RESTRICTED
WORLD TRADE WT/TPR/S/25
28May1997
ORGANIZATION(97-2208)
TRADE POLICY REVIEW
CYPRUS
Report bytheSecretariat
Thisreport, prepared forthefirstTrade Policy Review ofCyprus, hasbeendrawn up
bytheWTO Secretariat onitsownresponsibility. TheSecretariat has,asrequired by
theAgreement establishing theTrade Policy Review Mechanism (Annex 3oftheMarrakesh
Agreement Establishing theWorld Trade Organization), sought clarification from the
Government ofCyprus onitstrade policies andpractices.
Document WT/TPR/G/25 contains thepolicy statement submitted bytheGovernment of
Cyprus.
Note: Thisreport issubject torestricted circulation andpress embargo untiltheendofthemeeting oftheTrade
Policy Review Body onCyprus.Cyprus WT/TPR/S/25
Page iii
CONTENTS
Page
SUMMARY OBSERVATIONS viii
(1) Cyprus inWorld Trade viii
(2) Policy Framework viii
(3) Trade Policy Features andTrends ix
(4) Sectoral Trade Policies x
(5) Cyprus andtheMultilateral Trading System xi
I. THE ECONOMIC ENVIRONMENT 1
(1) Major Features oftheCyprus Economy 1
(2) Recent Economic Performance 3
(3) External Performance andTrade Patterns 8
(4) Economic Outlook 11
Annex I.1 Exchange regulations 12
II. TRADE AND INVESTMENT POLICY REGIME: INSTITUTIONAL FRAMEWORK 13
(1) Institutional Structure ofPolicy Formulation 13
(i) Form ofGovernment 13
(ii) Policy-making andadministration 14
(iii) Advisory andreview bodies 17
(2) Policy Objectives 17
(3) Trade Relations 19
(i) Regional andbilateral agreements 19
(4) Trade Consultations andDisputes 20
(5) Investment Policy 20
III. TRADE MEASURES 24
(1) Overview 24
(2) Measures Directly Affecting Imports 24
(i) Registration requirements 24
(ii) Tariffs 24
(iii) Tariff quotas 27
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Page
(iv) Other levies andcharges 27
(v) Import prohibitions andlicensing 29
(vi) State trading 31
(vii) Countertrade 31
(viii) Standards andother technical requirements 31
(ix) Government procurement 32
(x) Anti-dumping andcountervailing dutyactions 34
(xi) Safeguard actions 34
(3) Measures Directly Affecting Exports 35
(i) Registration requirements 35
(ii) Export subsidies 35
(iii) Taxanddutyconcessions 36
(iv) Export insurance 36
(v) Export promotion 37
(vi) Free trade zones 37
(4) Other Trade-Related Policies 37
(i) Adjustment assistance 37
(ii) Assistance forresearch anddevelopment 38
(iii) Taxincentives 39
(iv) Interest ratesubsidies 39
(v) Price controls 39
(vi) Competition policy 40
(vii) Protection ofintellectual property rights 41
(viii) Environmental policies 42
IV. SECTORAL TRADE POLICIES 43
(1) Overview 43
(2) Agriculture 43
(i) Market access 44
(ii) Domestic support 47
(iii) Export assistance 48
(3) Manufacturing 54
(4) Services 59
(i) Tourism 59
(ii) Offshore business 60
(iii) Financial services 61
(iv) Transportation 64
(v) Telecommunications 66
REFERENCES 67
APPENDIX TABLES 69
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CHARTS
Page
I. THE ECONOMIC ENVIRONMENT
I.1 Trade asashare ofGDP, 1975-95 3
I.2 "Competitiveness" profile, 1990-95 6
I.3 Sources ofrevenue, 1995 7
I.4 Trade ingoods andservices, 1980-95 10
III. TRADE MEASURES
III.1 Frequency distribution ofm.f.n. andpreferential tariff, 1996 26
IV. SECTORAL TRADE POLICIES
IV.1 Value added inagriculture, 1995 43
IV.2 Volume ofproduction andexports ofcitrus fruits, 1980-96 52
IV.3 Volume ofproduction andexports ofpotatoes, 1980-1996 53
IV.4 Gross manufacturing output bymajor industry, 1995 55
IV.5 Share ofservice industries inGDP, 1996 60
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TABLES
Page
I. THE ECONOMIC ENVIRONMENT
I.1 Main features oftheeconomy, 1995 2
I.2 Economic performance, 1990-96 4
I.3 External performance, 1990-95 8
II. TRADE AND INVESTMENT POLICY REGIME: INSTITUTIONAL FRAMEWORK
II.1 Trade laws andregulations andmain provisions 13
II.2 Organizational structure oftheMinistry ofCommerce, Industry andTourism 16
II.3 Notifications made totheWTO (asat6February 1996) 18
II.4 Agreements onthereciprocal promotion andprotection ofinvestment 22
II.5 Approved foreign direct investment applications byorigin 23
II.6 Foreign direct investment inflows bysector 23
III. TRADE MEASURES
III.1 Applied tariffs, 1996 25
III.2 Excise duties applied todomestically produced andimported goods 28
III.3 Import prohibitions 29
III.4 Products requiring animport licence 30
III.5 Industrial products subject tosafeguards 35
III.6 Assistance toindustry 38
III.7 Products subject toprice control 40
IV. SECTORAL TRADE POLICIES
IV.1 Trade andtariff dataforagricultural products 44
IV.2 Domestic support, 1986-95 47
IV.3 Export subsidies, 1991-96 49
IV.4 Manufacturing output, 1990-95 55
IV.5 Trade andtariff dataforindustrial products 56
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APPENDIX TABLES
Page
AI.1 Exports andre-exports byproduct group, 1990-95 71
AI.2 Imports byproduct group, 1990-95 73
AI.3 Imports ofCyprus byprincipal source, 1990-95 75
AI.4 Exports ofCyprus byprincipal destination, 1990-95 76
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SUMMARY OBSERVATIONS
(1) Cyprus inWorld Trade
1. Since the1960s, when primary products
(minerals andcitrus fruits) dominated exports, the
Cypriot economy hasbeen transformed bythe
continuous development ofitstertiary sector, with
services today accounting for70percentofboth
GDP andforeign exchange receipts. Tourism,
followed more recently bybusiness services witha
significant offshore element have been themain
contributors toeconomic growth inthelastdecade.
2. Percapita income inCyprus hasgrown
rapidly inthelast10years, tripling toaround
US$13,650 in1996, andproviding Cypriots wih
living standards onaparwithSpain. Besides the
importance ofservices, salient economic features of
theRepublic ofCyprus aretheopenness ofthe
economy (trade asashare ofGDP oscillates around
100percent), strong trade andeconomic relations
withtheEuropean Union (EU), ahighly educated
labour force andfullemployment combined withlow
inflation.
3. External factors playanimportant rolein
Cyprus 'continued growth, particularly given the
small sizeofthedomestic market. Itsreliance on
tourism putstheeconomy inavulnerable position
toexternal shocks. Inaddition, long-standing
preferences intheEUarebeing eroded, as
enlargementcontinues.Cyprusalsofacesalowlevel
ofinvestmentinmachineryandequipment,risingunit
labour costs inexcess ofthose inpartner countries,
andalabour shortage.
4. Achievement oftheconvergence criteria of
theMaastrichtTreatyguidesmacro-economicpolicy.
Tight monetary conditions, tosupport thepegofthe
CypruspoundtotheECU,hascontributedtokeeping
inflation low. Thefiscal deficit, which grew to
6.8percent ofGDP in1991, waslowered to
1percentin1995 butwidened to2.9percentin
1996. Public debt, which rosesteeply inthe1980s
andearly 1990s, wasreduced to54percentofGDP
in1995; theGovernment haslessened itsreliance
onforeign, aswellasCentral Bank, financing.
External debtasashare ofGDP hasfallen from
close to40percentin1990 to27.3percentin1996.
5. Cyprus hasastructural trade deficit: given
itssmall manufacturing baseandthemovement of
domestic resources into services activities,
merchandise imports represent nearly 40percentofGDP, outweighing exports byafactor ofalmost
three. In1996, merchandise exports amounted to
US$1.4 billion, imports were US$3.9 billion and
thecurrent account deficit widened to5percentof
GDP. Merchandise exports arefairly evenly
distributed between agricultural andmanufactured
goods; leading agricultural exports arepotatoes,
citrus fruit and wine. Reflecting weakened
competitiveness inthesector, manufactured exports
(principallyclothing,pharmaceuticalsandfootwear)
areonadecline. Exports ofcommercial services,
ledbytourism receipts, farexceed merchandise
exports,amountingtoUS$3billionin1996,upfrom
US$341 million in1980.
6. TheEUisCyprus 'most important trading
partner; theUnited Kingdom accounted for
25percentofCyprus 'exports in1995. Inspite of
theimplementationoftheCustomsUnionAgreement,
theshare ofCyprus 'exports totheEUhasfallen in
thelastfiveyears, astheEastern European and
Middle Eastern markets, important destinations for
re-exports, have grown inimportance.
(2) Policy Framework
7. TheRepublic ofCyprus isbased ona
presidentialsystemwithastrictseparationofpowers
between thethree branches ofGovernment, the
executive, thelegislative andthejudiciary. The
executive branch, consisting oftheCouncil of
Ministers, appointed andchaired bythePresident,
theHead ofState, maintains aright ofvetoand
approval onmost economic issues.
8. Thepowertoconcludeinternationaltreaties,
including trade andtrade-related agreements, rests
intheCouncil ofMinisters; these become operative
and binding when ratified bythelegislature.
International treaties andagreements, liketheWTO
Agreement, once ratified, have superior force to
national law.
9. LikeforthePresident, thetermofoffice of
thelegislature, theHouse ofRepresentatives, isfive
years. Orders andDecisions bytheCouncil of
Ministers donotrequire legislative approval. Draft
bills aresenttotheAttorney-General forlegal
verification; theyarethensubmitted totheCouncil
ofMinistersforapproval;thesameprocedureapplies
toRegulations drafted byvirtue ofalaw. Once the
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Council approves thebillitissenttotheHouse of
Representatives. ThePresident oftheRepublic and
theVice-President have theright ofvetoonbills
passed bytheHouse thatconcern certain specified
issues offoreign affairs, defence andsecurity.
10. TheMinistry ofCommerce, Industry and
Tourism isdirectly responsible fortheformulation
andimplementation oftrade policies. Inaddition
toregularmeetingswithrepresentativesoftheprivate
sector, including theChamber ofCommerce andthe
Employers andIndustrialists Federation, aJoint
Consultative Committee meets toresolve problems
encountered bythebusiness community.
11. TheGovernment'soverridingpolicyobjective
istheharmonisation oflaws, policies and
institutional structures withtheEuropean Union 's
"acquis communautaire". Cyprus hasbeen linked
withtheEuropeanCommunity(EC)sincethesigning
oftheAssociationAgreementon19December1972.
The1987 Protocol ("Customs Union Agreement")
came intoforce on1January 1988 andprovides for
twophases, thefirstforaduration oftenyears and
thesecond forfourorfiveyears to2001 or2002.
InJuly 1990, Cyprus applied forfull EU
membership; afavourable opinion wasissued bythe
Commission on30June 1993. Accession
negotiations are expected tostart in1998.
In1995, theEUCouncil adopted aDecision fora
pre-accession strategy forCyprus andestablished
theelements ofa"structured dialogue"; objectives
includedeterminingpriorityareasforharmonization
and preparing theposition formembership
negotiations.
(3) Trade Policy Features andTrends
(i) Recent evolution
12. Since thefavourable opinion bytheEU
Council onCyprus 'request foraccession tothe
European Union in1993 andtheconclusion ofthe
UruguayRound,theGovernmenthasaimedtoadapt
itslegislation andpolicies bothtoitsregional policy
goals andmultilateral commitments. Tomeet the
latter, discretionary import licensing wasabolished
(except forgroundnuts), witheffect from1January
1996. Anewforeign direct andportfolio investment
policy wasintroduced on10February 1997. The
regime allows foreign participation upto
100percentinawide range ofactivities; inall
cases, acertain minimum level ofinvestment is
required. Foreign investment infinancial, banking
andinsurance companies, oilrefining andtradingandtouristagencies,isconsideredonacase-by-case
basis; thenumber of"saturated" sectors, where
foreign investment isprohibited, hasbeen reduced
tolanddevelopment, tertiary education andpublic
utilities.
(ii) Type andincidence oftrade measures
13. Themajorityoftariffsareleviedadvalorem,
butCyprusappliesspecific,mixedoralternateduties
quite liberally, affecting 12percent oflines,
predominantly ontheimports ofagricultural
products. In1996, theaverage applied m.f.n. tariff,
excluding specific duties, was16.4 percent; on
imports from preferential (EU) suppliers itwas
7.2percent. Bytheendof1997, Cyprus willadopt
theEU'sCommon Customs Tariff forproducts
covered initsProtocol.
14. Inaddition totariffs, other border
taxes include atemporary refugees 'levy, excise
duties onselected products andthevalue-added tax
(VAT),withthelatterappliedequallytodomestically
produced goods. This isalso thecase for
excise duties, except for cigarettes whose
imports fromm.f.n. suppliers aretaxed attwice the
rateasthose locally produced orimported from
theEU.
15. Import prohibitions areapplied toenforce
environmental agreements, forsecurity reasons, to
enforce intellectual property rights orforother
reasons notified under GATT Articles XXorXXI.
Import licensing onindustrial products isused to
ensure that imports meet health, safety and
environmental considerations.
16. Aprocess ofharmonization ofCypriot
standards withthose oftheEUwasinitiated in1990
and completed recently. Testing procedures
performed intheexporting country arerecognized
iftheyareperformed according tointernational or
European standards andprovided certificates are
issued byagovernment department orrecognized
independent testing authority.
17. Thecoverage ofprice controls, instituted
inthe1970s tostillinflationary pressures, hasbeen
considerably reduced inthelast few years;
maximum prices orprofit margins, onlocally
producedorimportedgoods,respectively,stillapply
to14products where conditions ofimperfect
competition aredeemed toexist. These controls are
expected tobeeliminated byend1998. Asinother
policy areas, Cyprus hasadopted EClegislation
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oncompetition policy; thusblock exemptions are
allowed,e.g.oncomputerreservationsystemslinked
totheairtransport monopoly. TheCommission for
theProtection ofCompetition hasuseditsauthority
toresolvecomplaintswithregardtoanti-competitive
practices.
18. Cyprus hasnoexport bansorprohibitions
apart fromcontrols inaccordance withUNSecurity
Council Resolutions orwith international
conventions. Nordoesthetrade regime haveexport
quotas orexport performance requirements;
however, there areincentives toexport including
reduced income taxrates onearnings from exports
ofmanufactures andproduct-specific subsidies to
agricultural exports.
19. Adraft lawonpublic procurement iswith
thelegislature. Above acertain threshold, aMain
Tender Board exercises procurement; smaller
amounts arehandled directly bydepartmental or
ministerial tender boards. Decisions must
beunanimous oraredetermined bysuperior
bodies. Procedures allow fora20percent
preference forlocally supplied goods thathave a
minimum of25percent domestic value added.
TheGovernment estimates thatroughly 95percent
ofprocurementisthroughcompetitive
tendering; selective tendering ispermitted in
emergency cases.
(iii) Temporary measures
20. Cyprus isintheprocess ofrevising
itsanti-dumping andcountervailing legislation but
hasnever applied anyactions inthiscontext. Ithas
notified safeguards totheWTO: these areon
productsonwhichprotective"surcharges",included
inthecustoms duty, were accorded following the
abolition ofquantitative restrictions in1996.
With theexception ofthree products (cement,
chipboard andwater pumps) thesurcharges willbe
phased outfrom 1January 1998.
(4) Sectoral Trade Policies
(i) Agriculture
21. IntheUruguayRound,Cyprus
offeredceilingbindingsofbetween30
and245percent on agricultural products
(adopting tariff equivalents atleastashighasthose
usedbytheEU), afterconverting thespecific duties
from ECUs toCyprus pounds. Close tohalf
ofagricultural tariff linescarry amixed, specific orcompound duty. Based onadvalorem
rates, in1996, Cyprus 'simple average m.f.n. tariff
on agricultural products was37.6 percent;
thepreferential tariff, applicable toEUimports,
stood at23.3 percent. There isconsiderable
dispersion ofm.f.n. rates byproduct groups inthe
farm sector; fruits, vegetables andtobacco carry
average rates above 60percent; seasonal tariffs
apply tovarious fruits, vegetables, cutflowers and
fish.
22. From1January1996,Cyprustariffiedallits
quantitative restrictions onagricultural products,
followingprotractednegotiationswiththeEU,excep t
forgroundnuts, which aresubject tolicensing.
Notified asatrade-related investment measures,
importers arerequired topurchase predetermined
quantities oflocally grown groundnuts before they
areallowed toimport.
23. IntheUruguay Round, Cyprus agreed
toreduce levels ofdomestic support on
agricultural products to£C50.6 million by2004.
Thetotal aggregate measure ofsupport (AMS) in
1995 amounted to£C36.5 million, representing
about one-sixth ofagricultural value added. Cyprus
isadopting many ofthe provisions of
theEUCommonAgriculturalPolicyandhaschanged
the base forsubsidies from production to
area cultivated. Cyprus was one ofthe
fewdeveloping countries tomake commitments to
reduce export subsidies; export subsidies of
approximately £C9million (mainly forvegetables,
fruit andwine) willbereduced progressively by
24percentby2004.
24. For certain crops, semi-governmental
organizations are the sole buyers and
sellers. Themain objectives ofthese organizations
aretofacilitateproductmarketingand
stabilize producer returns. The Cyprus Grain
Commission, thesoleimporter ofgrains, andthe
Vine Products Commission, solebuyer ofgrapes,
aredirectly financed bytheGovernment; the
Grain Commission operates aprice support
scheme forgrain producers andsellsgrain atlower
than world prices tosubsidize animal feed and
thelivestock sector. Membership ofthemarketing
boards responsible forexports iscompulsory
forproducers. Inaddition tothesemi-government
organizations,cooperativeorganizations
participate actively inbothlocal andexport sales
offarm produce. Apolicy toreduce andstabilize
beef and milk production has recently been
introduced.
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(ii) Manufacturing
25. Manufacturing,primarilyfoodandclothing,
accounts for12percentofGDP. Cyprus isa
significantnetimporterofmanufactures.Duringthe
UruguayRound,Cyprusboundapproximately80per
cent ofitsindustrial tariff lines at40percent;
clothing, footwear and motor vehicles remain
unbound. Applied rates areconsiderably lower; in
1996,theaveragem.f.n.tariffonindustrialproducts
was10.9percentand3percentonimports from
theEU.
26. TheGovernment hasshifted itsindustrial
developmentfocustodiversificationandthefostering
ofspecialization through technological upgrading;
investment incentives formachinery andequipment
havebeen introduced. Pasthighimport protection
allowed local consumer industries tosupply the
domestic market. Asprotective barriers havebeen
lowered, demand hasbegun toswitch toimports and
increased competition fromcustoms union withthe
EUwillbring further adjustment pressures.
(iii) Services
27. Receipts from services transactions far
exceed merchandiseexports;ledbytourism,services
earningswerenearlyUS$3billionin1995,compared
toUS$1.2 billion frommerchandise exports. Inthe
GATS negotiations, Cyprus made specific
commitments onprofessional andfinancial services;
itgenerally accords national treatment.
28. Tourism generates 40percentofcurrent
account receipts andmore than20percentofGDP.
Likeotherservicesectors,certaininvestmentprojects
intourism have been opened tomajority control by
non-residents;however,theceilingonforeignequity
intouroperations andtravel andcarrental agencies
insubject toa49percentlimit.
29. Financial liberalization isone ofthe
cornerstonesofpolicyreformtowardsharmonization
ofCyprus 'institutional framework with theEU.
Financial supervision ofinstitutions isbeing
strengthened through legislation; money laundering
isacriminal offense andsurveillance measures are
inplace. Licensing requirements forforeign banks
arethesame asfordomestic banks. Foreign banks
mayestablish bothbranches andsubsidiaries and
nodistinction ismade between domestic andforeign
banks interms oftheservices theymayprovide, or
ontheirsourceoffunds.Policytowardsthegranting
ofbanking licences, determined bytheCentral Bankinconsultation withtheMinistry ofFinance, aims
toprovide arange ofservices while maintaining the
soundness ofthebanking system. Concentration in
thecommercial banking sector ishigh; twobanks
control two-thirds oftotal deposits.
30. Cyprus made commitments, according
national treatment, inboth thelifeandnon-life
insurance sectors during theUruguay Round
negotiations. Allforms ofinsurance activities are
open toforeign suppliers; 100percent foreign
equity ispermitted under thenewinvestment regime.
31. Cyprus maintains theworld 'sfourth largest
open registry. Vessels flying thenational flagmust
bemajority-ownedbyCypriots;incentivestoregister
ships inCyprus include lowregistration feesanda
completely tax-free status forshipping companies.
This includes exemption from taxonprofits and
dividends,capitalgainstaxonsaleofshiporshares,
income taxoncrew wages, stamp dutyondeeds and
estate duty. Domestic shipping companies are
eligible forpreferential taxtreatment through a
30percentreduction oftheannual tonnage taxif
theshipsareoperatedbyaCypriotshipmanagement
company. Cyprus limits cabotage, inland trucking
and port services tonationals, although the
authorities mayapprove foreign participation upto
49percentonacase bycase basis. Thestate-
controlled Cyprus Port Authority isthemonopoly
provider ofanumber ofportservices, pilotage,
towing,navigationaids,andberthing;provisioning,
fuelling andemergency repair services areprovided
bytheprivate sector, subject toapproval bythe
Cyprus PortAuthority.
32. Theprovisionoftelecommunicationsservices
inCyprusiscurrentlyunderagovernment-controlled
monopoly.TheCyprusTelecommunicationsAuthority
hassoleresponsibility fortheinstallation, operation
andmaintenance oftelecommunications networks as
wellasfortheprovision ofalltelecommunications
services.Tariffsfortelecommunicationsservicesmust
beapproved bytheHouse ofRepresentatives; a
system tofacilitate cost-oriented pricing isbeing
developed. TheAuthority performs typeapproval
functions, butwithdrew from thesaleofterminal
equipment several years ago.
(5) CyprusandtheMultilateralTradingSystem
33. Cyprus 'trade policy isdetermined byits
twingoals ofharmonizing laws andpolicies with
those oftheEUandensuring conformity withWTO
Agreements. Theentry intoforce oftheWTO has
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precipitated theremoval ofquantitative restrictions
andallowed forgreater predictability, particularly
withthebinding ofthemajority oftariffs. While
Cyprus willadopt theEU'sCommon Customs Tariff
attheendofthisyear, thefrequency ofspecific, or
other non advalorem duties, detracts from
transparency. Theexcise dutyoncigarrettes may
need tobereviewed forconformity withnational
treatment. Measures, suchastemporary emergency
protection intheform ofsurcharges forcertain
products,reducedtaxratesforexportmanufacturing,
certain preferential treatment fordomestic content,
suggest further steps maybenecessary toconform
withmultilateral rules. Underutilization oftariff
quotas oncertain farmproducts suggests thattariffs
inthese areas could belowered withlittleeffect on
imports. Subsidies tostate-trading organizations
intheagriculturalsectorposeaburden,particularlyastheGovernment isdetermined onachieving a
comfortable fiscal balance.
34. Efforts toimprove local conditions for
competition seem tobebearing fruit, asevidenced,
interalia,bytheremoval ofmostprice controls and
theimplementation ofcompetition legislation. State
monopolies stillexist incertain sectors, including
airtransport, telecommunications andportservices.
Redtapehasbeenreducedandtheinvestmentregime
liberalized; many sectors oftheeconomy havenow
beenopenedtomajorityforeigncontrol.Prospective
removal oftheinterest rateceiling andremaining
restrictions oncapital movements willliberalize
financial markets. Theoffshore business sector and
shipping aswellastransit trade services continue
toprovide animportant source ofgrowth tothe
increasingly service-oriented economy.
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