During the fifty years since independence in 1960, Cyprus has been gradually transformed from a mostly closed economy, based on agriculture and mining, into a service-based, export-oriented economy. Independence did not only mark political liberation from British colonial rule, but also freed the creative spirit of the people of Cyprus, especially their entrepreneurial drive. In the early years, agricultural production shifted towards irrigated products for export such as oranges, potatoes, vegetables and grapes, but also animal husbandry for domestic consumption. The first years of industrialisation were concentrated on agricultural processing, soft drinks and tobacco, followed by products for the construction sector, clothing and shoes.

Much of this transformation was achieved because of the open character of the economy, notwithstanding a policy of import substitution with relatively high tariff protection. A big step towards openness was made in 1973, when Cyprus signed a Customs Union agreement with the European Economic Community. Becoming part of the Customs Union was the first initiative towards joining the European Union (EU), thirty years later.

Τhe 1974 military invasion and occupation of more than a third of Cyprus by Turkey had a devastating impact on the economy, characterised by mass unemployment and the loss of a very significant part of the production capacity of the Cyprus economy. An expansionary fiscal stance was followed as was appropriate in order to address the consequences of the invasion and subsequent occupation, especially through expenditures for infrastructure purposes. In parallel, there was a significant reduction in public and private sector wages. As would be expected, there was a sharp turnaround in public finances, with deficits around six percent of the Gross Domestic Product (GDP), increasing public debt and a build-up of inflationary pressures and external current account deficits. Led by the sacrifices of the working people and the entrepreneurial skills of the business community, there was a remarkable recovery of the economy.
Agriculture, Harvesting wheatAgriculture, Harvesting wheat Tourism, Protaras area Agriculture, Pruning vines Unloading at the port of Limassol (trade) Tourism, Protaras area Services, Cyprus Post Manufacturing of plastic Wind Park  'Makarios' Satellite Station

The mass unemployment created as a result of Turkey's military aggression, was transformed to near full employment within three years. Employment growth was mostly observed in the areas of construction and services. There was also strong encouragement of Cypriots to work abroad, especially in the construction industry in the Middle East/Arab countries, which absorbed large numbers of people from Cyprus.

During this period, the tourism, shipping, electricity and telecommunications industries recorded remarkable growth. The banking sector, including the cooperative movement, also exhibited an impressive expansion. Beginning in 1976, there was a dramatic increase in the number of offshore companies established in Cyprus, attracted by a favorable tax system in a number of services sectors, including shipping, banking, insurance, information technology, and consulting. Accounting and Law firms also played a major role in attracting these offshore companies, strengthening the otherwise modest direct employment creation impact of these companies.

Regarding the currency system, the Cyprus pound was pegged to the pound sterling until 1972 and then to a trade-weighted basket of currencies and from 1992 up to 1999 to the European Currency Unit (ECU). This choice was guided mostly by the focus of this currency area on price and macroeconomic stability. On 1 January 1999, the Cyprus pound was pegged to the euro, whereas on May 1st 2004, Cyprus became a full member of the European Union. The years between 1999 and 2004, signalled a period of harmonisation and the abolition of several distortions for the efficient functioning of the markets, such as interest rate and capital movements liberalisation and the opening of the market in the utilities sectors to competition. In May 2005, the Cyprus pound joined ERM II, and on 10th July 2007 the EU Council of Finance Ministers approved Cyprus adoption of the euro as from 1 January 2008 and decided that the Cyprus pound exchange rate vis-a-vis the euro will be fixed at the central parity of €1=CY£ 0,585274. Hence, Cyprus became a member of the Eurozone on 1st January 2008 with the Central Bank of Cyprus becoming a part of the European System of Central Banks (ESCB). Together with the European Central Bank (ECB), it conducts monetary policy for the whole Euro-zone, based on conditions prevailing in this region.

In conclusion, the Cyprus economy has performed remarkably well for most of the period since independence. It has weathered significant external shocks and has taken advantage of a number of different opportunities. A key driving force has been the openness and the responsiveness to international markets and a successful partnership between the private and public sectors. The government invested in infrastructure essential for growth, and the private sector exploited exogenous opportunities such as the crisis in Lebanon, and the expanding markets in the Arab World, Eastern Europe and Russia. Economic policies have been overall appropriate, though sometimes uneven, providing a supportive framework of exchange rate and financial stability and expansionary fiscal policy when appropriate, all these resulting in reasonable price stability, strong employment growth and rising living standards.

Major events, such as the prospect of entering the World Trade Organisation (WTO), the European Customs Union, the EU and the Eurozone were intelligently used to anchor important and long-debated reforms. Good industrial relations and economic migration underpinned a relatively manageable wage growth, and when wage growth outpaced productivity the transformation to a service economy accelerated.

The Central Bank of CyprusThe Central Bank of Cyprus Water Pipe The Platform of 'Noble' Internal space in Noble platform The new Larnaca International Airport Oil Platform, Limassol Skouriotissa Mine Plastics Industry Pharmaceuticals Industry Golf Course (Photo: Cyprus Tourism Organisation) The Cyprus Stock Exchange Hotel complex in Paphos Limassol Port

The onset of the global financial crisis in 2008, reversed the growth path, affecting mostly the construction and tourism sectors. The Government followed expansionary fiscal policy in order to mitigate the impact of the crisis, focusing on the affected sectors. The continued difficult global economic situation, with the second wave of crisis, led to a deterioration of public finances, which in connection with the previous expansion, led to excessively high fiscal deficits and unsustainable public finances.

Fiscal consolidation became the primary objective, which took effect in a series of fiscal consolidation packages and the formation of a particularly tight budget, primarily focusing on the expenditure side with measures of permanent character, addressing the structural problems that arose.

At the same time, the global economic crisis revealed additional structural problems, particularly with regard to the competiveness of the economy, which must be addressed. However, it is widely accepted that structural changes are slow in having an impact on the real economy. The Government, recognizing the need for an immediate growth boost, has already started to implement a series of development measures. These measures focus on encouraging employment, attracting foreign investment, support tourism, encouraging land development and green growth, facilitating the financing of SME's and stimulating investment.

Finally, natural gas explorations that have recently taken place in the Exclusive Economic Zone of Cyprus have revealed significant reserves of natural gas which are estimated to have significant revenue implications. The Government is currently in the process of a second round of licensing for the offshore explorations of hydrocarbons and is exploring options of best conduct regarding economic policy surrounding the exploration, discovery and exploitation of natural gas in Cyprus.

 
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