Hopes Rise For Future on a Divided Island

Global Finance, Oct 2004 by Sheehan, Brendan

CYPRUS

Cyprus has experienced a great deal of change recently but still faces the future with a good deal of optimism.

It has been an eventful year for the beautiful but divided eastern Mediterranean island of Cyprus. On May 1 Cyprus joined the European Union, becoming its easternmost member and putting the union's frontiers within sight of Syria.

But for Brussels and for Cyprus itself, its accession is bittersweet. In April the Greek Cypriot majority rejected a historic UN plan to reunify the country after 30 years of division, a division that occurred in 1974 after a Greek-inspired coup prompted Turkish troops to invade the northern third of the island and 200,000 Greek Cypriote to flee their homes. A so-called "green line" has divided the country ever since, with the Greek majority in the south and the Turkish in the north.

Both sides want reunification, but hopes that this would occur in time to join the European Union were dashed when the Greek Cypriots rejected UN secretary general Kofi Annan's peace plan on April 24 on the grounds that it failed to meet their minimum requirements for a settlement. Many were unhappy that of the Greek Cypriots who fled their homes during the Turkish invasion, only around half would be able to reclaim them after reunification. Others feared the cost of implementing the plan would cripple the country's economy.

The result is that, instead of being united for the single most important event affecting the country for decades, the two sides remain divided, and only the southern part of the island will reap the full benefits of EU membership. Technically, EU law applies to all of Cyprus, but under the island's treaty of accession it was agreed that it would extend to the Turkish-occupied north only in the event of reunification. To do otherwise would be in violation of international law. For the Turkish Cypriots, failure to join the EU is a bitter blow. They have existed in relative economic isolation for 30 years and saw EU membership as their economic salvation.

The "Turkish Republic of Northern Cyprus" was declared in 1983 but has never been recognized by any country other than Turkey. Since 1974 Turkish Cypriots have seen their Greek Cypriot neighbors prosper while their own economic potential has remained largely undeveloped. Some analysts estimate that per capital income in the south is as much as six times greater than in the north. The EU has pledged to release around euro260 million to Turkish Cypriots to boost their economy. Barriers to trade between northern and southern Cyprus are also in the process of being lifted. The Turkish Cypriot leadership also wants to be able to trade directly with Europe, a request that has received strong opposition from the south.

For the Greek Cypriots, it is hoped that accession to the EU will boost its sizable services sector and attract more foreign companies to join its thriving international banking and business community. Cyprus is the wealthiest of the 10 new EU members, with the highest per capita income. Its employment rate is higher than any of the other newcomers, and GDP growth is expected to exceed 3% this year.

The Greek Cypriots hope to make the country a business bridge between Europe and the Middle East. Over the past 10 years much of the investment into Central and Eastern Europe and Russia has been channeled through Cyprus. The attraction of Cyprus for many companies is its favorable tax environment, its strategic location, modern banking and legal infrastructure, excellent telecommunications network and educated workforce.

"Cyprus is relatively low cost, highly advanced and very well situated for companies that want to do business with Europe and the Middle East," says Costas Apostolides, chairman of EMS Economic Management."It is also the only country in the EU which has no restrictions on bringing in employees from the eight Central and Eastern European states that have just joined the EU," he adds.

Not only is there an extremely low 10% corporate tax rate, but dividends are also tax-exempt.Tax losses in Cyprus can also be carried forward indefinitely and set against future profits, and there is no capital gains tax on share dealing. Cyprus also has double-tax-avoidance treaties with 40 other countries.

The presence of so many international companies in Cyprus has been accompanied by the development of the country as a regional telecommunications center. Cyprus has also recently restructured its stock exchange in order to attract foreign investors. In September the Cyprus Stock Exchange launched a three-tier market in a bid to coax back investors burned by boom and bust cycles.The three tiers will be the main, parallel and alternative markets, in addition to which there will be a market for investment companies and one for bonds.

Resident economist Fiona Mullen comments: "The Cyprus Stock Exchange has been split into five categories, leaving only the 1.7 most profitable companies in the main index. These will also be listed on the Athens Stock Exchange; therefore, the hope is that, having got rid of the underperforming companies which listed during the 1999 bubble but should never really have listed in the first place, more foreign investors will be interested in buying Cypriot securities."