Cyprus Foreign Trade and the Balance of Payments
Limassol, an important port and tourist center
Courtesy Embassy of Cyprus, Washington
Cyprus's trade balance has been consistently
unfavorable since
before independence. Given its large and expanding trade
deficit,
the Republic of Cyprus was fortunate to have a large and
growing
surplus in its invisibles account, enough even to offset
the trade
deficit in 1987 and 1988 (see
table 16, Appendix). The
major
factors contributing to this surplus were tourist
receipts,
receipts from transfers, and income from other goods and
services
(such as foreign military expenditures, in Cyprus, embassy
expenditures, and foreign exchange from offshore
enterprises).
Tourist receipts expanded from C£232 million in 1985 to
C£386
million in 1988. Income from other goods and services
increased
from C£173.3 million in 1985 to C£208.2 million in 1988.
Cyprus experienced its first overall
balance-of-payments
deficit after independence in 1973. During the 1980s, the
influx of
capital in the form of loans and investments was
sufficient to give
the country a positive balance of payments in all years
except 1985
and 1988, despite the usually negative current account
balance.
The foreign exchange reserves of the Republic of Cyprus
at the
end of 1988 reached C£571.8 million, an improvement over
the
reserves of C£501.2 million at the end of 1987. These
reserves were
estimated to be sufficient to cover about nine months of
imports.
Even though the trade balance was chronically
unfavorable,
exports had greatly increased since the Turkish occupation
in 1974.
Exports of goods and services rose by an average of 20.7
percent
annually (in current prices) during the 1975-86 period;
they
increased 16.5 percent in 1987 and 10.5 percent in 1988.
The main domestic exports had been agricultural
exports,
especially citrus fruits and potatoes, and manufactured
products,
most importantly clothing, footwear, chemicals, and
machinery.
Agricultural exports amounted to 24.7 percent of total
domestic
exports in 1985 but declined to 20.5 percent in 1988;
manufactured
exports were 71.7 percent of the total in 1985 and rose to
77.4
percent in 1988.
The European Economic Community (EEC) continued to be
the main
market for the republic's exports, absorbing 42.7 percent
of total
domestic exports in 1986, some 45 percent in 1987, and 47
percent
in 1988. Among the EEC countries, the top customer
continued to be
Britain, with a share of 50.4 percent in 1988, followed by
Greece
with a share of 19.5 percent. The other major block of
countries to
which the republic's exports continued to do well were the
Arab
countries. In 1986 this group took 42.2 percent of total
domestic
exports, in 1987 38.6 percent, and in 1988 36.7 percent.
The Republic of Cyprus was dependent on imports for
many raw
materials, consumer goods, transportation equipment,
capital goods,
and fuels. Total imports increased from C£177.8 million in
1976 to
C£1.130 billion in 1989. The seemingly permanent trade
deficits
amounted to C£365.8 million in 1987, C£476.6 million in
1988, and
C£668.6 million in 1989. In 1989 consumer goods were 18.8
percent
of total imports; intermediate goods (raw materials), 41.6
percent;
capital goods, 9.5 percent; transport equipment, 20.4
percent, and
fuels 9.6 percent.
Most of the republic's imports came from the EEC: 60.7
percent
in 1986 and 54.5 percent in 1988. Britain was the largest
source of
imports among the EEC countries, accounting for 22.1
percent of
imports from the group in 1986 and 25.5 percent in 1988.
Italy, the
Federal Republic of Germany (West Germany), and Greece had
the next
three largest shares. Other major trading areas that
provided
imports to the republic were Eastern Europe (5.2 percent
of total
imports in 1986 and 7.1 percent in 1988) and the Arab
countries
(7.2 percent in 1986 and 4.8 percent in 1988). The rest of
the
world provided 26.8 percent of imports in 1986 and 33.5
percent in
1988; Japan accounted for 34.7 percent of this group's
exports in
1988, and the United States 13.6 percent.
The balance of payments record of the Republic of
Cyprus
indicated the economy's vulnerability in the early 1990s.
Imports
continued to outpace exports, resulting in ever-expanding
trade
deficits. This situation would have been worse if it were
not for
the high protection afforded the domestic market. Although
the
Customs Union Agreement with the EEC, which became
effective in
January 1988, abolished all import duties on Cypriot
industrial
exports to the EEC countries, the real test for Cypriot
manufacturing was expected in the second half of the
1990s, when
all tariffs on EEC industrial and agricultural exports to
Cyprus
were to be phased out. EEC duties on Cyprus's agricultural
exports
to the EEC will also be phased out by then. Although some
exceptions were allowed, the agreement would require free
trade
with the main Cypriot export market.
The Customs Union Agreement was the outcome of long
negotiations. After Britain's entry into the EEC, Cyprus
signed an
association agreement, to become effective in June 1973
and to
cover a ten-year period. According to the terms of the
agreement,
Cyprus received preferential access to the British market
in return
for a 35 percent reduction of tariffs on EEC goods, phased
in over
five years. A follow-up phase of the agreement, covering
1978 to
1983, would have led to a full customs union. The Turkish
occupation interrupted the natural progress of this
agreement.
Cyprus was still allowed to export most of its industrial
goods to
the EEC without tariffs, but rules of origin restrictions
applied,
as did some restrictions on agricultural exports.
The Customs Union Agreement posed a major challenge to
the
highly protected manufacturing sector of Cyprus, revealing
its
competitive weaknesses. Only a restructuring of the sector
by
increasing the size of its units, reducing its labor-unit
costs,
improving its productivity, and strengthening the
marketing of
products to new markets would allow it to prosper. At the
beginning
of the 1990s, the sector's restructuring was under way,
and the
government had established the Council for the Promotion
of Exports
to make Cypriot products better known abroad.
Data as of January 1991
|