Cyprus's Economy at Cross-roads

15 March, 2003

Some might say that not just its economy but Cyprus as a country is currently at cross roads. Indeed the nation's polity is sadly torn between a hugely popular uprising of supporters for the referendum and a leadership that sees any unity move, as injurious to their interests. If one were to view this, in the context of the geo-political developments, Cyprus is clearly perched on the periphery of the Levant and Eastern Europe strategically and is now firmly poised for entry into the EU. The Greek majority area will, willy-nilly, want the EU membership but is concerned about competition that any unity move will engender. The Turkish third of Cyprus is also divided between what its leadership perceives as the best course and what ther common men want.

Cyprus used to attract tremendous attention from its neighbouring countries; what with its international companies and offshore financial centre now jostling themselves to be prepared as and when the EU trade winds blow in Cyprus's direction. There is every reason to believe that Cyprus will claim its cut and get it; just as the Czech Republic and the Croatians will get a piece of the enlarged EU cake.

Strident political overtone, as of now, appears to overweigh the rational economic thought processes in Cyprus. For its own good, the country will do well to progressively jettison such governance methods.

Given that Turkey is also so anxious to be a part of the EU, it can hardly deny its vassal in the Turkish part of Cyprus, to spurn the referendum offer; that Kofi Anan has so painstakingly put together. The Greek- majority populace is both apprehensive and welcoming of the referendum prospect. It is fearful that a full unification of the country, might worsen the existing unemployment situation in the Greek parts and allow for a free crossover of a highly bottled-up provincial enclave population to eat into the new jobs being created in the EU-centric economy. Farangusta beaches, it is said, are just as beautiful as that in the Greek provinces surrounding Nicosia, Limassol and Larnaca.

Cyprus's economy itself, thrives on tourism. The conflict in the Middle East that had previously involved Lebanon and Palestine did not auger very well for sea or air-based tourism. Therefore, an island looking to take its place under the EU sun, would be rightfully concerned that the Turkish side's tourism potential might lure the Germans and the other high spending tourists away to its better and cheaper beaches; once full unification takes place. All these misapprehensions perhaps stem from a respective misreading of the situation. A few days in Cyprus are hardly adequate to understand the undercurrents of a country; riven by such deep distrust. Clearly the country has tremendous natural heritage advantages and could become a placid melting pot, like Mauritius; truly enmeshing the capital overflows from the Levant, Turkey, Greece and from far afield in the heartland of eastern Europe.

Financial services sector has developed well and will get a shot in the arm with the EU entry. Cyprus has always prided itself on possessing some of the better banking brains from Greece, Lebanon and from the U.K., which professionals sought out the sun, the beaches and the freedom / lifestyle in Cyprus. Soon they helped flower Cyprus into a good offshore financial hub. The 'offshore' tag itself came under a cloud recently, because of the OECD's general and global concerns on tax and money-laundering matters. Nevertheless, a small, friendly financial regulatory regime will always find its share of customers and takers. Similar to 'boutique' banking versus the mass high street retail banking, good regulators will be recognised as positive facilitators and business will flow in that direction. Regulators can stifle their services sectors with their heavy handed, authoritarian and arbitrary attitudes and work at cross-purposes with the market development and FDI inviting entities; as they do in certain countries in this region.

On this first visit to Cyprus, I was also struck by its relative Third World ambience. Even though, Cyprus has long been regarded as European and has had British troops / air bases and very strong Greek influence, in a third of the country, the Turkish impact is palpable. In the past, Cyprus benefited from its status as an offshore banking centre, servicing the Levant, but also parts of the Gulf Arab countries. The senior executives of multinational companies that preferred the lifestyle, the sun, the beaches and the mild weather, got their regional offices covering the Middle East in Cyprus.

That situation has changed over the years, losing ground for instance, to Dubai, which has rivalled in providing superior lifestyle, even if it cannot match in terms of the pleasant weather through the year.

More importantly, Dubai, as an access point to the region, has very impressive infrastructure and an excellent communication travel hub. Thus it has elbowed out the likes of Cyprus, Beirut or Bahrain in some respects, as a preferred place for locating the regional headquarters of multinational and transnational companies. Cyprus may now get back some of its importance when it joins the EU; but the jury is out on that score.

The young people in Cyprus are anxiously looking forward to integrating with the EU but it is a pity that Cyprus has some legacy leadership that does not necessarily represent the will of the people. There is still much entrenched bitterness, perhaps in the older generation. The demographics however, would suggest that the young no longer carry the cross i.e. the conflicts of the past in their minds and want to be international in their outlook and economic reach. Thus nationalistic fervour and blind ethnic passions may not rule the roost and it is in this context, that the referendum has become relevant; especially if it were to allow the youth say above the age of 15, who can think and vote. They will be aware of the potential of the EU and will form the future of the country. If it were to be inclusive of the future generation, the referendum will gain overwhelming support. The wounds of the past would heal and the sad memories of the past, get erased from the economic fabric. The combined Cyprus, can thereafter, gain its rightful place in the comity of EU nations. That may not come to pass and it may be that just the Greek-majority part will join the EU; leaving behind the Turkish-held Cyprus, smarting under self-inflicted isolation and obscurantism. When the politicians of yesteryears, are so much in control of the destiny of the people, even if they lack legitimacy or popularity, then one can only blame those that catapulted them to positions of power and unable to shake off such yoke.

Ultimately, Cyprus is a small country with modest ambitions. It will do well only as long as the hard work and the commitment of its population continue. Fortunately, it is well endowed in natural resources as well as mild agriculture. White collar jobs, particularly in the services sector will grow.

The likes of Moody's, Capital Intelligence and other credit rating agencies add to Cyprus's credentials as a good financial cluster. We can only think of all this as a huge positive for a country that had been at odds with itself and now has a historic chance of putting aside politics for securing a better economic future for its citizens.

(The author (sureshk@emiratesbank.ae) is a General Manager in Emirates Bank Group. The views expressed in this article are not necessarily shared by the Bank.)

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