Small island of Cyprus feels economic pinch
Posted: Wednesday, February 04, 2009 3:25 PM
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By Tom Aspell, NBC News Correspondent
NICOSIA, Cyprus – Even the sunny east Mediterranean island of Cyprus is feeling the effects of the global financial meltdown and is implementing its own stimulus program.
The government announced this week that it will inject $380 million into its flagging tourism and construction industries to counter the effects of the global financial crisis.
That’s a drop in a bucket when compared with the $800 billion the United States intends to spend shoring up its economy. But for this nation of 800,000 people, the money is an expensive gamble to minimize damage to its two most important economic sectors.
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| AFP/Getty Images File |
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Tourists take a stroll during better times in Cyprus.
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Looking for a cheaper getaway elsewhere
Cyprus attracts about 2.4 million tourists a year, half of them from the United Kingdom. But tourism is in decline as Britons look for cheaper holiday destinations. And other Europeans are also booking fewer trips here.
The credit crunch, coupled with the high cost of tourist services, is suddenly making Cyprus much more expensive. British tour operators have warned Cyprus that unless it slashes its costs, they will encourage customers to go to Turkey or other cheaper holiday spots around the Mediterranean.
It was a wakeup call to the Cyprus tourist industry. At least $50 million of the latest cash injection will be aimed at attracting more foreign visitors. Hoteliers will slash their value-added tax from 8 percent to 5 percent, and the government will waive airport surcharges, enabling airlines flying to Cyprus to cut their ticket prices. There will also be reductions in utilities bills and municipal taxes for hotels. It's hoped that will enable tour operators to offer cheaper packages.
Farah Shammas of the San Rafael Hotel in Limmassol welcomed the changes.
"It's definitely been a positive move on the part of the government," Shammas said. "Tourism is a vital part of the Cypriot economy, and it's nice that the government is recognizing this. We’re doing our best, but we are facing stiff competition from other Mediterranean countries who give generous tax breaks to their hotels. Last year was really difficult for hotels in Cyprus, but this year now looks a little better. It’s a nice gesture."
Construction industry
In the Cypriot construction industry, the second-largest contributor to the island’s economy, the outlook is also gloomy. Revenues fell by 24 percent in 2008, and projections are for a 50 percent drop this year. Developers have begun laying off workers –
contributing to a sudden hike in the island-wide unemployment rate from 4.0 to 4.5 percent.
By far the largest chunk of the stimulus package would be $300 million spent on more construction of schools, roads and infrastructure projects. The Cyprus government also hopes to freeze unemployment by cracking down on illegal workers and providing more vocational training in the private sector.
Manthos Mavromatis, president of the Cyprus Chamber of Commerce, says his organization is still studying the plan.
"In general the proposals are favorable," he said. "We would like the bulk of the money to go into housing. More sections of the economy will benefit. Roads and bridges are fine, but the housing market is more of a multiplier."
But at the heart of the construction industry’s woes is the fact that even though property prices have fallen by as much as 20 percent, foreign buyers aren't coming to Cyprus to buy retirement or holiday homes any more. And many retirees who moved here from Britain are considering returning home after discovering that a fall in the value of the pound against the euro has suddenly made the cost of living here 30 percent more expensive.
The dents in tourism and construction have made Cypriots suddenly aware that their island is not immune to the worldwide economic downturn. According to the latest Eurobarometer public opinion survey, Cypriots believe they will weather the global economic crisis better than most countries. Nevertheless more than 60 percent of respondents reported trouble paying their monthly bills.
