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- GDP (PPP):
- $23.6 billion
- -2.4% growth
- 0.2% 5-year compound annual growth
- $27,086 per capita
- Inflation (CPI):
- FDI Inflow:
Cyprus’s economic freedom score is 67.6, making its economy the 46th freest in the 2014 Index. Its overall score is down by 1.4 points from last year, with notable declines in financial freedom, investment freedom, and monetary freedom. Cyprus is ranked 21st out of 43 countries in the Europe region.
Over the 20-year history of the Index, Cyprus’s economic freedom has remained virtually unchanged, with hard-won gains in earlier years largely eroded by recent declines in financial freedom and control of government spending. The country had been rated one of the “mostly free” economies throughout the 2000s and had even advanced into the ranks of the world’s 20 freest in 2011. However, since 2012, Cyprus has been on a declining path of economic freedom and has fallen back to the status of “moderately free,” recording its second lowest score ever in the 2014 Index.
Significant problems continue in several areas of economic freedom, and Cyprus’s score for control of government spending is far below the world average. The public sector has ballooned to encompass over 45 percent of the small island economy. Undermining the overall entrepreneurial environment, business freedom and investment freedom have also diminished as the pace of reform has slowed significantly.
A U.N. buffer zone has separated the Greek Cypriot Republic of Cyprus from the Turkish Republic of Northern Cyprus since 1974. The Republic of Cyprus is a member of the European Union and acts as the island’s internationally recognized administration. Despite deep hostility, Greek and Turkish leaders continue to negotiate on possible reunification through U.N.-brokered talks. Center-right politician Nicos Anastasiades became president of Cyprus in February 2013, defeating leftist Stavos Malas. A major economic crisis hit Cyprus in 2013. In March 2013, a €10 billion EU bailout plan centered on bank restructuring. However, draconian measures that include taxing bank deposits were imposed as part of the bailout. Unemployment has risen dramatically, especially among youth.
The absence of a political settlement in the northern area administered by Turkish Cypriots, where corruption, patronage, and lack of transparency continue, poses inherent risks for foreign investors. The March 2013 bailout by the EU that was intended to flush dirty Russian money from Cyprus’s bloated banks had the unintended consequence of giving Russian oligarchs majority ownership, at least on paper, of the Bank of Cyprus.
The top individual income tax rate is 35 percent, and the top corporate tax rate is 10 percent. Other taxes include a value-added tax (VAT) and a real estate tax. Overall tax revenue is equal to 26.5 percent of GDP. Government spending has been steady at 46.1 percent of GDP, but the eurozone crisis has put severe strains on the government’s budget, forcing it to seek a bailout. Public debt has accelerated past 85 percent of the domestic economy.
The regulatory process has become streamlined and relatively supportive of entrepreneurial activity, but the pace of reform has slowed in comparison to other comparable economies. The labor market is relatively flexible, but union power is quite strong. EU subsidies to Cyprus increased after the 2013 banking crisis, and the government mandates a minimum wage and controls prices of food staples.
EU members have a low 1.1 percent average tariff rate and, in general, few non-tariff barriers to trade. Cyprus maintains some additional barriers affecting the services and biotech sectors. The government imposed capital controls in 2013. The financial system continues to be under strain. Despite reorganizations following the March 2013 bailout that averted the country’s financial collapse, the banking sector remains unstable and plagued by uncertainty.