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Cyprus potatoes and the Brexit impact

By Fiona Mullen

The Cyprus News Agency (CNA) reported on Monday that the impact of Brexit on the Cyprus economy would be “nil”, citing a report by the Ministry of Finance. However, the Ministry of Finance issued a denial the following day, saying it “has not undertaken the preparation of any study which demonstrates that the impact on the Cyprus economy from the possible exit of the United Kingdom (‘Brexit’) from the EU will be minimal.”

Among the reasons for the absence of an impact, the CNA said: “Cyprus does not maintain significant commercial transactions with Britain, the main exports being potatoes, which amounted to only 3% of the total €1.7 billion exports of Cyprus in 2015.”

It is true that exports of goods (only – that is, excluding services) reached €1.7 billion in 2015, according to data from the Statistical Service (Cystat). This number includes domestically produced exports (€823m) as well as re-exports (€914m).

Exports of potatoes to all countries amounted to just €36.4m in 2015, accounting for 2.1% of all domestic and re-exports that year. (They counted for 3% of exports in 2014, so this must be the year CNA was referring to.) Only €8.6m worth of potatoes in 2015 went to the UK. We actually import more than double that from the UK in frozen potatoes (French fries).

If you are only looking at exports of goods, and specifically only at the great Cyprus potato, then the impact of Brexit on the Cyprus economy is indeed negligible.

However, that is not the place to look. While exports of goods reached €1.7bn in 2015 according to Cystat, exports of services reached almost €8bn in the same year according to separate data produced by the Central Bank of Cyprus. This means that exports of services are far more important to the Cyprus economy than exports of goods.

Moreover, the UK is the second largest market for services according to the latest available data. In 2013 exports of services to the UK reached €1.4bn or 18.9% of the total according to the Ministry of Commerce. The UK was second only to Russia, which reached €1.6bn. One can infer from tourism spend data that just over half of the UK’s €1.4bn came from tourism (where the UK is by far the biggest market). This implies that around €700m came from things like legal and accounting services.

 

Post-EU services exports

The UK and Cyprus of course have a trading relationship that pre-dates EU membership for either country.

To see whether a UK outside the EU will have a negative impact on services trade between the two countries, we could try to see if Cyprus’ services exports to the UK benefited from both countries being in the EU after the Republic of Cyprus joined the EU in 2004.

Here, the numbers are tricky (and may explain why CNA did not focus on it). No authority in Cyprus produces a back series for exports of services by country. Eurostat does produce a series, but only from 2002 and it ends in 2013. Moreover, the 2002-03 figures are based on a different methodology from the 2004-2013 series, therefore we can only really look at the 2004-13 data.

 

Professional services seemed to benefit

From this series we can see that services exports to the UK grew by 28% in the first four years of Cyprus’ EU membership – from €1.7bn in 2004 to €2.2bn in 2007. By contrast, services exports to non-EU countries declined by 22% in the same period from €1.2bn to €958m.

This happened at a time when the number of British tourists to the island and the British tourism spend was actually declining, which means that the professional services part must have climbed even more than 28% in those four years.

The overall rise in UK services exports seems to suggest, therefore, that the UK being in the EU was good until 2008, at least for Cyprus’ professional services. This makes sense. The ‘EU passport’ for financial services will have encouraged growth in this area.

It must also have been good for jobs, as the professional services sector in Cyprus is one of the few that has been adding jobs consistently in the past decade or so.

However, from 2008 to 2013 services to the UK show a decline. Is this related to EU (or from 2008, Cyprus’ eurozone) membership? My hunch is not. The 2008 global financial crisis hit the UK hard and was followed by the build-up to Cyprus’ own crisis in 2013. This will have hurt services trade between the two countries.

Was the tourism decline in the early post-EU years because of EU membership? I doubt it. This was the new era for low-cost airlines but Cyprus had none. It also had an outdated airport and was generally getting a reputation for bad value for money. Tourism is also heavily affected by exchange rates.

Things have improving lately. On the back of a strong sterling in 2015 and a wider choice of flights after the demise of Cyprus Airways, UK tourism arrivals leapt by almost 20% 2015 and another 25% in the first four months of 2016.

In short, with the absence of a long historical series, no post-crisis data, as well as the ‘noise’ created by the financial crisis, exchange-rate movements and other factors affecting tourism, it is difficult to prove either way that EU membership for both countries is definitely a boost for Cyprus-UK trade.

However, what we do know is that the UK is a very important partner for both tourism and professional services and that these are affected by exchange rates. If the referendum is for Brexit on June 23, one can expect sterling to weaken at least in the short term, and potentially for much longer depending on how long it takes to address the uncertainties about UK-EU trade relations and what the impact on the UK economy will be.

A weak sterling will be bad for Cyprus’ tourism and it will also make Cyprus’ professional services more expensive for Britons. Neither of those is going to be good for the Cyprus economy.

Fiona Mullen is Director of Sapienta Economics and author of the monthly Sapienta Country Analysis Cyprus

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