Cyprus – A City state

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When making business decisions, it is best to think of Cyprus as a city rather than a country. A city has its own micro-economic dynamics but is greatly affected by and is linked with what is happening at the country level. However robust the city’s economy may be, it cannot escape from the overall direction of the country’s economy. Basically, within reason, the city “is there for the ride” which means that it is more susceptible to overall changes in the economy compared to bigger economic agglomerations.

Cyprus is a small country with an economy of circa €21 billion and a population of 900, 000. The EU’s economy totals €3.3 trillion and its population 447 million, so Cyprus equates to 0.6% and 0.2% respectively. Cyprus’ economy is heavily reliant on external demand, with tourism, financial services, and real estate activities constituting 57% of GDP (22%, 19% and 16% respectively). As it has no energy resources or manufacturing to speak of, it is susceptible to changes in energy prices and the price of imports. In a nutshell, Cyprus is small and anything that happens at the EU or global level has a larger impact on its economy than in other countries.

The inhabitants of the urban areas of Nicosia and Limassol total 200,000 and 154,000 respectively, whilst those of Larnaca and Paphos are 72,000 and 36,000. Compared to the UK and Greece, the equivalent for Nicosia would be Milton Keynes or Patra, and for Limassol Colchester or Iraklion. So, if Cyprus is a city, then its cities would be best considered as peripheral towns compared to those in other, bigger countries.

The local population of Cyprus is aging, whilst the overall population has been increasing due to in-migration of foreigners from EU and other countries. The 2021 Census is still underway, but it would be logical to expect that this trend has continued in recent years as the number of children per household has been reducing and in-migration from Lebanon, Russia, Israel, and other countries has increased. Of course, who is considered a Cypriot and who isn’t, will be a challenge given that the government naturalised more than 6,700 persons from 2017 to 2020 (or 0.7% of the population) as a result of the “citizenship by investment” program.

With the above in mind, we can start putting together a framework to help guide our business decisions.

  • The country should be thought of a city, so the role of government in steering the country’s prospects is minimal (it’s more of akin to that of a ship’s captain during turbulent waters, trying to stay afloat rather than actually having control of the direction). With the EU increasingly being the one setting the agenda, the role of the Cyprus government will progressively become one of implementing rather than dictating policy.
  • A small population, fragmented across micro-cities means that it’s difficult to develop a robust business based on high volume, except when it comes to coffee or food, which is a favourite pass-time. Thus, any business will either have to rely on small volume and high margins or be targeting overseas markets which have the critical mass to make it sustainable.
  • A shrinking population means that demand for real estate is unlikely to come from new household formation, but from an upgrade of existing premises, e.g. there are few new families who will need a home, but there are many who will be upgrading their home as their income is rising and they have different requirements compared to prior generations.
  • the country’s small size means that it’s easy to dominate a specific industry and benefit from monopolistic profits. If the company does a half decent job, it would be close to impossible for a third party to enter the market given its small size. This is accentuated further by the high transport costs to import items to the country, which means that local suppliers/ sellers can enjoy above market profits even if they over-price their goods.

When thinking of doing business in Cyprus, you should target overseas markets. If you decide to focus on local demand, then either stay small and pick a low volume/ high margin business or be prepared to go all-out to dominate a specific sector (go big or go home). Anything in between is a recipe for failure, as the small market size makes it impossible to survive.

Next time you are out for a coffee, strolling along the beach, think about how blessed we all are to live on a small slice of paradise in the middle of the Mediterranean. And when you feel like the island is getting a bit too small for your liking, just pop over to London, Athens, or Berlin for a couple of days and then come back home for some souvlakia.