Address by the Minister of Commerce, Industry and Tourism at the Annual General Meeting of the Cyprus International Businesses Association [CIBA]

Jun 15, 2005

Chairman, Ladies and Gentlemen,

I would like to thank the Executive Committee of you Association for their kind invitation and for giving me the opportunity to address the Open Session of your Annual General Meeting.

The accession of Cyprus to the European Union in association with the recent participation of Cyprus in the European Rating Mechanism (ERM) II create new promising business opportunities for foreign investors.

The participation of our currency to this Mechanism will assist:
- the maintenance of our exchange rate stability,
- the convergence of our interest rates at lower levels, similar to those that prevail in the Eurozone,
- to the decrease and finally to the elimination of exchange rate fluctuations,
- to the creation of more favorable borrowing conditions for both the private and the public sector,
- the direct and easiest access to the Eurozone capital markets, and
- finally to the restrain of production costs, improvement of competition and further attraction of foreign capital for investment purposes.

The economy of the island is growing at a satisfactory pace exhibiting long term macroeconomic stability. The prospects for the current year 2005, remain positive with a projected growth of about 4% of the G.D.P.

The Fiscal Deficit has decreased to 2,9% while the Public Dept is expected to descend to 69,1% from 71,9% in 2004. Our efforts concentrate on the further reduction of Fiscal Deficit and Public Debt to less than 1 % and 60% respectively by the year 2008.

The per capita income is one of the highest in the region and in terms of purchasing power parity it stands at about 85% of EU average. Moreover, Cyprus enjoys full employment conditions, with unemployment rate being currently 3.5%.

The macroeconomic stability of the economy is manifested by the low core inflation of 2.5%, the healthy balance of payments position and a stable currency.

Economic development has been accompanied by a restructuring of the economy, from the sectoral point of view. Cyprus has been gradually transformed from an economy dependent on the primary sectors at the beginning of the 1960s to a fully-fledged export oriented service economy. The financial and other business services display an increasing share in GDP contribution of more than 76% of GDP, as compared to the 20% of the secondary sector and 4% of the primary sector.

The strong performance of the Cyprus economy has found due recognition by the International Monetary Fund in its biannual reports on Cyprus and the international credit rating organizations.

The ratings by the major rating agencies reflect the government's success in consolidating its finances and a commitment to further fiscal consolidation and underpin a prosperous and resilient economy.

The comparative advantages Cyprus offers as an International Business Center derive mainly from:
- The Strategic location of the island that acts as a natural meeting point of Africa, the Middle East and Europe .
- The high educational level of its workforce and its versatility in the use of new technology in conjunction with the competitive, as compared to international standards level of remuneration. (According to the Labour Force Survey of 2003, 32,5% of the total gainful population are graduates of tertiary level education).
- The social cohesion, that exists and is based on a long tradition of co-operation between employers, unions and the govern ment.
- The satisfactory state of its infrastructure, in transport, energy and telecommunications.
- The modern and transparent legal, financial and accounting systems modeled to that of Britain.
- The favorable business climate, which is directly related to the prevalence of conditions of macroeconomic stability. The economic policy approach in Cyprus is based on the free market philosophy, attaching emphasis on promoting private initiative and is characterized by continuity, independently from changes in the Government and the internal and external economic stability, reflected in relatively stable prices and stable currency .
- The attractive tax regime. The recent harmonized tax reform introduced a uniform corporate tax of 10%, which makes it the lowest corporate tax in Europe. This tax reform is in compliance with the EU code of conduct for Business Taxation and the commitment to the Organization for Economic Co-Operation and Development (OECD) for the elimination of harmful tax practices .
- In addition to the above, Cyprus disposes a wide network of agreements for double taxation avoidance with 40 countries including UK.
- The satisfactory living conditions for foreigners as well as the close economic and political relations Cyprus has developed with its neighbouring countries.

Foreign Direct Investments during the period 1997-2004 were in the region of Euro 360 million, showing an upward trend. Foreign investments in Cyprus are directed to all sectors of the economy i.e. services, trading, tourism, manufacturing, banking and insurance with the services sector holding by far the majority of Foreign Direct Investments in the country.

Cyprus' Foreign Direct Investments originate mainly from the European Union (41%) followed by other European countries (21 %), Middle East Countries (8%), America and Australia (2%) and 28% from the rest of the world.

Our investment policy is completely liberal and allows 100% foreign participation in all sectors of the economy not only for EU citizens but also for investors from third countries. All restrictions concerning maximum allowable percentage of foreign participation, as well as minimum level of foreign investment in any enterprise in Cyprus, has been lifted as from January 2000 for EU-citizens and from 1st October, 2004 for non - EU citizens unless otherwise stated in the legislation e.g. the acquisition and development of land.

From the 1 st October, 2004 there is no distinction between onshore and offshore companies; they are all Cypriot companies with the opportunity to expand their activities to the local market and at the same time benefit from the numerous incentives and low tax regime.

The Government of Cyprus, taking into consideration the numerous challenges that arise daily, because of the intensification of competition and the globalization of the economy, announced recently a far-reaching and bold new industrial policy. This policy includes schemes and incentives that aim at the following:
- The attraction and development of new high - tech industries.
- The technological upgrading of the traditional manufacturing industries.
- The improvement of productivity.
- The attraction of capital-intensive foreign investments.

It is worth noting that, all the schemes and incentives of the New Industrial Policy, cover not only Cypriots but also foreign investors, who wish to register a company in Cyprus, or a combination of Cypriot and foreign interests. In this framework and among other measures, the Investors Service Center provides guidance and assistance to investors and particularly to foreign investors.

The Government has taken the political decision to promote a stronger involvement of the private sector in planning, designing, financing, building and operating public infrastructure projects, through various forms of public-private partnerships. Projects already undertaken under such arrangements include the reconstruction of the two airports in Larnaca and Paphos and the Marinas.

In conclusion, the Cyprus Government's main responsibility is to ensure the economic stability, an attractive business environment, the creation of the necessary infrastructure, the extension of support services and the provision of appropriate incentives.

Finally, I would like to thank the Cyprus International Businesses Association for your active contribution to the Cyprus economy and assure you that the Ministry is at your disposal for the exchange of views on issues of mutual interest.

Ladies and Gentlemen,
I thank you all for your attention.

Mr. Yiorgos Lillikas
Minister of Commerce, Industry, and Tourism