Cyprus: Outperforming Expectations

The long-divided island seeks to benefit from its neighbors’ woes and Brexit.

Encouraging news has been scarce this year in the eastern Mediterranean, where attention has been dominated by the still unfolding horrors of the wars in Syria and Iraq and Lebanon’s struggles to find economic and social stability.

Cyprus, however, is emerging as an unexpected success story.

As Global Finance went to press, Greek and Turkish Cypriot leaders were meeting in Geneva to discuss a solution to the bitter, decades-old Cyprus problem—the north and south have been divided since the Turkish army’s 1974 intervention. The list of negotiation issues is daunting. It includes questions relating to property, territory (Greek Cypriots want the towns of Morphou and Famagusta returned) and the presence of 20,000 Turkish troops. But observers say Nicos Anastasiades and Mustafa Akinci are eager for a deal, and closer to it than they have been in many years.

A reunified Cyprus could boost investment, raise GDP by as much as €20 billion ($21.2 billion) and resolve one of the world’s most persistent international disputes. It also would enable the island to exploit its natural gas reserves, development of which is currently frustrated by the island’s division. The offshore Aphrodite field could hold as much as six trillion cubic feet of natural gas, which Nicosia hopes can be exported to Egypt and, eventually, Europe. October saw the third licensing round, with such oil majors as ExxonMobil, Eni, Qatar Petroleum, Statoil, Total and Cairn Energy all submitting bids.

Then there is the encouraging evidence that Cyprus’ economy—battered by a financial crisis between 2012 and 2014, during which GDP contracted by 11%—is recovering faster than anybody thought possible. After modest GDP growth of 1.6% in 2015, Cyprus exited its International Monetary Fund program in April 2016—a program set up in April 2013, when it received a €10 billion bailout. Cyprus’ economy should grow some 2.7% this year as restructuring and moves toward finding a new economic model start to bear fruit. Both Moody’s and Standard & Poor’s have upgraded Cyprus this year, the latter from BB- to BB, with a positive outlook. In the words of IMF mission chief Rachel van Elkan, the country has “moved from the acute care stage and is now well into the recovery phase.”

In keeping with that prognosis, the country’s largest bank, the Bank of Cyprus, is set to list on the London Stock Exchange. Only three years ago, it became the first bank in the eurozone to oblige its wealthier savers to absorb losses on their deposits as part of a bailout package.

For Yiorgos Lakkotrypis, Cyprus’ minister of Energy, Commerce, Industry and Tourism—a large portfolio that, incidentally, highlights the new priority areas of the economy—the most important thing is that “trust is coming back.” He points to the fact that new business registration this year has grown 22% in fields as diverse as tourism, shipping, energy and professional services, and that Cyprus is having success attracting investment in technology and innovation.

“To companies looking for an EU [European Union] base, I would say Cyprus is the destination you have been looking for,” he told an audience of businesspeople and investors gathered in London in November.

Lakkotrypis and other officials always highlight Cyprus’ appeal, rather unique in this part of the Mediterranean: a common law system, good infrastructure and English spoken by virtually everyone, all legacies of British colonial rule (which ended in 1960), plus a sound tax system and good human capital. The reforms that have been put in place since 2013 include fiscal consolidation, a restructuring of the banking system and improvements in corporate governance and transparency. They have bolstered the country’s appeal, as have geopolitical developments. Indeed, one of the main reasons for Lakkotrypis and other senior colleagues’ visit to London—which was followed by an event in Edinburgh and preceded by a high-level visit of Cypriot bankers and businessmen to London in late September—was Britain’s decision to leave the European Union.

“With Brexit scheduled for end March 2019, there is no guarantee that British companies will have access to key EU markets, especially in financial services,” argues Michael Izza, CEO of the Institute of Chartered Accountants in England and Wales (ICAEW). Cyprus offers a reservoir of skills and laws and customs that British companies are familiar with, Izza says. “The relationship between Cyprus and the UK long predates either’s membership in the EU, and I think it will be significant again in the future.”

The other big positive for Cyprus has been the almost miraculous recovery of tourism, responsible for some 20% of GDP, and rather more when ancillary services and multiplier effects on other parts of the economy are factored in.

For many years, the sector has been internationally uncompetitive, a trend exacerbated by membership in the eurozone. No longer: The collapse of neighboring tourist markets, notably Turkey but also Lebanon and Egypt, and the desire of many tourists for a safe and reliably sunny destination has helped Cyprus roar back. Arrivals were up 19% this year between January and July, with 3.1 million visitors likely by year-end, the highest number ever.

Lakkotrypis says the 10-year plan will focus on making Cyprus a year-round destination, incorporating health, agricultural and cultural tourism and appealing to the wealthy, yacht-owning set.

The €300 million Limassol Marina project recently opened. It will be joined by new marinas in Ayia Napa, Paralimni and maybe Paphos (all costing €300 million to €350 million). In October the government awarded Hong Kong’s Melco–Hard Rock Resorts Cyprus Consortium the contract to build South Cyprus’ first casino, a vast, 500-room leisure and spa complex just outside Limassol. It will feature 160 casino tables and 1,000 slot machines.

The project, Europe’s first multi-themed casino, is expected to cost more than half a billion euros and to open in 2020. Its aim is to attract large numbers of visitors from Russia and the Middle East.

Natasa Pilides, director general of CIPA, the national investment agency, says these investments confirm Cyprus is broadening its appeal in the wake of the 2013 crisis.

“We’ve come a long way in a short period of time,” Pilides says, “but it is vital we retain the momentum and our current competitive advantage,” adding that “the crisis from which [we] are emerging has made us recognize the need for proactiveness. We must keep ahead of the pack.”

Cyprus has some considerable challenges ahead of it. Bank nonperforming loans remain very high at around 60%, which, because of the still disproportionate size of Cyprus’ bank sector, translates into an alarming 150% of GDP.

However the ratings agencies’ view of the sector is increasingly positive, with Moody’s latest report suggesting economic recovery will gradually restore the newly consolidated bank sector to profitability and raise asset quality.

Pilides says tightened bank regulation and supervision should bolster the confidence of foreign institutions and investment funds wanting to use Cyprus as a destination for new financial activities, including a pathway into the EU.

Public finances, though recovering, also remain a concern, with public debt standing near 100% of GDP. And privatization has stalled because of political opposition, despite recognition that the state assets lined up to be sold—which include the telecom CYTA and the Cyprus Stock Exchange—do belong in the private sector and will attract much-needed investment once their future has become clear.

But the way ahead seems clear. Says Lakkotrypis: “Yes, there is a lot of work ahead; but rest assured, we are getting it done.” Data Summary: Cyprus

Central Bank: Central Bank of Cyprus

International Reserves

$807.9 million

Gross Domestic Product (GDP)

$19.330 billion*

Real GDP Growth







GDP Per Capita—Current Prices


GDP—Composition By Sector*














Public Debt (general government
gross debt as a % of GDP)







Government Bond Ratings

(foreign currency)

Standard & Poor’s




Moody’s Outlook


FDI Inflows


$921.6 million


$3,678.2 million


$173.9 million

* Estimates Source: Country Economic Reports