Economic Update

Published 22 Jul 2010

When the European Union’s much-anticipated aid package to Cyprus was unveiled last week, reactions were decidedly mixed among both Turks and Turkish Cypriots. While any steps to end the economic isolation of the Turkish side of the island – and its dependency on the “mother country” – are welcome in Ankara, it seems that there is still a long way to go before a serious revival of Turkish Cypriots’ fortunes can take place.

The package presented by the European Commission on July 7 was the result of April’s referendum on the island on the UN’s latest reunification plan. While Turkish Cypriots voted overwhelmingly in favour, Greek Cypriots voted just as overwhelmingly against.

Deciding that the Turkish Cypriots should not be “left out in the cold” by the referendum result – which had left the two parts of the island still separated – European Commissioner for Enlargement Gunther Verheugen announced an aid plan he hoped would “foster the economic development of the northern part of the island” and “build new bridges between the two communities and thus keep alive hopes of the reunification of Cyprus”.

The package includes 259m euros in aid for the 2004-2006 period, with a small portion of this, some 6m euros, expected to be delivered this year. The major portion is due to be provided in two tranches in 2005 and 2006.

This financial aid will be co-ordinated directly by the EU through its own offices, to be opened in the Turkish Cypriot part of the island. It includes financial provisions to support structural reforms to bring the Turkish Cypriots into line with EU law, and to bankroll reconciliation programmes and some infrastructural development.

In addition, the aid package includes provisions to reopen Turkish Cypriot ports to EU ships. Since 1974, these have been effectively closed to international trade thanks to an embargo aimed at punishing Turkey and the Turkish Cypriots for the Turkish invasion of that year.

This is extremely good news for the city of Famagusta in particular. Once the island’s main international port, it now presents a sorry picture to the visitor. Few ships ever call here, despite the fact that it has the only natural deep-water port on the island. Instead, sea-borne traffic destined for Turkish Cyprus must go to a Turkish port first. From there, cargoes can be transferred for shipment to the island. All other traffic bound for Cyprus goes via ports in the Greek Cypriot south – primarily Limassol and Paphos.

Now, under the EU package, the Turkish Cypriot Chamber of Commerce will be authorised to issue documents accompanying products certifying they originated in northern Cyprus. These goods can then enter the EU under a quota system.

Yet the real opening Turkish Cypriots were looking for failed to materialise. This is the opening of their side of the island to direct international flights.

Currently, to fly to the north of the Turkish Cypriot island requires first a stop-over in Turkey, severely restricting tourist arrivals, particularly from Middle Eastern countries. While the island is barely half an hour by plane from Beirut, the trip currently takes around 3-4 hours as planes have to fly to Istanbul first. The difficulties over air traffic have also led to few airlines operating the route – while many head for the Greek Cypriot airport at Larnaca.

Verheugen said that the flights issue was not under EU jurisdiction, but up to individual countries. Currently, the Turkish Cypriot government has been making strenuous efforts to persuade European countries to open this route, with Britain and Germany the main targets. These two countries are currently responsible for the vast bulk of tourists visiting the Turkish Cypriot north.

While some politicians welcomed the EU moves, others were more sceptical. They came soon after US President Bush had also referred to the obligation on countries not to exclude the Turkish Cypriots after they had approved reunification. However, the US accounts for only a fraction of the tourists who visit the island, and has even less of a role in its economy. Direct flights from the US are unlikely to materialise on pure economic grounds, even if they become technically, and legally possible. US interests remain almost entirely political and strategic, rather than economic.

Yet the recent manoeuvres by the UN, EU, US and UK over Cyprus have not gone without some effect on the Turkish Cypriot economy.

Up to now, the finances of the Turkish Republic of Northern Cyprus (TRNC) – which remains unrecognised by any country except Turkey – have depended largely on tourism receipts, some citrus exports and a major grant from Ankara. The Turkish army, which maintains some 20,000-30,000 troops in the TRNC – is also a big local spender. Deprived of easy international outlets and largely off the global tourism radar, Ankara’s influence has been paramount. Turkish currency is used for all transactions – although both the Cypriot and British pound are also widely circulated. The annual grant aid from Ankara has also created a political culture that many Turkish Cypriots have grown to dislike, with patronage in the distribution of the money a major political tool.

So closely tied into Turkey, the island also suffered badly when the Turkish economy went into meltdown in 2000-2001. This crisis was indeed the beginning of the political change that led to the recent referendum result, as many Turkish Cypriots had grown tired of the status quo and grown personally familiar with its disadvantages.

Reunification offered a quick way out – via the EU, which Cyprus joined on May 1. In the build up to this – and the referendum, which took place the week before – the Turkish Cypriot economy did undergo something of a minor boom. Clauses in the UN plan on the restoration of property formerly owned by Greek Cypriots led to a flurry of house building and modification, as property that had been so constructed since 1974 seemed more likely to remain with its present owners. Meanwhile, large numbers of Greek Cypriots had been visiting the north since the border restrictions were eased by the Turkish Cypriots in spring 2003. This pumped in a considerable amount of money into the north initially, though this has now begun to dry up.

Meanwhile, the money promised by the European Commission will likely come – though the Greek Cypriots have raised objections to the establishment of an EU office in the TRNC to handle the funds and the recognition the package gives to the Turkish Cypriot Chamber of Commerce. The Greek Cypriots claim authority over the whole island, and see such a move – which bypasses the official government of Cyprus – as possibly illegal. Yet, if such funds are to be handled by the Greek Cypriots, many Turkish Cypriots fear they are unlikely to see them.

Funding of this kind, of course, can only do so much. Reviving the economy as a whole in the TRNC will have to take quite a different approach if it is to encourage the development of private businesses and investments. For this though, the political situation must be sorted out. While more adventurous speculators are banking on this being the case soon – and investing in real estate and tourism in the TRNC now – others are taking a more cautious approach. Cyprus has a long history of risk, and it will likely take more than an EU grant to change that perception. Yet, other analysts see a growing de facto reunification taking place, even if officially the island remains just as divided as ever. Whatever the case, the Turkish Cypriots and Turkey will be pushing hard to capitalise on the EU’s newfound sympathy for their cause.