month, January, 5-15°C; driest month, July, 2 mm average rainfall; wettest month, December, 59 mm average rainfall

Languages

Greek and Turkish; English is also widely spoken

Measures

Metric system

Currency

Euro (€) = 100 cents replaced Pound (C£) = 100 cents on January 1st 2008 at the irrevocable exchange rate of C£0.585274:€1

Fiscal year

Calendar year

Time

2 hours ahead of GMT (3 hours ahead in summer)

Public holidays

January 1st; January 6th; Green Monday (50 days before Greek Orthodox Easter); March 25th; April 1st; Good Friday and Easter Monday (Greek Orthodox calendar); May 1st; Pentecost-Kataklysmos (50 days after Greek Orthodox Easter); August 15th; October 1st; October 28th; December 24th; December 25th; December 26th

March 06, 2012