Economy and Tourism of Cyprus - Term Paper Example

Cyprus is one of the fastest growing economies where the economic affairs are dominated by the division of the country into the southern area controlled by the Cyprus Government and the northern-Turkish Cypriot-administered area. The Greek Cypriot economy has been classified as one of the most advanced economies of the world by the IMF but it is highly susceptible to shocks (Katircioglu, 2006). North Cyprus has not been able to develop is economic structure. Agricultural sector continues to be the backbone of the North Cyprus as it contributes to employment, exports and supply of raw materials to industry. Cyprus as a whole is now an open, free-market, service-based economy with some light manufacturing (TDS, 2008). Since 1st May 2004, Cyprus has accession to the European Union, which is an important milestone in its recent economic development. The Cypriots are the most prosperous people in the Mediterranean region. It has good, educated English-speaking population, good airline connections and an excellent telecommunications. The economic activity in Cyprus had been based on agriculture in the past but in the past two decades there has been a shift towards light manufacturing and services. Today agriculture contributes only 3.2% to the GDP while industry and construction contribute 19.2 percent and the services sector including tourism contribute 77.6% to the GDP employing 72.1% of the labor force (TDS, 2008). Cyprus has very few proven natural resources although the government is trying to explore the possibilities for offshore oil and gas reserves off its southern coast. The GNP growth rates have declined as the Cyprus economy has matured over the years. Public finances have improved considerably and the fiscal deficit which had peaked in 2003 was eliminated by 2007 (TDS, 2008). There was fiscal surplus in 2007 and the public debt declined simultaneously. The Cyprus economy got a further boost when Euro replaced the Cyprus pound as Cyprus’ national currency. This is expected to bring about a higher degree of price stability, lower interest rates, reduction of currency conversion costs and exchange rate risk, and increased competition through greater price transparency. The investment climate in Cyprus is conducive to FDI. There is increased flow of FDI particularly from the EU. Cyprus has good communication system, an educated labor force, good airline connections, and a sound legal system and provides modern infrastructures and tax incentives for business houses. The cost of living in Cyprus is low which makes it an attractive destination for tourists. Since agriculture forms a large part of the economy, the local produce is fresh and excellent. With accession to the EU, Cyprus gains from increased EU financial assistance. Since tourism contributes to high employment, it has become the impetus for growth. The Republic of Cyprus has always been a popular tourist destination for the British tourists as they do not receive culture shock. English is widely spoken on this former British Colony. Cyprus has the locational disadvantage as the island is located in the eastern Mediterranean 105 km west of Syria, 380 km north of Egypt and 75 km south of Turkey, which renders it highly susceptible to exogenous political factors (Sharpley, 2001). At the same time this island has become the mainstream summer-sun destination even though holidays in Cyprus are 15 percent more expensive than competitor destinations. Internal political stability has influenced the rate and characteristics or tourism development on the island as a whole. One of the most significant factors that have contributed to the growth of tourism on the island was the permission granted for charter flights to land on the island. Prior to mid 1980s the government had restriction on charter flights to protect the interest of its domestic carrier, Cyprus Airways, and thereby contribute to the economic growth of the island. The tourism industry in Cyprus had been contributing to the economic growth and the GDP but experienced a downturn after the terrorist attacks in the US and the economic slowdown in Europe. Tourist arrivals peaked at 2.70 million in 2001 but were 2.40 million in 2006 (Clerides & Pashourtidou, 2007). Similarly, revenues too peaked at 2.17 billion Euro (EUR), in 2001 while in 2006 they were EUR 1.76 billion. The contribution of tourism sector to national income has dropped even faster. Revenue from tourism as a percentage of GDP was 12.3% in 2006, down from 20.6% in 2000. The reason for this decrease in tourist arrivals has been associated with Cyprus no more being attractive as a tourist destination. Deteriorating infrastructure, rising cost and increased competition have all made Cyprus less competitive and less attractive. With the emergence of Egypt, Croatia and Turkey, Cyprus face more challenges in attracting tourists (Clerides & Pashourtidou, 2007). This is also because the new destinations operate at significantly lower costs than Cyprus. The tourist product remained one-dimensional (sun and sea) in Cyprus and the hotel accommodation and other infrastructure remains outdated. Perishing cultural identity and depleting natural environment and resources are some of the other challenges that the island faces apart from competition destinations. In order to combat competition the Cyprus Tourism Organization (CTO) developed the Strategic Plan for Tourism Development 2003-2010 to provide a roadmap for the future development of tourism in Cyprus (Clerides & Pashourtidou, 2007). Since the island’s economy is dependent on tourism, the plan was to maximize the earnings from tourism. This requires increases in the tourist expenditure and increase in the number of tourist arrivals in Cyprus. Various incidents like the Iraq war, the crisis in Lebanon and the terrorist attacks in the US have adversely impacted the tourism industry in Cyprus. There have been signs of recovery of arrivals in 2004 and 2005. The table below shows tourist arrivals in Cyprus and expenditure per person by tourists’ country of usual residence for 2006 along with the corresponding changes from 2005. (Clerides & Pashourtidou, 2007). Based on the above data, the CTO will direct its efforts in implementing marketing strategies until 2010. About 80% of the tourist arrivals in 2006 were from the EU and nearly 57% from the United Kingdom. Compared to 2005, there was a reduction of 2.5% tourist arrivals in 2006. While the arrivals from Russia increased those from France and Austria decreased. Despite the decrease in tourist arrivals, the expenditure per tourist has increased compared to 2005. The length of the stay in Cyprus is important to determine the tourist expenditure. The Strategic Plan for Tourism Development 2003-2010 as cited by Smid and Zwart (2002) includes the following targets: 1. Real revenue must be doubled by 2010. 2. Average spending per tourist must be increased by 2010. 3. The tourism sector’s dependence on the season must be lessened by realizing a 33 to 40% decrease in tourist arrivals during the peak season (July to September). At the same time, during the other months, the Plan targets to get 250,000 tourists per month. 4. The number of tourist arrivals must be increased from 2.5 million in 2000 to 4 million in 2010. 5. Return visitors must increase by 35% in 2010. As an attempt towards the implementation of the Plan, the government would upgrade and existing organization for the co-ordination of the tourism development activities (Smid & Zwart, 2002). Benchmark studies would be conducted to compare with other tourist destinations. They also plan to evaluate EU funding options. Cyprus has not introduced any other segment in tourism apart from relaxation visits. Conference facilities exist only in one or two hotels in Cyprus and this needs to be paid attention to. CTO may not be benefited by trying to attract tourists from other destinations and should concentrate on the UK, and the Scandinavian and the German markets. Trying to encourage tourists through smaller, specialist tour operators may also be counter-productive according to Sharpley (2002). They should work with the major operators which would help to consolidate the existing business and increase the low season and winter-sun arrivals. Since the nation-island is dependent on tourism, the satisfaction level of the tourists has to be considered for formulating the marketing plans. Tourists have been forming unfavorable impressions of the destination and hence the Strategic Plan to increase the returning tourists would not be effective. This requires proper segmentation and according to Clerides and Pashourtidou (2007), CTO should attract the retired senior citizens who would like to repeat their visits and would prefer to come to Cyprus during the off-peak periods. Tourism is a volatile sector and reacts strongly to external factors. According to World Tourism Organization statistics, Cyprus is one of sixteen countries that had tourism receipts exceeding 15% of their GDP in 1998. The economy is totally dependent on tourism but Cyprus should have a diversified economy. Cyprus has all the advantages like an educated workforce, excellent geographical location, accession to the European Union and now even the European Monetary Union. With these advantages Cyprus can expand and diversify its economy. While tourism would continue to remain an important source of income, the decline in tourism could perhaps become the reason for Cyprus to look for other opportunities for the growth of the island. References: Clerides, S. & Pashourtidou, N. (2007). Tourism in Cyprus: Recent Trends and Lessons from the Tourist Satisfaction Survey. Cyprus Economic Policy Review, Vol. 1, No. 2, pp. 51-72 (2007) 1450-4561 Katircioglu, S. H. (2006). Causality between agriculture and economic growth in a small nation under political isolation A case from North Cyprus. International Journal of Social Economics Vol. 33 No. 4, 2006 pp. 331-343 Sharpley, R. (2001). Tourism in Cyprus: challenges and opportunities. Tourism in Cyprus: challenges and opportunities, Tourism Geographies, 3:1, 64-86 Smid, S. & Zwart, P. (2002). Tourism on Cyprus. Available from http://ec.europa.eu/enterprise/enlargement/doc/cyprus-tourism.pdf; accessed 07 May 2008 TDS (2008). Cyprus Europe: Economy. Available from http://www.traveldocs.com/cy/economy.htm; accessed 07 May 2008 Read More