Many articles have presented the importance and contribution
of Cyprus to the international business sector. By contrast
this article highlights the importance of the international
business sector to Cyprus. The international business sector
has become a vital contributor to Cyprus's economy over the
past few years and its importance has recently increased
further, for the following reasons.
First, capital inflows and deposits from foreign companies
helped boost revenues recorded by the Cyprus Inland Revenue
Department by 8.9% year-on-year in January-September 2005, with
revenues reaching CYP450.2 million ($916.5 million) compared
with CYP413.3 million in the same period of 2004. This increase
in revenue is reportedly largely the result of foreign company
activity, which has boosted both the corporate tax take and the
defence tax, which is levied on corporate dividends and on
interest paid on deposits.
Second, the relative importance of tourism in Cyprus's
external finance (CXR) has declined. Tourist numbers recovered
slightly in 2004 following the 2002-2003 trough caused by the
general slowdown in the global tourism industry and preliminary
indications point to further recovery in 2006. Even so, tourism
now accounts for just over 26% of all CXR, representing a
significant rebalancing of the economy from previous levels
(35% of all CXR in 1995 and over 40% in the early 1990s). On
the other hand, business services are a further important
source of foreign exchange (19% of CXR).
Thirdly, the widening of the visible trade deficit (to 26%
of GDP from 24% in 2003) added to the current account deficit
in 2004. Demand was fuelled by reductions in import duties
(particularly for cars). At the same time a rise in oil prices
outstripped visible export earnings by 4.5 percentage points.
By contrast, invisible (service) exports showed robust growth,
despite the lacklustre performance of tourism. Business
services were the main driver of service receipts, growing by
over 30% in dollar terms and contributing to overall service
income growth of 17.6% for the year.
The final factor was an increase in net Cypriot investment
abroad. Since 2001 equity foreign direct investment (FDI)
inflows have not been enough to cover the current account
deficit. However, in 2004, for the first time in a decade,
total net FDI inflows (including debt flows) were lower than
the current account deficit, reflecting an upturn in Cypriot
investment abroad. One component of the increased capital
outflow was net lending abroad by the banking sector, which
reached $4.8 billion, largely reflecting the growing activities
of Cypriot banks abroad. There was also a big increase in
Cypriot equity investment in Greece, the new EU candidate
countries, Russia and Ukraine.
The figures suggest that the international business sector
is set to continue, and probably increase, as a source of
revenue to the economy, highlighting the continuing importance
of promoting Cyprus as an international business centre and
providing a business-friendly environment.