IIF RESEARCH NOTE
Cyprus: Just the Facts
© Copyright 2013. The Institute o International Finance, Inc. All rights reserved.
The rapid growth in business services reected a avorable business environment and theavailability o an educated, English-speaking labor orce.
Foreign capital was attracted by one o the lowest income tax rates in the EU (10%, zeroor dividends) and the existence o double taxation treaties with many countries.
Construction grew 6.7% a year on average during 2000-2008, and the number o newlybuilt houses tripled between 2000 and 2008. Housing prices rose 50% during 2006-2008.
Growth since EU entry was driven by domestic demand, with private consumption rising6.5% a year rom 2005 on average through 2008 and fxed investment rising 9% a year.Most o the increase in investment was centered in construction, however.Driven by the boom in domestic demand, general government revenues rose by 6.8% o GDP between 2000 and 2008. Strongly rising revenues helped shit the fscal balance rom a6.6% o GDP defcit prior to EU accession in 2003 to surpluses in 2007 and 2008, despitesubstantial real increases in spending (Chart 4, previous page). Government debt declined to49% o GDP by the end o 2008 rom 70% in 2003 as a result.However, the rapid expansion in growth and fscal surpluses concealed the accumulation o substantial macroeconomic imbalances. Key among these were the ollowing:
A sharp widening in the current account defcit.
With the savings rate alling rom 15%in 2004 to just 7% in 2008 and the investment rate rising rom 19% to 23%, the currentaccount defcit jumped rom 5.1% o GDP to 16.8% o GDP (Chart 5). (Excludingreinvested earnings and dividends, which reect accounting entries rather than actualtransactions, the defcit widened to 12% o GDP in 2008 rom 1.4% o GDP in 2004.)
A marked worsening o competitiveness.
Relative unit labor costs rose 20% between2000 and 2008, more than in other periphery countries.
A sharp deterioration in the net international investment position (IIP).
Persistentcurrent account defcits and large inows o oreign capital shited the net IIP rom a
The rapid expansionconcealed largemacroeconomic imbalances
Chart 5Current AccountBalance
CABCAB (excl. reinvestedearnings and dividends
Chart 6GDP and Unemployment Rate
12-month %change and %
GDP2007 2008 2009 2010 2011 2012