The predominant and continuously expanding share of the services sectors (55% of GDP in 1980, 66% in 1990 and 75,7% in 2003) at the cost of both the primary sectors of economic activity, agriculture and mining and quarrying and the secondary sectors of manufacturing and construction, reflects the comparative advantages, which Cyprus enjoys in the sectors of services.

These advantages derive mainly from:

• its strategic geographical location at the crossroads of three continents;

• the favourable business climate, which is directly related to the prevalence of conditions of macroeconomic stability and a generally favourable tax regime. In relation to this, the recent tax reform introduced a uniform corporate tax rate of 10%;

• the well-educated labour force (according to the Labour Force Survey of 2003, 32,5% of the total gainfully employed population are graduates of tertiary level education), in conjunction with the competitive, as compared to international standards, level of remuneration;

• the relatively satisfactory state of its infrastructure in transport, energy and telecommunications;

• satisfactory living conditions for foreigners, as well as

• the close economic and political relations Cyprus has developed with its neighbouring countries.
  The hotels and restaurants sector’s share to GDP rose throughout the 1980s (3,6% in 1980, 10,6% in 1990). During the 1990s, however, the sector exhibited fluctuations, and its share was contained to 7,7% of GDP in 2003, confirming its vulnerability to exogenous and imponderable factors.

The sectors of financial services, business and real estate and renting activities, educational and health services, also exhibited an increasing trend in their share to GDP. This development was the result of the utilization of the comparative advantages of Cyprus as far as the supply of high quality of services are concerned, both in the domestic market and in the external market, as well as the high income elasticity which characterizes these services. The share of public administration and defence to GDP exhibited intertemporally a slight increasing trend; it remained, however, at low levels by international comparison.

The agricultural sector’s share to GDP has been decreasing (10% in 1980, 7,1% in 1990 and 4% in 2003), a development that constitutes an international phenomenon, and is attributed to the relatively low-income elasticity of demand for agricultural products, the urbanization trend and the reallocation of productive resources from agriculture to other more profitable economic activities. In the case of Cyprus, a constraining factor to the growth of the agricultural sector was also the Turkish invasion and the occupation of a large portion of fertile land, the water scarcity for irrigation, a problem which has become more intense in the past few years, the land fragmentation into small units, which prevents the use of advanced technology and the use of agricultural land for tourist development and other uses. In parallel, agricultural production faced intense competition during the 1990s due to the trend towards gradual liberalization of world trade of agricultural products.

The contribution of the manufacturing sector to GDP also exhibited a falling trend since the early 1980s (18,2% in 1980, 14,7% in 1990, 9,and 3% in 2003). The sector is characterized by chronic problems of competitiveness, due, inter alia, to the small size of the majority of manufacturing units, which negatively affects their capacity to utilize advanced technology and modern methods of management, production and marketing. A study conducted by the Department of Economics of the University of Cyprus, in which the total factor productivity index of the manufacturing sector was estimated, confirmed that during the period 1987-96 the rate of increase of productivity in most Cypriot manufacturing sub-sectors was lower, compared to that of all other countries included in the study, that is, Germany, France, Italy and the UK. The decreasing trend of the contribution of the manufacturing sector to GDP is also attributed to the faster increase of production costs, as compared to competitor countries as well as the intensification of competition due to the implementation of the Customs Union Agreement between Cyprus and the E.U. and the trend towards liberalization of world trade.

The construction sector’s share to GDP has also been falling (14% in 1980, 9,9% in 1990, 8,2% in 2003), a development attributed to the satisfaction of the housing needs of the vast majority of the population, the reduced interest in the construction of new tourist accommodation and the relative slackening of demand for secondary homes in recent years. Concerning the housing conditions, it is noted that according to the Family Budget Survey 1996/97, 74,3% of the households live in privately owned dwellings and a substantial percentage around 16,5% lives in Government housing estates, such as refugee estates, self-help housing estates etc. It is noted, however, that a reversal of the decreasing trend of the construction sector is observed during the past three years, a development mainly attributed to the expansion of investment demand of the private sector. The increased interest of the private sector is partly explained by the negative performance of the investment in the C.S.E., which increased the relative profitability of investment in immovable property, as well as the increased external demand for holiday houses, as shown by the applications and approvals for purchase of immovable property by foreigners.

In conclusion, the continuing upward trend of the share of the tertiary sectors of services to GDP reflects the comparative advantages of Cyprus in these sectors and denotes the important role of services in a contemporary society.

Structure of Employment - The change in the structure of production in favour of the tertiary sectors implied a similar change in the structure of employment. The contribution of the tertiary sectors to the total gainfully employed population increased from 45,5% in 1980, to 57,2% in 1990 and around 71,5% in 2003, which was accompanied by a fall in the shares of both the primary and secondary sectors. In parallel, it is noted that as early as from the beginning of the 1960s there was a decrease, in absolute terms, of employment in the primary sectors, while a similar trend is observed in the secondary sectors as from the beginning of the 1990s, a development which implies that the additional posts are exclusively created in the tertiary sectors of services.

Another basic characteristic of the labour market is the employment of large numbers of foreign workers, especially in unskilled or low-skilled occupations. The total number of legally employed foreign workers reached 40.700 in 2003 and represented 12,9% of the gainfully employed population. From a sectoral perspective, in 2003 29,6% of the foreign workers in Cyprus were employed as household help, 19,6% worked in the sector of hotels and restaurants, 8,5% in construction, 8,4% in agriculture, 8,3% in manufacturing and 8,3% in trade.

Structure of Investment - There has been a decline in gross fixed capital formation as a percentage of GDP over the past years, from 34% in 1980 to 24,5% in 1990 and around 17,5% in 2003. This development reflects the gradual satisfaction of the housing needs of the refugees and, more recently, the reduced interest in investing in new tourist accommodation. In addition, economic activity has tended in recent years to focus on the tertiary sectors of services, which are more labour-intensive rather than capital-intensive.

The structure of investment continues to display weaknesses, given that about 69% of the total is channelled into construction works. Investment in machinery and equipment, however, improved in recent years, with its share to total gross fixed capital formation rising from 19,5% in 1980 to 26,5% in 2003, but still lacks behind as compared to the respective percentage of the majority of the developed countries, which fluctuates between 40-50%. These figures are indicative of the low level of utilization of advanced technology, which affects adversely the growth of productivity, particularly in the primary and secondary sectors.

Structure of Exports - The changing structure of the Cyprus economy is reflected in a parallel change in the structure of exports of goods and services. Characteristic of these changes is the rise in the exports of services, which in 2003 accounted for around 85% of all revenues from the export of goods and services, compared to 50% in 1980. Exports of services, except tourism, constitute the primary source, accounting for about 53% of the total. Tourism contributes around 32% of total receipts from exports of goods and services and the E.U. countries constitute our main tourist market with a share of 83,3% of the total tourist arrivals. The share of the UK in total tourist arrivals accounted for 58,5% in 2003, while Germany, Greece, Russia and Sweden followed with a percentage share of 5,6%, 4,8%, 4,6% and 3,8% respectively. At the same time, the share of international business activities exhibits an upward trend and has risen from 1% of the total value of exports of goods and services in 1980 to 12% in 2003. Other export-oriented sub-sectors include banking and other business services, such as accounting, market research, consultancy services, etc.

Exports of goods accounted for about 15% of total foreign currency revenue in 2003, with the largest share, around 7%, coming from re-exports. Domestic exports accounted for 6,5% of the total and ship stores for the remaining 1,and 5%. Cyprus’ main agricultural exports are potatoes and citrus fruit, while the most important manufactured products are pharmaceuticals, clothing, despite a steady decline in the past decade, cigarettes, cement and Halloumi - cheese.

Trade Relations - The E.U. member countries and particularly Britain continue to be the most important trading partners of Cyprus, absorbing 54,5% of domestic exports in 2003. The share of domestic exports, which is absorbed by the E.U., exhibited an upward trend during the 1980s, from 33% in 1980 to 61% in 1990. However, during the 1990s, the corresponding share decreased gradually to 54,5% in 2003, reflecting, mainly, the erosion of competitiveness of Cyprus’ products in these markets.

The Arab countries absorb about 17% of domestic exports and constitute the second most important trading partner of Cyprus. The Eastern European countries progressively increased their share in domestic exports reaching 10,5% in recent years. As regards imports, the E.U. constitutes the main supplier of goods with a percentage of around 55,5% of total in 2003. It is noted that an important part of imports comes from other countries, such as Japan, 5,6%, China, 4,9%, the USA, 4,2% and other Asian countries with a percentage share of around 4,5%.

Distribution of Income by Factors of Production - The basic characteristic of the Cyprus economy, as far as the distribution of income by factors of production is concerned, is the high, compared to international levels, percentage share of capital earnings (profits, depreciation, interest) to GDP. Over time, a slight downward trend has been observed during the past decade, from 42,8% in 1990 to 40,and 8% in 2002. Correspondingly, the percentage share of income of both employees and self-employed rose slightly from 57,2% in 1990 to 59,2% in 2002.

At the same time, it is noted that Cyprus is in a generally favourable position, as regards the distribution of income. Indicatively, the Gini coefficient, which gives an overall picture of the distribution of income and fluctuates between 0 (complete equality in the distribution of income) and 1 (complete inequality), in 1996/97, was estimated, based on the net income per adult equivalent, according to the Family Budget Survey to be 0,324, virtually identical to the corresponding one in the E.U., where the Gini coefficient in 1994 was equivalent to 0,322. In addition, according to the same Survey, in 1996/97 the poorest 20% of Cyprus’ population received 8% of total disposable income, while the richest 20% received 37% of the total income, that is, 4,6 times more (known as the S80/S20 ratio). In 1994 the corresponding figures for the E.U. were 8% for the poorest 20% of the population and 39% for the richest 20%, giving an S80/S20 ratio of 4,9.On the basis of this indicator, income distribution was less unequal in Cyprus as compared to the E.U.