General Information on Economy and Finance

During the period between 1963 and 1974 the Turkish-Cypriot economy exhibited most of the symptoms of the economic underdevelopment. The principal reason for this condition was the economic blockade faced and the fact that the productive base of the country was inadequate. Ongoing economic activities were dependent upon unstable factors which made development difficult.

During the period that followed with the help of new administrations and up to date methods these problems were surpassed and a more stable and healthy economy was attained.

Development planning primarily had focused on reactivating the manufacturing and tourism industries while expanding agricultural exports. These efforts have been successful to a certain degree, and following a period of rapid economic growth, the economy has settled to a more modest and sustainable growth rate.

The economy of Northern Cyprus is dominated by the services sector including the public sector, trade, tourism and education, with smaller agriculture and light manufacturing sectors. During the period from 1977 until 2003 GNP increased 37.5% at constant prices of 1977 and reached 10,177.1 million TL (representing US$1,283.7 million). Agriculture is still important in the North Cyprus economy where the main products are citrus fruits, grapes and vine products, potatoes, and other vegetables. Manufacturing, construction, distribution and other services are the major employers. Tourism is the main growth industry producing the lifeblood of the economy, foreign exchange. Plans to establish an industrial free zone in Famagusta to attract foreign investment for exportable commodities have been implemented and are working successfully.

The economy operates on a free-market basis, although it continues to be handicapped by the political isolation of Turkish-Cypriots, the lack of private and governmental investment, high freight costs, and shortages of skilled labour. Despite these constraints, the economy exhibited an impressive performance over the past two years, with growth rates of 9.6% in 2004 and 11.4% in 2003. Over the same period, per capita income almost doubled reaching US$7,350 at the end of 2004, compared with US$4,409 in 2002. This growth has been buoyed by the relative stability of the Turkish Lira, the employment of over 5,000 Turkish-Cypriots in the South Cyprus where wages are significantly higher, and by a boom in the education and construction sectors. In 2003, the services sector accounted for nearly two thirds of GDP, industry accounted for 11.6% of GDP, agriculture 10.6%, and construction 10.1%, according to statistics.

The easing of travel restrictions between the two parts of the island in April 2003 enabled movement of persons (almost seven million crossings to date) between the two parts of the island with no significant interethnic incidents. In August 2004, new EU rules allowed goods produced in North Cyprus to be sold in the South provided they met EU rule of origin and sanitary/phyto-sanitary requirements. In May 2005, the Turkish-Cypriot authorities adopted a new regulation mirroring the EU rules and allowing certain goods produced in the south to be sold in the north. Suppliers of imported products in the South Cyprus cannot directly serve the North Cyprus market and vice versa. Despite these efforts, direct trade between the two sides on the island remains very limited.

Regarding the foreign trade, Turkey remains, by far, the main trading partner of North Cyprus, supplying 60% of imports and absorbing over 40% of exports. In a landmark case, the European Court of Justice (ECJ) ruled on July 5, 1994 against the British practice of importing produce from the area based on certificates of origin and phyto-sanitary certificates granted by TRNC authorities. The ECJ decision stated that only goods bearing certificates of origin from the 'Government of Cyprus' could be recognized for trade by EU member countries. The ECJ decision resulted in a considerable decrease of Turkish-Cypriot exports to the EU - from US$36.4 million (or 66.7% of total Turkish-Cypriot exports) in 1993 to US$13.8 million in 2003 (or 28% of total exports)-. Even so, the EU continues to be the second-largest trading partner of North Cyprus, with a 25% share of total imports and 28% share of total exports. Total imports increased to US$853.1 million in 2004 (from US$477.7 million in 2003), while total exports increased to US$61.5 million (from US$50.6 million in 2003). Imports from the U.S. reached US$7.1 million in 2004, while exports to the U.S. were less than US$10,000.

North Cyprus is also seeking to diversify its export markets and now sells almost half its exports to the Middle East. The trading account continues in deficit and is offset by invisible earnings, mainly from tourism, foreign aid and development loans (mainly from Turkey), capital inflow, and income derived from the those working in South Cyprus, British Sovereign Base Areas and the U.N. personnel.

Assistance from Turkey is crucial to the Turkish-Cypriot economy. Under the latest economic protocol signed between the two countries in 2005, Turkey undertakes to provide North Cyprus loans and financial assistance totalling US$450 million over a three-year period for public finance, tourism, banking, and privatization projects. Turkey also provides assistance annually in the form of low-interest loans to mostly Turkish entrepreneurs in support of export-oriented industrial production and tourism. Total Turkish assistance to North Cyprus since 1974 is estimated to exceed US$3 billion.