The financial dependency of the Turkish occupied areas of Cyprus on Turkey, which is due inter alia to the use of the Turkish lira, the uncertainty arising out of the Cyprus problem which remains unsolved, the insistence on secessionist actions and efforts aiming at the recognition or upgrading of the puppet regime in the occupied areas, and the massive presence of Turkish settlers, who are the majority of the population in the occupied areas, are among the reasons for the poor development of the occupied areas, according to an assessment published by the Ministry of Finance.
In its research, with which it gives answers to the allegations of the occupation regime that the main reason for the underdevelopment of the occupied areas is the so-called isolation of the Turkish Cypriots, the Ministry of Finance notes that more reasons for the situation is the inefficient economic system based on large ‘public’ intervention, the lack of credible and prudent macroeconomic policies leading to weak investment and growth, the structural weaknesses of the construction industry due to problems in the smooth functioning of the market mechanism, and the lack of transparency and market based institutions.
The Ministry of Finance says that the economy in the occupied areas has the characteristics of an open economy, reflected in large foreign trade, and that imports are much higher than exports, hence competitiveness problems and not isolation led to unsustainable high trade and current account deficits, while high inflows from Turkey are not directed towards productive purposes.
It notes that isolated economies are characterised by restricted access to foreign markets for their goods and services, and restricted access to imports and capital.
These isolation characteristics are normally reflected in a low export ration, a low import ratio and limited access to foreign direct investment and foreign financing, while the balance of payments reflects the degree of openness of an economy or the degree of isolation.
In the conclusions of the study, the Ministry of Finance points out the underperforming economy in the occupied areas, the recent rebound which is not sustainable, that ‘isolation’ is not the reason for poor performance, that the way to achieve sustainable growth and convergence is to unify the economy of the island, and that the UN proposed solution plan, known as the Annan Plan, is lacking in safeguarding this objective.
In its general conclusions, it says that the def facto ‘economic union’ of the occupied areas with Turkey is detrimental to growth and macroeconomic stability, and that self-imposed economic isolation has not been an important constraint.
It adds that economic growth must be supported by sound and credible macroeconomic policies and institutions, and that the reunification of the island and EU accession will provide the framework for progress and growth.
Cyprus joined the EU as a full member in 2004. The implementation of the acquis communautaire has been suspended in the occupied areas.
The general conclusions point out that economic reunification should create conditions for macroeconomic stability and growth, observe rules governing the EU and the Eurozone, and exploit economies of scale for inter alia infrastructure projects, for the provision of services and the financial system.
In its assessment, which it says is shared by external analysts, the Ministry of Finance notes that the acceleration of growth is not sustainable, and that the recent depreciation of the Turkish lira indicates that difficult times lie ahead.
Referring to the recent trends of the economy in the occupied areas, the Ministry of Finance points out the extraordinary high rates of growth since 2003, with the 11.4% GDP in 2003, 15.4% in 2004 and 10.6% in 2005.
The main factors for this were the construction boom related to some problematic provisions of the Annan Plan, the consumption of Greek Cypriots in the occupied areas, the employment of Turkish Cypriots in the government controlled areas, and the tourism from the government controlled areas to the occupied areas. These sources correspond to 10% of GDP in the occupied areas.
The Ministry adds that improved economic conditions in Turkey also contributed to better growth performance and lower inflation, noting that fiscal deficits remain high.
Presenting an analysis of the balance of payments in the occupied areas, the study notes that the low export ratio to Turkey and European countries, mainly the UK, is due to competitiveness problems rather than restricted market access.
Furthermore, it says that Turkey is the main supplier of imported goods in the occupied areas, and that there is low foreign investment from third countries due to the status of the occupied areas and the property rights issue, but extremely high capital inflows from Turkey.
Regarding the medium term trends of the economy in the occupied areas, the Ministry notes the low per capita income, the low and volatile growth, the low investment ratio, the low capital productivity, the structural weaknesses in the labour market which are due to the high share of the employment in the agricultural and ‘public’ sector, the low labour productivity, the high inflation, the weak currency of the Turkish lira, and the high current account and fiscal deficits, with dependency on Turkey for financing, which correspond to up to 20% of GDP.
The Ministry of Finance says that the fundamental axes for a viable solution concerning the economic aspects should be a viable and functional solution of the Cyprus problem, reunification that would benefit the entire population of Cyprus, Greek Cypriots and Turkish Cypriots, the gradual convergence of living standards between Greek Cypriots and Turkish Cypriots, and the smooth integration of Cyprus into the EU and the Eurozone.
