Many articles have presented the importance and contribution of Cyprus to the international business sector; the purpose of this article is to present the importance to Cyprus of the international business sector. The international business sector (IBS) has become a vital contributor to Cyprus’ economy over the past few years. Its importance has recently further increased due to the following reasons:
First, capital inflows and deposits from foreign companies helped boost revenues recorded by the Cyprus Inland Revenue Department by 8.9% year on year in January-September, with revenues reaching CYP 450.2 mln compared with CYP 413.3 mln in the same period of 2004. The increase in revenue is reportedly largely the result of foreign company activity, which has boosted both the corporate tax intake and the defence tax, which is levied on corporate dividends and on interest paid on deposits.
Secondly, a decline of the relative importance of tourism in Cyprus’ external finance. Tourist numbers recovered slightly in 2004 following the slowdown in 2002-2003 caused by the general slowdown in the worldwide tourism industry. Tourism now accounts for just over 26% of all CXR, representing a significant rebalancing of the economy from previous levels (35% of all CXR in 1995 and over 40% in the early 1990s). On the other hand, business services are a further important source of foreign exchange (19% of CXR).
Thirdly, the widening of the visible trade deficit (to 26% of GDP from 24% in 2003) added to the current account deficit in 2004. Demand was fuelled by reductions in import duties (particularly for cars). At the same time a rise in oil prices outstripped visible export earnings by 4.5 percentage points. On the other hand, invisible (service) exports showed robust growth, despite the still lacklustre performance of the tourist sector. Business services were the main driver of service receipts, growing by over 30% in USD terms and contributing to overall service income growth of 17.6% for the year.
The final factor was an increase in net Cypriot investment abroad. Since 2001 equity foreign direct investment (FDI) inflows have not been sufficient to cover the current account deficit. However, in 2004, for the first time in a decade, total net FDI inflows (including debt flows) were lower than the current account deficit, reflecting an upturn in Cypriot investment abroad. One component of the increased capital outflow was net lending abroad by the banking sector, which reached USD4.8bn, largely reflecting the growing activities of Cypriot banks abroad. There was also a major increase in Cypriot equity investment in Greece, the new EU candidate countries, Russia and Ukraine.
The figures suggest that the International Business Sector is set to continue, and probably increase, as a source of revenue to the economy, highlighting the continuing importance of promoting Cyprus as an international business centre and providing a business-friendly environment.
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