Cyprus — building bridges, not walls

The choice of Cyprus as a location for this year’s EBRD meeting will help to strengthen the fast-improving perception of the island among international investors. It will also help to put the potential of the Turkish-Cypriot economy on the map, with the EBRD planning to host two meetings north of the Green Line in Nicosia

  • By GlobalMarkets
  • 07 Mar 2017
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Road to Cyprus — a series of articles in the run-up to the 2017 EBRD Annual Meetings in Nicosia

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There are few more poignant symbols of the economic waste created by the division of Cyprus than the northern coastal resort of Varosha. Now frequently referred to as a ghost town, Varosha used to be regarded as one of the most desirable tourist destinations in the eastern Mediterranean, and was popular with glitterati such as Brigitte Bardot, Sophia Loren and Elizabeth Taylor. Since 1974, the hotels, bars, restaurants and seafront apartments of Varosha have been gathering dust and cobwebs — tourism’s equivalent of Miss Havisham’s cake in Great Expectations.

Officially, the self-declared Turkish Republic of North Cyprus (TRNC) still attracts tourists. Over 1.5m visited last year. But the overwhelming majority of these were from Turkey, with only around 360,000 from elsewhere. This compares with the 3.2m tourists who visited Cyprus in 2016.

The relative size of the tourism industry on either side of the Green Line which has divided Cyprus since 1974 mirrors the differences between the island’s two economies, with the South dwarfing the North by virtually any measure. Reliable, updated data on the TRNC economy is hard to come by, but Ioannis Tirkides, head of economic research at Bank of Cyprus, has put together a number of valuable reports on the size and structure of the Turkish Cypriot economy (TCE).

His recent analysis notes that Greek Cypriot GDP is about 5-½ times the size of the TCE, and per capita income is double. The TRNC, says the Bank of Cyprus report, is “a tiny, €3bn economy, with a growth model driven by consumption and an oversized public sector, funded by aid and credits from Turkey”.

Crucial support

This Turkish support, adds the Bank of Cyprus report, accounts for about 12% of GDP. This, say Nicosia-based economists, means that Turkey effectively acts as the TRNC’s economic life-support machine. “It is no exaggeration to say that the north is in very bad shape,” says Andreas Charalambous, director of financial stability at the Ministry of Finance. “Unless Turkey is willing to continue to support the north, in the event of a settlement there would need to be a lengthy adjustment period to bring public finances to sustainable levels.”

As the Bank of Cyprus report comments, with the ratio of private credit to GDP in the TCE low at about 60%, the economy of the north would also need to rebalance towards investment and the private sector. Many economists believe this may be achievable, given the unrealised potential of the TRNC. “The north has been isolated for so long, and with such restricted access to global markets, that reunification would clearly generate potential in areas such as services, tourism and agri-business,” says Peter Sanfey, deputy director for country economics and policy within the Department of Economics, Policy and Governance at the EBRD in London.

Others agree that reunification would electrify growth in the tourism sector nationwide and reassure investors casting their eye over the potential of gas reserves in the Eastern Mediterranean. It would also open innumerable opportunities for infrastructure investment in the north as well as for the republic’s shipping sector. “Although we’re a shipping economy, vessels sailing under the Cypriot flag are unable to visit Turkish ports, so reunification would create a huge opportunity for growth,” says one local banker.

Historically, there has been a strong correlation between apparently productive peace talks and economic growth in the North. According to the Bank of Cyprus report on the TRNC economy, between 2002 and 2007, annual average growth in the Turkish-Cypriot economy was 11%. This, notes Bank of Cyprus, was driven by “construction and trading activity in an environment of an expected solution of the Cyprus problem.”

The peace dividend

It is easy enough to see why economic activity tends to pick up in the expectation of reunification. Comfortably the most thorough and granular analysis of the potential impact of reunification is still a report published in 2014 by the Peace Research Institute Oslo (PRIO), entitled The Cyprus Peace Dividend Revisited.

Some argue that this report on the peace dividend may have been written through a rose-tinted lens, given the short-term costs and uncertainties that reunification is likely to entail. Its longer-range calculations, however, are compelling. Assuming a united Cyprus is based on a bi-communal, bi-zonal federation, PRIO sees considerable potential for recurring benefits based on access to the Turkish and EU markets, as well as settlement-related investment.

Although the peace dividend arising from these drivers was based on a solution being implemented from the start of 2016, the notable date in the PRIO report’s projections is 2035, by which time it forecast that all-island GDP in a united Cyprus would reach €45bn, up from just over €20bn in 2012. This compared with a projected figure of €25bn without a solution.

Reunification, however, remains a sizeable ‘if’. Although recent talks on a settlement appear to have been more fruitful than previous dialogues, there are still a number of formidable hurdles that will need to be cleared before the Green Line can be dismantled. As Charalambous at the Ministry of Finance says, one of the most intractable red lines from the perspective of the Greek Cypriot side is the continued presence of Turkish troops on the island. “I don’t think the presence of foreign troops can be acceptable in an EU member state,” he says.

Little wonder that the Ministry of Finance says it is not yet ready to incorporate any dividend from a potential reunification into its economic projections. It is notable that reports published by external forecasters, such as the IMF and the European Commission (EU), are also shy of pencilling any firm numbers from a reunification into their forecasts.

Nevertheless, international observers are clearly heartened by the political climate in a country which, refreshingly, appears committed to erecting bridges rather than walls, and to pulling borders down rather than building new ones. The choice of Cyprus as a location for this year’s EBRD meeting will help to strengthen the fast-improving perception of the island among international investors. It will also help to put the potential of the Turkish-Cypriot economy on the map, with the EBRD planning to host two meetings north of the Green Line in Nicosia — one on women in business and the other on trade finance. “Our outreach to the north so far has been concentrated on advisory services and trade finance,” explains an EBRD spokesman.

He adds that this will build on projects that the EBRD has already supported, such as its investment in a lending programme to small businesses run by Turkey’s Garanti Bank, which has seven branches in the TRNC. 

This article is the second part of a series of six pieces on Cyprus’s economy in the run-up to the 2017 EBRD Annual Meetings in Nicosia. 

Click here for part one – Cypriot economy surprises on the upside February 22, 2017

Click here for part three – Cyprus's game-changer: the Mighty Aphrodite March 27. 2017

Click here for part four - Cyprus eyes golden future for tourism industry April 10 2017



Click here for part fiveAccelerating the recovery in Cyprus’s banking sector March 19 2017

Click here for part six – Cyprus focuses on new FDI push May 2 2017






  • By GlobalMarkets
  • 07 Mar 2017

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4 Barclays 75,288.19 241 6.66%
5 Goldman Sachs 68,504.71 208 6.06%

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3 Goldman Sachs 7,736.57 37 7.42%
4 Citi 6,897.11 46 6.62%
5 Bank of America Merrill Lynch 6,215.31 24 5.96%