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Amid economic crisis, isolation ‘blessing in disguise’ for Turkish Cypriots

27 November 2011, Sunday / ABDULLAH BOZKURT, LEFKE

Turkish people walk in a shopping main street past the Selimiye Mosque in Nicosia. The Turkish Republic of Northern Cyprus may be isolated by the Greek Cypriots, but it has enjoyed a boom in its economy thanks to strong Turkey backing.

The continuing isolation of the northern part of the divided island of Cyprus since the 1960s and an undeclared embargo may be blessings in disguise for the Turkish Cypriots against the backdrop of the economic crisis in the eurozone and the whopping sovereign debt crisis in some EU member states, including Greek-administered southern Cyprus.

“One good aspect of our closed banking and the financial system we are accustomed to because of our isolation is that we are not impacted by the lingering economic and financial crisis in the EU as well as on the Greek Cypriot side,” Seda Yavaş, a board member of the Turkish Cypriot Chamber of Commerce in Nicosia, told the audience during an international symposium on isolation held last week.
Because the Turkish Republic of Northern Cyprus (KKTC), recognized only by Turkey, is isolated by the Greek Cypriots, who enjoy the sole title of representing whole country in international forums, the Turkish Cypriots are challenged by the huge cost of maintaining their banking and financial structures. For example, Turkish Cypriot banks have to use intermediaries to complete transactions because they cannot obtain SWIFT or IBAN numbers as the Greek side was opposed to such moves, claiming it might lend legitimacy to the independent status of the north.
The financial system in the north is closely linked to that of Turkey, and the Turkish lira is the main currency used on the island. Unlike the Greek Cypriots, who joined the euro in 2008, Turks have the luxury of playing with the national currency to curtail imports while stimulating exports. The Greek Cypriots lack this important tool to respond to economic challenges.
Added to that, thanks to the strong banking and fiscal policies adopted in Turkey and on the island in early 2000, the banks in the north as well as in Turkey have been heavily supervised by the Central Bank of Turkey and its corresponding institution on the island. Yavaş says balance sheets are monitored on a daily basis and that there are strict guidelines banks in the north must adhere to. There are 24 commercial banks operating in the north with $6.8 billion in deposits in total. Seven of them are branches of Turkish banks.
What is more is that there is no stock exchange in the north administered by Turkish Cypriots, closing the door to speculative actions in the market. Because the Turkish north is not officially recognized, international credit rating agencies also cannot rank and evaluate government coffers, banks and other financial institutions on the northern side. This might be another blessing in disguise for the Turkish Cypriots as credit rating agencies are often accused of triggering the economic crisis in Greece, Italy, Portugal and Spain by downgrading their ratings on sovereign bonds.
The Greek-controlled south took a beating from credit rating agencies earlier this month when back-to-back downgrades of Cyprus and its top three banks by Moody's prompted Greek Cypriot officials to accuse the agency of “fear mongering.” Moody's downgraded the Greek Cypriot sovereign rating to a step above junk status, mainly because of its banks' heavy Greek exposure. It also warned further cuts may follow, meaning that a possible junk status may force the Greek Cypriots to seek a financial bailout from its eurozone partners.
Tourism income, which accounts for 12 percent of southern Cyprus's gross domestic product (GDP), is still down 1.1 percent from 2008 levels for the first nine months of this year, though it increased slightly compared to 2010 levels. The number of passengers carried by financially troubled Cyprus Airways in the first 10 months of 2011 dropped by 15 percent when compared to the same period last year. Coupled with that, decreasing property prices in the south took a huge bite from government revenues and led to the reversal of Cyprus' budget balance, which has moved from a surplus in 2008 to a deficit in 2009. This prompted the EU to issue a warning to Greek Cyprus, with Economic Affairs Commissioner Olli Rehn saying the Greek Cypriots risk violating the fiscal rules next year and may face penalties unless the government adopts more spending cuts or increases taxes.
While the Greek Cypriots are struggling to keep the economy afloat with 0.5 GDP growth this year and 0.2 percent in 2012, the Turkish north is booming with 6 percent GDP growth thanks to the robust economy of Turkey, its main trading partner and financial backer. The north recorded its best year in terms of tourism revenues since 1974 according to Prime Minister İrsen Küçük. Though the north cannot receive international flights directly because of its isolation, it nevertheless manages charter flights via Turkey from other countries. Thanks to subsidies Turkey and the KKTC offer to travel agencies and tour operators, the cost of vacationing in the north is highly competitive compared to the south, Dimag Caginer, a tour operator in the north, says. That led to a construction boom in the hotel and hospitality industry in the north, with the government aiming to increase the bed capacity for touristic purposes from some 19,000 beds to 40,000.
Because of the downgrade by credit rating agencies, the south is having a hard time obtaining financing from international markets at lower rates. The Greek Cypriots had to secure short-term financing from local banks and a 2.5 billion euro loan from Russia to avoid default. Many suspect, however, that is not enough to stem the downfall of the Greek Cypriot economy. The country may soon resort to the European Financial Stability Facility fund in order to cover its financing needs.
The northern economy is also riding high on the appeal of education, making the north a much sought after destination for Turks and students from other countries. It is the second biggest source of income after the service industry and tapped 47,000 students at seven internationally accredited universities. “We are expanding to accommodate more students and opening up new faculties,” says Ahmet Bülent Göksel, the rector of the European University of Lefke.
Hasan Ali Akbıçak, president of the Higher Education Planning, Evaluation, Accreditation and Coordination Council of North Cyprus (YÖDAK), sounded upbeat in pursuing new deals with university organizations in different continents. “We'll keep pushing to have the recognition of universities abroad by striking agreements with them,” he said. There are many international students studying at universities based in the north, and the number of students is expected to increase, Göksel predicts. The tuition and living expenses for foreign students are much cheaper in the northern part of the island when compared to other universities abroad, including those in the southern part of the island.
That does not mean Turks in the north are happy with what they call the unjust and unwarranted isolation they have been subjected to for decades. Turkish Cypriots say they want the isolation to end in order to level the playing field with the south. According to officials here, the cost of isolation on the Turkish Cypriot economy has been $52 billion so far and counting. In the meantime, the Turks here learned how to live with isolation and developed smart bypass mechanisms to thwart the Greek Cypriots' unrelenting efforts to corner them. They have developed contingency plans in the event of a failure of the long-held talks as they realize the current situation is no longer sustainable.
“The isolation of the Turkish Cypriot side has been in place since the 1960s despite there having never been an international decision to impose an embargo on the Turkish side. We have since continued our struggle against the policies of isolation and the embargo. We want to seek a solution to the Cyprus problem with comprehensive negotiations,” Derviş Eroğlu, the leader of the Turkish community, said. “But if that fails, we have to seek alternatives. For that we have to be strong economically,” he told a group of Turkish reporters at his residence last week.
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