PUB-6352 A WORLD BANK COUNTRY STUDY , , CYPRUS A Long-Term Development Perspective /v*7*7.J. .F A WORLD BANK COUNTRY STUDY * . . tj CYPRUS A Long-Term Development Perspective The World Bank Washington, D.C., U.S.A. The World Bank 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing July 1987 World Bank Country Studies are reports originally prepared for internal use as part of the continuing analysis by the Bank of the economic and related conditions of its developing member countries and of its dialogues with the governments. Some of the reports are published informally with the least possible delay for the use of governments and the academic, business and financial, and development communities. Thus, the typescript has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. The publication is supplied at a token charge to defray part of the cost of manufacture and distribution. Any maps that accompany the text have been prepared solely for the convenience of readers. The designations and presentation of material in them do not imply the expression of any opinion whatsoever on the part of the World Bank, its affiliates, or its Board or member countries concerning the legal status of any country, territory, city, or area or of the authorities thereof or concerning the delimitation of its boundaries or its national affiliation. The most recent World Bank publications are described in the catalog New Publications, a new edition of which is issued in the spring and fall of each year. The complete backlist of publications is shown in the annual Index of Publications, which contains an alphabetical title list and indexes of subjects, authors, and countries and regions; it is of value principally to libraries and institutional purchasers. The latest edition of each of these is available free of charge from the Publications Sales Unit, Department F, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66 avenue d'16na, 75116 Paris, France. Library of Congress Cataloging-in-Publication Data Cyprus, a long-term development perspective. (A World Bank country study) 1. Cyprus--Economic conditions. 2. Cyprus-- Economic policy. I. Series. HC415.2.C956 1987 338.95645 87-15988 ISBN 0-8213-0931-5 ABSTRACT Cyprus has overcome many serious constraints to reach the present relatively well advanced economic and social development. Per capita income in the southern part of the island, the subject of this report, is about $4480 and lift expectancy is 75 years. The economy has continued over the past few years to operate at practically full employment, with relatively low inflation and manageable external debt burden. To maintain this good development record, Cypriot economic planners have started work on charting the course for future development and to examine their development options. On the basis of past performance and potential to grow further, planners have decided that future development would be anchored on three sectoral pillars, namely, tourism, manufacturing, and agriculture; these sectors would receive necessary promotion to achieve their potential growth. With locational and skill advantages, Cyprus has also achieved considerable growth from exports of services - off-shore businesses, warehousing and transhipment, consultancy and business services etc. The growth of these exports could accelerate if they were to be included as another pillar of development and thus receive necessary promotion as the other three sectors. For the sectors to reach their full potential, current issues need to be resolved. In tourism, the most pressing issue relates to the need to diversify the product mix from the current overwhelmingly middle-income sun-and-sea tourism. To achieve the goal of attracting higher income tourists, measures are needed to slow down the rapid growth of hotels and hotel apartments at the low end of the market and at the same time conserve areas which so far have not been touristically exploited for development of the high end of the product. In manufacturing, serious restructuring is required because external demand for medium-quality light manufactured goods in the Arab oil-exporting countries will continue to at best stagnate, and customs union with the EEC which is due to take place shortly will necessitate the dismantling of the present high level of protection. Necessary measures needed for the restructuring have been discussed and are well known to policy makers; they should be put in place without delay. In agriculture, a few products have done extremely well while a few others continue to need large subsidies. To reach its potential, future development needs to be much more selective and those activities that have no comparative advantage should be allowed to exit and resources diverted to better use somewhere else. Elimination of subsidies which have no justifiable social consideration, particularly those for animal feeds and domestic grain production, would go a long way toward achieving this goal. For the sectors to reach their potential, necessary resources for investment must be made available and stable economic environment must be provided. The main measures to achieve these relate to the need to reduce the government budget deficit and improve domestic savings, which have been extensively discussed with the Government. Besides drastic reduction of subsidies, measures that need to be taken relate to de-indexing civil servants' pay, adopting a value-added tax, improving tax administration, removing interest rate ceiling at 9 percent, and opening up more channels for private savings such as stock and bond markets. - iii - PREFACE This report is based on the findings of an economic mission which visited Cyprus during February 17 - March 8, 1986, and was comprised of Messrs. Sawai Boonma (Mission Chief), Jacob Levitsky (Industrial Economist), Fabio Sestini (Agricultural Economist, Consultant), and Vladimir Tlusty (Tourism Economist, Consultant). CYPRUS Exchange Rate Equivalent Year US$/CE 1975 2.7162 1976 2.4371 1977 2.4510 1978 2.6788 1979 2.8221 1980 2.8341 1981 2.3789 1982 2.1071 1983 1.9008 1984 1.7039 1985 1.6407 1986 (September) 1.9585 Fiscal Year January 1 - December 31 - iv - TABLE OF CONTENTS PAGE NO. BASIC DATA. . . . . . . . . . . . . SUMMARY AND CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . ix I. PATTERN OF GROWTH AND CURRENT STRUCTURE . . . . . . . . . . . . 1 A. Introduction .. . 2 B. Salient Aspects of the Growth Pattern and Current Structure . . . . . . . . . . . . . . . . . . . . . . . . 2 (i) Sectoral Contributions to Growth and Employment . . . 2 (ii) Foreign Exchange Earnings . . . . . . . . . . . . . . 5 (iii) Resource Gap and External Debt . . . . . . . . . . . 6 C. An Outline of Future Development Strategy . . . . . . . . . 7 II. TOURISM . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 A. Present Situation .... . . . . ...... . . . . . . . 11 B. A Strategy for Future Development . . . . . . . . . . . . . 14 (i) Demand for Leisure Travel in Western Europe . . . . . 15 (ii) Options for Cyprus . . . . . . . . . . . . . . . . . . 15 C. Implementation of Tourism Development Strategy . . . . . . 18 III. MANUFACTURING . . . . . . . . . . . . . . . . . . . . . . . . . 21 A. Past Development and Constraints . . . . . . . . . . . . . 21 (i) Labor Supply and Labor Costs . . . . . . . . . . . . . 21 (ii) Markets and Marketing . . . . . . . . . . . . . . . . 23 (iii) Foreign Investment and New Products . . . . . . . . . 24 B. Options for Future Development . . . . . . . . . . . . . . 26 (i) Options for Existing Industries . . . . . . . . . . . 26 (ii) New Industries and Products . . . . . . . . . . . . . 28 C. Institutional Support .... . . . . . . . . . . . .. . 30 -V- PAGE NO. IV. AGRICULTURE .... . . . . . . . . . . . . . . . . . . . . . . 34 A. Structure, Past Growth and Potential of Existing Agriculture .... . . . . . . . . . . . . . . . . . . . 34 (i) Crops .... . . . . . . . . . . . . . . . . . . . . 34 (ii) Livestock . . . . . . . . . . . . . . . . . . . . . . 37 (iii) Fishing .37 B. Strategy for Future Development . . . . . . . . . . . . . . 38 V. A LONG-TERM GROWTH SCENARIO ..41 A. A Fourth Pillar: Services .41 B. Sources and Pattern of Output: An Overview . . . . . . . . 42 C. Labor Force Allocations .43 D. Resource Requirements .45 STATISTICAL ANNEX .47 MAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 - vi - COUNTRY DATA - CYPRUS UL AREA POPULATION DENSITY (19841 9,300 sq. km. 665 thousand (mid-1984) 72 per sq. km. Rate of growth: 0.7 % (from 1973 to 1984) POPULATION CHARACTERISTICS (1981) HEALTH (19811 Crude birth rate (per 1,000) 21.2 Population per physician 1120 Crude death rate (per 1.000) 8.4 Population per hospital bed 190 ACCESS TO PIPED WATER (19791 ACCESS TO ELECTRICITY (19792 Occupied dwellings without X of population - urban 99 piped water (X) 5.0 - rural -- TOTAL -- NUTRITION (1981) Calorie intake as & of requirements 135.0 Per capita protein intake 106.0 (grams/day) GNP PER CAPITA IN 1984: US$ 3590 GROSS NATIONAL PRODUCT IN 1985 ANNUAL RATE OF GROWTH (percent constant prices 19801 USSi M Percent 197fi-79 1982-B5 GNP at market prices 2378 100.00 10.7 5.4 Gross domestic investment 715 30.1 27.9 3.5 Gross national savings 564 23.7 13.1 5.5 Current account balance -158 -6.6 63.2 -7.4 Exports of goods, NFS 1214 51.5 15.9 8.4 Imports of goods. NFS 1457 61.3 15.8 6.0 OUTPUT. EMPLOYMENT AND PRODUCTIVITY IN 1984 Value Added Labor Force V. A. Per Worker USS M. Percent IbL Percent U1 Percent Agriculture 204 9.5 43.1 17.7 4,733 53.7 Industry 653 30.5 66.9 27.5 9.761 110.7 Services 1287 60.0 101.1 41.6 12.730 144.4 Unallocated Z/ -- -- 32.1 13.2 -- -- Total/Average 2,144 100.0 243.2 100.0 8,816 100.0 PUBLIC FINANCE C Pounds M. Percent of GDP i48 19B 1983-BS Current receipts 379 26.6 25.6 Current expenditures 393 27.6 27.3 Surplus/Deficit (-) -14 -1.0 -1.7 Investment 47 3.3 3.5 J/ Data on area, population, population density, and per capita GNP refers to the whole country;the rest relates only to the Government-controlled area. Z/ Include unemployment, workers employed In British bases, foreign organizations, and in other countries. July 1986 - vii - COUNTRY DATA - CYPRUS MONEY. CREDIT AND PRICES MILLIONS OF CYPRUS POUNDS OUTSTANDING AT END PERIOD MERCHANDISE EXPORTS (1982-84) AVERAGE 198 I98 198 198 1984 USS, M. Percent Money supply 153.3 188.3 218.5 248.4 259.4 Citrus 25.6 6.7 Bank credit to public sector 76.2 100.6 94.3 114.7 137.0 Potatoes 40.8 10.6 Bank credit to private sector 404.7 462.4 542.7 609.5 688.7 Clothing 81.7 21.2 Footwear 31.2 8.1 Cement 17.5 4.6 Others 188.7 48.8 Total 385.5 100.0 PERCENTAGE OF INDEX NUMBERS Money as percent of GOP 20.5 21.9 21.9 22.4 19.7 GDP Deflator (1980 = 100) 100.0 111.2 122.6 130.4 141.2 Annual percentage change in: EXTERNAL PUBLIC DEBT. DECEMBER 31. 1985 GOP deflator 14.9 11.2 10.2 6.4 8.2 USS M. Bank credit to public sector 53.7 31.9 -6.2 21.6 19.4 Disbursed only 923 Bank credit to private sector 13.5 14.2 17.4 12.3 13.0 Including undisbursed 1,077 BALANCE OF PAYMENTS (Millions of USS) DEBT SERVICE RATIO FOR 1985 1981 1983 J12a!14 8 Percent Exports of goods. NFS 1049.0 1084.6 1244.7 1213.5 Public Debt 11.6 Imports of goods, NFS 1321.8 1382.8 1529.1 1456.9 Resource gap (deficit = -) -272.8 -298.2 -284.4 -243.5 IBRQ/IDA LENDING. DECEMBER 31. 1985 llSS M. Net factor income 64.3 46.4 42.1 61.2 IJLR ID Net transfers 27.4 23.2 24.7 24.8 Outstanding and Current account balance Disbursed 83.1 - (deficit = -) -181.1 -228.6 -217.6 -157.5 Undisbursed 90.8 - Outstanding Grants to Government 35.7 51.0 18.7 16.6 including Non-monetary capital 194.5 172.8 247.9 164.7 undisbursed 173.9 - Net errors and omissions 13.3 17.9 23.7 22.8 Overall balance (deficit = -) 62.5 13.1 72.8 46.6 Gross reserves (end year) 508.8 625.0 684.1 604.6 Petroleum imports 251.0 228.0 246.8 - July 1986 - viii - SUMMARY AND CONCLUSIONS i. Cyprus has overcome many serious constraints and adversities to reach the present relatively well advanced economic and social development. The 1985 per capita income of the southern part of the island, the subject of this report, is about $4480. The economy has been operating at practically full employment, inflation rate is low, and the external debt burden is manageable. The fruits of development are well distributed and the general well being of the population is amply indicated by the present life expectancy at birth of 75 years, a level comparable to those of much more advanced economies. ii. These achievements have been attained because of flexibility to a great extent in government policies and Cypriots' ability to take full advantage of opportunities when they arise, be it a drought in Europe to establish markets for potatoes or increasing incomes in the regional oil exporting countries to expand manufactured exports. Although these examples are indicative of the country's ability to adjust quickly to the changing realities, Cyprus cannot base its development efforts on the unexpected opportunities that may arise along the way. Only known parameters should be used in the planning for future development. Scarcity of water, agricultural land and mineral deposits will continue to be binding constraints. A small and slow-growing population presents no population pressures, but with already full employment, will limit growth to mostly the gain in productivity. At the same time, the small work force must not concentrate too heavily in one sector so that sources of income are reasonably balanced and the risk of vulnerability to shocks is minimized. These are some of the parameters that need to be considered as Cypriots embark on examining the country's long-term development options. Sources of Growth, Employment, and Foreign Exchange Earnings iii. The most dynamic sector over the past decade has been trade, hotels and restaurants, which includes tourism. Due mainly to rapid growth of tourist arrivals at over 19 percent per year during 1976-85, real growth of this sector averaged almost 12 percent annually; it accounted for over a quarter of GDP growth during this period and absorbed nearly 30 percent of the increase in employment. It is now the largest sector, accounting for close to 19 percent of GDP in 1985. Due to its labor intensiveness, however, the value-added per worker in this sector was about 8 percent below the national average. iv. The financial sector, which includes banking, insurance, real estate and business services, also grew rapidly at close to 10 percent per year and contributed to over one-fifth of the increase in GDP during the past decade. Offshore businesses, including off-shore banking, consultancy services and computer programming emerged as a very dynamic group of activities. Although its contribution to employment is modest, at 4.4 percent, this sector contributed almost 17 percent toward GDP in 1985; its value-added/worker, excluding imputed value of housing, was more than twice the national average. v. Manufacturing also grew considerably at 6.6 percent per year, contributed 16 percent and 26 percent, respectively, to growth in total GDP and employment. It, however, lagged behind the trade and tourism sector. Its - ix - - x - value-added/worker was almost 19 percent below national average, due mainly to concentration of manufacturing activities in labor-intensive, low-end of the product mix--medium quality textile and leather products. vi. Measured against the performance of the above three sectors, agriculture's contribution was quite low: a 1.4 percent annual growth, no contribution to additional employment, and value-added/worker at 40 percent of the national average. It, however, continues to employ about 20 percent of the labor force, and provides a large share of foreign exchange both directly and indirectly as supplier of raw materials for manufactured exports such as wines. vii. Reflecting the growth pattern, the structure of foreign exchange earnings has substantially changed. Exports of services now account for over 70 percent of the total compared to 40 percent a decade ago. Tourism accounted for almost 43 percent of the total increase during 1978-84, and contributed 36 percent of total earnings in 1984. The dominance of service exports was to some extent enhanced by the stagnation of goods exports which grew only about three percent per year during this period - less than half of the growth rate of GDP. Resource Gap and External Debt viii. Full employment has been achieved partly by maintaining a high level of domestic demand which in recent years results mainly from the rapid growth of consumption, both of the government and of the private sector. Indicative of this situation is a continued high level of budget deficit, averaging almost 7 percent of GDP during 1983-85, and negative government savings. This has created a consistently large resource gap during the past decade. Although declining, this gap remains very large at 9.5 percent of GDP in 1985 compared to a 3 percent average for the middle-income oil-importing countries. The gap has been financed partly by private capital inflow, mainly from Cypriots settled abroad and by grants to the government. A large part, however, has been filled by foreign borrowing. As a result, external debt has risen quickly, approaching 40 percent of GDP, a level comparable to those of Brazil and Korea. Although there appears no debt servicing problem in the near future (1985 debt service ratio was about 14 percent), Cyprus must substantially reduce the resource gap if it wants to avoid increasing its borrowing to an unsustainable level. An Outline for Future Development Strategy ix. Cypriot economic planners have begun drawing up the next medium-term development plan (1987-91). Unlike previous plans which were focussed mainly on short-term responses to situations created by the 1974 events and the oil shocks, this plan is to be placed within a long-term development framework and strategy, which is also being drawn up. A preliminary framework places emphasis on development of three sectors as the main pillars of the economy - tourism, manufacturing and agriculture. Based on past performance and contributions to growth, employment and foreign exchange earnings, there is no doubt that these three sectors should be the pillars of future development. On the basis of past performance and potential to grow, another sector should be included as the fourth pillar of development, namely, banking, insurance, - xi - real estate and business and other services. In order to develop these sectors to their full potential, however, sectoral issues need to be resolved. At the same time, these sectors can develop fully only if a stable economic environment and sufficient resources for investment are provided; reduction of budget deficit and increased domestic savings are key policy requirements. Tourism x. The rapid growth of tourism has been one of the most important factors contributing to Cyprus' recent success. The rapid growth, however, has created some serious issues that need to be urgently addressed. Most infrastructure is inadequate to support the volume of demand. Traffic congestion and conflict between road users and pedestrians are persistent. Water supply is short and intermittent during the peak season. Sewerage capacity is inadequate and in need of upgrading to prevent pollution of water and beaches. Concentration on construction of accommodation capacity has created shortages in supplementary facilities for sports and recreation. Limited water sport facilities exist. There are no golf courses. The whole growth has been one product, beach-based hotels and hotel apartments to cater to middle income tourists. Even the quality of this could have already been eroded by the existence of a large informal sector consisting of private apartments and houses not licensed as tourist accommodation but offered to tourists anyway. Having a large supply of one product, which is the same as those offered by other Mediterranean destinations, has also created a buyers' market situation in which the tour operators are able to exploit through getting abnormally high discounts. Despite the discounts, Cyprus remains relatively a high-price destination, indicating that it is still being viewed favorably by tourists. The government has announced periodically a goal to change the product mix toward the high end of the market. A lack of appropriate development strategy and weak zoning regulation and enforcement, however, have hindered achievement of that goal. xi. Some of these issues have been addressed through ongoing projects in transport, water development and centralized sewerage service. Expedient completion of these projects will help solve most problems in these areas. Financial and tax incentives are provided for investment in supplementary facilities but so far have not been sufficient to attract rapid growth of these facilities. One way to modify this situation is to withhold construction permits for new accommodation without adequate provision for such facilities. The most important measure, however, is to promote product diversification. xii. In drawing up a tourism development strategy, a number of factors must be considered. A leading one relates to potential demand. The main source of tourists for Cyprus has been Western Europe, which for various reasons will continue to play that role. After two decades of rapid growth, however, the overall increase in travel abroad by Western Europeans is expected to slow down to about 3-4 percent per year. From this source, there will be great competition among various destinations to increase their shares if they hope to grow faster than 3-4 percent. Currently Cyprus represents only about 1.5 percent of the Mediterranean traffic. The potential pool for Cyprus to draw on therefore is large. To increase its share, however, Cyprus - xii - would need to diversify its product because other destinations also offer similar sun-and-sea products, and Cyprus already offers very deep discounts which reduce the room to compete on prices. xiii. In the short- and medium-run, the options for Cyprus are limited because existing facilities and those soon to come on stream cannot be substantially changed. Increased efforts to fill these facilities are, therefore, the major requirement. Much can still be done in the long-run, however, because there exist areas with great potential that have not been developed touristically. To achieve that potential, however, requires that a long-term development strategy and measures be drawn up and implemented without delay. xiv. Due to the expected slow growth of demand as indicated above, the Cyprus Tourism Organization's projection of reaching over 1.1 million tourist arrivals by 1991 may not materialize. Even if Cyprus could win a larger share of tourists to reach that arrival level, it remains doubtful whether Cyprus should attempt to do that because it would certainly involve constructing more accommodation facilities at a rate higher than desirable, and the facilities that can be built quickly would only be the type that already exists; this would not be consistent with the goal of upgrading the product mix toward the high end of the market. For various reasons stated below, it actually should be time to slow down growth of arrivals and the 1-1.2 million tourist level should be the long-term goal of tourism development. A higher proportion of growth should come from a higher level of per capita expenditures by those who come. xv. Besides expected intense competition in the Mediterranean region, there are factors that should be considered to slow down growth and limit tourism to 1-1.2 million arrivals with an aim of increasing revenues only through higher per capita expenditure. First, most of beach areas suitable for development have already approached saturation point; further building will adversely affect quality of the product. On the other hand, areas that offer room for further development should be more carefully exploited so that the goal of product diversification will be achieved. Second, there is a limit in labor supply. No matter what product is offered, tourism will be basically a labor-intensive industry. The slow growth in the labor force and full employment conditions will continue to constrain availability of labor. xvi. Within the upper limit of 1-1.2 million arrivals, focus should be made to raise per capita expenditure of tourists. This could be achieved by the following: (i) establishing integrated holiday centers for areas that have not been touristically developed - Khrysokhou Bay, etc.; (ii) building at least two high quality golf courses as supplementary facilities and to attract holiday golfers (this may be part of integrated holiday centers); (iii) adding marinas with substantial berths to the limited existing capacity to offer Cyprus as another stop to an expected substantial increase in yachting activity; (iv) granting casino licenses for at least one tourist location; and (v) selectively developing and presenting historical monuments as additional attractions. - xiii - xvii. Implementation of this strategy will involve difficult decisions on the part of the government. The first thing is to stop the growth of the sun-and-sea development that has been the bread and butter of tourism up to now. A declaration of moratorium on construction of new hotels and hotel apartments, except for the very top class, especially if they bring in foreign capital and involvement of major international chains. At the same time, ways must be found to check the growth of unlicensed facilities, outlawing them if necessary. The next step is to find ways to develop areas with good potential and to build additional facilities like golf courses and marinas. These will require substantial funds and the skills to conceptualize, design and implement large projects. As these requirements cannot be met by the existing institutions, consideration should be made to set up a new entity to be called, say, Cyprus Tourism Development Corporation (CTDC), to be owned jointly by the government and the private sector through share subscription if possible. CTO and other entities now involved in tourism development can be merged with this new entity. CTDC will not only undertake projects on its own but also lead or participate in other large projects that would require financial and management support. Where land ownership is fragmented, private land owners should be included as share holders in these large projects. Manufacturing xviii. Manufacturing has contributed substantially to economic growth of the past decade, but has shown a marked downward trend to well below the overall growth of GDP during the past few years. There are many factors contributing to this phenomenon, the major ones relating to labor, markets, and an inability to attract foreign investment and to develop new industries. xix. With slow growth of population and the labor force, shortage of workers has been a constraint limiting growth in this sector. The existing production structure, which is overwhelmingly concentrated in labor-intensive light manufacture, including textile and leather good products, and lack of investment in new industries, have kept labor productivity relatively low. Despite lack of improvement in productivity, wages have gone up rapidly. Strong unions, existence of automatic wage indexation, and relatively higher pay in the government civil service have been important factors in increased labor cost. As a result, Cyprus' competitiveness has been continuously eroded. xx. Past manufacturing development has benefited greatly from a high level of protection; tariffs are generally very high, quotas are imposed, and some imports are totally banned. Three quarters of output is consumed domestically. Exports are concentrated on few products - textile, clothing, leather and travel goods - and few markets in Arab oil exporting countries. Cyprus has failed almost completely to diversify both export products and markets over the past decade. Despite successes in some markets, marketing efforts remain inadequate. In the most part, individual manufacturers go separately to look for markets, sometimes fiercely undercutting each other abroad. Institutional assistance has been sporadic in the form of trade centers and representations staffed by government personnel without the required background. These problems have long been recognized but solutions have been slow in coming. - xiv - xxi. Due to small domestic market, limited labor supply demanding high wages, and past reluctance to accept foreign participation on the part of local entrepreneurs, foreign investment in manufacturing has been minimal. No multinational corporations have set up operations in Cyprus. This has been a factor in the failure to develop new industries. Provisions of tax incentives, industrial estates, and a free industrial zone have not been sufficient to overcome the problem so far. xxii. With negotiations substantially completed, Cyprus will likely join the EEC customs union within the next ten years. This entails dismantling the present protection system. Although the dismantling will probably be carried out in ten stages, it will still adversely affect some high-cost producers who have existed solely under the high wall of protection. To reduce the potential adverse impact, Cyprus has asked for exclusions for a number of items from the customs union agreement. Even if the EEC agrees to the exclusions, in the long run they will do little to solve the long term problems of this sector. A more positive approach would be to start without delay progressively dismantling the whole structure of protection and to force Cypriot manufacturers to take necessary steps to increase the productivity of their operations and the quality of their products. xxiii. For the existing industries, these steps would include (i) rationalization to increase the size of operations from the small, fragmented, family-run enterprises; (ii) modernization of existing inferior and low productivity machinery; (iii) introduction of incentive pay systems to reduce unit labor cost; and (iv) creation of large trading firms to spearhead marketing of products in new markets. Until such trading firms are organized, short-term arrangements would be required, such as strengthening of selected trade centers, improving export credit scheme and customs drawback operations. xxiv. For new industries and products, the government has already identified 250 as having potential for manufacturing in Cyprus. This is a good list but clearly these goods could only be produced successfully if there were joint ventures with overseas manufacturers which would help with technology and sales in export markets. Development of new industries will need strong institutional support. The government support in this sector has been extensive, but the institutional set-up has been highly fragmented, making it difficult to be effective. The institutional support functions involving investment and export promotion can conceivably be unified under a new agency to be called Industrial and Trading Development Corporation (ITDC), combining features of such institutions as the Irish Industrial Development Authority, the Economic Development Board of Singapore or the Barbados Industrial Development Corporation. Agriculture xxv. Agriculture's contribution to growth has been relatively small, but it remains a large employer and contributes substantially to foreign exchange earnings. In order not to divert limited resources away from the most productive use, future development of agriculture has to become more selective so that only those with true potential based on comparative advantage get - xv - necessary resources. Past development policies of providing subsidies for cereals, livestock and vine products will have to be changed. Subsidies have created considerable distortions leading to misallocation of resources. They must be reduced and some activities that have emerged or survived because of their existence must be allowed to exit. A firm schedule for their reduction, especially for animal feed subsidies, should be drawn up with an aim of complete elimination by the end of the next five year plan (1987-91). xxvi. Without cereal subsidies, barley production would substantially decline. The decline can partly be compensated by introducing higher-yield varieties, improvement in production techniques, and practicing crop rotation. The land that is no longer profitable without subsidies would go to other production such as hay and grazing range. At the same time some new crops that have shown potential could be introduced. Two oil seeds species in particular - safflower and rape - would be suitable for the dryland and would also substitute for some of the annual import of seed-oil for domestic consumption. Leguminous crops such as chick peas could be introduced. Besides having higher value than barley, they are an excellent crop for rotation. Without feed subsidies and if imports are allowed, the production of pork and poultry could also decline. This should be allowed to happen so that resources would be diverted to more efficient use somewhere else. For the vine subsidies, except for the replanting program which will take some time to complete, reduction should be initiated now. A long-term strategy has already been pursued in this sector with a view of reducing production of the low quality wine grapes and replanting some areas with more superior varieties. The effect will be a reduction of total output but with higher unit value. xxvii. For products that do not benefit from subsidies, at least not directly, potatoes and citrus have done well and would need only additional water from ongoing projects to reach their potential. An only exception would perhaps be a need to rationalize the marketing of citrus which remains quite fragmented with numerous small exporters whose operations are too small to realize full economies of scale. Selected varieties of vegetables also have potential to expand further in the export markets. To realize their potential, however, substantial changes in marketing arrangements must be undertaken. This is already being addressed in an ongoing Bank-financed project. To enhance potential of this irrigated crop sector, new varieties should also be introduced. These include fruits such as babaco, guava, and soursop, and cut flowers and potted plants for export. High protein crops such as alfalfa also appears promising. Where waste water is used for irrigation, crops such as cotton and jojoba could also be introduced. xxviii. In the mountain zone, further development of deciduous orchards are possible. But due to slow growth in demand, consideration should be made to introduce other crops, in particular, medicinal and aromatic plants which command high prices in Europe. Another possibility that has not been investigated is the production of truffle in selected areas where climatic and botanical characteristics are suitable. - xvi - A Fourth Pillar of Development xxix. Due to past rapid growth, high value-added and the availability of a large pool of university graduates, another sector would appear to have great potential to grow much further: banking, insurance, real estate and business services. Domestic banking services are already well developed and widespread; the scope for this aspect of services can only grow slowly. Other domestic services, however, remain underdeveloped. These include a securities market and insurance. On the export side, off-shore businesses and banking have just started to develop and have potential to expand substantially. Similarly business services such as consultancy, accountancy, and computer programming offer great potential. Development of these businesses has so far, however, followed a path similar to that of goods exports, namely, numerous, small exporters are out on their own looking for markets. An idea has been advanced to amalgamate exporting of these services under an umbrella organization that would undertake joint marketing, etc. This would appear to be an appropriate approach that could broaden the services and markets and help realize economies of scale. If it cannot stand by itself, consideration should be made to include it as an arm of an export organization proposed under manufacturing. To this narrowly defined (in national account sense) service sector, one could add exporting of other services which to some extent are taking place - warehousing, transhipment, and health care services. With locational and skill advantages, Cyprus has potential to further expand export of these services. The growth of these exports could be accelerated if their promotion is undertaken under a policy framework of the fourth pillar of growth as has been the case regarding tourism, manufacturing, and agriculture. An Overall Growth Scenario xxx. In some respects, Cyprus already resembles more advanced industrial economies in which population and labor force grow very slowly. Cyprus is even ahead of some advanced economies in one respect, i.e., unemployment is considerably lower. The slow growth of labor and near full employment conditions, however, do set the limit as to how fast future growth can be. With the economic structure concentrating mainly on labor-intensive industries, improvement in productivity cannot be expected to increase rapidly. For these reasons, long-term growth can be expected to be slow in the range of 3-4 percent. This would already be higher than the average rate of 2.8 percent achieved by 19 industrialized economies during 1970-82. (The highest rate was achieved by Japan at 4.6 percent.) xxxi. Within this overall growth possibility and sectoral strategies as outlined above, trade and tourism will continue to be the sector with highest growth, contribute the largest share to GDP and command the largest share of labor. This is followed by the financial and business services sector. The need to restructure manufacturing will entail very slow growth initially. This would be made up later as restructuring progresses and more productive operations take hold. Due to expected substantial decline in some subsectors as subsidies are reduced, agriculture will grow only slowly, perhaps averaging about 0.7 percent annually. It will continue to release labor for other sectors. Although short-term cyclical fluctuations are expected and unemployment may increase in the process of restructuring both in agriculture - xvii - and manufacturing, implementation of sectoral strategies as described would lead to a long-term development pattern that follows the country's comparative advantage. Short-term unemployment may rise, but labor shortage rather than unemployment will be a long-term constraint. xxxii. Whether the development scenario outlined here will materialize will depend a great deal on the government policy to improve domestic savings and keep the balance of payments deficit and external debt within manageable levels. Policy measures to achieve these have already been outlined in various government documents and discussed in previous Bank reports; adoption of these measures should no longer be delayed. To reduce budget deficit and generate government savings, subsidies have to be sharply reduced, growth of government wage bill slowed down through abandonment of full wage indexation, tax collection increased through improved tax administration and a value-added tax adopted soon. These measures should be complemented by actions to further increase private savings through removal of interest rate ceiling of 9 percent and providing additional channels for saving by establishing stock and bond markets. The existence of interest ceiling has potential to not only discourage private savings but also to encourage capital flight seeking higher returns abroad and to divert capital that might be available for productive investment into such activities as real estate speculation; in a capital-short economy such as Cyprus', this only serves to compound the problem. It also prevents the government from using a powerful tool of monetary and economic management. It is in fact an anomaly that Cyprus does not have a reasonably well-functioning stock and bond market because in many even much less advanced market economies, trading in stocks and bonds is well established. These markets are essential for companies to raise funds and expand their capital base, particularly if they want to move into more capital-intensive ventures that are a vital part of the future development strategy. I. PATTERN OF GROWTH AND CURRENT STRUCTURE A. Introduction 1. Cyprus' current economic position compares favorably with most developing countries. The 1985 per capita income for the southern part of the island, is estimated at $4480. 1/ It has been operating at near full employment with average unemployment rate ranging between 2.5 and 3.5 percent during the past five years (1981-85). Inflation rate has been relatively modest (5 percent in 1985), and external debt service obligations are not excessive, with the total debt service ratio of 14 percent in 1985. The fruit of development is reasonably well distributed, with all sectors of society having access to requirements for basic needs. Education, modern health services, electricity, and safe water supply are available throughout, even in the remote villages. The general well-being of the population is indicated by a long life expectancy of 75 years, a level comparable to those of much more advanced countries. 2. Cyprus has overcome many serious constraints and adversities to reach this position. A small island with limited endowment of natural resources, be it water for irrigation or mineral deposits, its best asset lies with its well educated and motivated work force and the ability to take full advantage of opportunities when they arise. A good example is its quick recovery from the 1974 partition of the country with attendant serious dislocations when one-third of the population became refugees and more than one quarter did not have jobs. The situation was compounded by the first oil shock of the mid 1970s. The country was able, however, to overcome these adversities by exploiting opportunities created by (i) a drought in Europe to get a foothold there for its potato exports, (ii) a civil war in Lebanon to establish transhipment and re-export trade, (iii) a rapidly rising income in Middle Eastern oil exporting countries to establish its exports of light manufactured goods, and (iv) a rapid growth in tourism demand in Northern Europe to focus promotion of its tourism industry. 3. Although the above examples are indicative of its ability to adjust quickly to the changing realities, Cyprus cannot base its development efforts on the unexpected opportunities that may arise along the way. As it embarks on planning for future development, only known parameters should be used. The given parameters such as limited resource endowment as mentioned above will continue to be binding constraints. Its small population which grows only slowly, about 1 percent per year, presents no population pressure; but it also 1/ Based on estimated 1985 GNP and population of the southern part of the island and conversion to the US dollar at the 1985 exchange rate. This report deals with only the southern part of the island which remains under the control of the internationally recognized government of the Republic of Cyprus. While a global analysis of the whole island and its prospects would be relevant, lack of up-to-date and comparable data for the northern part renders it impossible. - 2 - means that labor supply will grow only slowly, domestic absorption is small, and development strategy will have to be export-oriented. With already at near full employment, production expansion will have to come mostly from increased productivity rather than expanded employment. At the same time, to guard against the vulnerability of being solely dependent on one source of income, a reasonable balance must be struck in the development of its production structure. These are the main parameters to be considered as Cypriots examine various options for future development. 4. This report intends to explore in broad terms potential for future economic development of Cyprus and to discuss measures that are required for the country to achieve its potential. The sections below will briefly review past pattern of development to place various sectors and issues in perspective. Then Chapters II, III, and IV, will examine the major sectors that are considered by the Cypriots to be the main pillars of future development - tourism, manufacturing and agriculture. Chapter V will discuss a suggestion for an additional pillar, and put together sectoral growth strategies and examine their implications. Data are presented in the Statistical Annex at the end. B. Salient Aspects of the Growth Pattern and Current Structure (i) Sectoral Contributions to Growth and Employment 5. Before examining the long-term prospects of the economy, it is useful to briefly review the pattern of past growth which leads to the current structure. The review will also bring out some trends that are relevant determinants for future development strategy. To be sustainable in the long-term, the quality of growth is important, i.e., growth should come mainly from the tradeable sectors. Particular attention would therefore be paid to sectors producing these outputs: agriculture, manufacturing, hotels and restaurants (for tourism), and to some extent trade and transport (for transit trade and tourism), and banking and business services (for off-shore banking, and other business services). 6. The most dynamic sector over the past decade has been trade, hotels and restaurants. Its value-added grew almost 12 percent annually, and contributed over a quarter toward total real growth of GDP during this period (Table 1-1). As a result, it has now become the most dominant sector contributing to almost 19 percent of GDP in 1985; ten years earlier, it contributed less than 13 percent, or ranked only fifth behind manufacturing, public administration, agriculture, and finance. The most important factor in this rapid growth is tourism, which saw arrivals of holiday visitors growing from 165 thousand in 1976 to 814 thousand in 1985 or 19.4 percent per year. Value-added in hotel and restaurant subsector, as a result, showed the most rapid growth at over 16 percent per year, and increased its share in GDP from only 2.6 percent in 1976 to 5.3 percent in 1985. Due to continued domestic problems in Lebanon, increased re-export trade also grew significantly; this is indicated by the value of re-exports which grew from CE 21 million in 1976 to CE 93 million in 1984. - 3- Table 1-1: Pattern of Growth and Structure of Output 1976-85 (In percent) Annual Growth Contribution Share in Share in Rate to Growth 1976 GDP a/ 1985 GDP a/ Agriculture 1.4 2.2 13.7 8.2 Mining and Quarrying -4.0 -0.7 2.1 0.8 Manufacturing 6.6 16.6 18.2 17.5 Electricity, Gas and Water 7.1 1.6 1.6 1.6 Construction 5.4 7.8 10.8 9.4 Trade, Hotels, and Restaurants 11.7 25.6 12.6 18.6 (Hotels and Restaurants) (16.1) (8.5) (2.6) (5.3) Transport, Storage, and Communications 8.1 11.2 9.4 10.2 Banking, Insurance, Real Estate, and Business Services 9.7 20.5 13.4 16.7 (Housing) (5.8) (4.9) (6.3) (5.7) Public Administration, Community, Social & Personal Services 6.2 15.1 18.0 16.8 TOTAL 7.1 100.0 100.0 100.0 (GDP at constant 1980 prices) (CE501 Mn.) (C£924 Mn.) a/ Based on GDP at constant 1980 prices 7. The trade sector also absorbed substantially the growth in employment - nearly 30 percent 1/ - during this period (Table 1-2). As a result, its share in employment increased from 15.5 percent in 1976 to 19.5 percent in 1985. The fast growth in output and employment, however, was not accompanied by a similar trend in value-added/worker which had been rather low compared to the average for the economy - 91.5 percent. Without relative price changes, value-added/worker in this sector actually declined from over 15 percent above average in 1976 to about 5 percent below average in 1985. For this reason, the source of growth in this sector came principally, or even exclusively, from expansion of employment rather than from increased productivity. As will be discussed in the Chapter II, this is indicative of the fact that quality of tourism may have declined despite a pronounced policy to achieve higher quality and to attract higher spending tourists. 8. The financial sector, which includes banking, insurance, real estate and business services, also grew rapidly at almost 10 percent per year and contributed substantially to growth - 20.5 percent - during 1976-85. Its growth came from various sources - the boom in housing partly to accommodate those displaced by the 1974 event; off-shore business activities, including off-shore banking, which did not exist in the mid 1970's but at end 1985 1/ Out of this 30 percent, over 22 percent is estimated to be the contribution of direct employment in tourism. - 4- comprised 3600 entities, 700 of which maintain offices in Cyprus; nine off-shore banks have been fully operational. Businesses such as accounting firms, legal services, computer programming have also grown substantially in the past decade. This sector's contribution to employment has remained relatively small at less than 6 percent in 1985 and its contribution to growth in employment was only 6.7 percent during 1976-85. Its share in GDP, however, was substantial and growing. It contributed 13.4 percent toward GDP in 1976 and 16.7 percent in 1985. This was achieved because its comparatively high value-added/worker at more than twice the economy's average in 1985. 1/ 9. Manufacturing grew 6.6 percent per year during 1976-85 and contributed to more than 16 percent of total growth of GDP during this period. Its contribution to new employment was over 26 percent, next only to Table 1-2: Pattern of Employment and Value-Added/Worker (In percent) Value-Added/ Value-Added/ Share in Contribution Worker at Worker in 1985 Employment to Employment 1980 Prices a/ at Current 1976 1985 Growth 1976 1985 Prices a/ Agriculture 29.4 20.1 -3.7 46.7 41.8 40.1 Mining & Quarrying 1.5 0.5 -2.2 139.0 165.1 158.1 Manufacturing 18.5 20.6 26.2 92.4 84.9 81.3 Electricity, Gas, & Water 0.8 0.7 0.3 191.6 230.7 223.9 Construction 6.9 9.5 16.2 152.9 99.7 94.8 Trade, Hotels, & Restaurants 15.5 19.5 29.8 115.2 95.3 91.5 (Hotels and Restaurants) (4.4) (7.0) (13.3) (61.5) (77.5) (132.1) Transport, Storage & Communi- cations 5.4 5.9 7.3 174.9 173.2 165.8 Banking, Insurance, Real Estate, & Business Services 3.5 4.4 6.7 646.7 378.7 362.6 (227.5) b/ (207.1) b/ (258.1) b/ Public Administration, Community, Personal and Social Services 18.5 18.8 19.5 97.5 89.2 137.6 TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 (In Thousand) (153.9) (213.2) (E3252.0) (F£4335.0) (E4527.0) a/ As percent of the economy's average. b/ Without inputed value of housing. 1/ The inputed value of housing is taken out because it provides no employment. -5- trade, hotels, and restaurants. Similarly, its contribution to 1985 GDP, at 17.5 percent, was next only to the trade sector. Its value-added/worker, however, was rather disappointing at far below average for the economy by almost 19 percent. This is an apparent indication of having mainly the labor-intensive, low end of product mix, including medium quality textile and leather products, which are principal manufactured exports. 10. The transport sector, which could to some extent be considered tradeable because of large components in transhipment trade, warehousing services, and air passenger services in connection with tourism, grew rapidly at over 8 percent per annum and contributed over 11 percent of GDP growth. By 1985, its share in GDP has passed that of agriculture to over 10 percent. It, however, contributed to only 7.3 percent of employment creation during this period. The value-added/worker in this sector was much higher than the economy's average by almost 66 percent in terms of current 1985 GDP. 11. Measured against the performance of the above sectors, growth of agriculture is quite low at about 1.4 percent per year; it contributed only 2.2 percent toward total growth of GDP during the past decade. Its share in GDP declined from almost 14 percent in 1976 to just over 8 percent in 1985. It continues, however, to employ substantial number of people 1/ - about one-fifth of total employment, or about the same as manufacturing. Its contribution to growth in employment was negative and its value-added per worker was only about 40 percent of the economy's average in 1985. (ii) Foreign Exchange Earnings 12. Reflecting the growth pattern described above, the structure of foreign exchange earnings also has changed substantially. In 1976, exports of goods contributed 60 percent to total foreign exchange earnings, while exports of non-factor services contributed 40 percent (Table 1-3). By 1984, the proportion was reversed to 40:60 (preliminary data for 1985 indicate that exports of services have risen to 70 percent of total foreign exchange earnings). Two-thirds of the increase in foreign exchange earnings came from exports of non-factor services. The most important contributor to the increase by far was tourism at 42.5 percent. As a result tourism's share in foreign exchange earnings went%up from less than 15 percent in 1976 to almost 36 percent in 1984. Exports of clothing were next in terms of contribution to growth in export earnings - at close to 12 percent, raising their share in total export earnings from less than 6 percent in 1976 to 10.5 percent in 1984. Besides these two items, no other single export contributed more than 10 percent to total growth in foreign exchange earnings. Direct agricultural exports account for about 20-25 percent of total goods exports; including agriculture-based exports such as wines and hides would raise agriculture's share to about one-third. 1/ Employment in agriculture, however, should be interpreted carefully because small land holdings and proximity to towns allow people to engage in more than one occupations, resulting is substantial part-time farming - 54 percent of those engaged in farming had other nonfarm work according to the 1977 Agricultural Census. Those who spent more than two months per year farming are defined as engaged in agriculture, and daily wage farm workers are converted to full-time equivalent. - 6- 13. Rapid growth of tourism was not the only factor that contributed to this drastic change in the structure of foreign exchange earnings. Stagnation and decline of some major merchandise exports also played a major role. Major exports such as potatoes and clothing fluctuated widely due partly to price changes but mostly to quantity exported. Overall, merchandise exports grew only about 3 percent per year in real terms during 1977-85 compared to 6.2 percent for GDP. A greater proportion of output has been consumed domestically. For example, over 30 percent of manufacturing output was exported in 1977, while only 26 percent was exported in 1984. The growth in tourism could probably explain part of this increase. But rapid growth in consumption in general is probably the main factor. (iii) Resource Gap and External Debt 14. A high level of domestic demand has been a major factor in achieving and maintaining near full employment condition. As discussed in earlier Bank reports, 1/ both domestic consumption and investment have been at high levels averaging 80 percent and 32 percent of GDP, respectively during 1981-85. As a result, the resource gap has been relatively large over this period. As shown in Figure I, the gap was over 20 percent of GDP during 1977-79 but has since gradually declined. It remains relatively high, however, compared to those of other countries: the 1985 average resource gap for middle-income oil importing countries was 3 percent 2/, while the lowest level so far achieved by Cyprus was 9.5 percent in 1985. Cyprus receives a large private capital inflow annually, mainly from Cypriots living abroad who remit money to buy houses and apartments. Unlike normal foreign capital invested in commercial ventures, this capital is unlikely to be repatriated. It has therefore been suggested that this component of private capital inflow be counted toward filling part of the resource gap. As shown in Figure 1--i, after including this capital, the resource gap, although declining, remain relatively high; the lowest level was achieved in 1985 at 7.8 percent of GDP. 1/ Cyprus: Current Economic Positions and Prospects for Growth During the Five-Year Plan, January 1983; Cyprus: Trends and Issues in Public Finance, July 1984; and Cyprus: Country Economic Memorandum, July 1985. 2/ World Bank, World Development Report, 1985. Table 1-3: Pattern of Foreign Exchange Earnings - Share of Exports of Goods and Non-factor Services (In Percent) Contribution to 1976 1984 Growth (1976-84) Exports of Domestically Produced Goods 60.0 39.7 33.3 Potatoes 12.5 5.1 2.8 Citrus and Grapes 5.4 3.2 2.5 Carrots and Other Fresh Vegetables 1.5 0.8 0.6 Alcoholic beverages 5.1 2.0 1.0 Cigarettes 2.3 0.8 0.3 Clothing 5.9 10.5 11.9 Footwear 3.2 3.0 2.9 Cement 6.5 1.1 -0.6 Others 17.6 13.2 11.8 Exports of Non-factor Services 40.0 60.3 66.7 Air passenger Services 0.2 5.1 6.6 Other transportation a/ 4.4 6.5 7.2 Foreign Visitors' Expenditure 14.6 35.8 42.5 Foreign Military Expenditure 19.4 12.0 9.5 Others 0.9 0.9 0.9 TOTAL 100.0 100.0 100.0 (Million Cyprus £) (141.8) (591.9) a/ Include freight, insurance, ship stores, and aviation fees. 15. As discussed in earlier Bank reports mentioned above, part of the growth in domestic demand came from rapid growth in government expenditures. Part of this growth was needed to restore the economy from a severe recession in the mid-1970s but rapid growth has continued long after full employment was restored. As a result, government deficit, as a share in GDP, has been high. The lowest level was achieved in 1985 at 4.8 percent, compared to the 1983 average for middle income oil importers of 4.6 percent. 16. Foreign borrowings have been the main source of finance for these high levels of resource gap and budget deficit. As discussed in a previous Bank report, 1/ although there appears no immediate problems with the current level of debt, continued high levels of borrowing, coupled with a serious downturn in export earnings could create debt servicing difficulties. The debt service ratio, which was very low in the late 1970s has shot up rather quickly to about 14 percent, approaching the average level of middle income oil importers at slightly over 16 percent. C. An Outline of Future Development Strategy 17. Cypriot economic development planners have recently started working on a medium-term development plan (1987-91). Due to the dislocations and 1/ IBRD. Cyprus: Country Economic Memorandum, July 1985. -8- FIGURE I: SALIENT INDICATORS Percent of GDP 25_ 24- 23- 22 _ 1 21 / 20 - (I-S) 19' 18 1983 average debt 17 - T - - t - service ratio of upper 17 a / \middle income countries 16 - _ - _ - _ \ 1983 average debt service ratio of middle income 15- / \ \oil importers. 14 | \ . $ i,.Debt service ratio 12L r Budget deficit 11 \ \ \\ 10 8 > / - - ' X \(I-S) less private capital inflow 1983 average budget deficit for middle 6\ income countries 5 1983 average budget 4 deficit for middle income oil importers 3 _ _ - - (I-S) 1983 average for # e I - m l ' ' , , ,middle income oil importers 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 - 9 - problems related to the 1974 events and oil price increases of the 1970's, focus of previous plans have been mostly short-term without having the benefit of a long-term perspective as to where the economy should be going. Now that the economy is fully revived, and that period of "emergency" planning is over, planners would like to put this plan into a broader and longer-term perspective. The patterns of development as described above provide a setting for future development strategy. Based on past growth performance, contribution to growth, and foreign exchange earnings, there appears no doubt that planners are correct to place tourism as one of the main pillars of future development. Strong as it is, however, tourism development faces a number of difficult issues. Besides a need to raise its value-added/worker in order to maximize growth because labor growth will continue to be low, the questions of whether to further increase the dominance of this sector, assuming demand exists, still will need to be determined. Since it now earns over one-third of foreign exchange, further increase will certainly subject the country to more vulnerability. There are also questions relating to the pace and type of development that have taken place so far. A repeat of the past pattern certainly is not the best use of resources. These issues will be discussed in Chapter II. 18. Manufacturing also has substantially contributed to past growth and employment and has been rightly included by Cypriot planners as a major pillar of future development. Past growth depends mainly on two factors, namely, exports of medium-quality textile and leather goods to the Middle Eastern oil exporting countries, and high protection for local industries. The medium-quality nature of manufacturing is clearly indicated by its relatively low value-added/worker shown in Table 1-2. For future development, it is clear that this low value added/worker will need to be substantially raised, i.e., a move away from medium quality textile and leather goods is needed. And as Cyprus is prepared to join the European Communities (EC) as a full customs union member, the high level of protection will have to be dismantled. These will be major considerations as we examine this sector in Chapter III. 19. Cypriot planners also include agriculture as a main pillar in future growth strategy. Based on past performance and contribution to growth, there appears limited scope for agriculture to substantially contribute to future growth compared to other sectors. It, however, continues to provide substantial foreign exchange. Including it as a main pillar is based also on other considerations: (i) As shown in Table 1-2, agriculture continues to provide employment for 20 percent of the labor force, and income for a large group of part-time farmers considering that over-half of agriculture can be considered part-time. 1/ For many, if not most, to relocate occupationally can only be done gradually. (ii) Large investment has already been made and fixed assets in rural villages - houses, schools, infrastructure - will have to be abandoned and replaced with new investment near towns if these people were to be geographically relocated. For them to remain in the villages therefore not only make use of the existing fixed assets but also avoid overcrowding infrastructure in towns. (iii) Despite a very low overall value-added/worker, some subsectors continue to be highly profitable and earn 1/ For a study on part-time farming, see D.J. Ansell, C. Bishop, and M. Upton, Part-time Farming in Cyprus, University of Reading, Department of Agricultural Economics and Management, Development Study No. 26, 1984. - 10 - substantial foreign exchange, e.g. potatoes, citrus fruits. (iv) By promoting agriculture, some sectoral balance is maintained. Discussions of agriculture are in Chapter IV. 20. Although not included as a pillar of growth by government economic planners, there appears a need for consideration of the financial sector - banking, insurance, real estate and business services - because its past contribution was next only to trade in terms of GDP growth and it has the highest value-added/worker. In the labor-short situation, this is certainly worth examining. Off-shore banking and businesses have been promoted, but there appears good potential in insurance and business services. Discussions will be made at the beginning of Chapter V to outline possible future strategy. - 11 - II. TOURISM 21. Discussions in Chapter I clearly indicate the importance of tourism in the economic development of Cyprus over the past decade. The extremely rapid pace of past growth, however, has created a number of issues that will need to be addressed if this sector is to play the leading role that planners have envisaged. This chapter will briefly discuss past development and issues that have been raised and outline the strategy for future development and the role tourism should play in the long-term. A. Present Situation 22. Cyprus has developed as a "sea and sun" destination. Its tourist facilities are located almost exclusively on the seaside. After 1974, development quickly spread at four coastal locations, first at Limassol, followed by Ayia Napa and the nearby areas in Famagusta District, then Larnaca and most recently Paphos. Clusters of hotels and hotel apartments were quickly built in these locations. At the same time, there has also been rapid expansion of the so-called "informal" sector consisting of apartments which are unlicensed to be offered to tourists, but are built particularly for that purpose. It is estimated that about one-third of accommodation facilities fall into this category. Virtually all tourist facilities are in the private sector. At the end of 1985, it is estimated that there were about 29,000 beds in the formal or licensed sector and about 15,000 in the informal sector, 1/ not including private homes which are offered to tourists during the peak season. Tourists who come to Cyprus are mainly Western Europeans who arrive in Cyprus basically on packaged tours, either on chartered flights or on group inclusive tours. The largest group is from the U.K., followed by Sweden, West Germany, Greece, Norway, Switzerland and Austria. 23. The rapid growth of tourist arrivals in Cyprus over the past decade (18.4 percent annually vis-a-vis 4.8 percent for the world during 1977-85), accompanied by rapid growth in accommodation facilities, while helping the economy of Cyprus to operate at practically full employment since 1978, have created these issues that will have important bearing on future development of the sector. (i) Inadequate infrastructure. There are serious bottlenecks regarding transport facilities accessing existing tourist resorts and, within the resorts themselves constant congestion and conflict between road users and pedestrians (tourists) have been an acute problem particularly in Limassol. This arises because the road network has been constructed partly before the boom in tourism and partly with little consideration for the walking population; neither has it been designed to handle the high volume of traffic resulting from intensive building of tourist facilities. Overloading of this component of infrastructure is already widespread. At the same time there has been an increasingly acute shortage of water supply and centralized sewerage service. Water resources on the island have of course been generally scarce. Competing uses of these resources both for agriculture and for domestic consumption have already resulted in 1/ About 10,000 of these are in the process of being reclassified as "licensed." - 12 - overpumping of aquifers. This problem has been compounded by the fact that per capita consumption in tourist areas is more than double that in residential ones. During the suimmer months when tourism is at its peak and the precipitation at its lowest, water supplies in some areas are intermittent. Hotel operators must resort to purchasing and trucking water from remote boreholes. The shortage could have long-term effects on tourism, especially if Cyprus hopes to get repeated visits from the tourists. At present, waste waters are disposed of in individual systems mainly of septic tanks and absorption pits, except for some hotels which have installed waste water treatment units. These arrangements, however, have not been completely adequate and some raw sewage and waste water are discharged into the sea and pollute some beaches. This situation, if not rectified soon, will create serious sanitation problems and adversely affect the tourist industry. The lack of basic centralized disposal systems is compounded by the fact that intensive growth and the resulting higher volume of waste has exceeded the soil absorption capacity, creating easy flooding conditions when it rains; floods can also cause affluent overflow creating health hazards. Intensive growth of hotels, apartments, etc. also tend to block natural drainage of the land contour, complicating further the situation. (ii) Inadequate supplementary facilities. Development has been centered on the natural resources of beaches, although most of them tend to be narrow with limited carrying capacity. Overcrowding has already taken place on some beaches. Despite beach-centered growth, development of water activities have been quite limited. Water sports such as water skiing, wind surfing, and diving are not widespread due mainly to lack of facilities and promotion. Boating itself is limited by having only one marina, at Larnaca with only 200 berths; even this has already used up its reserve space as 350 vessels have been berthing here. Even a popular sport like tennis is not readily available; only major hotels have their own tennis courts, while most hotel apartments do not. There are no golf courses. Despite an existing policy of promoting these supplementary facilities, their development has been rather slow. (iii) Lack of product variety. What Cyprus has developed is a one-product beach-based tourism. As competition is increasingly intense due to additional bed capacity coming onstream in the Mediterranean area, such a one-product tourism becomes increasingly more vulnerable. Although there are other natural and historical assets on the island, they have not been developed in any significant way. For example, historical assets have been generally preserved but they have not been presented as the focal points of attraction. In addition, no particular man-made leisure facilities have been developed such as sport or social events. As mentioned in (ii), a lack of sport facilities rule out sport holidays. The idea of establishing casinoes have been discussed off and on as another attraction, but so far none have been in operation. (iv) Relatively high price. An analysis of the retail price that the holiday maker pays, excluding airfare, shows that Cyprus is on the high end of the scale (Table 2-1). The comparison is based on a one-week package tour, using a four-star hotel, on half-board arrangement, and the exchange rates of August 1985. Despite this relatively high price being paid by the tourist, the hotel and apartment keepers do not get the normal share because intense competition has created a buyers' market situation which is being exploited by - 13 - tour operators. Although hotel rates are regulated, discounts are widespread. Wholesale rates to tour operators are not to be reduced more than 20-25 percent, but in reality, tour operators have been receiving rebates in the range of 33-48 percent of regulated, published minimum rates. This situation shows two things: (i) Cyprus is viewed favorably by the tourists who are willing to pay higher prices for holidays there, and (ii) competition has been fierce and the market is in the hands of the strong buyers (tour operators). The existence of such deep discounts also rules out the possibility for Cyprus to compete with other destinations on the basis of prices. Table 2-1: Comparison of Retail Prices for Package Tours in Selected Generating Countries and Destinations (In Cyprus pounds) Generating Countries Destination United Kingdom West Germany Switzerland Low High Low High Low High Spain - 120 192 142 249 175 240 Balearic Island (April) (July-Aug.) (April) (July-Aug.) (April) (July) Italy - 88 105 98 154 100 175 Rivieras (May) (July-Aug.) (May) (July-Aug.) (May) (July) Greece - Crete 91 180 89 164 92 166 (April) (Aug-Sept.) (April) (July-Aug.) (April) (July) Rhodes 69 100 64 132 70 125 (May) (July-Aug.) (April) (July) (April-May) (July) Yugoslavia 73 130 72 150 -- -- South (April) (Aug) (April) (Aug.) Turkey -- -- 114 172 180 180 (March-Apr.) (July) (Summer) (Summer) Tunisia 81 91 121 156 121 153 (May) (July-Aug.) (April) (July-Aug) (Mar.-May) (July-Aug.) Morocco - 85 95 83 98 86 97 Agadir (April) (July-Aug.)(Apr.June,Aug.) (July) (Mar.-June)(July-Oct.) Cyprus 120-137 164-196 142-162 (Easter-Oct.) (Easter-Oct.) (Easter-Oct.) - 14 - (v) Lack of strategy for development. As mentioned above, development so far has been on the southern coastal areas, with clusters of hotels, hotel apartments and a host of other unlicensed accommodation facilities put up by entrepreneurs hoping to realize quick returns. The rapid pace of development has more or less pushed aside an idea of how to properly exploit the island's limited resources. Although growth of tourism has been principally beach-based, the beaches themselves besides being limited in number and capacity, have been unwisely encroached upon due to lack of proper exploitation plans, zoning, regulation and enforcement. Some hotels are built right on the beach so as to make the beach almost unaccessible to general users. Lack of appropriate planning and implementation also has led to an and hoc approach to development. The result has been that many major tourist locations have been more or less continuous construction sites affecting the quality of the completed facilities. The fast pace of development and the existence of a large number of unlicensed accommodation facilities with inadequate supporting infrastructure and supplementary facilities as mentioned in (i) and (ii) not only make it difficult to uphold the quality of product but also may have altered the entire nature of resources as to preclude the possibilities of developing other types of facilities to substantially raise the quality of the product mix with an aim of attracting a larger proportion of high spending tourists. B. A Strategy for Future Development 24. Tourism has been designated as a main pillar of economic development in the next five-year plan (1987-91) and will likely continue to play a leading role thereafter. To play this important role, not only major issues as discussed above will need to be resolved but also a new well-conceived strategy will need to be put in place soon. 25. The infrastructure issue is in the process of being resolved through road, water development and sewerage projects. Some of these projects, to address the problem in the most effective way, however, must be implemented expeditiously. As regards the supplementary facilities, tax concessions and financial incentives have already been offered through the Fund for Priority Projects. These, however, have not been sufficient. To rectify the situation, consideration should be made that new projects will not be approved without adequate provision for such facilities. A new type of development such as integrated holiday centers to be discussed below would be an alternative development that meets this requirement. The issues relating to having only one product which is the same as what is being offered throughout the Mediterranean, and the steep discounts, very much rule out the possibility of Cyprus competing on the basis of prices. Part of the strategy for future development, therefore, must be product diversification. The past development has already set in place the present structure of supply, which caters principally to middle income tourists. New construction, either underway or to be underway shortly based on project approval and financial arrangements, will mainly reenforce this structure. Due to these factors, not much can be done to alter the nature of product being offered in the short- and medium-term. In the longer-term, however, substantial changes can be made if a proper strategy is conceived and implementation carried out according to this well-conceived vision. - 15 - 26. In drawing up the strategy, a number of factors must be taken into account. Prospective growth in demand should be a major consideration. It will therefore be appropriate to examine potential demand that Cyprus can reasonably expect. Up to now, Western Europe has been the principal source of tourists for Cyprus. Although some expansion at the margin can be expected from other sources, mainly of the long-haul nature, the main focus will still need to be placed on this traditional source. An analysis of demand therefore will deal exclusively with this market. (i) Demand for Leisure Travel in Western Europe. 1/ 27. In Western Europe, fast growth of travel abroad in the past two decades, due to rising income and convenience of travelling, is expected to slow down considerably in the future. The main factor behind this is that a good part of leaves available for travel abroad have already been used. In these countries, where it is estimated that the average annual leave available for travelling abroad is about 4.5 weeks, about 72 percent 2/ has already been spent for holiday making outside the residents' countries. Within this absolute limit of time available, travelling abroad is also being affected by such factors as shorter work-weeks, or longer weekends, which tend to influence people to invest in their own leisure facilities - a country home, a boat, a garden, etc. At the same time, as income increases and travelling becomes even more convenient and relatively cheaper, long-haul travel has been taking a larger share of travelling. As a result, a short-haul destination such as Cyprus is affected. 28. This expected slower growth of Western European tourists may, however, not affect Cyprus as much as other destinations because even after a very rapid growth, Cyprus represents only about 1.5 percent of total Mediterranean traffic. The potential pool for Cyprus to draw upon, therefore, remains very large. The problem of course remains competition as bed capacity in the region continues to expand rapidly; and most of the capacity is in the middle income sun-and-beach category. (ii) Options for Cyprus. 29. As mentioned above, in the short- and even medium-run, options available to Cyprus are limited because of existing capacity and that soon to come on stream due to current construction and commitments that have already been made. For this reason, increased efforts to fill this capacity will be the major requirement for the next few years. At the same time measures to ensure an appropriate longer-term development will need to be launched without delay. (a) The Medium-Term Outlook. 30. The Planning Bureau (PB) has already developed projections to be used for the next five-year economic development plan (1987-91). These projections 1/ Countries under consideration - the main tourist originating sources - are West Germany, Austria, Switzerland, Belgium, France, Netherlands, U.K., Denmark, and Sweden. 2/ These are the levels already reached by individual countries in 1983: U.K. 90 percent; France 76 percent; Netherlands 75 percent; Belgium, Luxembourg and Austria 72 percent; and West Germany 53 percent. - 16 - are based on a five percent annual growth rate for arrivals during 1985-91 to reach 1,150,000 arrivals by 1991. These projections could prove optimistic unless major efforts are undertaken to increase Cyprus' share in the Mediterranean market and to increase occupancy rates in the existing accommodation facilities or a mass construction of new facilities is put in place quickly in the next couple of years - an option that is contrary to the strategy to raise the product quality and to exploit resources carefully as advocated by Cypriot economic planners. The following considerations are the main factors that have led to such a conclusion: First, based on the above figure that travelling abroad has already taken about 72 percent of available leaves for workers in Western Europe, and assume that by 1990 leaves that are available to be used for such travelling will be used up, and the Cyprus' share in the receiving end of this travelling remains the same, by 1991 Cyprus would get 971,200 arrivals from these sources - about 16 percent below PB's projection. Second, on the basis of accommodation capacity, the following conclusion should be drawn. By 1991, it is estimated that the existing capacity plus those under construction and committed building programs will raise the operational licensed capacity to about 38,700 beds. Assume that these facilities will maintain the 64 percent occupancy rate (a level estimated to have been achieved in 1985) and the length of visitor's stay of about 11 nights (achieved in the past few years), the number of visitors will be about 822,000. For the unlicensed accommodation, using the estimated bed-capacity/visitor ratio for 1985, and estimated 20,000 1/ capacity to be available in 1991, the number of visitors in this category would be 228,000. Total visitors staying in both licensed and unlicensed accommodations would be 1,050,000 or about 9 percent below PB projection. To reach the PB number of 1,150,000, after taking out the 228,000 visitors who are estimated to stay in unlicensed accommodations, the 922,000 will raise the occupancy rate of licensed hotels and apartments to 72 percent if the length of stay remains at 11 nights. This means extending the tourist season to 8.6 months which appears very unlikely. Although, new facilities, especially cheap ones, can be put in place quickly, but this is not the option that Cyprus wants to pursue. For this reason, a million visitors a year by 1991, may be a reasonable level that Cyprus should aim for. (b) Long-Term Strategy 31. For the longer term, the questions that should be asked relate to the level and composition of tourism that the country should aim for. For various reasons discussed below, Cyprus should perhaps not aim for more than 1-1.2 million annual arrivals. Rather than aiming to increase the number per se, the focus should be shifted toward composition with a larger share coming from the high end of the market - i.e. higher expenditure/capita. How this could be achieved is discussed below. Various factors that should be important considerations as to why it may not be wise to try to push ahead beyond the 1-1.2 million level are as follows: (1) Demand and Competition. As discussed above, it appears that the period of rapid growth for international travel out of Western Europe, especially for short-haul is over. At the same time, countries in the Mediterranean have been increasing their bed capacity rapidly. In the eastern 1/ Some of these will probably become licensed during the next few years in addition to the 10,000 being considered presently, but due to uncertainty about the rate of licensing, this number is maintained for the purpose of calculation. - 17 - part of the Mediterranean alone, excluding Cyprus, about 40,000 additional bed capacity is coming on stream by 1987. The capacity in the region is mainly beach-based. Intense competition is therefore envisaged. And in this situation, the buyers' market condition will continue to prevail leading to lower prices and in general lower return on investment. It is doubtful that with very steep discounts already being offered, Cyprus can afford to compete on further price cuts without reducing the profit margin to an unsustainable level. (2) Environmental constraints. Up to now, building has been concentrated on the South and Southeastern part of the island - Limassol, Larnaca and Ayia Napa-Paralimni. As these areas approach saturation point and overcrowding, building starts to spread to the Southwestern coast in the Paphos district. The basic quality of Cyprus beaches is not very high - only few white sand beaches with only limited depth of about 15 meters. Their upper load in fact has already been surpassed in most places in the tourist belt of Limassol-Larnaca-Ayia Napa. Further building will only cause deterioration in the quality of this limited resource. The only area that still offers additional capacity lies in the Paphos district which should be carefully exploited in a different manner than those in the Limassol-Larnaca- Ayia Napa areas so that a degree of product diversification is achieved, with an aim of raising product quality to attract higher spending tourists. (3) Manpower consideration. Tourism is a labor intensive activity. As seen in Chapter I, the value-added per worker in this sector has at best been average. The expanding role of tourism means a larger share of manpower will be used for this average return activity. Besides this consideration, currently labor shortage has already been experienced in selected areas of skills - notably cooks, and housekeepers. The generally tight labor market has already necessitated hotels to keep their staff almost all year round - the ratio of year-round staff to peak staff being an exceptionally high 93 percent. This adds to the cost of running the facilities. 32. Within this 1-1.2 million level, higher income can be generated by changing the product mix from the present almost exclusively middle class toward the high end of the market. Since past development has already set the structure of accommodation that will exist in the near term, the mix can be changed only at the margin, provided that additional supplementary facilities are built and new capacity is concentrated solely at the high end of the market. For the area that has not been heavily built, particularly in the Paphos district, an opportunity exists to concentrate mainly on the high income tourists. To achieve this, however, involves substantial changes in the approach to tourism development. A study aimed at master planning for Paphos is to be launched shortly. 33. Without prejudicing the outcome of the study, these measures should be considered to achieve the desired market composition with increased share of higher income groups. (1) Integrated holiday centers. These are for areas that have not been touristically developed, e.g. Khrysokhou Bay. In order to prevent these areas from becoming exploited before feasibility studies are completed, and thus, precluding the possibility of building holiday centers, a moratorium on construction in certain areas by individual developers must be imposed, particularly if they pattern after the clusters that have been developed in - 18 - the South and Southeastern coast. To get enough land and capital for this type of development, some sort of cooperative or public corporation should be launched, in which landowners could become share holders, under the sponsorship of a government-private sector joint venture corporation to be set up for this purpose (see below). Although the legality of a moratorium on construction can not be examined in the present report, it must be stressed that the issue is of national importance to warrant taking drastic action before the whole tourist resources are "set in concrete" leaving no chance to diversify the product in any substantial manner. (2) Golf courses. Golfers, especially those who play the game regularly, definitely belong to the high income and high spending tourist group. Availability of golf courses is an important consideration for the choice of a holiday destination for these high income people. For Cyprus to be considered as a destination, at least two high quality golf courses must be built. A plan already exists for a private group to build a holiday complex, which will include a golf course, in the Paphos district. This private course should be complemented by at least another one within a reasonable distance; perhaps in the Khrysokhou Bay area where development of at least one integrated holiday center should be seriously considered. If no private group is willing to take the risk, Cyprus Tourism Development Corporation (CTDC) to be proposed below should consider taking the initiative. Since golf can be played year round in Cyprus weather, it should be helpful for Cyprus in its efforts to extend the tourist season if it can become a winter destination for golf tour groups. (3) Additional marinas. The only marina available now is in Larnaca, whose capacity has been fully utilized since 1983. All possible capacity reserves have also been exhausted and demand for additional berths has not been met since. According to the Yacht Club officials of the U.K., France, and Germany, the trend points toward increased purchase of private vessels. They believe that by year 2000, Cyprus could increase capacity by about 3,000 berths. Additional 1,000-1,200 berths in fact may be needed by 1990. This activity could also come under the jurisdiction of the CTDC. (4) Casino(s). The issue of granting casino licenses has been debated for quite some time. The attraction of having a casino as an aspect of tourism diversification, however, appears overwhelming. In fact, more than one casino should be considered - one with easy access from the Limassol-Ayia Napa tourist belt and another in the southwestern coast area. (5) Presentation of historical monuments. So far the work has been concentrated on preserving the valuable historical sites. With limited budget, work on preservation of each site is drawn out over a long period. To develop these as tourist attractions, funds should be concentrated on a few sites to be finished and presented quickly. Presentation, which has up to now never been a major consideration, includes accessibility, publicity, appropriate pricing and adequate supporting business suprastructure. C. Implementation of Tourism Development Strategy 34. It has been stated repeatedly over the years that the government wants to change the tourist product toward the higher end of the market, i.e., toward more affluent groups. Development up to now, however, has been almost totally catered to the mass middle income market. This can be interpreted in - 19 - two ways; (i) there is no commitment to achieve the pronounced goal and (ii) the desire to change the product mix is genuine but the policy is not effectively pursued. Considering the challenge posed by factors discussed above and considering the role of this sector in the economy, the issue is sufficiently serious to be given priority at the national level. 35. In order to achieve the desired composition of the product in the long term, there appears no other way but to declare a moratorium on construction of new bed capacity, except for those at the very top end of the market, e.g., five-star hotels, particularly if they also bring in foreign capital and involvement of major international hotel chains. Up to now both foreign capital and involvement of major hotel chains have been lacking. Their involvement will help broaden the market as well as bring in additional capital. This moratorium could be carried out by denying banks from making loans for construction of unapproved facilities and by denying licenses to those not falling into the national priority criteria. To be effective, action will also be needed in the unofficial sector - apartments and houses unlicensed for offering to tourists. These are partly financed by proprietary funds, pre-sales, and foreign loans. Administrative means would have to be used to keep their growth in check. One way is to make it illegal to offer new residences, flats, etc. for temporary occupation by tourists. Although a law of this type will be difficult to enforce, the issue of national importance would dictate that it must be tried. 36. The check on growth of middle class accommodation must be complemented by new major developments, such as integrated holiday centers which may also include such facilities as golf courses and marinas. These major developments will not only require large amounts of fund but also the capacity to conceive, plan and implement large tourism projects. The large financial requirements, either in the form of borrowing from local and international capital markets or in the form of shareholding/equities, of such large projects would appear to call for a development bank type of set-up. The technical and operational elements in the projects, however, would be outside of normal bank operations. The CTO, on the other hand, under the present set up, would not be able to carry out such large projects. A solution seems to be a mixture between CTO and a development bank - to be called, say, Cyprus Tourism Development Corporation (CTDC). With government sponsorship and private participation 1/, the immediate task of CTDC would be to initiate projects aiming at diversification of Cyprus tourist products. CTDC would also be in charge of sponsoring/promoting other public companies/cooperatives such as those suggested for some of the Khrysokhou Bay area where landowners become shareholders of the integrated development project. It must be stressed that CTDC is not necessary a new organization. In fact a public corporation has already existed, Cyprus Tourism Development Co., Ltd., under the control of the Government. But up to now this company serves only as a holding entity of the Cyprus Hilton Hotel. The proposed CTDC would therefore consolidate functions now scattered in various institutions and expands as necessary as a response to the changing realities and policy direction in the sector. 1/ Public offering of stock or bonds of such a corporation could be a channel to mobilize fund; it would also increase options available for private savings and help boost the stock market if and when it is open. - 20 - 37. Before an organization such as CTDC is set up, immediate measures need to be implemented within the existing machinery. A pressing problem relates to a large discrepancy between registered bed nights reported by the hotels and hotel apartments and those resulting from the Tourists Expenditure Survey (TES) carried out regularly by CTO. Not only does this discrepancy raise the questions relating to the role and nature of the sector but also those relating to tax revenues. Considering that the country has had difficulty raising revenues to meet the expenditure requirements, it is important that this fast growth and large sector generates more revenues. 38. According to the reported hotel registered data, the occupancy rate for licensed establishments during 1982-85 ranged from 37 to 42 percent. This is substantially below the rate that can be derived from TES and from tour operators who report that most group tours coming to Cyprus stay about two weeks vis-a-vis 7-8 days reported by hotels and hotel apartments. It is difficult to imagine that these establishments can break even consistently at such low rates of occupancy when they have to keep labor practically year round and offer very steep discounts. And considering that new facilities have been consistently added, some profits must have been generated. For these reasons, there appears a prima facie case to suspect that hotels and hotel apartments have been systematically underreporting their activities to avoid paying taxes, both the 3 percent on their gross bills to the CTO and the income taxes on profits. This situation is compounded by the existence of the unofficial sector which is estimated to be about one half of the official sector. This unlicensed group is estimated to have paid little taxes, if any. This issue should be tackled immediately as part of strengthening the tax administration proposed in a previous Bank report. 1/ 39. For the immediate future, a change in marketing strategy should also be considered. The Cyprus tourist product is marketed predominently in the form of packaged tours. The publicity of the destination must reflect this fact. The source of information for the majority of travellers is the relevant market outlet, i.e., the tour operator (through his travel catalogue) and the local retail travel agent; it is not the CTO. The other target groups are travellers with special interests - sailors, golfers, etc. They have special magazines which can be used to pass the message to them. These highly integrated packaged tours and special interest groups do not justify a dense network of overseas representations as currently carried out by CTO. The costs of these offices in choice locations are expensive and may not be very cost effective. 1/ IBRD. Cyprus: Trends and Issues in Public Finance, July 1984. - 21 - III. MANUFACTURING A. Past Development and Constraints 40. As shown in Chapter I, manufacturing has contributed significantly over the past decade; it ranks first in employment, second in share in GDP and third in contribution to growth during 1976-86. This overall contribution, however, conceals a significant downward trend in growth: During the three-year period 1978-80, just after the economy fully recovered from the shock of the 1974 events, growth of manufacturing GDP in real terms averaged almost 10 percent annually; during 1983-85, however, the annual average real growth rate was sharply down to only 3.4 percent, well below the growth of overall GDP at 4.9 percent. This is far below the growth rate of 6.3 percent per year envisaged in the 1982-86 development plan. This sluggish growth was caused to a varying degree by a number of constraints, including labor, markets, and an inability to attract foreign investment and to develop new industries. (i) Labor Supply and Labor Costs 41. The Cypriot labor force has grown very slowly in the past few years. The economically active population increased by only 2 percent per year during 1981-85, and gainfully employed population increased by slightly less at 1.9 percent per year. The manufacturing labor force hardly grew at all in the period 1981-85. There were 41,730 persons recorded as employed in the manufacturing sector in 1981 (including approximately 1,400 engaged in cottage industry) and 43,982 in 1984. Even though the mining sector continued its decline in employment from 1,500 in 1981 to 1,100 in 1984 and there was a decrease of approximately 1,800 persons officially engaged in agriculture, this did not result in an increase in the manufacturing labor force. The major increase in employment was in the tourist industry and services. 42. Nor is there much unused human resources available among the unemployed. Official figures put the number of unemployed at the end of 1984 at approximately 8,000 or 3.3 percent of the economically active population, which represents a slight but hardly significant increase from the situation in 1982 (2.9 percent). An early estimate of the unemployed figure at the start of 1986 is put at approximately 3.5 percent although there could be a significant number of underemployed among the rural population that might possibly enter the manufacturing labor force if opportunities were available. 43. This notwithstanding, it is clear that there are major labor constraints in Cyprus and that any significant industrial development, such as the creation of some new large enterprises requiring thousands or even hundreds of workers, would face serious problems in finding new recruits. Some industrial employers in fact have had difficulties in finding suitable new employees; this had been a factor in their decisions not to expand their activities. 44. The current economic development plan (1982-86) recognizes the limitations in expecting increased industrial output on the basis of an increase in the labor force and preferred to base growth on annual - 22 - productivity increases of 5.6 percent. This has certainly not been attained. Productivity measurement in Cyprus is still somewhat crude and is based on overall figures of value added per employee. The figures put out by the Planning Bureau in March 1986, gave the value added per employee in the manufacturing labor force as US$8,249. This figure represents less than a third of the value of the output per worker in France and Germany in 1981 and almost a fourth of the United States (1982). Even more disturbing perhaps is the fact that this output is less than Spain and only slightly ahead of Portugal. Whether these figures are to be treated as strictly accurate or not, it appears that output per worker in factories in such industries as clothing and footwear is less than 50 percent of the levels of countries such as Italy and Germany and that this productivity has certainly not increased significantly in the last few years. 45. The failure to register significant productivity improvements is made more disturbing by the fact that labor costs in Cyprus have been increasing far more rapidly than that of its major competitors in Europe and elsewhere. It is estimated that between 1980 and 1985, unit labor costs in Cyprus rose by about 35 percent more than in Portugal and about 60 percent more than in Spain, given suitable adjustments for exchange rate changes. 46. Absolute comparisons are difficult. The minimum monthly wage for a beginner in the clothing industry was CE93 at the end of 1985 but the average monthly earnings in all factories was in the order of C£160-170 which would put the hourly wage at close to US$2. By comparison the average hourly wage in Korean industry in 1985 was US$1.38 (in the clothing industry probably less), in Greece around US$1.50 and in Portugal around US$1.20. However, to put things in perspective hourly labor costs are in the range of US$ 6 to 8 or higher in most in EEC countries. 47. The comparatively high wage in Cyprus have developed primarily because of tripartite arrangements between the government, employers and the unions which have allowed nominal wages and salaries to increase at substantially more than the level of inflation and out of line with the growth in national productivity. During 1980-85, nominal wages in manufacturing rose by over 11 percent per year, while inflation rose by less than 7 percent per year. Adjusted for the rate of inflation, real wage growth was about 5 percent per year while output per worker hardly grew at all. 48. The tripartite arrangement for settling wage increases and the very strong unionization of employees in Cyprus has tended to put the employers in a weak position and has led to their agreeing to real wage settlements above levels of productivity growth. The tripartite agreement also calls for full compensation for rise in cost of living. In the period 1980-82 profits were high and since wage levels were rising from a low base, employers were able to accede to high wage demands. Another factor for the high wage settlements was that the government as a large employer was quick to accede to wage demands with respect to its own employees, thus making it more difficult for the private sector to take a stronger stand. Cyprus is one of the few countries where the wage and salary range of government employees are higher, at least in many categories, than those offered by private businesses. 1/ l/ For the full treatment of this issue, see IBRD. Cyprus: Trends and Issues in Public Finance, July 1984, pages 20-25. - 23 - (ii) Markets and Marketing 49. In general, it is perceived that the level of gross industrial output in Cyprus is mainly determined by exports. This is particularly true regarding a few industries such as clothing, footwear, travel goods and cigarettes for which export markets accounted for more than half of the output in the past decade. It is important to recognize, however, that the overwhelming majority of manufacturing output is absorbed by the domestic market; during 1982-84, export markets accounted for about 25 percent of manufacturing output, a decline from almost 29 percent during 1976-78. Furthermore, as domestic market is highly protected, this probably explains the relatively high cost of Cypriot manufactured goods and their relatively poor quality. Cypriot tariffs on imports are very high and there are some items the import of which is banned completely. In some cases, imports from some non-European markets are completely excluded. Tariffs on the import of clothing, for instance, is over 80 percent for products from the European community and over 90 percent for those from other countries and there are certain categories of low cost clothing items that are completely excluded; for most footwear, the rates are 70.9 percent and 77 percent respectively. Only 19 percent of the textile and clothing market is taken up by imports and less than 10 percent of footwear sold in Cyprus is imported. A number of items produced in Cyprus depend almost completely on selling to the domestic market protected by high tariff barriers. 50. The manufactured items exported are mainly textiles, clothing, footwear, travel goods and paper products and a few specific items such as cement, cigarettes, and water pumps. Two items, textiles together with clothing and footwear, accounted for 46 percent of all manufactured exports in 1984. Significantly enough, both of these items are sold primarily to the Middle Eastern markets. Half of the exports of knitwear and clothing goes to Libya, and 80 percent of all footwear export goes to the Arab market. Because of the volatility of these markets, manufactured exports sharply fluctuate from year to year. The quantities involved are such that one large order from Libya, either initiated or cancelled, exaggerates the change in the volume of manufactured exports. 51. The three different markets to which manufacturers mainly direct their products, namely, the Cyprus domestic market, the Arab and the European, (which together take 90 percent of all manufactured products) pose different problems: (a) The domestic market is heavily protected; although there is a fair amount of internal competition in some categories between local producers, it remains a fact that, shut off from imports, the domestic market is open for local manufacturers to sell goods at high cost and of low quality. (b) The Arab and Middle East markets, conveniently located geographically, have presented good scope for the aggressive salesmanship of Cypriot manufacturers in the textile, footwear and other fields, who were able to offer reasonably priced items for quick delivery. At one time profitability of these exports was high but this has charged over the last few years as the oil revenues of the Arab world have decreased and competition in the Arab market has increased. Cypriot manufacturers have been forced to lower prices in some cases to keep markets thus cutting into profits even in the face of rising production costs. (c) Exporting to Western Europe has proved difficult due to many factors, including low quality, and the fact that development has never been oriented toward these markets which results in - 24 - inadequate efforts to penetrate them. Cyprus has been more successful in finding markets in the Western European countries which take about 20 percent of textile and clothing exports, than in the case of footwear, where less than 2 percent of the products find their way to the markets. About 10 percent of footwear is exported to Eastern Europe. Overall, however, between 1981 and 1985 Cyprus manufacturers have failed almost completely to diversify the markets in which they sell their products. There has been a failure to reduce dependence on the Arab markets and to increase exports to Europe and North America. As the Middle East countries are reducing imports due to the drop in oil revenues, Cyprus manufacturing is facing shrinking markets. 52. Despite successes in some markets, overall marketing efforts remain inadequate. Export sales have been made by individual manufacturers who in most cases are too small to negotiate large orders and in some cases fiecely compete with each other for the same orders. Institutional assistance has been organized in a sporadic fashion. There are Cypriot trade centers and representations in London, New York, Brussels, Cologne and the Middle East, but lack of budget, specialized personnel and industrial contacts limit the usefulness of these centers. The inadequacy of these marketing arrangements have long been recognized and a failure so far to achieve market diversification is symptomatic of this inadequacy. (iii) Foreign Investment and New Products 53. A further factor which has adversely affected Cyprus industrial development is the very low level of foreign investment in the country. 1/ The Cypriots industries have developed within a closed economy so that capital, entrepreneurship and labor have all come from within the country. Foreign investment in Cyprus has been limited to a few joint ventures to produce such items as telecommunications equipment for the Cyprus market, or to some collaboration on cigarette or soft drinks production. No multi-national corporation has manufacturing operations in Cyprus. Presumably, they have not found the Cyprus market attractive due to its small size and high costs of production have not encouraged them to use the country as a base for manufacturing products for sale elsewhere. As has been shown in the development of so many countries, there are distinct limits to indigenous development and links with producers in other countries are needed to obtain the technology and market experience to develop successfully the manufacture of new more sophisticated products. 54. Although aware for several years of the need to encourage the participation of foreign enterprises in Cyprus industrial development and the need to promote new products using more advanced technology, it is only recently that some definite steps have been taken. In 1984 a Committee has set up composed of representatives of various relevant government departments and of concerned commercial and industrial organizations to study measures needed to be taken to attract foreign productive investment in Cyprus. This Committee submitted a special report to Committee of Ministers setup for the 1/ Cyprus receives considerable amount of private foreign capital annually ranging from £30 million to £40 million since 1980. These represent about 11 percent of fixed investment during this period. But this capital, mostly from Cypriots settled abroad, goes mostly to real estate and tourist facilities. - 25 - purpose, and the result was a new set of tax incentives which was published in January 1986 aimed at promoting more investment. 55. The new tax measures which are more liberal than previously are of two types: one set of incentives offered to both residents and non-residents investors, Cypriots and foreigners, the second apply only to foreign businesses set up in the Free Industrial Zone at Larnaca and as offshore companies. In the first set of tax incentives, profits derived from the manufacturing of new products are exempted from income tax during the first ten years of operation. A list of 250 products that could benefit from this tax exemption is appended to the publication "Tax Incentives in Cyprus" (January 1986). 56. The second set of tax measures apply to those setting up in the Larnaca Free Industrial Zone. The slow development and inability to attract new investment in this zone is an indication of a haphazard approach to attracting new investment and a lack of interest in investing in Cyprus by foreign company in general. This zone was created on the basis of a 1975 law subsequently amended in 1981 and was set up in the pattern of an export processing zone (EPZ) similar to those in existence in the Far East, the Caribbean and elsewhere, namely the provision of serviced factory sites to be leased to foreign industrialists on a long term basis at relatively low rentals provided they undertake to export their products. The required materials and inputs for manufacturing the products can be brought into the company without payment of customs fee. Foreign personnel working in enterprises on the Zone can also benefit from tax exemptions. 57. Although the first budget appropriation was made to start construction of the zone in 1976 - it took until 1985 before the first factories started operations. In the year 1976 through 1984 the Government spent CE693,415 (US$1.3 million equivalent) on constructing the Free Zone in Larnaca, but as of February 1986 there were only three factories in the early stages of operation - a Japanese zipper manufacturer, an Australian/Lebanese fabricating specialized bakery machines and a Lebanese investor producing high quality chocolate. Two other factories - to manufacture English period furniture and a Cypriot venture making water pumps are under construction. The exact reason for Cypriot water pump manufacturer operating from the free zone is unclear since the two major exporters of water pumps operate quite successfully from the Limassol Industrial Estate. Two further projects to produce CB meters and polyethylene cross linked tubes have signed agreements to set up factory in the Zone. All the factories with signed contracts operate from the Zone account for less than 10 percent of the land available. 58. It has proved a long and slow process to find suitable occupants for the free zone giving further evidence of the difficulties of attracting foreign investment to Cyprus. In fact, although a great deal of time has elapsed since the Larnaca Project was approved no real effort has been made to promote the free zone among potential clients. Finding occupants has been left to the same small Industrial Estates Unit in the Ministry of Commerce and Industry that administers the other industrial estates and extensions. The personnel of the unit neither have the time nor the background to undertake the promotion of the free zone, which is entirely different than dealing with the local estates for which there is a greater demand for space than what is available. It is a matter of urgency to set up a unit adequately staffed and with sufficient budget to promote the zone as has been done in other EPZ projects with which Larnaca has to compete. - 26 - 59. It is doubtful if the provision of sites in the Larnaca Free Zone and the new more liberal tax incentives will prove sufficient to attract more than a few foreign investors in new industries, since such EPZs with at least as attractive tax concessions are available on other locations in the Caribbean, in the Far East and elsewhere where labor costs are much lower than in Cyprus. Most EPZs attract investors in assembly and finishing operations in clothing and footwear, in electronics, toy manufacture, etc., -- all of which are based on the availability in abundance of cheap labor which certainly is not the case in Cyprus. A different approach will be needed to attract occupants for the Larnaca Zone and a dynamic promotional campaign will be needed. It will be necessary to seek out specific prospective applicants who already manufacture the products and to reach some coventure agreement whether on the basis of a technology transfer arrangement or better still a joint venture involving foreign capital investment. Assistance in marketing the products will have to be part of the agreement. B. Options for Future Development 60. The reduced growth in industrial output and exports as well as the failure to develop new products and new markets pose serious challenges to the Cyprus Government. In addition, the ongoing negotiation with the European Common Market will almost certainly lead to an agreement on a Customs Union which will require from 1987 a progressive liberalization of the domestic market to allow the import of goods from the EEC countries. It is likely that the textile, clothing, footwear, travel goods, chemicals, cement, furniture as well as some parts of the food industry will be adversely affected due to inability to compete with imported EEC products. The protection afforded by the government to manufacturers in imposing heavy tariffs and quotas on imports to Cyprus has left the local industry unable to compete either in quality or price. Most of the efforts are now being directed in negotiations with EEC in providing justification for excluding a whole array of items for the Customs Union Agreement. This list includes various food items such as vegetable oils, margarins and meat preparation, beer, plywood, chipboard and turbine pumps. 61. Even if the EEC agrees to these exclusions, in the long run they will do little to solve the long term problems of Cyprus' industrial development. A more direct approach would be to start without delay progressively dismantling the whole formidable structure of protective tariffs and restrictions and to force Cypriot manufacturers to take the necessary steps to increase the productivity of their operations and the quality of their products. The need to diversify products and markets was first raised in 1980-81 and it is clear now after more than five years that while they are able to rely on selling over 70 percent on the protected domestic market and around 60 percent of the remainder to the Arab Market where quality and price are less decisive, Cyprus manufacturers have taken no real steps during this period to become more competitive and to expand into new products and new markets. Increased exposure to competition ultimately remains the only effective means to impose changes on the manufacturing sector. In order to face these new challenges, measures must be take to: (a) make the existing industries viable and (b) embark on new directions. (i) Options for Existing Industries 62. Existing manufacturing enterprises in the textile, clothing, footwear, etc., will continue to be viable for many reasons. First, -27 - investment are already in place, with modernization the product could be upgraded. Second, industrialists and workers have gained experience in these industries. Third, some footholds have already been established in selected new markets, further expansion will likely result from further marketing efforts. Measures along the following lines need to be taken for the existing industries. (1) Rationalization. Production units need to be regrouped into larger units on a more economic scale able to justify investment in more efficient equipment, to mechanize materials handling systems and to reduce costs through simplification and standardization of production lines. Most of Cyprus industries are family owned with limited financial, technical and managerial resources and cannot undertake such rationalization program. Attempts until now to encourage mergers through tax benefits have had little results mainly due to the individualism of the entrepreneurs and the ability to survive and prosper from the protected domestic market and the 'soft' Arab market. Restructuring of industry into larger groups will only take place when competitive pressures will force weaker units to be taken over by the more successful firms. (2) Modernization. Even the larger medium sized clothing and footwear factories are relatively poorly equipped and need more modern productive machinery. The equipment of most knitting plants is much inferior and of lower productivity than that of European and Asian manufacturers competing in the same markets. (3) Payment Systems. As already stated labor costs have mounted above productivity increases in the past few years. Traditional methods of payments to workers in the clothing and footwear industries in virtually all countries is in the form of incentive systems which establish a linkage between earnings and output. The unions have generally opposed such systems but employers will need to find a way to negotiate acceptable incentive pay schemes. (4) Marketing and Trading Firms. Either through direct government support to private initiatives or through the creation of mixed public and private trading companies, such organizations need to be developed with the necessary staffing and resources to break into new markets and to identify outlets for Cypriot products. Until now most export sales have been made by individual manufacturers unable to negotiate larger orders and in some cases this has resulted in fierce competition between Cypriot exporters. Trading or marketing companies could influence and assist manufacturers to introduce higher quality and better designed products more acceptable to European and possibly also to North American markets. 63. Until such trading organizations are developed, industrialists will have to be assisted in finding export markets in some other way. The following measures could be a start: (1) Expanding and strengthening the number of trade centers and trade representations with personnel with business background who can make direct contacts with importers and obtain orders for Cyprus products. - 28 - (2) Providing Government help to groups of manufacturers in the same sector to set up joint marketing organizations. (3) Establishing export quality standards and strengthening the resources and staff of Organization for Standards of Control of Quality. This organization operating at present from the Ministry of Commerce and Industry has done some useful work in settling food standards but is hopelessly understaffed. It needs to be given autonomous status and given a larger budget to expand substantially its field work. (4) Expanding and improving the export credits scheme. A new improve scheme was introduced in April 1984 but its procedures remain cumbersome and time consuming. (5) Improving the operation of the "drawback" scheme in the repayment of customs paid for imported materials later exported in finished goods. (6) Improving the tax and fiscal incentives for exports. Although tax incentives are not the most effective in Cyprus since there are so many ways of avoiding the payment of full taxes, some major tax concession above the current 6 percent allowance to selected non-traditional markets might provide encouragement for some manufacturers to intensify exporting efforts, particularly in new markets. (7) Making available government grants to cover part of the expenses incurred by firms in purchasing foreign technology or in bringing over designers or in the purchase of marketing services (including advertising abroad, displays at fairs and exhibitions, etc.) in countries to which there are prospects for exporting. Such grants could also help to encourage the introduction of testing facilities or quality control systems to raise the quality level of exported products. (ii) New Industries and Products 64. In attempting to formulate guidelines for Cyprus' future industrial development one should set out clearly the factors involved both negative and positive. 65. The negative factors are that Cyprus has only a small domestic market, has virtually no natural resources and sources of conventional energy, has a limited supply of labor and the labor costs are relatively high. It has only shallow indigenous technical professional skills (it has no real university) particularly related to engineering industries; it has very little industrial tradition. This is a formidable array of negative factors but there are some positive ones too. Cyprus has a relatively good geographical location, at least in relation to Europe, the Middle East and Africa, has good communications, has a pleasant climate, is an attractive place to live, has an efficient banking system with good legal, accounting and administrative services and has well educated labor and management. Cypriots are good businessmen, excellent salesmen and there is a fair supply of entrepreneurs. While unions are strong and wages relatively high, the labor force has shown itself to be disciplined. - 29 - 66. Clearly in light of the above factors new industrial investment in Cyprus must be more capital intensive than the existing structure. This in fact is already evident. Examples of recent investments in Cyprus - an aluminum extrusion plant, an investment of over US$3 million producing 20 new jobs and a factory producing disposable baby diapers with US$2 million equivalent investment creating 40 new jobs - are indeed by international standards considered capital intensive for the size of enterprise. One new investment in a plant producing plastic carriers bags was a new complex machine costing more than CE400,000 (US$750,000 approximately) that will increase capacity by over 20 percent but will require no additional workers. 67. The economic objective therefore should be to look for industrial investments that maximize value added for workers which means not only capital intensive investments but also those able to produce items with a high technical and quality context. Even in the existing consumer goods industries investments are needed in modern equipment and also in design and in finishing operations. The aim should be to use higher quality inputs to produce high cost products catering to a higher grade market. The Cyprus clothing and footwear industries must move up market in their products. The same applies to new industries or new products. 68. The search to identify new products and industries has been carried on to a limited extent by the Ministry of Commerce and Industry, the Planning Bureau and the Cyprus Development Bank (CDB) over the past five years but not with great results. Several items - ship building and ship repair, ceramic tiles, glass bottle, etc. - have been appearing in pipelines for years. Some are gradually being dropped either because they were found not to be feasible economically or for lack of promoters and access to technology. A new study is underway in cooperation with CDB to identify new products suitable for Cyprus but it is doubtful if this will produce concrete results in the near future. 69. The list of 250 products for which the government is prepared to grant tax incentives already covers a wide range of new products that are considered to have potential for manufacture in Cyprus. Among them are those where the local market including tourists could absorb a greater share of production and where economies of scale are less significant. Some food items such as dehydrated fruits and vegetables, baby or infant's food, breakfast cereals and food flavors appear fitting this criterion. Other consumer items which have a link with tourist facilities are cutlery, kitchenware, sports equipment, educational toys, alarms, and such appliances as electric fans, hair dryers, coffee grinder, etc. 70. All these items could only be produced successfully in Cyprus if there was a line up with an overseas manufacturer which would help with technology and sales in export markets. This will not be achieved simply by putting out lists of products for which tax incentives will be given. It will need a major promotional effort. Furthermore, Cyprus needs to upgrade its metal and engineering industries and workshops so that they can undertake orders for production of components for transport equipment, hand tools, and parts for industrial machinery and appliances. An entry as subcontractors for large European manufacturers could be the first step toward progressive manufacturers of assemblies or even complete appliances under foreign brand names. - 30 - C. Institutional Support 71. The Government provides a great deal of support in industry but the delivery of this assistance is fragmented from an institutional point of view. The following is a shortlist of such support: In the Ministry of Commerce and Industry, there are: - Unit for Industrial Promotion engaged in review and approvals of proposals for industrial projects for Management of Industrial Estates. - Unit for construction and management of industrial estates. - Organization for setting quality standards for industrial products and controlling quality. - Group for providing technical extension services for industries. - Department for assisting in promoting exports. Outside the Ministry, there are also: - The Cyprus Productivity Center (CPC) engaged in programs of management training. - Industrial Training Authority providing vocational training. There is also, of course, the CBD which not only provides equity and loans to industries but also is now vigorously promoting a consulting service to help entrepreneurs in the preparation of projects for investments and more recently in financial management as well. 72. In addition, the Government introduced two new guarantee schemes in 1984, one for guaranteeing loans for setting up new industrial units and the other for credits made available to firms to fulfill export orders. 73. Added together Cyprus government support for industry is extensive but the fragmentation makes for waste and overlapping and imposes on the industrialists or investors the bother of going from office to office to find out with what is available and to derive any benefit from the support. It is clear that apart perhaps from the Industrial Estates Program, the other services are little known by most of industry except when they are required to obtain approval for some new investments. The number of different units and services involved means that each is small, inadequately staffed and that each time the applicant is required to provide again all the relevant facts about his business and his needs. 74. It is certainly time for Cyprus to consider a major overall of institutional support for industrial development. There are various possible options but the essential element must be to take out all these various small units from the Ministry and to bring all support services together in one organization. The most desirable option would be the creation of an Industrial Development Corporation (IDC) combining features of such institutions as the Irish Industrial Development Authority, the Economic - 31 - Development Board of Singapore or the Barbados Industrial Development Corporation. An organization chart showing functions of the proposed corporation is shown in Figure II. 75. The purpose would be for the IDC to offer the following: - A 'one-stop' facility for all foreign (and domestic) investors, where they could obtain all information in relation to potential investments, help in carrying out feasibility studies of new projects. The IDC could also find local partners and search out foreign investors. - Management of the industrial estates program. - Promotion and administration of the Larnaca Industrial Free Zone to foreign investors. - An extension and advisory service to enterprises in technology, management (possibly a cooperation with CPC) and marketing. - Special programs such as the promotion of subcontracting for overseas industries, development of innovative pilot projects with public funding and the implementation of technology transfer agreements. 76. Such an IDC would need to have some representations abroad. Since Cyprus is a small country with limited resources it is feasible to expand the IDC to cover export promotion as well (in which case it might be called the Industrial and Trading Development Corporation). An alternative option would be to have an independent Export Promotion Agency, but either way it would be necessary for the institution to carry out the measures mentioned above. Maintaining representatives in centers abroad is a costly business and it may be possible with some local assistance in some cases for the same representatives to carry out both the investment and export promotion functions. It should be emphasized that IDC is not necessarily an additional institution but rather a consolidation of existing services with additional functions to response to the needs of new economic realities. 77. In conclusion, the time has come for some decisive steps to be taken in Government intervention in industrial development in Cyrpus. The Ministry of Commerce and Industry should give up the operation of various fragmented services and should concentrate on policy issues including overall studies relating to policy questions. These support services -- extension, information, quality control, industrial estates, export support--should be transferred to an autonomous corporation or agency as outlined above. The resistance of officials to such changes should not be allowed to jeopardize the creation of a suitable institutional infrastructure to meet the needs of Cyprus for further industrial development. 78. The creation of an IDTC (or a IDC together with an Export Promotion Agency) will involve costs, probably in all about 100 professionals may be needed with appropriate administrative support. Of the figure about 15 to 20 Figure II - -AL mur -e w (S-p) U EW A I ~ ~ ~ ~ ~ ~ b~ 1 rm:t I Ibml I I mo 1 ~ Wm I-- I-dz l 1- Acv10 o_ I_ b er os G n I .jd nkAcdvim etc (S-MP)_ |I__1-it ut - 33 - will need to be stationed abroad mainly in Europe in EEC countries. Of the staff 25 to 30 could be absorbed from the existing unit in the Ministry so that the additional staff needed may be less. In the course of time the Corporation should be able to earn fees in both industrial development and investment and promotion activities. It may also be able to obtain revenues from its equity investments but this will take time. Meanwhile, the Government will have to make the necessary investment. There is also a need to change the type of persons at present offering services to industry from officials and economists with little or no business experience, to more dynamic individuals with business background. 79. In summary the steps needed to be taken to stimulate the development of a more vibrant manufacturing sector in Cyprus able to meet the challenges of the next ten to fifteen years are: (1) Following a policy of gradually liberalizing the domestic market to encourage manufacturing industries to compete effectively with foreign industries. (2) Removing the interest rate ceiling and relaxing foreign exchange controls to enable financial institutions to play a greater role in financing industrial development. (3) Reducing energy costs and making greater efforts to control the rise in labor costs. (4) Taking measures to ensure a source of equity or venture capital for new industrial projects. (5) Strengthening considerably activities for promoting foreign participation in different forms and in particular promoting more dynamically the facilities of the Larnaca Industrial Free Zone. (6) Increasing efforts to promote exports through furnishing adequate up-to-date market information to facilitate export orders and to encourage joint marketing of firms. Also expanding and improving incentives for exports including more efficient and extensive drawback schemes for both direct and indirect exporters. (7) Creating an Industrial and Trade Development Corporation (or an IDC with a Export Promotion Agency) to combine all support services for industry, for promoting industrial investment and for expanding exports. - 34 - IV. AGRICULTURE 80. As discussed in Chapter I, based on performance and contribution to growth over the past decade, there appears limited scope for agriculture to substantially contribute to growth in the future. Even the small growth that has taken place in the past has been somewhat artificial in the sense that subsidies play an important role in growth of some subsectors. It has been argued that these subsidies have been maintained for social reasons. Most of these reasons, however, appear very weak. The government has announced the intension to reduce these subsidies but so far little has been done. Should this policy be implemented, substantial changes will take place in the agricultural structure. 81. Limited agricultural land and shortage of water have been the leading constraints for agricultural development. Past growth has been achieved through a combination of policies to overcome these constraints. Through mainly public investment, most underground and surface water sources have been tapped to provided irrigation water. As full investment cost is not generally recovered through water charges, an indirect subsidy is provided to water users. Where land is relatively poor and irrigation water is not available and production costs are high, subsidies are provided to cereal and vine farmers to induce them to continue production. Livestock farmers enjoy generous subsidies for feed and almost total protection from competition as imports are for the most part not allowed. A. Structure, Past Growth and Potential of Existing Agriculture 82. Crops are the leading subsector contributing around three quarters of agricultural value-added. Livestock add another 15-20 percent, while fishing contribute 2-3 percent, forestry and hunting play only a minor part and will not be considered in the strategy for future growth. Because of the overwhelming size of crops, performance of this subsector will be an important factor in future development of the sector as a whole. In order to arrive at a strategy for future development of agriculture, it would be useful to briefly review their past performance, assess their potential and determine factors that are likely to affect their future growth. A similar review of livestock will also be made. (i) Crops 83. The most important crop is potatoes. Other main crops are grapes, citrus, cereals, fresh fruits, olives and vegetables (Table 4-1). Vegetables and citrus are irrigated crops; some such as potatoes and carrots are developed mainly for export markets. The others are dryland crops and (except for grapes) are developed mainly for domestic consumption. Developments of these have faced different sets of constraints, which will be important factors in their future growth. 84. Potatoes are grown mainly for export. During 1980-84, over 88 percent of output was exported. Potato production has been more or less at the same level over the past decade. This for two reasons: The demand in the traditional export market mainly the U.K. limits the quantity that Cyprus - 35 - Table 4-1: Shares in Gross Output of Major Agricultural Products, 1984 Percent Cereals 6.7 Barley 6.0 Vegetables 27.0 Potatoes 19.1 Tomatoes 2.9 Fruit and tree crops 29.8 Grapes 11.5 Citrus (oranges, lemons, grapefruit) 7.3 Apples, pears, peaches, cherries 2.8 Olives 5.6 Livestock 36.6 Sheep and goat meat 8.9 Pork 2.7 Poultry 6.3 Milk 11.2 Total 100.0 could export. 1/ Production is also limited by land suitable for potatoes and by the availability of water which come from an aquifer that has already been overpumped. There has been no direct subsidies from the government in potato production, although it has been argued that some indirect subsides exist for this reason: Farmers who pumps water from the underground aquifer pays no water charges although the same water could be partly used for urban consumption either at the present or in the future. Due to the nonavailability of this water for urban use, a large investment is being made in the Southern Conveyor Project (SCP) to bring water to urban areas in need of additional water supply. Even with the availability of SCP water, to supplement groundwater, expansion of potatoes is not envisaged. For these reasons, this important crop will not be a contributor to future growth of agriculture although it will remain as one of the most important crops at the present level of production. 85. Other vegetables are produced both for domestic consumption and for exports. Carrot production, for example, has been mainly for export markets which have absorbed about 84 percent of carrot output during 1980-84. The production of these vegetables as in case of potatoes, have not increased 1/ Potatoes are the only important agricultural product for which the rules of the EEC are still the national one. Should they be included in the CAP, as Italy has insisted, Cyprus exports to the U.K. could be affected. - 36 - during the past decade. Besides water which has been provided mainly at below cost by various government irrigation schemes, these crops enjoy no subsidies. This sector has potential to grow further partly to supply the expanding, albeit slowly, domestic market and partly to supply external markets. But currently exporting is being constrained by marketing problems. The marketing issue has been addressed by a Bank-financed project approved in 1981. 1J Progress in this area, however, has been slow. 86. Citrus is another irrigated crop that has been produced mainly (about 75 percent), for export. As in the case of vegetables, besides getting water at below cost, this subsector does not benefit from government subsidies. And it has been the only subsector among irrigated crops which has shown substantial growth over the past decade. 2/ With additional irrigation water to be made available at completion of water development projects currently under implementation, citrus has great potential for expansion. According to the feasibility study for the Southern Conveyor Project, total production of citrus could increase from 125,700 tons in 1983 to 344,800 tons by 2000, an annual increase of about 6.1 percent. With this kind of potential, citrus could surpass potatoes as the most important crop. As in case of vegetables, citrus is faced with marketing problems resulting from having numerous exporters, some of them quite small, and the resultant high costs. With these problems solved, there appear no other constraints to prevent this crop from realizing its full potential. 87. Grapes are produced mainly for wine making. A small proportion, about 10-15 percent, is table grapes produced for home consumption and export both in fresh and dried forms. Exports of fresh grapes have been declining over the past decade while exports of dried grapes have increased. The net effect is that external markets have not increased absorption of grape output. Grape production increased from 1976 to 1981 and since then appeared to have stagnated or even declined. Production of table grapes has had difficulty in marketing and production of wine grapes has had problems relating to low yield and lack of export market for wines. The production of wine grapes has benefited from subsidies provided by the government in the form of per donum subsidy for old varieties, of per donum subsidy for replanting with superior varieties, and of subsidy per unit of output. 3/ These subsidies are intended partly as income supplement for relatively older and poorer villagers. Without these subsidies, it is likely that production of wine grapes will substantially decline. Although potential exists for production of certain superior quality wine grapes, the subsector as a whole cannot be expected to play a major role in contribution to future growth. The program to replace existing varieties with more superior one will be slow and will likely effect the total production only at the margin. 88. Cereals are composed mainly of barley and wheat. Barley production, although fluctuates wildly due to weather conditions, has been on the increase (55,880 tons in 1976, 83,250 tons in 1984) at the expense of wheat (34,544 tons in 1976, 9,000 tons in 1984). This is because the producers subsidies 1/ Fruit and Vegetable Export Project (Loan No. 188-CY) May 1981. 2/ Least-square growth rate of 6.5 percent annually. 3/ Specifics are discussed in a previous Bank report, Cyprus: Current Economic Positions and Prospects for Growth During the Five-Year Plan 1982-86, January 1983. - 37 - provided to production of these two crops have proved more profitable for the production of barley. Subsidies are provided in the form of government purchase of domestic production at prices considerably higher than the import purchases. 1/ Despite these subsidies, Cyprus has produced only a small proportion of requirement (about 20 percent) for barley. 2/ There is therefore no scope for expansion of cereal production. In fact should the subsidies be removed, substantial reduction will likely take place. 89. Other permanent tree crops have had mixed performance. Olives, except for a disastrous year in 1983, appear to show a slight increase since 1976. Carobs on the other hand has drastically declined due to loss in competitiveness. Other fresh fruits, namely apples, peaches, pears and cherries, and nuts (almonds) have shown small growth at about 1.3 percent per year. Unlike other crops discussed above these dryland permanent tree crops receive no subsidies. Except for carobs, they have potential for expansion. And as domestic demand increases, albeit slowly, there would appear to be a ready market to absorb the expansion. (ii) Livestock 90. Livestock sector has shown a steady growth over the past decade - about 6.8 percent per year. All major subsectors have grown. There are two main factors contributing to this growth, namely the generous subsidies 3/ provided by the government for animal feed (mainly barley) and the protection from competition in the form of import ban. This subsidy-cum-protection has already been discussed in previous Bank report Trends and Issues in Public Finance, which has shown that without the subsidies and protection from imports, livestock production could be substantially curtailed. Livestock production under this system has no justifiable economic reason and its potential for expansion therefore does not exist. The provision of subsidy particularly to barley has had some adverse impact on the production of certain ruminants such as sheep and goats which can be raised on hay and grazing range, the very same land that is used to grow barley. The production of hay and grazing range would increase without subsidies provided to wheat and barley. (iii) Fishing 91. Data on fish catch shows that during 1979-83, fish catch has grown in real terms by over 12 percent per year, reaching some 2,000 tons in 1983. Cyprus Department of Fisheries estimates that this sector has potential to grow further with an annual catch reaching 4,000 - 5,000 tons on a sustained basis. This, however, will require proper management, improved fishing l/ See IBRD Cyprus: Trends and Issues in Public Finance, July 1984. 2/ This requirement is somewhat artificial because it rests on production of livestock domestically; without heavily subsidized feed, some of the production would unlikely be taking place. 3/ Government buys domestically produced barley and imports feed grains and resells them to livestock producers at substantial discounts - as much as 60 percent. - 38 - methods, and additional research and extension. These requirements have been addressed in a recently approved Bank-financed project. 1/ B. Strategy for Future Development 92. The above discussions clearly indicate that past agricultural development policy has created considerable distortions and misallocation of resources. The main cause of distortions of course has been the provision of government subsidies for local cereal production, for animal feed, and for wine grape production. Some of the subsidies have been justified on social grounds, namely to provide income supplement to poor farmers and to keep the cost of living low through controlling prices of subsidized products. But as the system makes no distinction among the beneficiaries - the rich may benefit as much as the poor - even social justification is very weak. There is no food-security argument to produce food locally either because local production cannot provide self-sufficiency in any case. For example, self-sufficiency in pork and poultry has been reached but their production depends on imported feed. The existence of subsidies therefore has been for the most part due to political pressures from those who have benefited handsomely from subsidies. The need to eliminate these subsidies has long been recognized, and the government has announced intension to do so. 93. Without subsidies, some subsectors will substantially decline, while others which have been adversely affected by subsidies would have favorable conditions for growth. At the end the product mix would reflect the comparative advantage of these subsectors. The performance of some subsectors, such as potatoes and citrus appears to have already reflected their comparative advantage. There is little that can be said about them. The Potato Marketing Board has been highly successful in controlling production and exporting and with additional water to be provided at completion of the SCP, potatoes should continue to be a major crop although no expansion is envisaged from the level of current production. in case of citrus, potential to grow further has already been stated above. By 2000, citrus is likely to be as important, if not exceed, as potatoes. 94. The expected decline of barley would release resources for expansion of wheat and hay as they would become more competitive without subsidies. This has been clearly demonstrated in simulations using a model built specifically for this purpose. 2/ Barley itself may not decline as sharply, as indicated by these simulations which are based on the existing yield and cost of production. The yield has been very low on the average (1.8 tons/hectare) and the cost of production relatively high because the provision of subsidies has made it profitable to cultivate even the most marginal land with very poor yield. It will be competitive to grow barley on relatively good land, especially if measures to improve yield and lower cost of production are taken. These are: (i) introducing higher yield varieties (which may yield up to 8 tons/hectare); (ii) improving production techniques such as proper land preparation, fertilization and insect control, and early Autumn sowing; and (iii) practicing crop rotation with broad beans, chick peas, lentils, oil seeds and leguminous fodder. [/ Agricultural Research and Extension Project (Loan No. 2509-CY), April 1985. 2/ See Annex IV of IBRD, Cyprus: Trends and Issues in Public Finance, July 1984. - 39 - 95. Experiments in Cyprus and other Mediterranean countries have indicated that other crops are promising as substitutes for barley in the dryland zone. Initial promotion and extension will be needed to introduce these crops. Two oil-seed species appear suitable - safflower (Cartamus tinctorious) and rape (Brassica napus). They would substitute for imports of seed-oil for home consumption (approximately 13,000 tons/year equivalent to about 35,000 tons of oil seed). There appears a possibility to substitute for about 25 - 30 percent of imports, on 6-8,000 ha. of land or about 10-15 percent of the present barley land. Among the leguminous grain plants, chick pea (Cicer aretinum) appears the most promising because of these factors: (i) experimentation at International Centre for Agricultural Research in the Dry Areas (Aleppo, Syria) has obtained new hardy varieties with high yield, at 2-3 tons/ha. vis-a-vis yields of 1-1.2 tons/ha. in Greece and Southern Italy; (ii) its price is four times greater than that of barley; and (iii) it is the most suitable for crop rotation. Preliminary examination shows that cultivation of chick pea could be extended to as much as 1000 ha. 96. Without subsidies for feed and protection from imports, production of pork and poultry will be severely affected according to the simulations mentioned above. The existing production and cost structure have been totally distorted by the subsidies, protection and rapid growth as to render it impossible to model a supply response with any confidence. One thing is certain, however, i.e., efficient producers do exist and they have been profiting handsomely from subsidies. Without subsidies and protection, these efficient producers, with further effort to reduce cost, have a good chance to survive and would likely in fact be able to absorb some of the inefficient ones. Addition simulations have been undertaken to allow for a different supply response than from the existing data. 1/ They do confirm that some producers, perhaps more than half would survive. 97. In case of the vine subsidies, no simulations based on a model as in case of cereals and livestock has been undertaken. These subsidies have been much smaller than those for livestock and cereals and are intended not only to benefit old farmers living on marginal land but also to induce farmers to replace the common varieties, from which wines are difficult to market, with more superior ones. These subsidies should also be phased out beginning with that component granted on the basis of quantity produced. A sound long-term strategy has already been proposed for this sector. Due to the surplus of low quality wines in the international markets, a progressive reduction in areas planted with low quality varieties will be made. Some of these will be replaced by already tested noble imported strains. At the same time, some marginal areas will be abandoned. This strategy would likely lead to lower areas of production and output but with higher value per unit of output resulting from higher quality. 98. Implementation of this strategy should be enhanced by these complementary measures: (i) further research to single out and develop the best clones of local varieties and to improve picking methods and the vinification process; (ii) undertaking surveys to identify typical and homogenous production zones with well-defined characteristics and to arrive at suitable varieties of grapes, farming techniques and harvest calendar with the 1/ These data are gathered for tax purposes. Due to suspected widespread tax evasion problems, these data, especially those affecting profits, are suspect. - 40 - aim of producing good quality output; (iii) adopting the preliminary action for the application of ADC (Appellation d'origine controlee) methodology to certain typical, limited areas with specific conditions and an affirmed tradition for production of high quality wine (e.g. COMMANDARIA); (iv) establishing vinification plants in the wine growing areas, to avoid transporting grapes over long distances and high temperature, which adversely affects the quality of wines; and (v) establishment of a compulsory producers' consortium for each typical production zone under the guidance of Ministry of Agriculture, to be responsible for production planning and regulation and to act as agent for producers, with an aim of eventually participating in and controlling the processing activity; and (vi) establishment of scales for production, maturing, refinement, preservation and commerce of wine so as to prevent fraud. 99. Currently there are numerous projects being implemented in agriculture. They deal with most important subsectors, including fisheries that have not been discussed so far. With the provision of irrigation water, research and extension services and the schemes to facilitate marketing, there would appear that not much more can be done except to allow the market force and the comparative advantage to dictate the final product mix in the long-run. There is one area that would need emphasizing, however, that is the introduction of new products that would appear promising in the Cyprus conditions. In the irrigated zone, further development of subtropical fruit appears promising. This would add to the products that have already been introduced such as avocados, bananas, papayas. Without field trials, it is difficult to be precise as to what would be the most suitable for Cyprus. From experience elsewhere it would appear that these would include fruits like babaco (Carica pentagona), guava, soursop, carambola, cherimoya, Andes berry, etc. for export. The same can be said about cut flowers and potted plants which just begin to be of interest within Cyprus. Crops like cotton and jojoba could be grown where sewerage water is used for irrigation. Crops with high protein content such as alfalfa also appear promising. 100. As to the new crops for the dryland zone, discussion on barley has already taken up this aspect. Olive production is being dealt with under the FAO supported project - Improvement of Olive Production - which would fit well within the long-term development in the dryland area. In the mountain zone, where development of deciduous orchards is already taking place, it would appear that medicinal and aromatic plants could be profitably grown due to their high prices. These plants are saffron (Crocus satirus), gentian (Gentiana lutea), liquorice (Glycirrizza glabra), hyssop (Hyssopus officials), fennel (Foeniculum vulgare), mallow (Malva), origano (Origanum), plantain (Plantago mayor), rosemary (Rosmarinus officials), thyme (Thymus Valgaris), valerian (Valeriana), and sage (Salvia officials). Some bush-type fruits appear promising also, such as currant, copiloideus bilberry and raspberry. Another possibility that has not been investigated is the production of truffle in areas where climatic and botanical characteristics are suitable. This would involve inoculations of trees and shrubs that already exist. - 41 - V. A LONG-TERM GROWTH SCENARIO A. A Fourth Pillar: Services 101. Discussions so far have focussed on three sectors - agriculture, manufacturing and tourism - that have been designated by Cypriot economic planners as the pillars of future economic development. On the basis of growth performance and contribution to growth as shown in Table 1-1, another sector would appear to deserve consideration as another pillar of the economy: Banking, insurance, real estate and business services, which was second only to the trade and tourism sector in terms of contribution to growth during 1976-85. 1/ This sector has grown rapidly with the recent introduction of such activities as off-shore businesses, including off-shore banking, consultancy and computer programming. At end of 1985, off-shore companies registered in Cyprus totalled 3,600. Of these 700 had set up offices in Cyprus. Fourteen off-shore banking licenses had been granted; nine were fully operational in 1985. In addition, 5,500 ships with 9.5 million GWT were registered in Cyprus. Revenues from these off-shore companies have increased rapidly from Cf£3.5 million in 1980 to CE27.5 million in 1985; total revenues during 1980-85 were estimated at CE80.7 million. They also employ a large number of Cypriots, estimated at 700 - 1,000 or about 10 percent of total employment in this sector. In addition, they provide businesses for such professional firms as accounting and law. 102. There are two aspects of this sector. One relates to services in the domestic market; the other relates to exports. In the domestic market, banking services are already widespread due mainly to the relatively advanced state of economic and social development, smallness of the country, and good transport and communications facilities throughout the island. Growth in normal banking services therefore can be expected to grow only modestly, pari passu with the overall growth of the economy. An area of great potential remains in insurance and securities markets, both are underdeveloped. At the current state of economic development, it is quite surprising that Cyprus has not developed substantial trading in financial instruments. Existence of a law limiting interest rate to 9 percent maximum of course inhibits fluctuations in interest rates required for trading in bonds. It also limits the use by the government of a major economic management tool. Reluctance of businesses to go "public" to raise funds for expansion, partly because this would require financial disclosures and thus limits their room to benefit from tax evasion which is suspected to be widespread, limits the potential growth of trading in stocks. Better tax administration, therefore, not only will help increase revenues but also would have positive impact in encouraging businesses to go public - a goal advocated by the government for quite some time. Another positive aspect of having a well developed trading in financial instruments is that it would provide an additional channel for private sector savings. A goal for the next medium-term plan therefore should be to develop a well-functioning securities market. 103. Exporting of services of this sector has grown to some extent due to expansion in offshore business activities. They need lawyers, accountants, representations, business offices, and telecommunications facilities. At the 1/ If the inputed value of housing is excluded, the contribution of this sector falls to third place, marginally below that of manufacturing. - 42 - same time, avaiLability of well trained professionals in areas such as engineering and computer science has also provided a solid base for exporting of consultancy services in these areas. An examination of data on Cypriots studying abroad 1/ shows that more have enrolled in these professional courses. There is no reason to believe that this trend will not continue. A larger pool of these graduates would provide good potential for export expansion, especially in the Middle East region. 104. The growth in export of these services so far has followed a path similar to that of the export of goods, i.e., numerous, small exporters are out on their own looking for markets and businesses. They therefore suffered from similar problems of fragmentation and high costs. Ideas have been advanced to organize them under an organizational umbrella that would undertake joint marketing, etc. This would appear to be an appropriate approach that could broaden the services and the markets, and would realize economies of scale and prevent Cypriots from undercutting each other in foreign markets. If the organization cannot stand alone by itself, it would be worth consideration to.put it under the umbrella of an export organization that has been proposed under manufacturing export, allowing exporters of these services similar benefits enjoyed by the exporters of goods. 105. This fourth pillar, so far narrowly defined along the national accounting sense for convenience, could also be expanded to include all exports of services. In fact these activities to some extent have already been taking place - warehousing, transhipment, airline stopovers, international conferences, vocational training, and health care services. With locational and skill advantages possessed by Cyprus, these activities appear to have great potential for further expansion. Their growth could perhaps be accelerated if there is a policy framework to promote them at the same level accorded tourism, manufacturing and agriculture. B. Sources and Pattern of Output: An Overview 106. Implementation of sectoral strategies as discussed above will entail substantial changes in the sources and pattern of output. These changes of course are an important part of the development process. It would be useful to visualize the outcome of these changes and to see whether a degree of sectoral balance remains. The numbers that follows, however, should not be regarded as forecasts, but rather as indication of direction and approximations of magnitude that could take place. 107. In some respect, Cyprus already resembles more advanced industrial economies in which population and labor force grow very slowly. Cyprus is even ahead of these more advanced economies in one respect, i.e. unemployment is considerably lower. The low growth of the labor force and very low rate of unemployment, however, does set the limit as to how fast the future long-term economic growth can be achieved. During 1970-82, the average growth rate achieved by 19 industrial economies was 2.8 percent per year.2/ The highest rate achieved during this period was by Japan at 4.6 percent per year; this growth was achieved mostly by manufacturing (at 6.6 percent), while services 1/ There is no university in Cyprus. 2/ IBRD World Development Report, 1984, p. 221. - 43 - grew more modestly at 4.1 and agriculture actually declined. In this overall context, it would appear that for Cyprus, the slow growth of labor force (at 1-1.2 percent annually for the next 10-15 years), would dictate that future growth would be much slower than that of the past decade, because labor productivity is expected to improve only gradually in the future. This results from these factors: (i) given the importance of tourism and light manufacturing, the economic structure will remain to a great extent labor-intensive, and (ii) without deep technological and research tradition, a great leap forward into new and highly productive ventures that will raise productivity by a quantum jump is very unlikely. The long-run growth rate that Cyprus could hope for would be probably around 3-4 percent. 108. The only sector that is unlikely to grow is mining and quarrying because of further depletion of mineral deposits. Quarrying activities will modestly grow pari passu with construction; this will prevent the sector from actually declining. The strategy outlined for agriculture in Chapter IV would allow the output of this sector to grow only slowly. Without substantial subsidies some subsectors, such as cereals and livestock would decline. This will be compensated by growth in the fruit and vegetable subsector, whose growth has been without subsidies. Overall agriculture would expand much slower than in the past decade, in the range of 0.5 - 0.7 percent vis-a-vis 1.4 percent annually achieved during 1976-85. 109. The most rapid growth will continue to be in the trade, hotel and restaurant sector which includes tourism. If the strategy is pursued to limit tourism to a range of 1-1.2 million arrivals as recommended, the growth of this sector will taper off in the 1990's; the source of growth will come increasingly less from the actual number of arrivals but rather from higher real expenditure per tourist. In terms of value-added, an annual growth rate of 4.2 - 4.5 percent could be expected. Another relatively high growth sector will be banking, insurance, real estate and business services. This results partly from continued expansion in off-shore banking and business services such as computer programming and accounting. 110. For manufacturing, slow growth is expected in the medium-term due to the restructuring that will take place as stagnating external demand in the Middle East oil exporting countries limits growth in traditional exports, and greater competition from imports resulting from lower protection as required by the terms of customs union with the EEC takes away some of the domestic market. After this initial restructuring period, growth should again pick up. Overall an average growth rate of about 3.3 percent during 1986 - 2000 could be achieved. Ill. A mixture of growth performance in the tradeable sectors will result in an overall growth rate of about 3.5 percent annually. This would be complemented by growth in the nontradeable sectors, such as construction, transport, etc. Under this scenario, the structure of output, in 1985 prices, by year 2000 may look like a pattern shown in table 5-1. The trade and tourism sector will increase its dominance somewhat by over 2 percentage points - from 19 to 21.5 percent of total GDP. Banking, insurance and business services will also increase its share to 15.5 percent, while the share of manufacturing will decline marginally. Agriculture, of course will become much less important; its share will decline from slightly less than 8 percent in 1985 to about 5 percent by 2000. As a result a sectoral balance emerging from this growth scenario will anchor on three tradeable sectors - manufacturing, trade and tourism, and financial and business services. - 44 - C. Labor Force Allocation 112. The change in structure of output as indicated above can be achieved only if the labor force can be employed where it is needed. The recent rapid growth in tourism has encountered shortages of workers in certain categories and in some locations, particularly in Ayia Napa-Paralimni and in Paphos. At the same time surpluses exist in other categories and other locations. Employment in agriculture can be expected to decline further from the level of about 43,000 in 1984. By year 2000, with expected changes in agriculture outlined above, only about 33,000 will be needed in agriculture. During this period the labor force will increase from about 219 thousand to about 265 thousand. This increase together with reduction in agriculture will have to be absorbed by other sectors. Allowing that structural unemployment would be about 3 percent or about 8000 people in 2000 on the average, a level not much different from that of 1984, the number of workers to be absorbed then is 225 thousand. From this total, the nontradeable sectors can be expected within reason to maintain their shares of employment as their growth continues at a similar pace as the overall GDP. Due to its labor intensiveness and its relatively higher growth, tourism will need a lot more labor. By 2000, it will likely be the largest employer. After an initial period of restructuring, manufacturing can be expected to need more labor but will no longer be the most dominant employer. Banking and business services due to its relatively high growth, will also increase its share. By 2000, the employment pattern may look like what is shown in Table 5-2. Table 5-1: Growth and Structure of GDP, 1985, 2000 (In percent) Growth Rate Output Structure a/ 1985 - 2000 1985 2000 Agriculture 0.7 7.8 5.2 Mining and quarrying - 0.6 0.4 Manufacturing 3.3 16.8 16.3 Electricity, gas and water 3.5 2.3 2.3 Construction 3.0 10.8 9.9 Trade, hotels and restaurants 4.3 19.1 21.5 Transport and communications 3.5 9.9 9.9 Banking, insurance and business services 4.1 14.2 15.5 Public Administration and Other Services 3.7 18.5 19.0 Total 3.5 100.0 100.0 (MnEl,355) (Mn£2,270) a/ in 1985 prices. 113. At the present time there is some concern that because of expected structural changes resulting from Cyprus joining the EEC customs union and rapid growth of tourism, unemployment could substantially increase while shortages in certain categories of workers will continue. In the medium-term, this may very well happen. A joint study by various - 45 - government agencies has already been undertaken with a view of pinpointing how this situation can be avoided. The focus of the study, however, is on tourism. In order to make it more relevant, this study should be expanded to cover the whole economy so that the situation of labor surplus/shortage could be put in a broader context with a view of arriving at a proper policy to address the situation. Table 5-2: Sectoral Structure of Employment, 1984, 2000 1984 2000 Percent of Percent of Thousand Employment Thousand Employment Agriculture 43.1 20.4 33.0 12.8 Mining and quarrying 1.0 0.5 1.0 0.4 Manufacturing 43.9 20.8 52.7 20.5 Electricity, gas and water 1.5 0.7 1.8 0.7 Construction 20.5 9.7 24.4 9.5 Trade, hotels and restaurants 40.1 19.0 62.6 24.4 Transport and communications 12.2 5.8 14.9 5.8 Banking, insurance and business services 9.2 4.4 17.8 6.9 Public administration and other services 39.6 18.7 48.8 19.0 Total employment 211.1 100.0 257.0 100.0 Underemployment 8.0 3.6 a/ 8.0 3.0 a/ a/ Percent of labor force. D. Resource Requirements 114. Achievement of a growth scenario outlined above will require resources for investment and will be possible only if the government succeed in improving domestic savings and keeping the balance of payments deficit and external debt within manageable levels. The policy measures to achieve these have already been outlined in various government documents and discussed in previous Bank reports. Adoption of these measures has become even more urgent for these reasons: (i) Both the budget and the balance of payments deficits have been continuously at high levels; the borrowing required to finance these deficits have added substantially to the external debt service obligations which could soon exceed the self-imposed 15 percent of exports of goods and services. (ii) The need to restructure manufacturing will required substantial additional investment. But at the same time, the exports from this sector are not expected to grow much, if at all, in the medium-term due partly to stagnating demand in the traditional market in the region. (iii) An upsurge, particularly initially of manufacturing imports can be expected as trade barriers start to be dismantled to comply with the Customs Union requirements. - 46 - 115. It would be worthwhile to outline here the measures that are required. The most important relates to the area of government finance. It is generally accepted that the financial operations maintained by the government over the past decade - high level of overall deficit and negative savings - is not sustainable in the long-run. Proposals have been made to deal with a major component of the expenditure side, namely, the subsidies, but the policy to achieve the goal of complete elimination particularly of animal feed subsidy has not been pursued. As the government is in the process of drawing up the next medium-term plan (1987-91), and now that import prices of feed grains are lower than domestic selling prices, it is perhaps an ideal time to work out a step-by-step program to achieve the goal by, say, the end of this plan period. Elimination of subsidies, particularly for animal feeds, will not only help improve the budget but also help reduce the high level of distortions in agriculture; reduction of distortions is an important factor for agriculture to realize its potential. As regard the wage bill, government actions to reduce its growth so far have not been at the heart of the problem. Attempts to lower pay at entry levels or keep some vacancies unfilled, if they are carried out at all, will have only marginal impact. Only the change in the indexation system will have the desired results. 116. On the revenue side, discussions relating to discrepancies in the hotel registration data only serve to highlight further the need for better tax administration. In this connection, it should be added that if tax administration is carried out effectively, profits in hotels would be lower. This would serve to slowdown the growth in tourism investment, at least in the kind that the government does not want, and make the funds available for other purposes. It would also provide less incentive for businesses to "hide" their books; they would be more willing to "go public", providing more stocks and bonds to be traded. The proposal to adopt a value-added tax would help the tax administration problem and add substantial revenues; it should be adopted without further delays. 117. The measures to improve the public finance situation need to be complemented by actions to further increase private savings. A long standing obstacle in this area of course has been the law maintaining an interest rate ceiling at 9 percent. Although with lower inflation, domestic interest rates have become generally positive and rates in the international markets have substantially declined, this issue has to be tackled so that domestic interest rates could be used as an inducement for increasing private savings, to stem capital outflow seeking higher interest rates abroad at times when domestic rates are lower than international rates, and to make bank deposits and financial instruments competitive with such activities as real estate speculation. Removal of the ceiling would also allow the government to use this powerful tool for monetary and economic management. The availability of stocks and bonds in the open markets would add channels available for private sector savings. In this connection, consideration should be made to offer stocks and bonds of the newly created companies such as the CTDC through the local security market. Such companies, to be owned partly by the government, and engaged in high growth sector would appear ideal to induce private investors, particularly small ones, to start considering securities as alternative channeLs for savings. In this connection, it might be noted also that the absence of a well-functioning security market in Cyprus is somewhat of an anomaly considering that in many less advanced market economies, trading in stocks and bonds is quite well established. 0988S (page 1-79) - 47 - STATICTICAL ANNEX Table Number Standard Tables 1. National Accounts Summary (Current Cyprus Pounds). l.A. National Accounts Summary (at 1980 Cyprus Pounds). 2. National Accounts Summary (at 1980 US$) 3. Balance of Payments (at Current US$). 3.A. Balance of Payments (at Current Cyprus Pounds). Section 1: Employment and Population. 1.1. Sectoral Employment and Population. Section 2: National Accounts. 2.1. Gross Domestic Product by Sector (at Current Prices). 2.2. Gross Domestic Product by Sector (at 1980 Prices). 2.3. Gross Domestic Product by Expenditure (at Current Prices) 2.4. Gross Domestic Product by Expenditure (at Current Prices). 2.5. Gross Fixed Capital Formation by Activity. 2.6. Gross Output, Investment and Exports. Manufacturing (at Current Prices) 2.7. Principal Agricultural Products (in Metric ton) 2.8. Agricultural Land Utilization, 1980. Section 3: 3.1. Exports by Main Commodities 3.2. Exports by Main Countries 3.3. Imports by Economic Classification 3.4. Invisibles Account 3.5. Exports of Main Agricultural Products Section 4: External Debt. 4.1. External Debts Structure 4.2. Structure and Terms of External Public Debt Section 5: Public Finance 5.1. Consolidated Government Budget 5.2. Central Government Ordering and Development Budget. Section 6: Monetary Sector; 6.1. Monetary Survey 6.2. Interest Rates in Cyprus - 48 - Section 7: Price 7.1. Price Indices 7.2. Price Index of Domestic Exports 7.3. Import Price Index Section 8 8.1. Arrivals of Tourists and Excursionists and Estimated Income from Tourism. 8.2. Visitors by Country of Produce. Section 9: Wages 9.1. Index of Average Rates of Pay by Economic Activities. 9.2. Index of Average Earnings in Money terms by Economic Activities. - 49 - TABLE 1: NATIONAL ACCOUNTS SUMMARY: 1976-85 1l ---~---- (MILLIONS OF CURRENT CYPRUS POUNDS) 1976 1977 1978 1979 1980 19B1 1982 1983 -194 1985 BROSS DOMESTIC PRODUCT 329.3 417.5 498.8 620.6 749.1 860.7 999.5 1,107.1 1,316.7 1,422.2 (STATISTICAL DISCREP.) -12.0 -16.3 -14.6 -4.1 -0.5 -7.7 -8.7 4.4 24.9 13.7 RESOURCE GAP (M-X) 41.0 84.4 104.3 120.2 135.4 114.5 136.5 156.8 166.9 148.4 IMPORTS G+NFS 209.1 286.7 318.7 401.6 479:5 554.7 658.4 727.2 897.4 888.0 EXPORTS G+NFS 166.1 202.3 214.4 281.4 344.1 440.2 521.9 570.4 730.5 739.6 TOTAL EXPENDITURES 384.1 518.2 617.7 744.9 895.0 982.9 1,144.7 1,259.5 1,458.7 1,556.9 CONSUMPTION 302.2 375.5 431.4 507.1 604.0 690.0 818.6 917.9 1,019.6 1,121.0 GENERAL GOVERNMENT 56.1 61.3 67.0 86.3 107.5 136.9 167.1 188.2 204.8 224.7 PRIVATE 246.1 314.2 364.4 420.8 496.5 553.1 651.5 729.7 814.8 896.3 INVESTMENT 82.1 142.7 186.3 237.8 281.0 292.9 326.1 341.6 439.1 435.9 FIIED INVESI. 68.6 122.4 170.4 218.7 259.1 274.6 301.1 317.3 409.8 405.3 CHANGE IN STOCKS 13.5 20.3 15.9 19.1 21.9 18.3 23.0 24.3 29.3 30.6 DOMESTIC SAVINGS 27.1 42.0 67.4 113.5 145.1 170.7 180.9 189.2 297.1 301.2 NET FACTOR INCOME 13.9 18.9 20.2 22.1 26.6 27.0 30.5 21.8 24.7 27.2 CURRENT TRANSFERS 5.4 5.8 8.4 9.0 11.5 11.5 11.8 12.2 14.5 15.1 NATIONAL SAVINGS 46.4 66.6 96.0 144.6 183.2 209.2 223.2 223.2 336.3 343.5 AVERAGE EXCHANGE RATES CYPRUS POUND PER US$ 0.410 0.408 0.373 0.354 0.353 0.420 0.475 0.526 0.557 0.609 CYPRUS POUND PER SDR 0.478 0.464 0.458 0.455 0.465 0.504 0.539 0.582 0.631 0.597 EXCHANGE INDEX (POUNDIUSSi 116.3 115.6 105.8 100.4 100.0 119.9 134.5 149.0 166.3 172.7 US$ PER CYPRUS POUND 2.437 2.451 2.680 2.822 2.834 2.383 2.107 1.901 1.704 1.641 EXCHANGE INDEX (US5;POUNDi 86.0 86.5 94.6 99.6 100.0 84.1 74.4 67.1 60.1 57.9 li 1985 PRELIMINARY. SOURCE: CENTRAL BANK OF CYPRUS, BULLETIN, JUNE 1983, SEPTEMBER 1985. - 50 - TABLE IA: NATIONAL ACCOUNTS SUMMARY: 1976-85 1I -------- (HILLIONS OF 1980 POUNDS) 1976 1977 1979 1979 1980 1981 1982 1993 1994 1985 GROSS DOMESTIC PRODUCT 522.6 596.9 645.3 713.4 749.1 773.9 815.r 848.8 932.8 965.3 (STATISTICAL DISCREP.) 58.3 41.6 15.8 19.7 -0.5 4.0 -9.4 -10.9 5.3 -13.6 RESOURCE GAP (M-X1 91.2 131.8 127.0 140.0 135.4 104.8 125.8 128.7 154.6 115.5 IMPORTS 6+NFS 291.1 367.3 385.4 451.4 479.5 489.7 555.1 593.1 697.0 661.7 EXPORTS 6+NFS 199.9 235.5 257.6 311.4 344.1 384.9 429.3 464.4 542.4 546.2 TOTAL EXPENDITURES 555.5 687.1 757.3 633.7 885.0 674.6 950.3 988.4 1092.1 1094.4 CONSUMPTION 431.6 497.4 532.7 574.3 604.0 617.1 678.3 718.B 760.3 792.9 6ENERAL GOVERNMENT 94.3 95.8 92.8 102.4 107.5 119.5 128.2 135.1 138.7 142.9 PRIVATE 337.3 401.6 439.9 471.9 496.5 497.6 550.1 583.7 621.6 650.0 INVESTMENT 123.9 189.7 224.6 259.4 281.0 257.5 272.0 269.6 321.8 301.5 FIXED INVEST. 104.3 161.6 204.0 237.3 259.1 241.4 253.2 250.5 299.5 279.6 CHANGE IN STOCKS 19.6 28.1 20.6 22.1 21.9 16.1 18.8 19.1 22.3 21.9 DOMESTIC SAVINGS 91.0 99.5 112.6 139.1 145.1 156.7 136.8 130.0 172.5 172.4 NET FACTOR INCOME 22.0 26.9 26.1 25.4 26.6 24.3 24.9 16.8 17.5 18.5 CURRENT TRANSFERS 7.8 7.7 10.3 10.1 11.5 10.2 9.8 9.6 10.8 10.6 NATIONAL SAVINGS 120.8 134.1 149.0 174.6 183.2 191.2 171.5 156.4 200.8 201.5 11 1985 PRELIMINARY. SOURCE CENTRAL BANK OF CYPRUS, BULLETIN, JUNE 1983, SEPTEMBER 1985. - 51 - TABLE 2: NATIONAL ACCOUNTS SUIMARY : 1976-85 1/ -------- (MILLIONS OF USt AT CONSTANT 1990 PRICES) 1976 1977 1978 1979 1980 1981 1982 1983 1994 1985 GROSS DOMESTIC PRODUCT 1480.9 1691.5 182B.7 2021.6 2122.9 2192.8 2309.8 2405.3 2643.4 2735.5 (STATISTICAL DISCREP.) 165.2 117.9 44.8 55.8 -1.4 11.3 -26.6 -30.9 15.0 -38.5 TERMS OF TRADE EFFECT 88.8 67.1 4.7 13.9 0.0 10.5 30.4 2.3 70.8 13.9 GROSS DOMESTIC INCONE 1404.5 1640.7 1788.6 1979.7 2124.2 2192.0 2366.8 2438.5 2699.1 2787.9 RESOURCE GAP (IMP-CAP.INP) 169.6 306.4 357.4 382.9 383.7 286.4 326.1 362.4 367.3 313.4 IMPORTS 6+NFS 824.9 1040.9 1092.1 1279.2 1358.8 1387.7 1573.0 1680.7 1975.2 1875.1 CAPACITY TO IMPORTS 655.3 734.4 734.7 896.3 975.1 1101.3 1246.9 1318.3 1607.8 1561.8 EXPORTS G+NFS 566.5 667.4 730.0 882.4 975.1 1090.7 1216.6 1316.0 1537.1 1547.8 TOTAL EXPENDITURES 1574.2 1947.1 2146.0 2362.5 2507.9 2478.4 2693.0 2800.9 3066.5 3101.3 CONSUMPTION 1223.1 1409.5 1509.6 1627.5 1711.6 1748.7 1922.2 2036.9 2154.5 2246.9 GENERAL GOVERNMENT 267.2 271.5 263.0 290.2 304.6 338.6 363.3 382.8 393.0 405.0 PRIVATE 955.8 1138.1 1246.6 1337.3 1407.0 1410.1 1558.9 1654.1 1761.5 1842.0 INVESTMENT 351.1 537.6 636.5 735.1 796.3 729.7 770.8 764.0 911.9 B54.4 FIXED INVESTMENT 295.6 457.9 578.1 672.5 734.2 684.1 717.5 709.9 848.7 792.3 CHANGE IN STOCKS 55.5 79.6 58.4 62.6 62.1 45.6 53.3 54.1 63.2 62.1 DOMESTIC SAVINGS 181.5 231.2 279.0 352.2 412.6 443.3 444.7 401.6 544.6 541.0 NET FACTOR INCOME 62.3 76.2 74.0 72.0 75.4 68.9 70.6 47.6 49.6 52.4 CURRENT TRANSFERS 22.1 21.8 29.2 28.5 32.6 29.0 27.8 27.1 30.5 30.1 NATIONAL SAVINGS 265.9 329.2 382.2 452.7 520.6 541.1 543.0 476.3 624.6 623.5 POUND DEFLATORS (1980-100) GROSS DOMESTIC PRODUCT 63.0 69.9 77.3 87.0 100.0 111.2 122.6 130.4 141.2 147.3 IMPORTS G+NFS 71.8 78.1 82.7 89.0 100.0 113.3 118.6 122.6 128.8 134.2 EXPORTS G+NFS 83.1 85.9 83.2 90.4 100.0 114.4 121.6 122.8 134.7 135.4 TOTAL EXPENDITURES 69.2 75.4 81.6 89.3 100.0 112.4 120.5 127.4 134.8 142.3 GOVERNMENT CONSUMPTION 59.5 64.0 72.2 84.3 100.0 114.6 130.3 139.3 147.7 157.2 PRIVATE CONSUMPTION 73.0 78.2 92.8 89.2 100.0 111.2 118.4 125.0 131.1 137.9 FIXED INVESTMENT 65.9 75.7 83.5 92.2 100.0 113.8 119.7 126.7 136.8 145.0 CHANGE IN STOCKS 68.9 72.2 77.2 86.4 100.0 113.7 122.3 127.2 131.4 139.7 EXCHANGE RATE INDEX 86.0 86.5 94.6 99.6 100.0 84.1 74.4 67.1 60.1 57.9 (US $ PER POUND) 1i 1985 PRELIMINARY. SOURCE: CENTRAL BANK OF CYPRUS, BULLETIN, JUNE 1983, SEPTEMBER 1985. - 52 - TABLE 3: BALANCE OF PAYMENTS: 1976-85 1/ --------- t(MILLIONS OF CURRENT US DOLLARS) 1976 1977 1978 1979 1980 1981 1982 1983 1994 1985 EXPORTS (6+NFS) 404.B 495.8 574.5 794.1 975.1 1049.0 1099.7 1084.6 1244.7 1213.5 MERCHANDISE (FOB) 250.3 304.4 326.9 421.9 489.4 509.7 501.7 438.7 523.9 427.4 NON-FACT.SERVICES 154.5 191.4 247.6 372.2 485.7 539.3 598.0 645.9 720.7 786.1 IMPORTS (G+NFS) 509.6 702.7 854.0 1133.3 1358.8 1321.8 1387.3 1382.9 1529.1 1456.9 MERCHANDISE (FOB) 398.0 559.1 684.4 898.8 1072.9 1038.9 1083.5 1083.7 1228.0 1134.4 NON-FACT.SERVICES 111.6 143.6 169.6 234.5 285.9 282.9 303.8 299.1 301.1 322.6 RESOURCE BALANCE -104.8 -206.9 -279.5 -339.2 -383.7 -272.8 -297.6 -298.2 -284.4 -243.5 NET FACTOR INCOME 33.9 46.1 54.9 62.4 75.4 64.3 64.3 46.4 42.1 61.2 FACTOR RECEIPTS 54.8 69.6 84.7 107.0 133.2 136.3 150.9 142.8 143.6 167.4 FACTOR PAYMENTS 21.0 23.5 29.7 44.6 57.8 72.0 86.6 96.4 101.6 106.2 IM< INTEREST PAID) 5.3 8.6 13.4 24.8 29.3 41.5 49.8 62.9 65.9 65.8 NET CURRENT TRANSFERS 13.2 14.2 22.5 25.4 32.6 27.4 24.9 23.2 24.7 24.8 TRANSFER RECEIPTS 16.3 17.4 25.7 29.3 36.6 30.7 28.0 26.2 27.8 27.7 TRANSFER PAYMENTS 3.2 3.2 3.2 4.0 4.0 3.3 3.2 3.0 3.1 3.0 CURRENT ACCOUNT BALANCE -57.8 -146.6 -202.0 -251.4 -275.7 -191.1 -198.5 -228.6 -217.6 -157.5 N< CAPITAL INFLON DIRECT INVESTMENT 32.4 41.4 57.1 70.6 85.0 78.6 71.6 68.5 68.2 73.8 OFFICIAL GRANT AID 47.5 58.6 45.0 46.3 40.8 35.7 46.6 51.0 18.7 16.6 NET MILT LOANS (DRS) 17.9 58.4 65.7 52.2 107,8 105.6 136.1 62.8 153.4 75.9 DISBURSEMENTS 27.3 67.7 78.1 67.7 138.0 140.3 185.8 130.2 215.3 169.7 REPAYMENTS 9.3 9.3 12.4 15.5 30.2 34.7 49.7 67.5 61.9 93.7 OTHER M<, NET 12.2 -14.6 21.3 4.8 24.4 5.4 12.5 5.3 6.9 -3.1 NET CREDIT FROM IMF 40.0 0.0 -10.5 7.6 20.7 -10.2 -10.3 7.8 -2.4 -3.3 DISBURSEMENTS 40.0 0.0 0.0 7.6 20.7 0.0 0.0 7.8 0.0 0.0 REPAYMENTS 0.0 0.0 10.5 0.0 0.0 10.2 10.3 0.0 2.4 3.3 NET SHORT-TERM CAPITAL -12.6 2.3 8.6 24.2 5.7 15.1 9.1 28.5 21.9 21.3 CAPITAL FLONS NEI 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 ERRORS & OMISSIONS 3.7 5.9 14.7 21.2 21.8 13.3 16.2 17.9 23.7 22.8 CHANGE IN NET RESERVES -83.4 -5.4 0.1 24.6 -30.5 -62.5 -83.3 -13.1 -72.8 -46.6 ;- INDICATE INCREASE) 1/ PRELIMINARY SOURCE CENTRAL BANK OF CYPRUS, BULLETIN, JUNE 1983, SEPTEMBER 1985. - 53 - TABLE 3A : BALANCE OF PAYHENTS: 1976-85 1/ (- 1ILLIONS OF CURRENT POUNDS) 1976 1977 1978 1979 1980 1991 1982 1993 1984 1985 EXPORTS (6+NFSI 166.1 202.3 214.4 281.4 344.1 440.2 521.9 570.4 730.5 739.6 MERCHANDISE IFOD) 102.7 124.2 122.0 149.5 172.7 213.9 230.1 230.7 307.5 260.5 NON-FACT.SERVICES 63.4 78.1 92.4 131.9 171.4 226.3 283.8 339.7 423.0 479.1 IMPORTS (S+NFS) 209.1 286.7 318.7 401.6 479.5 554.7 658.4 727.2 897.4 889.0 MERCHANDISE (FOB) 163.3 228.1 255.4 318.5 378.6 436.0 514.2 569.9 720.7 691.4 NON-FACT.SERVICES 45.9 58.6 63.3 83.1 100.9 118.7 144.2 157.3 176.7 196.6 RESOURCE BALANCE -43.0 -84.4 -104.3 -120.2 -135.4 -114.5 -136.5 -156.8 -166.9 -148.4 NET FACTOR INCOME 13.9 18.8 20.5 22.1 26.6 27.0 30.5 24.4 24.7 37.3 FACTOR RECEIPTS 22.5 28.4 31.6 37.9 47.0 57.2 71.6 75.1 84.3 102.0 FACTOR PAYMENTS 8.6 9.6 11.1 15.8 20.4 30.2 41.1 50.7 59.6 64.7 (M< INTEREST PAID) 2.2 3.5 5.0 8.B 10.3 17.4 23.6 33.1 38.7 40.1 NET CURRENT TRANSFERS 5.4 5.8 8.4 9.0 11.5 11.5 11.8 12.2 14.5 15.1 TRANSFER RECEIPTS 6.7 7.1 9.6 10.4 12.9 12.9 13.3 13.8 16.3 16.9 TRANSFER PAYMENTS 1.3 1.3 1.2 1.4 1.4 1.4 1.5 1.6 1.8 1.8 CURRENT ACCOUNT BALANCE -23.7 -59.8 -75.4 -89.1 -97.3 -76.0 -94.2 -120.2 -127.7 -96.0 HILT CAPITAL INFLOY DIRECT INVESTMENT 13.3 16.9 21.3 25.0 30.0 33.0 34.0 36.0 40.0 45.0 OFFICIAL GRANT AID 19.5 23.9 16.8 16.4 14.4 15.0 22.1 26.8 11.0 10.1 NET MILT LOANS (DRS) 7.4 23.8 24.5 18.5 38.0 44.3 64.6 33.0 90.0 46.3 DISBURSEMENTS 11.2 27.6 29.1 24.0 49.7 58.9 88.2 68.5 126.4 103.4 REPAYMENTS 3.8 3.8 4.6 5.5 10.7 14.5 23.6 35.5 36.3 57.1 OTHER MILT, NET 5.0 -5.9 7.9 1.7 8.6 2.3 5.9 2.8 4.1 -1.9 NET CREDIT FROM IF 16.4 0.0 -3.9 2.7 7.3 -4.3 -4.9 4.1 -1.4 -2.0 DISBURSEMENTS 16.4 0.0 0.0 2.7 7.3 0.0 0.0 4.1 0.0 0.0 REPAYMENTS 0.0 0.0 3.9 0.0 0.0 4.3 4.9 0.0 1.4 2.0 NET SHORT-TERM CAPITAL -5.2 0.9 3.2 8.6 2.Q 6.4 4.3 15.0 12.9 13.0 CAPITAL FLOWS NEI 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 ERRORS & OMISSIDNS 1.5 2.4 5.5 7.5 7.7 5.6 7.7 9.4 13.9 13.9 CHANGE IN NET RESERVES -34.2 -2.2 0.0 8.7 -10.8 -26.2 -39.5 -6.9 -42.7 -28.4 (- INDICATE INCREASE) 1; PRELIMINARY SOURCE : CENTRAL BANK OF CYPRUS, BULLETIN, JUNE 1983, SEPTEMBER 1985. - 54 - TABLE 1.1: SECTORAL EMPLOYMENT AND POPULATION ---------- (IN THOUSANDS) 1976 1977 1978 1979 1980 1981 1982 1983 1964 AGRICULTURE 45.2 - 45.4 44.5 44.7 44.5 44;8 43.8 43.3 43.1 MINING & QUARRYING 2.3 2.3 2.0 1.8 1.7 1.5 1.3 1.1 1.0 MANUFACTURING 28.4 32.1 35.7 37.9 39.9 41.7 42.5 42.6 43.9 ELECTRICITY, GAS & NATER 1.3 1.3 1.4 1.4 1.5 1.5 1.5 1.5 1.5 CONSTRUCTION 10.7 16.8 18.6 20.6 22.0 20.9 20.3 20.4 20.5 TRANSPORTATION, STORAGE & COMMUNICATIONS 8.3 8.2 8.7 9.0 9.5 10.4 10.6 11.6 12.2 TRADE, WHOLESALE & RETAIL 23.8 24.2 26.2 28.7 31.5 36.2 37.7 39.2 40.1 BANKING, INSURANCE & REAL ESTATE 5.4 6.4 6.7 7.1 7.5 7.8 8.4 9.0 9.2 SERVICES 28.5 32.1 32.6 33.5 35.3 36.6 37.7 39.1 39.6 OTHER 1; 26.8 25.9 24.4 23.7 22.7 21.6 21.6 21.0 20.1 BRITISH HILITARY AUTHORITIES 5.4 4.9 4.7 4.7 4.4 4.2 4.1 4.0 4.0 & FOREIGN ORGANIZATIONS UNEMPLOYED 2/ 16.8 6.1 4.0 3.7 4.3 5.9 6.4 7.8 8.0 RATE OF UNEMPLOYMENT (7) 8.31 3.01 1.97 1.77. 1.9% 2.51 2.71 3.21 3.3X TOTAL ECONOMICALLY ACTIVE POPULATION 202.9 205.7 209.5 216.8 224.8 233.1 235.9 240.6 243.2 TOTAL POPULATION IMID-YEAR ESTIMATES) 613.0 613.0 616.0 621.0 627.0 634.0 640.0 649.0 657.0 1/ InclIudes Cypriots uorkinig abroid. 2/ Monthly average. SOURCE : DEPARTMENT OF STATISTICS & RESEARCH , MINISTRY DF FINANCE, ECONOMIC REPORT, 1984. - 55 - TABLE 2.1: GROSS DOMESTIC PRODUCT, BY SECTOR, 1976-85 1/ ------- {H(MILLIONS OF CURRENT POUNDS) 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 AGRIC. & FISH. 53.0 55.9 55.2 64.3 72.4 80.4 94.3 89.0 119.6 105.9 MINING 7.3 8.o 8.7 9.5 9.9 9.8 8.8 8.0 8.1 8.2 MANUFACTURING 56.8 74.1 91.4 109.6 132.2 153.3 172.2 184.8 212.5 227.4 ELECT., 6AS, WATER 5.1 5.6 7.0 7.8 10.0 14.7 17.2 22.1 27.4 30.8 CONSTRUCTION 26.1 41.2 58.6 79.8 101.1 103.9 113.9 123.3 135.1 145.5 TRADE 45.8 60.6 71.3 93.2 112.3 132.3 155.7 172.5 233.8 258.8 TRANSP., COMMUNICAT. 27.4 34.2 41.7 48.7 60.5 72.0 84.6 101.6 117.8 134.4 FINANCE, INSUR., BUSINESS 51.1 61.5 72.2 88.9 104.4 128.5 145.8 155.3 178.4 192.5 COMMUNITY, SOCIAL SERVIC. 10.2 14.0 16.5 20.9 25.6 31.3 35.5 43.1 52.6 57.9 TOTAL INDUSTRIES 282.8 355.7 422.6 522.7 628.4 726.2 828.0 899.7 1085.3 1161.4 GOVERNMENT SERVICES 40.1 46.5 54.5 69.4 88.8 107.9 132.8 149.8 166.5 184.6 PUBLIC ADMIN. & DEFENSE 25.8 27.9 31.6 40.4 52.0 65.0 77.9 88.5 98.6 110.3 PUBLIC SERVICES 14.3 IB.6 22.9 29.0 36.8 42.9 54.9 61.3 67.9 74.3 OTHER PRODUCERS 1.6 1.8 2.3 2.8 3.6 4.1 4.7 6.0 6.2 7.0 GDP, FACTOR COST 324.5 404.0 479.4 594.9 720.8 838.2 965.5 1055.5 1258.0 1353.0 IMPUTED BANK SERVICE CHARGE 8.9 11.9 13.1 18.3 23.0 33.4 36.8 31.7 36.1 36.0 IMPORT DUTIES 13.7 25.4 32.5 44.0 51.3 55.9 70.8 83.3 94.a 105.2 GDP, MARKET PRICES 329.3 417.5 498.8 620.6 749.1 860.7 999.5 1107.1 1316.7 1422.2 1; 1985 PRELIMINARY - 56 - TABLE 2.2: GROSS DOMESTIC PRODUCT, BY SECTOR, 1976-85 11 --------- (MILLIONS OF 1980 POUNDS) 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 AGRIC. & FISH. 68.6 68.8 66.4 68.8 72.4 72.0 72.3 68.9 78.6 77.9 MINING 10.4 10.6 10.0 9.7 9.9 8.7 8.6 8.2 6.8 7.3 MANUFACTURING 91.0 104.2 113.9 124.5 132.2 141.2 148.5 151.5 159.8 161.5 ELECT., GAS, WATER 8.1 8.7 9.2 9.8 10.0 10.1 10.4 12.7 14.0 15.0 CONSTRUCTION 54.2 71.5 85.7 97.9 101.1 89.8 86.8 87.0 87.6 87.1 TRADE 63.3 79.4 86.7 105.0 112.3 117.7 127.5 130.0 164.2 171.8 TRANSP., COMMUNICAT. 47.2 52.1 57.5 59.6 60.5 65.0 69.6 77.7 85.8 94.6 FINANCE, INSUR., BUSINESS 67.3 78.0 87.1 99.8 104.4 120.2 133.7 138.3 149.6 154.3 COMMUNITY, SOCIAL SERVIC. 17.5 21.8 21.6 24.0 25.6 28.1 27.5 30.4 32.5 33.8 TOTAL INDUSTRIES 427.6 495.1 538.1 599.1 628.4 652.8 684.9 704.7 778.9 803.3 GOVERNMENT SERVICES 70.2 74.9 76.8 83.2 88.8 94.0 100.5 106.0 111.8 116.4 PUBLIC ADMIN. & DEFENSE 44.7 44.6 44.5 48.4 52.0 56.7 59.1 62.8 66.6 69.9 PUBLIC SERVICES 25.5 30.3 32.3 34.8 36.8 37.3 41.4 43.2 45.2 46.5 OTHER PRODUCERS 2.7 2.9 3.1 3.3 3.6 3.9, 4.0 4.5 4.4 4.6 GDP, FACTOR COST 500.5 572.9 618.0 685.6 720.8 750.7 789.4 815.2 895.1 924.3 IMPUTED BANK SERVICE CHARGE 13.7 16.9 16.9 21.1 23.0 29.9 30.1 24.5 25.7 24.6 IMPORT DUTIES 35.8 40.9 44.2 48.9 51.3 53.0 55.8 58.1 63.4 65.6 GDP, MARKET PRICES 522.6 596.9 645.3 713.4 749.1 773.8 815.1 848.8 932.8 965.3 1: 1985 PRELIMINARY - 57 - TABLE 2.3: GROSS DONESTIC PRODUCT, BY EXPENDITURE, 1976-85 1/ ---------- (MILLIONS OF CURRENT CYPRUS PWUNDSI 1976 1977 1978 1979 1980 9l81 1982 1983 1984 1985 CONSUMPTION 302.2 375.5 431.4 507.1 604.0 690.0 818.6 917.9 1,019.6 1,121.0 GENERAL GOVERNMENT 56.1 61.3 67.0 86.3 107.5 136.9 167.1 188.2 204.8 224.7 PRIVATE 246.1 314.2 364.4 420.8 496.5 553.1 651.5 729.7 814.8 896.3 INVESTNENT 82.1 142.7 186.3 237.8 281.0 292.9 326.1 341.6 439.1 435.9 FIXED INVEST. 68.6 122.4 170.4 218.7 259.1 274.6 303.1 317.3 409.8 405.3 CHANGE IN STOCKS 13.5 20.3 15.9 19.1 21.9 18.3 23.0 24.3 29.3 30.6 RESOURCE BALANCE -43.0 -84.4 -104.3 -120.2 -135.4 -114.5 -136.5 -156.8 -166.9 -148.4 IMPORTS G+NFS 209.1 286.7 318.7 401.6 479.5 554.7 658.4 727.2 097.4 888.0 EXPORTS G+NFS 166.1 202.3 214.4 281.4 344.1 440.2 521.9 570.4 730.5 739.6 (STATISTICAL DISCREP.) -12.0 -16.3 -14.6 -4.1 -0.5 -7.7 -8.7 4.4 24.9 13.7 GROSS DOMESTIC PRODUCT (NKT.PRICE) 329.3 417.5 499.8 620.6 749.1 860.7 999.5 1,107.1 1,316.7 1,422.2 NET FACTDR INCOME FROM ABRDAD 13.9 18.8 20.2 22.1 26.6 27.0 30.5 21.8 24.7 27.2 GROSS NATIONAL PRODUCT 343.2 436.3 519.0 642.7 775.7 807.7 1,030.0 1,128.9 1,341.4 1,449.4 11 PRELIMINARY - 58 - TABLE 2.4: GROSS DOMESTIC PRODUCT, BY EXPENDITURE, 1976-85 1/ ---------- (MILLIONS OF 1980 POUNDS) 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 CONSUMPTION 431.6 497.4 532.7 574.3 604.0 617.1 678.3 718.8 760.3 792.9 GENERAL 6OVERNMENT 94.3 95.8 92.8 102.4 107.5 119.5 128.2 135.1 138.7 142.9 PRIVATE 337.3 401.6 439.9 471.9 496.5 497.6 550.1 583.7 621.6 650.0 INVESTHENT 123.9 189.7 224.6 259.4 281.0 257.5 272.0 269.6 321.8 301.5 FIXED INVEST. 104.3 161.6 204.0 237.3 259.1 241.4 253.2 250.5 299.5 279.6 CHANGE IN STOCKS 19.6 28.1 20.6 22.1 21.9 16.1 18.8 19.1 22.3 21.9 RESOURCE BALANCE -91.2 -131.8 -127.8 -140.0 -135.4 -104.8 -125.8 -128.7 -154.6 -115.5 IMPORTS 6+NFS 291.1 367.3 385.4 451.4 479.5 489.7 555.1 593.1 697.0 661.7 EXPORTS G+NFS 199.9 235.5 257.6 311.4 344.1 384.9 429.3 464.4 542.4 546.2 (STATISTICAL DISCREP.) 58.3 41.6 15.8 19.7 -0.5 4.0 -9.4 -10.9 5.3 -13.6 GROSS DOMESTIC PRODUCT iMKT.PRICE) 522.6 596.9 645.3 713.4 749.1 773.8 815.1 848.8 932.8 965.3 NET FACTOR INCOME FROM ABROAD 22.0 26.9 26.1 25.4 26.6 24.3 24.9 16.8 17.5 18.5 GROSS NATIONAL PRODUCT 544.6 623.8 671.4 73B.8 775.7 798.1 840.0 865.6 950.3 983.8 1; PRELIMINAR; - 59 - TABLE 2.5 GROSS FIXED CAPITAL FORMATION BY ACTIVITY, 1976-85 1/ --------- (MILLIONS OF CURRENT POUNDS) 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 AGRIC. & FISH. 6.3 8.5 11.9 16.0 15.0 15.6 19.6 24.4 35.8 36.9 MINING 1.0 1.1 1.4 1.7 1.3 1.5 0.9 0.4 0.4 0.6 HANUFACTURING 9.4 20.3 24.0 26.8 27.4 24.7 27.4 24.2 32.8 31.3 ELECT., GAS, WATER 3.5 4.7 4.1 4.1 10.9 18.3 20.4 11.6 7.6 9.2 CONSTRUCTION 1.2 4.0 6.3 9.8 11.7 7.0 9.4 10.8 14.9 10.6 TRADE, RESTAUR, HOTELS 5.5 10.2 16.6 22.5 37.6 41.0 50.0 57.3 66.5 74.5 TRANSP., STOR., COHUNICAT. 11.1 22.1 33.3 37.5 38.9 50.5 51.9 59.5 113.2 91.7 FINANCE, INSUR., BUSINESS 25.7 44.6 67.9 94.4 107.1 104.4 110.2 117.2 126.6 137.6 COMMUNITY, SOCIAL SERVICE 4.9 6.9 4.9 5.9 9.2 11.6 13.3 11.9 12.0 12.9 TOTAL FIXED INVESTMENT 68.6 122.4 170.4 218.7 259.1 274.6 303.1 317.3 409.8 405.3 I; 1985 PRELIMINARY - 60 - TABLE 2.6: BROSS OUTPUT, INVESTMENT AND EXPORTS IN MANUFACTURING ----------- IIN MILLIONS OF CYPRUS POUNDS) 1976 1977 1978 1979 1980 1981 1982 1983 1984 1- GROSS OUTPUT (TOTAL) 167.8 216.2 254.7 319.1 401.4 486.0 529.5 572.8 647.2 FOOD, BEVERAGES & TOBACCO 56.7 67.3 75.9 87.5 101.6 120.1 132.8 143.9 163.3 TEXTILES 32.0 44.1 57.2 71.5 83.7 103.9 107.1 120.9 152.8 VOOD S WOOD PRODUCTS 9.7 12.5 16.9 21.5 27.5 33.7 40.0 46.0 50.2 PAPER & PAPER PRODUCTS 8.2 9.9 13.0 17.7 23.1 29.5 30.8 29.3 35.2 CHEMICAL, PETROLEUH, RUBBER 27.9 37.3 37.6 51.2 81.1 98.4 107.7 121.2 126.0 NON-METALLIC MINERAL PRODUCTS 16.0 20.5 24.1 29.7 36.7 42.4 42.5 39.9 41.5 METAL PRODUCTS & MACHINERY 13.6 20.8 25.2 34.0 40.2 50.5 59.9 60.9 66.8 OTHER HANUFACTURING INDUSTRIES 3.7 3.8 4.8 6.0 7.5 7.5 8.7 10.7 11.4 11- INVESTMENT (TOTAL) 9.4 20.3 24.0 26.8 27.4 24.7 27.4 24.2 29.5 FOOD, BEVERAGES & TOBACCO 1.8 4.4 4.3 5.3 5.9 4.0 6.2 6.2 7.9 TEXTILES 2.4 3.3 3.3 3.2 3.2 4.1 4.0 5.0 6.0 MOOD 5 WOOD PRODUCTS 0.5 0.6 0.6 1.1 1.5 1.7 1.9 2.4 2.6 PAPER & PAPER PRODUCTS 0.3 3.2 4.2 2.7 2.6 1.3 1.4 1.1 2.2 CHEMICAL, PETROLEUM, RUBBER 1.3 2.7 5.0 6.1 5.4 4.4 5.3 2.8 3.9 NON-METALLIC MINERAL PRODUCTS 1.9 2.7 2.6 4.7 5.9 5.2 5.5 3.8 2.9 METAL PRODUCTS & MACHINERY 1.1 3.2 3.8 3.6 2.8 3.8 3.0 2.5 3.7 OTHER MANUFACTURING INDUSTRIES 0.1 0.2 0.2 0.1 0.1 0.2 0.1 0.4 0.3 111- EXPORTS (OTAL) 47.7 65.2 69.9 B6.3 107.5 143.2 140.6 135.3 171.5 FOOD, BEVERA6ES & TOBACCO 15.8 19.2 20.5 22.7 25.7 32.4 38.0 33.2 38.4 TEXTILES 14.2 19.8 26.5 35.8 44.3 61.5 52.4 58.4 85.6 MOOD W MOOD PRODUCTS 1.4 0.9 0.6 0.6 0.4 0.5 0.4 0.7 0.8 PAPER & PAPER PRODUCTS 1.5 2.1 3.1 5.4 7.0 10.0 9.5 6.5 8.6 CHEMICAL, PETROLEUM, RUBBER 1.4 4.6 3.5 3.4 6.0 8.3 9.3 11.4 13.2 NON-METALLIC MINERAL PRODUCTS 9.6 11.9 9.5 11.2 14.4 1J.0 15.5 11.5 9.2 METAL PRODUCTS i MACHINERY 3.5 6.3 5.9 6.8 9.5 15.1 15.1 13.2 15.3 OTHER MANUFACTURING INDUSTRIES 0.3 0.4 0.3 0.4 0.2 0.4 0.4 0.4 0.4 SOURCE : STATISTICS & RESEARCH DEPARTMENT, MINISTRY OF FINANCES ECONOMIC REPORT 1984. - 61 - TABLE 2.7: PRINCIPAL AGRICULTURE PRODUCTS ----------- (IN METRIC TONS) 1976 1977 1978 1979 1980 1981 1982 1983 1984 CEREALS : WHEAT 34,544 23,368 20,320 13,208 13,20B 10,668 10,160 9,100 9,000 BARLEY 55,880 56,896 68,072 64,008 B1,280 76,200 81,280 62,000 B3,250 VE6ETABLES POTATOES 182,880 203,200 147,320 172,120 191,008 174,752 171,704 188,000 185,000 CARROTS 9,957 11,786 6,401 8,839 7,417 8,839 9,550 6,000 6,200 TOMATOES 22,352 19,304 20,828 21,844 20,828 20,320 22,860 23,300 21,120 WATER MELONS 21,336 19,304 20,320 25,400 18,288 20,320 21,336 18,600 25,800 SWEET MELONS 3,861 4,877 5,385 4,572 4,877 5,080 4,877 5,100 6,250 CUCUMBERS 10,363 12,192 11,735 13,005 10,770 10,566 9,652 10,800 10,960 FRUIT & OTHER TREE CROPS GRAPES 167,640 155,448 182,880 203,200 208,280 213,360 201,168 210,000 198,500 ORANGES 36,068 40,132 36,8B1 36,068 32,512 40,640 43,180 41,500 51,000 LEMONS 9,652 13,208 11,786 16,662 16,764 21,031 24,892 29,000 26,500 GRAPEFRUITS 33,528 47,752 40,640 46,990 47,955 51,613 55,982 51,200 64,600 APPLES 10,973 10,465 7,620 9,347 9,144 7,620 8,636 9,000 9,000 PEARS 1,270 2,235 1,270 1,829 1,524 1,778 2,134 2,000 1,650 PEACHES 2,743 2,438 1,B29 2,032 1,626 1,372 1,626 1,700 1,000 CHERRIES 1,118 1,727 1,118 1,575 1,219 1,016 1,524 1,600 1,100 BANANAS 3,251 3,861 3,505 4,369 4,064 5,080 6,604 6,000 9,000 ALMONDS 3,759 4.064 4,267 2,438 3,048 3,353 1,930 3,600 3,500 OLIVES 10,160 B,636 10,363 10,668 15,240 10,66B 13,208 3,000 12,000 CAROBS 32,512 19,304 18,288 18,491 12,700 27,432 12,802 13,200 10,400 LIVESTOCK PRODUCTS CATTLE MEAT 1,57J 1,636 1,849 1,829 2,022 2,032 2,002 2,450 2,445 SHEEP & BOAT MEAT 4,145 4,642 5,776 5,492 5,337 5,387 5,570 5,890 6,440 PORK 13,614 14,224 15,240 15,646 15,321 17,526 19,609 21,000 23,250 POULTRY MEAT 7,620 7,823 B,433 9,957 9,997 10,160 11,278 12,200 12,600 HILk 48,971 54,255 61,468 65,989 71,883 76,BO9 83,870 93,100 100,200 SOURCE : DEPARTMENT OF STATISTICS & RESEARCH, MINISTRY OF FINANCE, ECONOMIC REPORT, 1984. - 62 - Table 2.8: AGRICULTURAL LAND UTILIZATION, 1980 (In thousands of donumsl/) Land use Irrigated Not- Total Irrigated Crop Area 228 910 1,138 Temporary Crops 131 539 670 Cereals 17 350 367 Legumes 9 16 25 Industrial crops 3 3 6 Fodder crops 8 170 178 Vegetables 94 -- 94 Permanent Crops 97 371 468 Vines 21 237 258 Citrus 39 -- 39 Fresh fruit 28 -- 28 Nuts 3 37 40 Other (Olives, carobs) 6 97 103 Fallow land 10 180 190 Grazing land - 30 30 Uncultivated land 290 290 Scrub, deserted land - 118 118 TOTAL AGRICULTURAL LAND 238 1,528 1,766 1/ 7.5 donums = 1 ha. Source: Department of Statistics and Research, Ministry of Finance, Agricultural Statistics, 1980 - 63 - TABLE 3.1: EXPORTS BY MAIN COMMODITIES …----- (IN THOUSANDS OF CYPRUS POUNDS) 1975 1976 1977 1978 1979 1980 19BI 1982 1983 1984 Citrus 5,203 5,115 6,631 6,701 8,851 8,227 11,045 12,750 13,510 14,323 Potatoes 7,125 17,707 19,435 . 10,772 13,624 12,6B3 16,064 22,530 12,372 30,172 8rapes 2,343 2,577 2,746 3,448 4,272 4,506 3,879 3,921 3,476 4,406 Fresh Vegetibles 562 1,570 2,192 2,761 2,197 2,388 2,730 3,156 2,421 2,800 Carrots 284 509 850 326 600 645 1,084 528 708 618 Carobs 592 1,021 1,402 1,110 1,172 1,247 803 2,708 1,113 1,561 Hides drid Ski::s 416 538 565 997 1,141 1,018 594 924 612 1,046 Wiie arid 6rape-musL 3,780 4,927 6,147 5,778 6,717 6,456 7,927 8,832 9,236 10,185 AlLohOliL bevetdges 385 2,415 1,061 662 1,263 1,612 2,388 1,839 1,756 1,781 Ciyarettes 1,321 3,348 3,815 5,915 5,705 6,983 8,834 8,984 5,956 4,634 Clolhi,:y 3,450 8,355 11,983 16,322 22,111 27,937 39,507 31,664 38,382 61,864 FootLedr 1,758 4,557 5,93i 7,104 8,342 11,663 16,287 15,841 15,770 17,713 Pdpef ProduLts 1,37B 1,464 2,034 2,959 5,219 6,767 9,788 B,965 5,290 7,041 Portidad Cement 5,980 9,168 10,556 8,306 10,251 12,880 10,923 10,584 9,955 6,697 Asbestos 2,127 3,316 4,381 3,724 5,202 4,616 6,056 4,009 3,250 2,101 Iron Pyrites 1,579 641 868 476 647 1,172 412 17 155 393 Cu,.,eous Cin.euIrdtes 2,495 3,339 1,864 1,462 995 105 0 0 0 0 Chromium 764 484 719 566 472 3i90 5B4 721 527 0 Othet 6,671 14,114 26,299 24,186 28,063 37,190 52,659 58,540 55,413 67,621 Totdil 48,813 85,165 109,501 103,575 127,644 148,485 191,564 196,513 179,902 234,956 Souroe : Central bank of Cyprus, bulletin, September 1985. - 64 - TABLE 3.2: EXPORTS BY MAIN COUNTRIES 11 --------- (IN THOUSANDS OF CYPRUS POUNDS) 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 Bdhrain 272 1,240 2,066 2,320 1,808 2,435 2,971 3,052 3,208 3,219 Belgiue 288 664 675 1,106 1,265 1,851 2,732 4,335 3,529 4,272 Czechuslovdkid 1,254 931 1,096 1,650 1,268 1,190 1,091 717 1,708 1,412 Denisdrk 429 557 823 1,111 1,723 1,160 845 969 655 540 Dubdi 923 1,820 3,028 2,697 2,542 3,543 5,717 6,135 5,6B4 5,3B9 Germany iF.R) 973 597 1,579 2,661 3,713 4,837 7,900 8,157 7,462 9,419 6reece 2,334 2,233 3,714 3,554 3,986 4,763 5,643 4,306 6,437 9,335 Iraq 816 1,977 1,143 1,883 2,957 3,649 14,914 17,990 4,937 6,046 ILaly 1,211 1,164 1,286 1,339 1,785 2,430 1,122 2,274 2,506 3,804 Kuwait 580 2,294 3,171 5,752 6,334 6,671 6,701 7,697 8,780 7,384 Lebanoni 2,194 18,025 12,012 12,953 15,092 18,660 15,024 32,067 35,794 47,628 Libya 4,026 5,836 6,970 5,727 8,217 15,514 22,840 5,162 13,928 38,502 Retherldnds 1,357 1,877 1,060 2,407 2,013 2,523 3,033 4,414 4,283 4,280 Oman 551 1,297 1,987 1,229 975 1,053 1,839 1,979 2,753 3,893 FPo1dad 177 125 1,111 1,225 1,373 479 230 92 86 38 Qatar 116 1,147 1,335 1,018 945 1,131 1,418 2,154 2,112 2,429 Saudi Arabia 1,297 6,313 16,465 11,527 12,034 14,411 19,688 24,425 21,799 25,190 Spain 1,043 2,109 1,054 1,088 1,223 546 726 581 149 917 Sweden 983 1,975 1,833 1,467 1,284 1,328 1,795 747 1,524 2,193 Syrii 4,475 6,419 3,653 6,B03 10,785 12,694 11,705 10,594 6,225 5,102 U.A.R 286 829 4,571 2,B64 2,697 3,110 5,679 7,428 8,716 10,429 UIiited Kinqdom 19,557 29,466 37,205 30,040 41,159 38,964 44,188 53,716 42,841 57,283 U.S.A. 278 508 1,102 1,894 2,199 2,462 2,337 2,849 6,262 11!442 U.S.S.R. 2,410 4,844 4,180 3,401 3,221 7,163 9,979 12,366 10,291 10,164 Giilers 8,182 12,08-5 16,632 20,654 31,273 35,469 44,656 49,603 58,856 66,514 TOTAL 56,012 106,332 129,751 128,370 161,B71 188,036 234,773 263,809 260,525 336,826 11 I;LiudC rf-expurts aind shipstores S,uULe CenLrdl bank oi Cyprus, builetiii, SepLeuder 1985. - 65 - TABLE 3.3: IMPORTS BY ECONOMIC CLASSIFICATION --------- (IN THOUSANDS OF CYPRUS POUNDS) 1977 1978 1979 19B0 1981 1982 1983 1984 Con,suser 6o0ds 49,337 56,189 671,787 79,544 93,310 125,413 149,324 155,406 Durdble 10,439 12,865 18,407 22,199 26,843 36,508 47,376 44,343 Semi-OurAble 9,213 9,995 13,556 16,377 18,732 26,06B 29,37q 31,841 Nori-Durable 29,685 33,329 35,824 40,36B 47,735 62,837 72,569 79,222 Inleraediate IIIputs 115,16B 122,650 172,400 185ft15 213,833 235,474 259,594 310,496 Agriculture 7,505 5,908 9,225 9,402 11,249 13,236 11,442 18,604 Construction & Miniig 15,662 19,067 31,857 27,900 28,377 35,117 33,238 37,619 manufacturilig 86,435 93,391 126,704 142,608 167,689 179,671 205,696 244,842 Trnisport, SLorige it 647 695 1,234 656 1,108 1,127 2,557 1,173 Coumunicdtions Other 4,919 3,589 3,380 4,749 5,410 6,323 6,661 7,658 Cdpital Goods 31,588 34,423 39,258 40,907 43,017 51,980 53,394 66,836 Agriculture 3,214 2,706 3,735 3,497 3,872 4,395 5,270 6,439 Coirstructioui & Nirniing 3,397 5,777 6,840 6,235 7,948 8,866 8,754 11,479 manufacturilg 16,638 16,375 15,104 16,978 14,756 17,772 16,345 21,b63 Trdnsport, Stordge 3,889 4,023 6,40B 6,101 8,644 10,320 10,363 10,678 Cum*unicatio;,s other 4,450 5,542 7,171 8,096 7,797 10,627 12,654 16,577 Tr.wsport EquipmenL 21,509 36,522 32,752 39,694 33,659 47,073 59,153 118,040 Fuels & lubticdnts 35,200 30,978 44,453 78,530 105,346 117,263 119,899 144,630 Oillers 1,206 1,924 953 302 371 348 598 910 TOTAL 254,008 282,686 357,603 424,292 489,536 577,551 641,962 796,518 SoutLe: Centril bank of Cyprus, bulletin, September 1985. - 66 - TABLE 3.4: INVISIBLES ACCOUNT --------- (IN MILLIONS OF CYPRUS POUNDS) 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 Freight and Insurdnce -7.8 -13.9 -20.8 -22.1 -29.6 -35.8 -42.1 -50.1 -55.5 -63.9 Receipts 3.4 3.6 4.5 5.0 5.7 6.3 6.7 7.5 8.5 9.6 Paymentes -11.2 -17.7 -25.3 -27.1 -35.3 -42.1 -48.8 -57.6 -64.0 -73.5 Other Trdnspoitdlio0r -1.3 -1.0 1.8 4.3 11.0 14.8 24.1 32.3 38.1 48.0 Pdsseniger Srevices -2.0 0.3 1.1 3.3 6.0 11.5 16.0 17.6 18.7 28.7 iviation & Shipping Fees 1.4 1.0 1.3 1.4 1.2 1.2 1.0 1.1 1.5 2.3 SLores for Ships & AirLrift 0.6 1.4 3.0 4.3 9.5 12.3 16.7 23.5 27.2 26.7 Port Services n.i.e. -1.3 -3.7 -3.6 -4.7 -5.7 -10.2 -9.6 -9.9 -9.3 -9.7 Trdvel -4.2 11.0 12.0 19.5 34.1 51.9 78.3 106.4 139.9 170.2 Fureign Visitors Expend. in Cyprus 5.4 20.7 23.8 33.3 50.1 71.7 102.4 136.7 174.8 212.0 Cypriot VisiLors' Expeud. Abroid -5.0 -4.7 -5.3 -5.8 -6.9 -8.4 -10.4 -15.0 -15.4 -19.4 Cypriot Studeits' Expend. Abroad -4.6 -5.0 -6.5 -8.0 -9.1 -11.4 -13.7 -17.3 -19.5 -22.4 Investmeent IrILOe -0.1 -2.4 -4.0 -4.0 -5.3 -5.8 -8.9 -10.0 -23.4 -23.8 Foreign Coepanies & Persons -1.7 -2.6 -2.4 -2.2 -2.2 -2.6 -2.6 -2.8 3.2 -2.5 Interest Received 5.3 5.1 4.8 6.1 8.6 12.3 19.1 28.4 24.8 33.6 Interesl Payments -3.7 -4.9 -6.4 -7.9 -11.7 -15.5 -25.4 -35.6 -45.0 -54.9 DLnier Goods Services & Income 31.6 37.B 49.3 51.7 63.4 74.4 86.6 95.6 113.7 140.5 Officidl 29.2 29.4 34.6 32.8 39.5 46.1 54.6 57.9 66.6 76.9 Foreign Hilitdiy Expend. 27.6 2B.2 32.8 30.9 37.5 43.2 51.4 54.0 62.1 71.3 Other 1.4 1.2 1.8 1.9 2.0 2.9 3.2 3.9 4.5 5.6 Privdte 2.4 8.4 14.7 18.9 23.9 28.3 32.0 37.7 47.1 63.6 Workers RemittanlLes 4.0 7.0 14.2 16.6 19.2 22.2 24.0 26.4 29.4 31.1 Earningr.s by Nor-Residenits -2.0 -1.1 -0.8 -1.2 -1.9 -2.3 -2.2 -2.7 -2.5 -2.2 '3lher 0.4 2.5 1.3 3.5 6.6 8.4 10.2 14.0 20.2 34.7 Transsfer Pdyse()Ls 26.6 24.9 29.7 25J.2 25.4 2J.9 26.5 33.9 39.0 2J.5 Prfivate Remittanlces 5.6 J.4 5.8 8.4 9.0 11.5 11.5 11.8 12.2 12.6 OffiLidl Aid ReLeived 21.0 19.5 23.9 16.8 16.4 14.4 15.0 22.1 26.6 12.9 NET 44.8 56.4 68.0 74.6 99.0 125.4 164.5 208.1 251.8 296.5 SourLe : Centrdl bdrk, huiletiui, Junie 1983 & Septesber 1985. - 67 - TltLE 3.5 EIPORTS WF NAIR1 AIICULTURIL PRCUCTS 1975 1976 1977 1978 1979 19 O 1981 1i1l2 1983 1984 PRODUCTS TIllS 1 X TOTAL TONS I OF TOTAL TICS I OF TOTAL TOWS I OF TOTAL T3S : OF TOTAL TONS OF OTAL T TNS IF L 2 Of TOTAL TONS I OF TOTAL TINS I OF TOTAL PRCOUCTIN PFR CTIN PROTUC71O POCTION PRSOC7TIO PR TIN PROWETIN PR8 CTIO1 PFRSTcIN P808T71CR 84RNE8S 22,934 71.71 ID,310 74.17 29,924 74.41 24,026 70.61 25,544 70.87 20,899 64.23 28,284 49.8 31,723 73.51 29,184 70. 2 29,743 58.35 LEMONS 8,074 72.43 6, 39 o8.85 9,644 73.21 8,244 69.95 12,496 74.2: 12,335 73.41 14,4L4 7B.03 18,405 74,7: 22,801 77.93 18,551 70.05 6R8PEFRUITS 29,557 84.5i 27,714 84,05 40,250 84.25 33,449 82.9 39,48 84.81 34,684 76.5 40,84 79.23 45,236 90. B 40,225 78.87 49,904 77.25 POTATOES 90,495 82.75 155,373 84.31 204,003 1/ 10.41 132,231 P89. 144,7480".12 11,498 84.77 158,045 90.51 149,429 87.05 143,104 84.81 172,B73 94.05 CARROTS 2,459 74.85 8,714 8t.93 10,154 86.23 4,950 77.01 7,247 82.05 6,335 15.41 7,843 89.02 8,317 87.15 4,445 77.41 4,931 79.57 I; 00,321 .t,i Ti7, o4 potato. exported du.,i. 1977 .re from lo h k o t prewiois War. SOURCE : STATISTICS i RESEARC DEPMRT4ENT, MINISTRY OF FININCE, ECINIIC REPORT, 1984. - 68 - Table 4.1 : External Debts Structure SERVICE PAYMENTS. COMMITEWNTS. DISBURSEMENTS AND OUTSTANDING AMOUNTS OF EXTERNAL P DEBT PROJECTIONS BASED ON DEBT OUTSTANDING INCLUDING ULNISBURSED AS OF DEC at. 1985 INCLUDES ONLY DEBT COMMITTED 000000 - 198112 DEBT REPAYABLE IN FOREIGN CURRENCY AND GOODS (IN THOUSANDS OF U.S. DOLLARS) * * * TABLE TOTAL * * t DATE OEST OUTSTANDtNG AT T R A N S A C T I O N s o U R I N Q P E R I o D OTHER CHANGES : END OF PERIOD D OISBURSED INCLUDING COMMIT- DISBURSE- S E R V I C E P A YM E N T S CANCEL- AOJJST- ONLY UNDISBURSED MENTS MENTS ----------- ------------- ----------- LATIONS * MENT * PRINCIPAL INTEREST TOTAL M(1) (2) (3) (4) (5) (6) (7) (8) (9) 197412 M.163 101,723 21,495 21.925 4,761 3.748 a.s - - 197512 76.332 102.949 11.158 9,803 5.129 4.924 10.053 2.002 -2.801 197612 94.356 145.814 52.007 27.254 9.317 5.252 14,569 392 667 197712 162.036 226.005 78,704 67,683 9,263 8.604 17.867 - 10.753 197812 .241.272 324.854 96.207 78.086 12.381 13.397 25.778 - 15.020 197912 299.564 364,885 49.103 67,675 15,458 24,762 40.220 - 6,386 198012 39n,018 529.519 206,037 137,967 30,191 29,311 59.502 222 -1o. no 198i12 486.934 658.107 18i.484 140.270 34,664 41,469 76,123 2.812 -22.420 198212 608.948 844,632 256.636 18*.832 49.684 49,s24 99,508 - -15,427 198312 649.882 837,180 109,933 130,221 67,456 62,860 130,316 25.757 -24.472 198412 769.048 940,040 210,564 215.302 61.903 65.868 127,771 9.775 -36.026 s98512 923.023 1.077,092 146.268 169.6S3 93,741 65,780 159.521 1.290 85.,15 * * * * * * THE FOLLOWING FIGUJRES ARE PROJECTED * * * 198612 865,699 974,199 - 45,570 102.879 75,403 178,282 - -14 198712 7806S7 851,697 - 37,419 122.498 69.470 191,968 - -4 198812 670,276 7i5,622 - 25.734 136.074 60.710 196,824 - -l f98912 563,311 590,101 - 18,557 125.523 50.914 176,437 - 2 199012 477.654 493,707 - 10,737 96.393 41.767 138,160 - -1 199112 398.895 409,532 - 5,418 84.169 34.581 118.750 - -6 199212 304.265 310,885 - 4.017 98.646 27.871 126,517 - -i 199312 221.070 223.386 - 4,306 87.496 20.569 108.055 - -3 199412 1iS.261 115.262 - 2.316 108.i22 13.676 121,798 - -2 199512 71,880 71.881 - - 43.379 7.093 50,472 - -2 199612 53,123 53,124 - - 18.756 4.172 22.928 - -1 199712 38.681 38,682 - - 14.443 2.798 17,241 - 1 199812 27,963 27,964 - - 10.719 1.803 12,522 - I 199912 20.682 20,682 - - 7,280 ,094 8.374 - -2 200012 15.804 15,804 - - 4,875 710 5.585 - -3 * PROJECTED AMOUNTS IN THIS COLUMN ARE AMOUNTS EXCLUDED FROM PROJECTIONS BECAUSE OF UtKNOWN TERMS. *- THIS COLUMN SHOWS THE AMOUNT OF ARITHMETIC IMBALANCE IN THE AMOUNT OUTSTANDING INCLUDING ULNISsURSED FROM ONE PERIOD TO THE NEXT. THE MOST COMMON CAUSES OF IMBALANCES ARE CHANGES IN EXCHANGE RATES AND TRANSFERS OF DEBTS FROM ONE CATEGORY TO ANOTHER IN THE TABLE. - 69 - Table 4.2 : Structure and Terms of External Public Debt as of Dec. 31, 1985 STRUCTURE AND TERMS OF EXTERNAL PUBLIC DEST AS OF DEC 31. 1985 INCLUDES ONLY DEBT COMMITTED 000000 - DEC 31. 1985 * DEBT REPAYABLE IN FOREIGN CURRENCY AND GOODS (IN THOUSANDS OF U.S. DOLLARS) AVERAGE TERMS INTEREST MATURITY GRACE GRANT GRANT - TOTAL*-* AMOUNT** (X) (YRS) (YRS) ELEMENT(%) EQUIVALENT AMOUNT 197412 2t,495 6.934 17.2 5.8 17.9 3.847 21.495 197512 11,158 6.001 8.1 5.8 19.9 2.224 11t158 197612 52,007 7.039 12.5 5.1 17.1 8.909 52.007 197712 78,704 7.403 10.0 2.4 10.5 8.290 76.704 197812 96,207 9.035 8.5 3.2 4.5 4.377 96.207 197912 49.103 8.969 10.5 2.6 5.9 2.890 49.103 198012 206,037 11.480 9.6 3.9 -5.9 -12,387 206,037 198112 188.494 14.266 9.9 3.6 -11.4 -36.717 68.494 198212 251.636 10.555 *.9 3.6 -2.7 -7.026 251.636 198312 109.933 8.436 it.1 4.4 7.1 7.769 109.933 198412 210.564 8.803 f0.8 5.0 6.6 13,826 210.564 198512 146,268 8.133 it.4 4.8 11.1 16.230 146.268 TOTAL EXTERNAL DEBT 1.421.606 9.957 1O.5 4.0 0.9 12.229 1.421.606 INCLUDES INCREASES DURING THIS PERIOW TO DEBTS WITH ORIGINAL COMMITMENT DATES FROM JAN. 1, 1900 TO DEC 31. 1985. TOTAL LOANS HAVING INTEREST, GRACE PERIOD AND MATURITY INFORMATION AVAILABLE. USED TO COMPUTE AVERAGE TERMS. TOTAL OF ALL LOANS IN THIS BREAKDOWN REGARDLESS OF AVAILABILITY OF INTEREST. GRACE PERIOD. AND MATURITY INFORMATION. - 70 - TABLE 5.1: CONSOLIDATED 6OVERNMENT BUDGET --------- (IN MILLIONS OF CYPRUS POUNDS) 19i6 1977 1978 1979 1980 1981 1982 1983 1°94 1985 PREL. REVENUE 63.; B2.5 99.7 123.5 161.2 191.3 232.8 275.6 333.4 378.9 CURRENT REVENUE 63.2 82.4 99.J 123.3 161.1 191.1 232.7 274.9 333.2 379.7 TAi 46.; 63.2 78.9 101.0 129.3 159.1 189.0 223.5 274.5 310.3 I1Ose & Property 16.5 18.8 22.1 29.0 42.6 45.1 52.4 64.9 84.3! 98.2 SoLidl SeLurdv Cuikributiui. 6. 5 `;.0 11.6 16.9 38.3 43.0 48.4 58.7 66.4 ldieLt 24.b 37.9 47.21 60.4 69.9 75.8 93,5 110.2 ;3;.5 145.8 NONTAX 16.9 19.2 20.o 22.3 31.8 Z.,u 4!.7 51.4 S 8.8 68.4 CAPITAL REVENUE 0.2 G.1 i.2 .V 0.1 0.1 0.2 0.8 I.2 I EXPENDITURE 101.J i;4.i 135.2 171.O 221. 255.6 297.0 57.3 409.J 4J3.G CURRENT EXPENDITURE 82.6 ; i.8 10.6 13O.2 177.1 2 i l. ;. 30.2 3u752 .0 392.5 Wdge$ r Sildlri s 30.6 316.0 422.9 58. .o 89.7 107.2 13.2 13.8 148.1i 6urtdS 1 S1rViLIs 17.5 18.2 20.6 23.5 25.3 33.9 35.4 '9.9 42.7 48.1 Sub .di ti5 5.0 5.0 . 7.v0 i7. 2;.0 22.^9 ',.4 2.8 6 ;. Ifie!et Piyva,It5 4.1 o.4 7.4 10. 9 14.4 20. i 26.9 . .o 4o.7 5 2, T g~r dlr b 22.2 26.4 25. 27. 3 J 45. 4 J,. 0 68.2 81.3 95.7 UidlULd.i6I 2.9 -0.2 0.6 3.2 . -2 _.1 3.9 5.6 14.8 15.J CAPITAL EXPENDITURE 19 .2 2S.o 40.6 44.4 45.3 43.8 51. 57. oO.5 hIvk!teeiit lo.l 16.9 20.9 .i.o 4. 6.2 33.6 41.6 47.1 46.7 Tr doi.fer s 3. J.5 I . 1.2 10.1 9. V iU.V 9.4 10.5 23.6 NET LENDIG;N 3. 3.9 , 5.7 4.8 5.0 9.S i;i.4 6.6 ;1. r TOTAL E;FENCITUFE a NET LENDING i4.7 117.5 4 2 .o4 .i 7. 226.3 60,. 6 O .'. 41S.3 464.9 CURRENT BALANlCEI 19,1 -*4 - I -G.7 -16. -it9.2 -2V. 6 3. -1; . 7 -13.E OVERALL BALANCE -41. 4 5.; -42.7 -5.2 -65.1 -69.4 -74.i -92.S -65.u o60.a 3aURCE ut: MINS2i aF r NAKcE. - 71 - TABLE 5.2: CENTRAL 6OVERIENT ORDINARY S DEVELOPMEIINT BUD6ET --------- (IN MILLIONS OF CYPRUS POUNDS) 1976 1977 1978 1979 1980 1981 1982 1963 1984 198J PREL. TOTAL REVENUE 48.4 66.1 81.4 102.1 125.0 133.1 167.3 200.1 231.1 263.8 DIRECT TAXES 9.7 14.1 19.2 22.5 33.0 37.4 46.1 57.5 73.3 86.4 incume Taxes 6.8 9.7 14.5 20.5 26.9 30.5 37.7 48.9 60.4 71.8 Coepinies 2.0 2.2 3.2 6.6 6.6 8.8 9.5 12.1 13.1 15.0 Individudls 4.8 7.5 11.3 13.9 20.3 21.7 28.2 36.8 47.3 56.8 Pruperty Taxes 0.7 1.3 1.7 2.0 2.5 3.4 3.5 4.0 6.0 6.7 OLter Direct Taxws 2.2 3.1 3.0 0.0 3.7 ;.6 4.9 4.7 6.9 7.9 INDIRECT TAXES 24.7 35.8 44.5 60.3 63.4 66.7 65.1 100.5 113.5 126.1 Taesu 6oods S SerViLes 11.2 13.7 21.1 3;5. 3.;3 33.8 40.8 48.8 57.3 65.4 SeleLtive Excises 9.5 11.9 18.8 28.5 29.7 30.1 36.1 42.1 46.7 52.3 LiLceses & Otlher Receipts 1.7 1.8 2.3 6.6 3.6 3.8 4.7 6.7 10.5 13.1 Import Duties 11.J 19.7 20.4 22.2 26.6 30.9 39.1 45.5 48.8 52.3 OttIIM 2.0 2.4 3.0 3.0 3.5 4.0 5.3 6.2 7.4 8.5 NONTAX REVENUE 1I 14.0 16.2 17.7 ;9.3 28.6 27.0 36.1 42.0 44.3 51.3 Of WIhiLh: Centrdl Bdnk Profits 4.0 4.0 4.0 3.4 7.5 6.1 12.4 15.1 11.6 14.2 TOTAL EXPENDITURE r NET LENDING 71.1 84.1 97.3 126.7 145.0 180.7 218.0 260.6 297.7 329.8 CURRENT EXPENDITURE 62.1 74.5 82.2 107.1 124.J 157.8 189.J 222.8 249.2 278.0 Mgges & sadlties jO.i i4.8 42.0 56.3 70.3 86.9 103.9 119.7 131.1 14J.J 60ods L SetfvlLeb 14.6 15.4 19.9 22.7 24.2 33.0 34.4 38.8 41.4 46.8 Subsidie, J.0 5.0 3.0 7.G 3.1 3.9 J.1 5.^ 6.8 7.0 iiltervst Pymefistb 4.1 6.4 7.4 10.9 14.3 20.3 28.8 39.r 40.6 51.9 Tr dnsbf et 5 S.3 12.9 9.9 10.2 12.6 13.7 17.;3 8.9 2;.3 26. CAPITAL EXPENDITURE 8.v 8.3 12.2 18.9 20.5 23.4 20.7 36.0 46.7 5G.4 Fixed Cipltdl FuruLiui. .2 7.3 11.G 17.2 17.1 21.0 22.6 32.5 40.4 41. Trdaisfers 0.8 1." 1.2 1.7 .4 2.4 3.9 3.5 6.2 8.8 NET LENDING 1.0 1.3 2.9 0.7 -0.1 -G.J 1.5 1.9 ;.8 1.4 OVERALL BALANCE -22.7 -18.G -15.9 -24.O -1I.9 -47.O -SG.8 -DV.S -66.6 -OC.G I,UE hiLIudti NRitRdF FINANLE. aWfiCE: M lNiSThRf OF FiNANCE. - 72 - TABLE o.1: MONETARY SURVEY (End of period, in sillions of Cyprus Pounds) 1975 1976 1977 1978 1979 1980 1981 1982 1993 1984 ASSETS OF THE BANKIN6 SYSTEM: FORE16N ASSETS InET) 69.2 86.8 88.1 92.4 84.7 90.1 129.1 181.8 19;.3 223.7 DOMESTIC CREDIT 195.4 228.2 269.1 323.9 406.3 481.0 562.9 637.0 724.2 925.6 Climus uor verriment (Net) 16.2 32.1 20.7 31.0 49.6 76.2 100.6 94.3 114.7 137.0 Cliiei 0 Privgte SentLr 179.1 196.1 248.4 292.9 356.7 404.7 462.4 542.7 609.5 688.7 TOTAL ASSETS 264.5 315.0 357.2 416.3 491.0 571.1 692.0 818.8 917.4 1049.3 LIABILITIES OF THE BANKING StYSTEM: MONEY o2.1 80.0 85.9 100.8 129.5 153.3 188.5 218.5 248.5 259.4 QUASi-MONEY 167.o 19J.1 230.1 2o2.5 304.0 347.9 413.2 491.0 542.7 640.1 SUB-TOTAL 8ROAD MGNEY) 229.7 275.1 316.0 363.3 433.J 501.2 601.4 709.5 791.1 899.4 OTHER ITEMS iNETi 34.8 39.9 41.2 52. 57.J 69.9 90.6 109.3 226.3 149.8 TOTAL LIABILITIES 264.J 315.v 357.2 416.3 491.0 571.1 692.0 818.8 917.4 1G49.; SOURCE : IMF, iteruidtiwidl FilldIlLidl Statistics. iedibouk 1984, Juate 1986. - 73 - Table 6.25 IUEST RTU IN CYMUS (In percent per year) Rate Central Bank discount retel/ 6.0 Central Bank loans to government agencies 6.0 Government Treasury Bills 5.5 Seven days deposits with Central Bank 4.5 One-month's deposits with Central Senk 5.0 Current accounts 4.0 Minimm reserve ratio account 5.0- 5.5 Banks Dmand deposit2/ For balances up to £1,000 No Interest For balances over E1,000 2.0 Savings deposits2l 4.0 Time deposits Up to seven days' notice or period For balances up to £5,000 4.5 For balances over £5,000 4.75 Over seven days' notice or period up to three soothe' notice or period For balances up to £5,000 5.0 For balances over £5,000 5.25 Over three onths' but less than twelve month' notice or period For balances up to £5,000 5.5 For balances over £5,000 5.75 Twelve months' notice or period and over For balances up to E5,000 6.0 For balances over £5,000 6.25 up to £10,000 6.5 For balances over £10,000 6.75 up to £20,000 For balances over £20,000 7.0 up to £50,000 For balance. over £50,000 Advances and loans Up to 9.0 1/ Applicable to discount of Treasury Bills. T/ Rates on minim monthly belance. Source: Central Bank of Cyprus, Bulletin, September 1985. - 74 - TABLE 7.1: PRICE INDICES 1977 1978 1979 1980 1981 1982 1983 1984 RETAIL PRICES JULY 1976-JUNE 1977 = 100 1981 - 100 ALL ITEMS 104.1 111.8 122.4 139.0 153.9 106.4 111.8 118.5 FOOD & DRINK 105.5 111.4 119.0 136.3 151.9 108.1 112.8 122.2 RENTS & HOUSING 102.4 111.0 122.8 135.9 145.9 103.7 108.5 114.5 FUEL & LIGHT 102.5 109.3 124.3 170.6 223.8 105.1 110.8 126.0 CLOTHING & FOOTWEAR 104.9 113.9 125.3 136.5 147.0 107.8 115.9 123.8 HOUSEHOLD EQUIPMENT 105.3 114.6 124.5 136.4 145.4 106.9 110.5 113.3 HOUSEHOLD OPERATIONS 101.7 104.2 109.9 125.4 140.4 107.2 108.6 114.1 MISCELLANEOUS 103.4 111.8 124.7 143.5 * 160.9 105.8 111.8 116.5 WHOLESALE PRICES BY SECTOR il972-100) AS OF OCTOBER PRIMARY LOCAL PRODUCTION FOR DOMESTIC CONSUMPTION 160.9 165.5 174.5 195.2 223.8 236.2 250.3 269.4 LOCAL INDUSTRIAL PRODUCTION FOR DOMESTIC CONSUMPTION IB8.3 192.8 227.6 271.6 302.6 325.1 332.2 349.1 DOMESTIC GOODS 177.5 182.0 206.7 241.5 271.5 290.1 299.9 317.7 IMPORTED GODDS 180.6 186.2 207.0 230.5 246.8 252.9 260.0 270.0 ALL ITEMS 178.5 183.3 206.B 238.1 263.9 27B.6 287.6 302.9 SOURCE : CENTRAL BANK OF CYPRUS , BULLETIN, SEPTEMBER 1985. - 75 - TABLE 7.2 : PRICE IHDEX OF DOMESTIC EXPORTS __ _ __--- 11977 = 100) 1975 1976 1977 1978 1979 1980 19B1 1982 1983 1984 TOTAL FOOD 92.5 105.1 100.0 100.2 108.5 111.7 131.5 149.8 128.1 169.9 CITRUS 99.9 101.2 100.0 120.0 135.7 139.6 151.7 155.2 164.6 172.7 GRAPES 82.7 86.8 100.0 105.1 121.1 142.9 149.1 133.1 175.4 196.7 RAISINS 72.2 68.2 100.0 99.2 124.2 138.5 149.9 139.4 139.4 116.1 POTATOES 88.0 117.4 100.0 66.5 96.1 82.3 106.7 158.2 79.6 182.0 CARROTS 135.4 68.7 100.0 78.7 99.2 122.1 165.5 76.2 182.9 150.4 CAROBS 94.7 88.7 100.0 124.2 131.1 177.7 140.0 159.2 210.7 214.9 TOTAL BEVERA6ES & TOBACCO 102.8 104.2 100.0 105.4 111.4 117.4 125.4 122.5 128.3 132.0 MINE 104.9 105.4 100.0 105.0 105.4 105.0 109.2 107.5 116.3 121.6 LEAF TOBACCO --- 89.0 100.0 92.3 95.0 101.5 117.3 107.4 133.0 146.2 TOTAL CRUDE MATERIALS 95.0 91.0 100.0 95.8 112.4 133.2 167.0 166.1 157.9 240.4 ASBESTOS CRUDE, WASHED OR GROUND 60.9 79.7 100.0 102.5 107.3 122.3 168.1 169.2 192.3 206.2 IRON PYRITES 74.3 85.7 100.0 75.5 116.1 257.3 226.8 302.4 275.4 24B.8 CUPREOUS CONCENTRATES 116.1 131.5 100.0 93.3 135.4 213.9 --- --- --- --- TOTAL DOMESTIC EXPORTS EXCLUDING MINERALS 93.5 99.4 100.0 100.1 107.1 116.3 142.4 139.2 137.0 152.4 TOTAL DOMESTIC EXPORTS 92.5 100.1 100.0 100.4 106.8 115.4 141.0 137.8 135.6 151.9 SOURCE : CENTRAL BANK OF CYPRUS, BULLETIN, SEPTEMBER 1985. - 76 - TABLE 7.3: IMPORT PRICE INDEI _----- _- _ X1977 a 100) 1975 1976 1977 1970 1979 1990 1981 1982 1983 1984 FOOD 90.2 97.8 100.0 91.6 105.5 119.9 145.4 139.9 140.9 155.1 BEVERAGES & TOCACCO 79.9 89.3 100.0 100.7 109.1 115.2 135.9 152.4 185.2 206.3 INEDIBLE CRUE MATERIALS 67.0 94.2 100.0 94.3 103.3 125.4 143.3 121.B 125.6 153.4 EXCEPT FUELS MINERAL FUELS, LUI41CANTS E 69.6 86.5 100.0 90.6 124.5 192.7 259.5 265.1 262.9 274.8 RELATED NATERIALS ANIMAL I VEGETABLE OILS & FATS 109.2 85.t 100.0 99.2 114.3 10B.4 110.4 106.0 129.3 179.2 CHEHICALS 107.6 99.5 100.0 97.1 107.5 123.2 126.7 132.7 120.4 141.7 ANuFACTIMED 6ODS CLASSIFIED 97.6 93.4 100.0 97.9 110.1 123.5 126.9 136.0 139.0 149.0 BY MATERIAL MACHINERY & TRANSPORT EQUIPNENT 106.1 98.5 100.0 110.0 110.8 109.6 119.9 118.1 126.8 123.7 NISCELLAMEOUS NAIUFACTIRED ARTICLES 99.1 104.2 100.0 117.4 111.9 116.9 126.6 123.0 119.4 139.2 TOTAL INPORTS 93.4 95.1 100.0 100.5 111.3 127.3 144.1 144.2 146.6 154.4 SOLRCE : CENTRAL BANK OF CYPRUS, BULLETIN, SEPTENBER 1985. - 77 - TABLE 8.1: ARRIVALS OF TOURISTS & EXCURSIONISTS AND ----------- ESTIMATED INCOWE FRM TOURISM 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 VISITORS OF OVER ONE DAY 47,084 180,206 178,185 216,679 297,013 353,375 429,313 548,180 620,726 736,972 HOLIDAY 33,973 165,164 141,686 171,144 247,152 322,679 404,139 492,219 575,435 690,820 BUSINESS 7,333 14,319 19,727 24,928 25,930 23,083 20,399 24,231 24,720 28,583 OTHER 5,778 723 16,772 20,607 23,931 7,613 4,775 31,730 20,571 17,569 EXCURSIONIST (ONE-DAY STOPOVER) 32,345 34,516 74,503 72,247 60,968 50,045 68,745 58,697 94,771 89,481 TOTAL 79,429 214,722 252,688 288,926 357,981 403,420 498,058 606,877 715,497 826,453 ESTIMATED INCOME FROM TOURISH ---- 20.7 23.8 33.3 50.1 71.7 102.4 138.7 174.8 212.0 (IN MILLIONS OF CYPRUS POUNDS) SOURCE: CENTRAL BANK OF CYPRUS, BULLETIN, JUNE 1983 & SEPTEMBER 1985. - 78 - TABLE 8.2 : VISITORS BY COUNTRY OF RESIDENCE 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 UNITED KINGDOM 17,474 34,501 55,5b5 74,593 106,2B7 111,359 129,051 134,767 168,108 210,156 GREECE 7,506 15,826 22,376 25,518 33,649 33,586 27,850 34,679 32,220 36,228 SWEDEN 623 1,961 3,127 6,516 11,629 30,597 67,778 85,369 55,835 57,899 GERMANY (F.R) 1,108 4,278 7,708 10,573 19,838 28,565 31,070 35,391 36,930 41,094 LEB&NON 4,312 77,887 26,307 25,866 26,295 22,704 31,381 52,483 78,847 103,772 AUSTRIA 443 508 800 1,020 3,3B9 8,68B 10,265 11,667 11,767 14,651 FINLAND 175 384 1,189 3,770 6,994 7,039 7,573 9,329 9,090 13,446 SWITZERLAND 407 736 1,118 2,605 4,066 8,149 10,691 12,328 16,515 22,769 SYRIA 469 2,275 2,139 3,198 4,498 7,213 7,273 9,802 11,045 12,081 EGYPT 878 3,209 5,790 1,939 2,370 6,738 6,931 8,351 13,204 16,328 U.S.A. 2,090 4,967 7,477 7,049 7,909 7,322 8,076 10,817 14,026 16,742 FRANCE 776 2,501 2,899 3,512 4,628 5,113 6,038 9,719 10,318 12,091 OTHER 10,823 31,173 41,690 50,520 65,461 76,302 85,336 133,478 162,821 179,715 TOTAL 47,084 180,206 178,185 216,679 297,013 353,375 429,313 548,180 620,726 736,972 SOURCE : DEPARTMENT OF STATISTICS X RESEARCH, MINISTRY OF FINANCE, ECONOMIC REPORT, 1984. - 79 - TABLE 9.1: INDEX OF AVERAGE RATES OF PAY BY ECONOfIC ACTIVITIES 1/ ---------- (OCTOBER 1980 = 100) 1976 1977 1978 1979 1980 1981 1982 1983 1984 AGRICULTURE 45.6 53.2 60.4 7B.0 100.0 114.8 133.7 147.3 161.0 MINING & QUARRYING 45.5 53.0 62.2 76.9 100.0 119.5 140.2 151.8 164.3 MANUFACTURING 39.1 48.1 59.3 76.6 100.0 119.7 140.7 153.2 166.6 ELECTRICITY, GAS & WATER 4B.5 55.5 64.1 79.4 100.0 115.4 138.4 149.4 161.1 CONSTRUCTION 40.4 49.6 64.1 77.8 100.0 115.5 131.7 142.0 153.9 WHOLESALE & RETAIL TRADE 42.6 51.9 63.1 78.2 100.0 119.1 140.4 154.9 170.2 BANKING, INSURANCE & REAL ESTATE 45.6 53.2 62.7 78.9 100.0 118.3 143.7 158.8 174.7 TRANSPORT, STORAGE & COMMUNICATIONS 47.2 54.5 63.7 78.7 100.0 116.7 137.8 151.6 165.5 GOVERNMENT 43.7 52.3 63.9 78.9 100.0 117.9 141.1 157.0 170.6 MUNICIPALITIES 42.9 50.4 60.9 74.3 100.0 113.4 145.2 157.7 172.0 SERVICES 44.9 52.7 63.1 78.9 100.0 117.B 139.3 152.6 167.1 ALL ACTIVITIES 42.8 51.2 62.1 78.1 100.0 118.2 139.5 153.1 166.9 1l Data refer to gross rates of pay for normal hours worked, excluding overtime, in october of each year. SOURCE: STATISTICS h RESEARCH DEPARTMENT, MINISTRY OF FINANCE, ECONOMIC REPORT, 1984. TABLE 9.2: INDEX OF AVERAGE EARNINGS IN MONEY TERMS BY ECONOMIC ACTIVITIES 1/ ---------- (OCTOBER 1980 = 100l 1976 1977 1978 1979 1980 1981 1982 1983 1984 AGRICULTURE 42.2 47.8 57.9 76.2 100.0 115.0 132.3 141.9 157.5 MINING & QUARRYIN6 43.6 51.8 62.4 77.7 100.0 119.2 122.7 134.3 145.4 MANUFACTURING 41.4 51.7 J3.2 81.0 100.0 118.6 137.9 148.9 162.1 ELECTRICITY, GAS ; WATER 48.2 55.7 63.9 80.4 100.0 116.3 140.5 150.5 162.1 CONSTRUCTION 40.3 51.9 69.0 80.8 100.0 114.0 130.1 140.5 154.1 WHOLESALE & RETAIL TRADE 43.6 53.1 64.4 78.7 100.0 119.8 141.2 155.5 171.2 BANkING, INSURANCE & REAL ESTATE 45.2 52.9 62.4 78.8 100.0 118.5 145.2 161.5 175.7 TRANSPORT, STORAGE & COMMUNICATIONS 45.5 53.8 63.4 78.8 100.0 116.6 138.2 152.3 166.1 GOVERNMENT 44.6 53.3 64.5 79.0 100.0 117.8 141.5 157.3 170.3 MUNICIPALITIES 43.3 51.6 61.8 74.1 100.0 114.3 145.4 157.3 172.4 SERVICES 46.9 54.9 65.5 79.9 100.0 119.2 139.8 153.4 166.6 ALL ACTIVITIES 42.8 52.3 63.7 79.4 100.0 118.2 138.9 151.9 165.7 1/ Ddta refer to gross eirnings for actual hours worked, including overtime, in october of each year. 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