Economic crisis hits Cypriot tourism and construction industry

Cyprus Institute for Mediterranean, European and International Studies
Cyprus felt the impact of the global financial crisis, however, at a lower scale than other EU member state economies. In October, the international credit crisis escalated significantly and the “Cyprus Stock Exchange” suffered its heaviest losses since 1999. At the time, Cypriot President, Demetris Christofias, in his intervention at the seventh EU-Asia Summit (ASEM) in Beijing, noted that the international financial crisis required fast and coordinated actions by all states.[1] Upon his return to Cyprus, Christofias stated that the Cypriot economy is not substantially affected by the crisis, while the country’s banking system still stands strong.[2] Minister of Finance, Charilaos Stavrakis, sharing the president’s view, also observed that the Cypriot economy will inevitably be affected by the international financial crisis, but because of its robust foundations it will be able to come out of the crisis much easier than other states.[3]
While efforts were made at EU and Eurozone level to come up with measures to address the crisis, the European Commission’s economic forecasts for Cyprus showed growth for the island’s economy (2.9 percent) at 29 times the Eurozone average despite the overall slowdown.[4] Minister of Finance Stavrakis, speaking from Brussels, expressed satisfaction with the forecasts, while adding that these are not reason for calm.[5] He also stated that this is the best indicator that the government’s economic planning is in the right direction and that it appears that the government will be able to fulfil its plans. He also expressed the belief that if oil prices remain at current levels, inflation in Cyprus could slow down to 2.5 percent.
To overcome the impact of the financial crisis, the Cypriot government followed the guidelines drafted at an EU level during the high-level discussions between the European Commission, the European Central Bank and largely affected states, such as the United Kingdom, Germany and France. The Ministries of Finance and of Commerce, the “Central Bank of Cyprus” and other financial bodies, often briefed the Committee on European Affairs of the “House of Representatives” on the deliberations on the European level regarding the effort to contain the financial crisis. The “House of Representatives” needed to revise existing legislation, according to revised EU directives, in order to reinforce the stability of the financial system, the reduction of exposure of credit institutions to risk, and the improvement of the oversight of banks which operate in more than one EU member state. As the president of the Committee on European Affairs of the “House of Representatives”, Nicos Cleanthous, stated, this is a particularly serious issue given the international financial crisis, and therefore the briefing of the “House of Representatives” will continue in order for it to be better informed and therefore capable to further refine the legislation which will be derived from the EU directives.[6]
All relevant authorities in Cyprus were also called to prepare emergency plans in order to support sectors that might be affected by the crisis, including the tourism industry and the holiday home market. Thus, according to data released by the “Cyprus Hotel Owners’ Association” and the “Cyprus Τourism Organisation” the arrival of tourists from the UK and Russia is expected to decrease for 2009 and the income of the tourist industry for September 2008 was expected to face a decrease of 6 percent.[7]
The Ministry of Commerce, Industry and Tourism examined a series of measures, such as the promotion of Cyprus’ tourist product, concentration on new markets, and the creation of a coordinating committee which will handle a possible crisis.[8] The Cyprus tourism organisation outlined a plan for winter tourism and also announced a programme for the attraction of domestic tourists.[9] By early February 2009, however, some signs were somewhat melancholy: overall figures about tourist arrivals in January were down by 8.5 percent compared to the same month in 2008. On the other hand, arrivals from the promising market of Russia in the same month had increased by 42.9 percent as compared to January 2008.[10]
In this connection, our communication with the consulate general of Cyprus in St. Petersburg provided the following useful data. First, the visas issued by that consulate to Russian tourists travelling to Cyprus in 2007 were 23,698, reaching 30,911 in 2008. And second, the total number of Russian tourists travelling to Cyprus for the years 2006 to 2008 were as follows: (1) 2006: 114,758 people; (2) 2007: 145,914 people (i.e. an increase of 27.1 percent over the previous year); and (3) 2008: 180,919 people (or an increase of 24 percent over 2007).[11]
For its part, the Ministry of Labour announced that, while Cyprus does not have a problem with unemployment, the government will take measures in case the financial crisis does affect the construction and tourism industries.[12] Part of these measures is the creation of a permanent mechanism for observation of the labour market, which will convene on a regular basis.
The Interior Ministry also announced its plans for 2009, which aimed at boosting the construction industry, which is the first sector to be affected by the crisis, as developers warned of layoffs and called for a reduction of transfer fees and capital gains tax.[13] The ministry’s plans include the renovation of old apartment buildings and their resale to those entitled to subsidised housing. Also, the increase in housing aid to refugees of up to 100 percent, which will be effective retroactively as of 1 March 2008, and the grant of government aid to the construction sector, based on income criteria and for those purchasing their first residence, in compensation for the payment of transfer fees.
Two aid packages were also announced by the government. The one, announced in November 2008, provided for a 52 million Euro aid package in support of the tourist and construction industries.[14] According to the package, development projects will be accelerated and bureaucratic procedures will be simplified in an effort to support the construction industry. Also, the application for visa by third-country citizens will be simplified, a number of consulates will be opened in countries with a high potential for tourism, and the Cyprus tourism organisation budget will be supplemented by 12 million Euro. The government also decided to form two action groups to deal with potential problems in the two sectors in danger.
Despite President Christofias’ reassurances that the Cyprus economy is not only in good shape but also resilient, and that the government makes sure that this remains so through a dynamic development programme, the main opposition party, Democratic Rally DISY, expressed its dissatisfaction with the first package of measures announced, while saying it expected a radical revision of the budget and the support of the private sector, which did not happen.[15]
A second aid package followed in early February 2009, when the government announced the approval of an additional 300 million Euro for the economy.[16] The package of measures, which aims to maintain high productivity levels and low unemployment in light of the global financial crisis, concerns the construction, tourism and financial sectors. President Christofias outlined the measures, which he described as satisfactory for the time being, noting that these are temporary in nature, and stressed that there will be no new taxes imposed by the government.[17] With regards to the tourism industry, airport fees will be reduced for 2009 after the government waives its share, VAT for the tourism industry for 2009 is reduced from 8 percent to 5 percent, fees payable to local authorities per stay in hotels are waived, and measures are taken to promote domestic tourism and subsidise domestic tourism for low income families. The total cost of these measures is estimated at 51 million Euros. With regards to the construction sector, the government decided to grant long term low interest loans (for at least 20 years) for low and mid-income couples looking to purchase a house of up to 200 square meters. The loans will have a 0 percent interest rate for the first two years. It also decided to construct new units for refugees and the repair of school buildings. The total cost of the package for the construction sector is estimated at 200 million Euros. In view of the need to maintain low unemployment rates, expected to reach 4.5 percent in 2009, the government will focus on training workers and the securing of a suitable job for those applying to the unemployment office, as well as run a campaign against illegal workers and revise allowances for non-EU member state employees. In an effort to strengthen the financial sector, Christofias announced that the government will extend its deposit of 700 million Euros in commercial banks for an additional three and a half months in an effort not to affect the liquidity of the sector. Concluding the analysis of the package, Christofias also reiterated that the government will continue its social policy and that it will in no case stop supporting the taxpayer. The measures were welcomed by political parties and professionals associations.
In all, the global financial crisis is an issue which certainly concerns the Cypriot people. As shown in the autumn 2008 Eurobarometer, Cypriots claim to be largely affected by the crisis and are concerned by the future of the Cypriot, and the EU economy.[18] 67 percent stated that they can barely pay their utility bills each month, while 78 percent said it is not satisfied with the cost of living in Cyprus. In addition, 88 percent expressed dissatisfaction by the increasing price of energy and 93 percent by the increasing housing prices.[19] In “Marfin-Laiki Bank’s” annual survey, the “Cyprobarometer”, nearly half of the people asked (48 percent) said that, as regards the economy, 2008 was a much worse year than 2007,[20] Then, on 11 February 2009, upon returning from the ECOFIN and Eurogroup meetings in Brussels, Finance Minister Stavrakis admitted that Cyprus will not avoid an economic slowdown in the second half of 2009. Talking at an event entitled “Leadership in a Challenging Environment”, he added that, in any case, the Cypriot government will retain its present rates for company taxation, given that they provide Cyprus with a comparative advantage in attracting foreign investment.[21]
In the international power constellation system, the past months’ financial downfall showed a relevant shift, as the Euro had proven its strength and credibility compared to the US Dollar and the British Pound. Analysts from the “Central Bank of Cyprus” have expressed the estimation that Eurozone’s economy will be able to eventually come out of the financial crisis much stronger than before (already, in many Middle Eastern countries the use of the US Dollar has been replaced with the Euro as it is considered a more stable currency).[22] In general, the crisis could lead the world’s large economies to seek a more effective and efficient financial system, perhaps a ‘new Bretton Woods’ as leaders such as Nicolas Sarkozy have started envisioning. Political analysts also believe that when the financial crisis comes to an end, the political system will be transformed to a multi-polar global system of numerous regional powers, thus the cooperation between nations will be imperative.[23]

[1] Demetris Christofias, President: ASEM address, Beijing, 24/25 October 2008 (as reported by all Cypriot Media).

[2] Demetris Christofias, President: Statements, Larnaca, 25 October 2008 (as reported by all Cypriot Media).

[3] Charilaos Stavrakis, Minister of Finance: Statements, Nicosia, 26 October 2008 (as reported by all Cypriot Media).

[4] Council of the European Union: 2901st Council meeting Economic and Financial Affairs, press release, No. 15067/08 (Presse 311), Brussels, 4 November 2008, available at: (last access: 25 January 2009).

[5] Charilaos Stavrakis, Minister of Finance: Statements, Brussels, 4 November 2008 (as reported by all Cypriot media).

[6] Statements after members of the Committee on European Affairs of the House of Representatives after its session, 21 October 2008 (as reported by the Cyprus News Agency).

[7] Cyprus Hotel Owners’ Association Press conference, 28 October 2008 (as reported by all Cypriot media).

[8] See: Ministry of Commerce, Industry and Tourism, 4 November 2008, available at: (last access: 25 January 2009).

[9] Cyprus Tourism Organisation: Press conference, 4 November 2008 (as reported by all Cypriot Media).

[10] 2,793 Russian tourists had arrived in Cyprus in January 2009, as compared to 1,955 in the same month of 2008. See: Simerini (newspaper), 12 February 2009.

[11] Correspondence with the consulate general of Cyprus at St. Petersburg, 16 February 2009.

[12] See: Ministry of Labour and Social Insurance, 4 November 2008, available at: (last access: 25 January 2009).

[13] See: Ministry of Interior, 1 November 2008, available at: (last access: 25 January 2009).

[14] Demetris Christofias, President: Statements, Nicosia, 14 November 2008.

[15] Democratic Rally: Announcement, 14 November 2008 (as reported by the Cyprus News Agency).

[16] Demetris Christofias, President: Statements, Nicosia, 3 February 2008.

[17] Ibid.

[18] Standard Eurobarometer 70, Autumn 2008, available at: (last access: 25 January 2009).

[19] Ibid.

[20] Economic Research and Planning Department of Marfin Laiki Bank: Cyprobarometer-2007, 19 June 2008.

[21] Simerini (newspaper), 12 February 2009.

[22] Interviews conducted by Nicoleta Athanasiadou at the Central Bank of Cyprus, Nicosia, December 2008.

[23] Interviews conducted by Christos Xenophontos at the Cypriot Ministry of Foreign Affairs, Nicosia, December 2008.