Identifier
Created
Classification
Origin
06NICOSIA757
2006-05-19 14:07:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Nicosia
Cable title:  

TURKISH CYPRIOT ECONOMY ENJOYING DOUBLE-DIGIT

Tags:  ECON ETRD EFIN PREL PGOV CY 
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VZCZCXYZ0003
RR RUEHWEB

DE RUEHNC #0757/01 1391407
ZNR UUUUU ZZH
R 191407Z MAY 06
FM AMEMBASSY NICOSIA
TO RUEHC/SECSTATE WASHDC 6054
INFO RUEHTH/AMEMBASSY ATHENS 3587
RUEHAK/AMEMBASSY ANKARA 4642
RUEHVI/AMEMBASSY VIENNA 0467
RUEHLO/AMEMBASSY LONDON 1189
RUEHBS/USEU BRUSSELS
RUCPDOC/USDOC WASHDC
UNCLAS NICOSIA 000757 

SIPDIS

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EFIN PREL PGOV CY
SUBJECT: TURKISH CYPRIOT ECONOMY ENJOYING DOUBLE-DIGIT
GROWTH


(U) This cable is sensitive but unclassified. Please
protect accordingly.

UNCLAS NICOSIA 000757

SIPDIS

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EFIN PREL PGOV CY
SUBJECT: TURKISH CYPRIOT ECONOMY ENJOYING DOUBLE-DIGIT
GROWTH


(U) This cable is sensitive but unclassified. Please
protect accordingly.


1. (SBU) Summary: Over the past three years the service-
based Turkish Cypriot economy has experienced double-digit
annual economic growth -- an estimated 10.6 percent in 2005,
15.4 percent in 2004 and 11.4 percent in 2003, according to
Turkish Cypriot statistics. This growth has been fuelled by
the relative stability of the Turkish Lira, a large
construction boom, the expansion of Turkish Cypriot
universities -- which cater to Turkish and other
international students -- and the employment of roughly five
thousand Turkish Cypriots in the Greek Cypriot south where
wages are significantly higher. As a result, the income gap
between Turkish Cypriot and Greek Cypriots has narrowed (per
capita GDP is now estimated as USD 10,200 in the north and
USD 22,506 in the south),which should improve the
workability and alleviate the financial costs to the Greek
Cypriot community of any future settlement. The
construction boom, however, which has often involved the
development and sale of property owned by Greek Cypriots
displaced in 1974, has further muddied the already cloudy
property issue, complicating efforts to find any settlement
acceptable to both sides.


2. (SBU) Tax avoidance is common and as much as 60 percent
of the north's economic activity remains unregistered.
Despite efforts to obtain more political autonomy from
Turkey, the Turkish Cypriot community continues to remain
dependent on the GoT to finance its bloated public sector
and most major infrastructure projects. Growth is forecast
to slow to seven percent in 2006 and could slow further
should the Turkish Lira continue to slide, oil prices
continue to rise, or Greek Cypriot legal challenges against
British owners of Greek Cypriot property prove successful.
End Summary.

Private Consumption Drives Double Digit Growth
-------------- -

3. (SBU) The self-proclaimed "Turkish Republic of Northern
Cyprus" ("TRNC"),is only recognized by Turkey and controls
about one-third of the island's area and around a fifth of

the population (264,172 people were physically present in
the north on April 30, 2006, according to preliminary
results from last month's census). The New Turkish Lira
(YTL) is the main currency, although British and Cyprus
Pounds are widely used. The economy is largely service-
based and heavily dependent on imports. Turkish Cypriots
produce very little and export even less. Businesses tend
to be small and family-based.


4. (SBU) Over the past three years, the Turkish Cypriot
economy has expanded rapidly, driven largely by strong
growth in private consumption. After contracting by 5.4
percent in 2001 in the wake of the Turkish financial crisis,
real GDP in the Turkish Cypriot community increased by 6.9
percent in 2002, 11.4 percent in 2003, 15.4 percent in 2004
and an estimated 10.6 percent in 2005, according to the
Turkish Cypriot "State Planning Office (SPO)." Key to this
has been the relative stability of the Turkish lira, which
has led to significant reductions in interest rates and
increased business and consumer confidence. Other
significant sources of growth have been a boom in
construction and property sales (often to foreigners --
mainly Brits),the employment of several thousand Turkish
Cypriots in the Greek Cypriot south, and the rapid expansion
of the universities catering primarily to mainland Turkish
youth. (Note: Turkish Cypriot statistics should be treated
as indicative rather than exact. Statistical practices do
not meet international standards and training of employees
in the SPO is limited.)

Around Five Thousand Turkish Cypriots Work in the South
-------------- --------------

5. (SBU) Estimates of the number of Turkish Cypriots
employed in the south -- mainly in construction and tourism
-- range from 4,000 to 10,000. Given that GoC statistics
show an average of less that 6,000 Turkish Cypriots crossing
the Green Line per day, the true figure is probably closer
to four than to ten. According to a recent EU report, the
increased income this has generated had added an estimated
100 million Euros to the north's GDP (or around 9 percent of
GDP alone).


6. (SBU) The exodus of Turkish Cypriot workers to the south
has also created labor shortages in the north (especially in
construction),which are often filled by importing cheap
labor from Turkey (Turks are not allowed to cross the Green
Line). In some sectors, where qualified Turkish labor is
also scarce, it has pushed up Turkish Cypriot wages,
increasing Turkish Cypriot discretionary spending but also
increasing business costs.

Education: Catering to the Turkish Masses
--------------

7. (SBU) Another source of the rapid economic growth is the
six universities in the north, which teach in English and
are rapidly increasing their intake of foreign students.
During the 2005-2006 school year, the six universities
enrolled 39,383 students (up from 35,000 the previous year),
of which only 9,877 were Turkish Cypriot. Almost 27,000
were from Turkey and the rest were mainly from Iran, Africa,
and the Middle East. Turkish Cypriot "Economy Minister"
Dervis Deniz described the economic impact of the students,
who pay tuition, room and board, as equivalent to 1.2
million tourists. The universities are accredited by the
Turkish authorities and tend to attract Turkish students,
who are unable to get into any university on the mainland.
Were the Turkish education authorities to withdraw their
accreditation, something which appears unlikely in the near
term, this industry would collapse.

Construction: Fueling Growth but Muddying Property Issue
-------------- --------------

8. (SBU) The construction sector, and ancillary businesses,
have boomed in the north since 2002, and accounted for 35
percent of the growth in 2004 alone, according to "Finance
Minister" Ahmet Uzun. The increase in property prices has
also caused a wealth effect, contributing to the growth of
private consumption. There were over 3,000 applications for
new building permits in each of the past three years. Greek
Cypriot legal challenges combined with rising prices appear
to have slowed down the tourist villa market aimed primarily
at the foreign (mostly UK) buyer. Imports of construction
materials, however, have not declined and new construction
for the domestic market and in hotels and universities has,
for now, filled the void. Note: As much as 85 percent of
the land in the north is claimed by private Greek Cypriots
displaced in 1974 (around 60 percent) or the government (an
additional 25 percent). End note.


9. (SBU) Nevertheless, most observers believe this boom may
have reached its peak and is, in any case, unsustainable in
the mid-term. The construction has rapidly outpaced the
north's limited infrastructure, aggravating traffic,
straining waste facilities, and contributing to persistent
shortages of water and electricity. An upcoming decision by
a UK judge whether to enforce a Greek Cypriot court order
against a British couple living on Greek Cypriot land also
has the potential to crash the market. Much of the
construction has occurred on Greek Cypriot property, which
will make any future reunification of the island
significantly more complicated.

Tourism: Big Plans for Future but Stagnant in 2006
-------------- --------------

10. (SBU) With some of the best beaches and historic sites
in Cyprus, tourism in the north remains an economically-
important but largely untapped sector. Efforts to attract
new tourists are often stymied by the Greek Cypriot Tourism
Organization (CTO),which discourages (through the use of
legal threats and financial incentives) international
tourist operators from sending tourists to the north, where
the vast majority of hotels and restaurants are located on
Greek Cypriot property. While there are many flights from
the UK to the north (and a few from elsewhere in Europe),
all must touch down in Turkey in route (due to GoC's
insistence as the sovereign government that Ercan is an
illegal airport),increasing the cost and duration of
travel. Efforts to bring tourists through the airports in
the south have also proven difficult due to problems getting
seats, unpredictable delays at the Green Line, and
restrictions on Turkish Cypriot buses operating in the
south.


11. (SBU) Nevertheless, in 2005, the Turkish Cypriot
community welcomed 652,000 tourists up from 599,000 in 2004
(of which 488,000 came from Turkey and 90,000 from the UK),

compared to roughly 2.4 million tourists in the south. At
the end of 2005, Turkish Cypriot hotels had a bed capacity
of around 13,000 and a year-round occupancy rate of 42.8
percent. Plans are in place for the construction of an
additional 30 hotels. The Turkish Cypriot authorities plan
to increase bed capacity to 30,000 by the end of 2007,
eventually rising to 45,000 (compared to around 100,000 in
the south). The cornerstone project is a multi-hotel, 9,000-
bed project at Bafra in the Karpass, which aims at
attracting major international tour operators. Another
10,000 beds are planned for a major development along the
coast north of Morphou.


12. (SBU) While there are big plans for the future, actual
tourist arrivals are not expected to increase in 2006.
According to the association of Turkish Cypriot tour
operators, bookings are down 30 percent so far this year,
mainly due to fears sparked by the isolated avian influenza
outbreak in January and lower prices being offered in
Turkey. Even the usually optimistic "Economy Minister" Deniz
concedes that the overall number of tourism arrivals is
unlikely to exceed last year's number.

Bloated Public Sector Financed by Turkish Largess
-------------- --------------

13. (SBU) The Turkish Cypriot authorities continue to be
dependent on large scale Turkish transfers. According to
"Finance Minister" Uzun as much as a third of the "TRNC's"
USD 1.2 billion annual budget is financed by Turkey. Turkey
also regularly obligates over an additional USD 100 million
a year for infrastructure projects, part of which often
remains unspent due to the Turkish Cypriot authorities'
failure to identify promising projects. In recent years,
the Turks have financed the construction of highways and new
university buildings as well as the renovation of Ercan
airport. Contracts, however, are generally awarded to
Turkish (and not Turkish Cypriot) firms, diminishing their
impact on the local economy. The Turkish Development Bank
has also awarded USD 150 million in low-interest loans
(again primarily to Turks) to finance construction of
hotels. According to documents released by the "Turkish
Embassy," Turkey budgeted USD 531 million for the "TRNC" in
2004 and USD 581 million in 2005.


14. (SBU) Turkey's largess is critical to plugging the large
holes left in the Turkish Cypriot budget due to the bloated
public sector -- the result of years of make-work schemes
designed to keep young Turkish Cypriots from leaving the
island -- and rampant tax avoidance practiced by most local
firms. Efforts to cut jobs and stem wage increases, often
a nominal requirement for further Turkish aid, have
regularly failed due to opposition from the powerful Turkish
Cypriot unions. Most Turkish Cypriot firms keep two sets of
books and most transactions take place using cash.
According to Uzun, 60 percent of all business transactions
are unrecorded.

Trading with the World Through Turkish Cypriot Ports
-------------- --------------

15. (SBU) While tourism and education are the Turkish
Cypriot community's major exports, the north continues to be
heavily dependent on the import of goods. Turkish Cypriots
imported almost USD 1.2 billion in goods in 2005 while
exporting only 67.9 million, according to the Turkish
Cypriot "State Planning Organization." Turkey was the
north's largest trading partner accounting for 65 percent of
the north's imports of goods and 50 percent of its exports.
Despite a 1993 European Court of Justice decision that
effectively prevents EU countries from giving Turkish
Cypriot goods preferential treatment, the EU still accounts
for 22 percent of imports and 27 percent of exports. In
2005, Turkish Cypriots imported USD 8.2 million worth of
goods from the U.S. (e.g. grains, tobacco products, cars
etc.) while exporting less than USD 50,000 (textiles).
Official Turkish Cypriot trade with the Greek Cypriot
community is minimal, totaling a little over USD 2 million
in sales and around USD 300,000 in purchases in 2005.
Informal, unregistered, trade is thought to have been
several times higher.


16. (SBU) Over 99.9 percent of all goods imported or
exported by the Turkish Cypriot community flow through
Turkish Cypriot ports, although most is transshipped through
Turkey. Almost all sea traffic is conducted by a relatively

small group of cargo ships that ply the Mersin-Famagusta
route or an even smaller group of truck ferries that sail
between Mersin and the small tourist port of Kyrenia. While
transshipment through Turkey on Turkish- or Turkish Cypriot-
flagged ships is the norm, there are exceptions. Embassy
officers have observed North Korean and Russian flagged
vessels in Famagusta. Freight forwarders report that some
ships carrying citrus regularly sail directly to and from
Ukraine and Russia (carrying grain on the way back.) There
are also occasional, unconfirmed, reports of ships sailing
directly to the north from western European ports, but these
appear to be few and far between.

Slower Growth Expected in 2006
--------------

17. (SBU) Given uncertainties over the construction boom and
number of tourist arrivals, most observers expect slower
growth in 2006. The Turkish Cypriot "State Planning
Organization" has forecast growth of around 7 percent.
Other factors that could lead to even slower growth (or even
a recession) include an outbreak of AI, continued increases
in oil prices, and a UK decision against British property
owners in the north which could collapse the property
market.

SCHLICHER