2009 Index of Economic Freedom

Quick Facts

Population:

• 0.8 million

GDP (PPP):

• $20.0 billion
• 4.0% growth
• 3.2% 5-year compound annual growth
• $25882 per capita

Unemployment:

• 3.9%

Inflation (CPI):

• 2.2%

FDI Inflow:

• $1.5 billion

Cyprus's economic freedom score is 70.8, making its economy the 24th freest in the 2009 Index. Its overall score is 0.5 point lower than last year, reflecting slightly lower scores in four of 10 economic freedoms, including freedom from corruption. Cyprus is ranked 12th out of 43 countries in the Europe region, and its overall score is higher than the regional and global averages.

Cyprus scores above the world average on nine of the 10 components of economic freedom. The economy benefits from strong protection of property rights and a relatively high degree of trade freedom. Tariff barriers are low, although overall trade freedom is muted by adherence to the standard European Union subsidies of agriculture. The financial market is sound and open to foreign competition, and the judiciary is independent.

A high level of government spending is the primary weakness, although public finances have improved in recent years. There is room for improvement in business freedom, and the government has been pursuing policies designed to support a favorable business environment and private initiative.

Background Back to the top

Cyprus is divided between the Greek Cypriot Republic of Cyprus and the Turkish Republic of Northern Cyprus. The Republic of Cyprus acts as the internationally recognized administration of Cyprus, but hostility between the two sides is deep. The Greek Cypriot economy is dominated by services, especially tourism and financial services, and restrictions have been lifted for foreign investors. Economic liberalization was enhanced in 2004 with membership in the European Union, although privatization has yet to occur in such key sectors as telecommunications and utilities. On January 1, 2008, Cyprus became a member of the euro zone and replaced its national currency with the euro.

Business Freedom 70.0 Back to the top

The overall freedom to start, operate, and close a business is relatively well protected by the regulatory environment. Establishing a business is relatively easy. Regulations have been streamlined, administrative procedures have been simplified, and business regulations are transparent and consistently applied.

Trade Freedom 80.8 Back to the top

Cyprus's trade policy is the same as that of other members of the European Union. The common EU weighted average tariff rate was 2.1 percent in 2005. Non-tariff barriers reflected in EU policy include agricultural and manufacturing subsidies, import restrictions for some goods and services, market access restrictions in some service sectors, non-transparent and restrictive regulations and standards, and inconsistent customs administration across EU members. Pharmaceuticals and biotechnology regulations are more burdensome than EU general policy, enforcement of intellectual property rights remains problematic, and there is a dichotomy between the trade regimes of Greek and Turkish areas. Fifteen points were deducted from Cyprus's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 76.6 Back to the top

Cyprus has a high income tax rate and a very low corporate tax rate. The top income tax rate is 30 percent, and the flat corporate tax rate is 10 percent. The tax-free threshold was increased in 2008. Other taxes include a value-added tax (VAT) and a real estate tax. In the most recent year, tax revenue as a percentage of GDP was 36.6 percent.

Government Size 42.2 Back to the top

Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 43.9 percent of GDP. Public-sector wages have risen under the new government.

Monetary Freedom85.7 Back to the top

Inflation has been low, averaging 2.2 percent between 2005 and 2007, but began to rise steadily in late 2007, driven by higher energy and food prices. The government controls prices of some agricultural products. Five points were deducted from Cyprus's monetary freedom score to reflect this practice.

Investment Freedom70.0 Back to the top

The government grants national treatment to foreign investors. In the government-controlled area, existing procedures and regulations affecting business are generally transparent and applied without bias. The area administered by Turkish Cypriots has adopted more transparent regulation, but the level of transparency still lags behind European or U.S. standards. Non-EU investors may invest directly or indirectly in most sectors. Remaining exceptions involve the acquisition of property and investments in certain services and banking. Accession to the EU has further reduced barriers to investment, though some have been replaced by EU-wide barriers. EU residents may own 100 percent of local companies and any company listed on the stock exchange. Some payments, current transfers, and capital transactions are subject to central bank approval or restriction. Cypriot law imposes significant restrictions on the foreign ownership of real property.

Financial Freedom70.0 Back to the top

Cyprus's financial sector is diverse and relatively sound. Regulatory and supervisory frameworks for banking and finance are efficient, and access to credit for entrepreneurial activity is not constrained. Financing for domestic and foreign investors is available at market rates. As of mid-2008, there were 19 incorporated banks, 24 branches of foreign banks, and two representative offices of foreign banks. Total credit to the private sector has increased. The government lifted exchange controls and abolished the interest rate ceiling in 2001. The insurance sector is recovering from an equity market downturn in the early 2000s. The stock exchange is Europe's third smallest, with a capitalization of around 30 billion euros in January 2008.

Property Rights90.0 Back to the top

Contracts and property rights are enforced effectively. The civil judiciary is independent constitutionally but not always in practice. Intellectual property rights are not adequately protected in the area administered by Turkish Cypriots. Real property remains a key contested issue. The absence of a political settlement poses an inherent risk for the foreign investor interested in buying or leasing property in the North.

Freedom From Corruption53.0 Back to the top

Corruption is perceived as present. Cyprus ranks 39th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Some foreign companies complain of a lack of transparency and possible bias in government consideration of competing bids. Anecdotal evidence indicates that corruption and patronage continue in the Turkish Cypriot area.

Labor Freedom70.0 Back to the top

Cyprus's relatively flexible labor regulations facilitate employment and productivity growth. The government mandates a minimum wage and sets minimum standards for the terms and conditions of employment. Cyprus's unemployment rate is one of the lowest among EU members.