By Andreas Charalambous and Omiros Pissarides
The key feature of the Turkish Cypriot economy (TCE) is its over-dependence on Turkey, mainly in terms of trade relations, financing of the ‘public’ sector and the economic policy framework, which is determined by protocols that promote the integration of TCE with Turkey. Dependence on Turkey is a major point of friction among the Turkish Cypriot community.The over-dependence on Turkey is reflected, among others, in high inflation, which currently exceeds 100 per cent and is fuelled by the continuous devaluations of the Turkish Lira, which is the ‘official’ currency. Dependence on Turkey is also reflected in the current account of the balance of payments, which exhibits high chronic deficits. Undoubtedly, without funding from Turkey, such high deficits would have led to bankruptcy. Dependence on Turkey is also evident in the tourism sector, through the inflow of Turkish tourists and substantial investments in hotels and casinos.Tourism and higher education are important areas of growth, yet the overall economic growth is relatively low for a developing economy. At present, the economy is also affected by the pandemic, as well as the deteriorating external environment.The labour market is characterised by structural weaknesses, reflected in the relatively large contribution of agriculture and the ‘public’ sector. It is worth noting that the oversized ‘public’ sector also extends to the field of production. A further analysis of ‘public’ finances indicates that the imbalances are substantial. In practice, Turkey finances, through a number of protocols, the entire development budget, defence expenditure and a major part of consumer spending.The banking sector is also plagued by serious weaknesses, including problematic loans to ‘public’ companies, but also the lack of an adequate regulatory and supervisory framework.More generally, trade relations with countries other than Turkey are underdeveloped. Trade and economic relations with the areas controlled by the Republic of Cyprus are a stimulating factor (such as through trade across the green line and Turkish Cypriots working in the Republic of Cyprus) but do not change the gloomy picture.In conclusion, the TCE is characterised by serious macroeconomic and structural weaknesses. The standard of living at $14,000 is low, it is constantly eroded by devaluations of the Turkish lira and it depends, to a crucial extent, on aid from Turkey.Although Turkey and the Turkish Cypriot leadership state that the economic problems are due to “economic isolation”, in reality the underlying causes, as mentioned above, are of a structural nature and run deeper.In the event of a solution of the Cyprus problem, macroeconomic imbalances will pose a major challenge. A bold adjustment programme, on the basis of the adoption of the acquis communautaire, in a timely manner, including all four freedoms and generous external funding will be required to exploit the huge potential of a solution and achieve the necessary economic convergence among Greek and Turkish Cypriots.
Andreas Charalambous is an economist and former director at the Ministry of Finance. Omiros Pissarides is a managing director of PricewaterhouseCoopers Investment Services