Cyprus: June 1997
Cyprus' trade policy is determined by two major goals: harmonizing its laws and policies with those of the EU, and ensuring the conformity of these laws and policies with the WTO Agreements.
Cyprus works its way towards eu membership and WTO conformity
Cyprus' trade policy is determined by two major goals: harmonizing its laws and policies with those of the EU, and ensuring the conformity of these laws and policies with the WTO Agreements. Salient features of Cyprus are the openness of its economy and the growing importance of its services sector, notes a new WTO Secretariat report on Cyprus' trade policies and practices.
The WTO's report and one prepared by the Government of Cyprus will be the subject of two days of discussion on 25 and 26 June 1997. Services, the report notes, account today in Cyprus for 70 per cent of both GDP and foreign exchange receipts. In the last decade, tourism and more recently business services for a booming offshore sector have become the main contributors to economic growth. As a result, Cyprus' per capita income has tripled from $4,570 in 1985 to around $13,650 in 1996. Tourism generates 40 per cent of current account receipt and more than 20 per cent of GDP. Led by tourism, services export earnings were nearly $3 billion in 1995, compared to $1.2 billion from merchandise exports.
According to the report, Cyprus suffers from a structural trade deficit. Merchandise imports represent nearly 40 per cent of GDP, outweighing exports by a factor of almost three. Although different sorts of export incentives exist, Cyprus is a net importer of manufactures. In 1996, merchandise exports amounted to $1.4 billion, imports were $3.9 billion and the current account deficit widened to 5 per cent of GDP.
Even though the share of Cyprus' exports to the EU has fallen in the last five years, the European Union is still Cyprus' most important trading partner. Cyprus has applied for EU membership and is harmonizing its laws, policies and institutional structure with the EU's "acquis communautaire". Cyprus already meets the Maastricht "convergence" criteria: inflation is low, the fiscal deficit stood at 2.9 per cent in 1996 and its public debt was reduced to 54 per cent of GDP in 1995. On the basis of the existing Customs Union Agreement, Cyprus will adopt the EU's CommonCustoms Tariff by the end of 1997. The process of harmonization of Cypriot standards with those of the EU was completed recently. Cyprus has adopted EC legislation on competition policy and is liberalizing its financial sector according to EU requirements. Cyprus has entered specific commitments on professional and financial services in GATS by which it generally accords national treatment. While financial and insurance services are open to foreign service suppliers, the telecommunications services sector is still controlled by a government monopoly.
The WTO report states that Cyprus, in order to conform with Uruguay Round commitments, abolished its discretionary import licensing and is in the process of revising its anti-dumping and countervailing legislation. It introduced a new foreign direct investment policy in 1997 and has made efforts to improve competition on the local market. Most price controls, for example, have been removed. A draft law on public procurement is with the legislature. The Government estimates that roughly 95 per cent of procurement is executed through competitive tendering.
In 1996, the average applied m.f.n. tariff was 16.4 per cent (7.2 per cent for the EU, a preferential supplier). In the same year, the Secretariat report notes, Cyprus' simple average m.f.n. tariff on agricultural products was 37.6 per cent while the preferential tariff, applicable to EU imports, stood at 23.3 per cent but there is a wide dispersion of m.f.n. tariffs. Close to half of agricultural tariff lines carry a compound or specific duty. Thus fruits, vegetables and tobacco carry average rates above 60 per cent. Exports subsidies of $17.5 million on agricultural products (mainly for vegetables, fruits and wine) will be progressively reduced by 24 per cent by 2004. For certain crops, semi-governmental organizations are the sole buyers and sellers. For example, the Cyprus Grain Commission is the sole importer of grains and the Vine Products Commission is the sole buyer of grapes. Cyprus' agriculture accounts for 5.5 per cent of GDP.
In its conclusions the report suggests that Cyprus could take further steps to conform with multilateral rules. Currently, Cyprus uses many non ad valorem duties which reduces the level of transparency in its import tariffs and still resorts to measures such as reduced tax rates for export manufacturing or preferential treatment for domestic content. The report suggests that because tariff quotas on certain farm products are underutilized, tariffs in these areas could be lowered with little effect on imports.
Note to Editors:
The WTO Secretariat's report, together with a report prepared by Cyprus will be discussed by the WTO Trade Policy Review Body (TPRB) on 25 and 26 June 1997. The WTO's TPRB conducts a collective evaluation of the full range of trade policies practices of each WTO member at regular periodic intervals and monitors significant trends and developments which may have an impact on the global trading system. The two reports, together with a report of the TPRB's discussion and of the Chairman's summing up, will be published in due course as the complete Trade Policy Review of Cyprus and will be available from the WTO Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.
The reports cover the development of all aspects of Cyprus' trade policies, including domestic laws and regulations, the institutional framework, trade policies by measure and by sector. Since the WTO came into force, the "new areas" of services trade and trade-related aspects of intellectual property rights are also covered. Attached are the summary observations from the Secretariat and government reports. Full reports will be available for journalists from the WTO Secretariat on request.
Since December 1989, the following reports have been completed: Argentina (1992), Australia (1989 & 1994), Austria (1992), Bangladesh (1992), Bolivia (1993), Brazil (1992 & 1996), Cameroon (1995), Canada (1990, 1992, 1994 & 1996), Chile (1991), Colombia (1990 & 1996), Costa Rica (1995), C˘te d'Ivoire (1995), the Czech Republic (1996), the Dominican Republic (1996), Egypt (1992), El Salvador (1996), the European Communities (1991, 1993 & 1995), Fiji (1997), Finland (1992), Ghana (1992), Hong Kong (1990 & 1994), Hungary (1991), Iceland (1994), India (1993), Indonesia (1991 and 1994), Israel (1994), Japan (1990, 1992 & 1995), Kenya (1993), Korea, Rep. of (1992 & 1996), Macau (1994), Malaysia (1993), Mauritius (1995), Mexico (1993), Morocco (1989 & 1996), New Zealand (1990 & 1996), Nigeria (1991), Norway (1991 & 1996), Pakistan (1995), Peru (1994), the Philippines (1993), Poland (1993), Romania (1992), Senegal (1994), Singapore (1992 & 1996), Slovak Republic (1995), South Africa (1993), Sri Lanka (1995), Sweden (1990 & 1994), Switzerland (1991 & 1996), Thailand (1991 & 1995), Tunisia (1994), Turkey (1994), the United States (1989, 1992, 1994 & 1996), Uganda (1995), Uruguay (1992), Venezuela (1996), Zambia (1996) and Zimbabwe (1994).
The Secretariats report: summary
TRADE POLICY REVIEW BODY: CYPRUS
Report by the Secretariat Summary Observations
Sectoral Trade Policies
21. In the Uruguay Round, Cyprus offered ceiling bindings of between 30 and 245 per cent on agricultural products (adopting tariff equivalents at least as high as those used by the EU), after converting the specific duties from ECUs to Cyprus pounds. Close to half of agricultural tariff lines carry a mixed, specific or compound duty. Based on ad valorem rates, in 1996, Cyprus' simple average m.f.n. tariff on agricultural products was 37.6 per cent; the preferential tariff, applicable to EU imports, stood at 23.3 per cent. There is considerable dispersion of m.f.n. rates by product groups in the farm sector; fruits, vegetables and tobacco carry average rates above 60 per cent; seasonal tariffs apply to various fruits, vegetables, cut flowers and fish.
22. From 1 January 1996, Cyprus tariffied all its quantitative restrictions on agricultural products, following protracted negotiations with the EU, except for groundnuts, which are subject to licensing. Notified as a trade-related investment measures, importers are required to purchase predetermined quantities of locally grown groundnuts before they are allowed to import.
23. In the Uruguay Round, Cyprus agreed to reduce levels of domestic support on agricultural products to úC 50.6 million by 2004. The total aggregate measure of support (AMS) in 1995 amounted to úC 36.5 million, representing about one-sixth of agricultural value added. Cyprus is adopting many of the provisions of the EU Common Agricultural Policy and has changed the base for subsidies from production to area cultivated. Cyprus was one of the few developing countries to make commitments to reduce export subsidies; export subsidies of approximately úC 9 million (mainly for vegetables, fruit and wine) will be reduced progressively by 24 per cent by 2004.
24. For certain crops, semi-governmental organizations are the sole buyers and sellers. The main objectives of these organizations are to facilitate product marketing and stabilize producer returns. The Cyprus Grain Commission, the sole importer of grains, and the Vine Products Commission, sole buyer of grapes, are directly financed by the Government; the Grain Commission operates a price support scheme for grain producers and sells grain at lower than world prices to subsidize animal feed and the livestock sector. Membership of the marketing boards responsible for exports is compulsory for producers. In addition to the semi-government organizations, cooperative organizations participate actively in both local and export sales of farm produce. A policy to reduce and stabilize beef and milk production has recently been introduced.
25. Manufacturing, primarily food and clothing, accounts for 12 per cent of GDP. Cyprus is a significant net importer of manufactures. During the Uruguay Round, Cyprus bound approximately 80 per cent of its industrial tariff lines at 40 per cent; clothing, footwear and motor vehicles remain unbound. Applied rates are considerably lower; in 1996, the average m.f.n. tariff on industrial products was 10.9 per cent and 3 per cent on imports from the EU.
26. The Government has shifted its industrial development focus to diversification and the fostering of specialization through technological upgrading; investment incentives for machinery and equipment have been introduced. Past high import protection allowed local consumer industries to supply the domestic market. As protective barriers have been lowered, demand has begun to switch to imports and increased competition from customs union with the EU will bring further adjustment pressures.
27. Receipts from services transactions far exceed merchandise exports; led by tourism, services earnings were nearly US$3 billion in 1995, compared to US$1.2 billion from merchandise exports. In the GATS negotiations, Cyprus made specific commitments on professional and financial services; it generally accords national treatment.
28. Tourism generates 40 per cent of current account receipts and more than 20 per cent of GDP. Like other service sectors, certain investment projects in tourism have been opened to majority control by non-residents; however, the ceiling on foreign equity in tour operations and travel and car rental agencies in subject to a 49 per cent limit.
29. Financial liberalization is one of the cornerstones of policy reform towards harmonization of Cyprus' institutional framework with the EU. Financial supervision of institutions is being strengthened through legislation; money laundering is a criminal offense and surveillance measures are in place. Licensing requirements for foreign banks are the same as for domestic banks. Foreign banks may establish both branches and subsidiaries and no distinction is made between domestic and foreign banks in terms of the services they may provide, or on their source of funds. Policy towards the granting of banking licences, determined by the Central Bank in consultation with the Ministry of Finance, aims to provide a range of services while maintaining the soundness of the banking system. Concentration in the commercial banking sector is high; two banks control two-thirds of total deposits.
30. Cyprus made commitments, according national treatment, in both the life and non-life insurance sectors during the Uruguay Round negotiations. All forms of insurance activities are open to foreign suppliers; 100 per cent foreign equity is permitted under the new investment regime.
31. Cyprus maintains the world's fourth largest open registry. Vessels flying the national flag must be majority-owned by Cypriots; incentives to register ships in Cyprus include low registration fees and a completely tax-free status for shipping companies. This includes exemption from tax on profits and dividends, capital gains tax on sale of ship or shares, income tax on crew wages, stamp duty on deeds and estate duty. Domestic shipping companies are eligible for preferential tax treatment through a 30 per cent reduction of the annual tonnage tax if the ships are operated by a Cypriot ship management company. Cyprus limits cabotage, inland trucking and port services to nationals, although the authorities may approve foreign participation up to 49 per cent on a case by case basis. The state-controlled Cyprus Port Authority is the monopoly provider of a number of port services, pilotage, towing, navigation aids, and berthing; provisioning, fuelling and emergency repair services are provided by the private sector, subject to approval by the Cyprus Port Authority.
32. The provision of telecommunications services in Cyprus is currently under a government-controlled monopoly. The Cyprus Telecommunications Authority has sole responsibility for the installation, operation and maintenance of telecommunications networks as well as for the provision of all telecommunications services. Tariffs for telecommunications services must be approved by the House of Representatives; a system to facilitate cost-oriented pricing is being developed. The Authority performs type approval functions, but withdrew from the sale of terminal equipment several years ago.
(5) Cyprus and the Multilateral Trading System
33. Cyprus' trade policy is determined by its twin goals of harmonizing laws and policies with those of the EU and ensuring conformity with WTO Agreements. The entry into force of the WTO has precipitated the removal of quantitative restrictions and allowed for greater predictability, particularly with the binding of the majority of tariffs. While Cyprus will adopt the EU's Common Customs Tariff at the end of this year, the frequency of specific, or other non ad valorem duties, detracts from transparency. The excise duty on cigarrettes may need to be reviewed for conformity with national treatment. Measures, such as temporary emergency protection in the form of surcharges for certain products, reduced tax rates for export manufacturing, certain preferential treatment for domestic content, suggest further steps may be necessary to conform with multilateral rules. Underutilization of tariff quotas on certain farm products suggests that tariffs in these areas could be lowered with little effect on imports. Subsidies to state-trading organizations in the agricultural sector pose a burden, particularly as the Government is determined on achieving a comfortable fiscal balance.
34. Efforts to improve local conditions for competition seem to be bearing fruit, as evidenced, inter alia, by the removal of most price controls and the implementation of competition legislation. State monopolies still exist in certain sectors, including air transport, telecommunications and port services. Red tape has been reduced and the investment regime liberalized; many sectors of the economy have now been opened to majority foreign control. Prospective removal of the interest rate ceiling and remaining restrictions on capital movements will liberalize financial markets. The offshore business sector and shipping as well as transit trade services continue to provide an important source of growth to the increasingly service-oriented economy.Back to top
TRADE POLICY REVIEW BODY: CYPRUS
Report by the Government
TRADE AND INVESTMENT POLICY DEVELOPMENTS, 1994-1996
48. Cyprus' Trade Policy activities over the past two years have focused particularly on implementing the Uruguay Round Agreements and coordinated efforts to harmonize with the Acquis Communautaire, with a view to prepare the smooth integration of Cyprus in the United Europe.
49. These initiatives include developments in the following areas:
(i) Discretionary import licensing, to protect local production, was abolished, along with remaining quantitative restrictions, with effect from 1 January 1996; tariffs are now the main instrument of the import regime. Surcharges, incorporated in the customs duty, have replaced quotas on certain products, defined as sensitive within the terms of the Customs Union Agreement with the EU. During the Uruguay Round, Cyprus bound approximately 80 per cent of industrial tariff lines at 40 per cent, and all agricultural tariff lines are bound.
(ii) Implementation of WTO Agreements.
(iii) Reductions in tariffs and tariff simplification.
(iv) Elimination of Quantitative Restrictions and Quotas.
(v) Application of the provisions of the WTO Agreement on Sanitary and Phytosanitary Measures (SPS).
(vi) Competition policy to consolidate existing legislative framework and to make it comparable to the EU regulatory framework.
(vii) Price controls on locally produced and imported consumable goods were reduced to a limited number of goods.
(viii) Protection of intellectual property rights.
(ix) Environmental policies.
(x) Change in regulations regarding life and non-life insurance activities regarding foreigners.
(xi) A new policy governing foreign direct and portfolio investment.
(xii) Standards and Technical Regulations.
(xiii) Customs Valuation.
ECONOMIC RELATIONS BETWEEN CYPRUS AND THE EUROPEAN UNION Back to top
50. The period since the issuing of the Avis by the European Commission regarding the application of Cyprus for full membership to the European Union, in June 1993, is characterized by the coordinated and systematic efforts on the part of Cyprus to harmonize with the Acquis Communautaire, with a view to prepare the smooth integration of Cyprus in the EU.
51. The decision of the Council of Ministers on 6 March 1995 for the start of the accession negotiations with Cyprus six months after the completion of the Intergovernmental Conference, in conjunction with the subsequent confirmation of this decision in all meetings of the European Council which followed, indicates the importance attached by the EU to a balanced expansion to the south. The shaping of the new Euro-Mediterranean Partnership enhances even more the role which could be played by Cyprus as a future member of the EU for the successful promotion of this desired cooperation.
52. The accession course of Cyprus and other candidate members is closely associated with important developments in the EU in 1996, particularly the inauguration of the sessions of the Intergovernmental Conference, aiming at revising the Treaty of Maastricht.
PLANNED ACTION FOR THE PROMOTION OF ACCESSION
53. Following the issue of the Avis by the European Commission on the application of Cyprus for full membership, the efforts for harmonisation and adjustment to the Acquis Communautaire constitute a priority for Government policy. Both the Strategic Development Plan 1994-98 and the Fourth Financial Protocol between Cyprus and the EU, covering the same period, are concentrated on the achievement of this goal.
54. As from 1994, 22 working groups were set up with a view to study in detail the Acquis Communautaire in relation to the practices in Cyprus, identify possible divergences and prepare a plan of action for harmonisation. The reports of the working groups were presented to the Ministerial Committee on EU matters. These proceedings made clear that a sectoral approach on its own was not sufficient to satisfy the set targets, and that a synthesis of the partial conclusions and suggestions was necessary within a unified plan of action covering all sectors of economic and social activity.
55. Under this unified action plan the Government of Cyprus will undertake sectoral and intrasectoral comparison and analysis and will proceed to an evaluation, priority ranking and classification of the proposed measures, according to the expected impact on the economy. The basic objective of the harmonisation programme will be the achievement of the greatest possible degree of preparation for accession, with a minimization of the potential adverse repercussions. Back to top