Cyprus: country overview

27 May 2012
by Ina Dimireva -- last modified 30 May 2012

The area of the Republic of Cyprus under government control has a market economy dominated by the service sector, which accounts for nearly four-fifths of GDP. Tourism, financial services, and real estate are the most important sectors.

Year of EU entry: 2004

Member of Schengen area:No

Political system: Republic

Capital city: Nicosia

Total area: 9 250 km²

Population: 0.8 million

Currency: euro

Listen to the official EU language: Greek

Cyprus map

Country overview

Cyprus is the largest island in the eastern Mediterranean and is situated south of Turkey. The two main mountain ranges are the Pentadactylos in the north and the Troodos in central and south-western part of the island. Between them is the fertile plain of Messaoria.

Cyprus has long been a crossing point between Europe, Asia and Africa and still has many traces of successive civilisations – Roman theatres and villas, Byzantine churches and monasteries, Crusader castles and pre-historic habitats.

The island's main economic activities are tourism, clothing and craft exports and merchant shipping.

Since Turkey occupied the north of the island in 1974, the Turkish Cypriot and Greek Cypriot communities have been separated by the so-called Green Line.

Economy overview

Erratic growth rates over the past decade reflect the economy's reliance on tourism, the profitability of which often fluctuates with political instability in the region and economic conditions in Western Europe. Nevertheless, the economy in the area under government control has grown at a rate well above the EU average since 2000. Cyprus joined the European Exchange Rate Mechanism (ERM2) in May 2005 and adopted the euro as its national currency on 1 January 2008. An aggressive austerity program in the preceding years, aimed at paving the way for the euro, helped turn a soaring fiscal deficit (6.3% in 2003) into a surplus of 1.2% in 2008, and reduced inflation to 4.7%. This prosperity came under pressure in 2009, as construction and tourism slowed in the face of reduced foreign demand triggered by the ongoing global financial crisis. Although Cyprus lagged behind its EU peers in showing signs of stress from the global crisis, the economy tipped into recession in 2009, contracting by 1.7%, and has been slow to bounce back since, posting an anemic growth rate of 1.0% in 2010. A massive munitions blast in July 2011 at a Cypriot naval base triggered country-wide energy outages, a collapse of the governing coalition, and a cabinet shuffle intensifying Cyprus's economic problems. The economy experienced no economic growth in 2011. Serious Cypriot financial sector problems surfaced in early 2011 as the Greek fiscal crisis and euro zone debt crisis deepened. Two of Cyprus's biggest banks are among the largest holders of Greek bonds in Europe and have a substantial presence in Greece through bank branches and subsidiaries. A liquidity squeeze is choking the financial sector and the real economy as many global investors doubt the Cypriot economy can weather the EU crisis. Cyprus's borrowing costs have risen steadily because of its exposure to Greek debt. The budget deficit is on the rise and reached 7.4% of GDP in 2011, a violation of the EU's budget deficit criteria - no more than 3% of GDP. In response to the country's deteriorating finances and serious risk of contagion from the Greek debt crisis, Nicosia is promising to implement measures to cut the cost of the state payroll, curb tax evasion, and revamp social benefits. However, it has been slow to act, lacking a consensus in parliament and among the social partners for its proposed measures.