M croeconomics, Tr de & Investment
TURKISH CYPRIOT ECONOMY
IMPACT OF THE COVID-19 PANDEMIC:
A PATH TO BUILDING BACK BETTER
A Macroeconomic Monitoring Note
SPECIAL ISSUE: IMPROVING THE EFFECTIVENESS OF PUBLIC FUNDS IN AGRICULTURE
March 2021
TURKISH CYPRIOT ECONOMY MACROECONOMIC MONITORING NOTE
M croeconomics, Tr de & Investment
TURKISH CYPRIOT ECONOMY
IMPACT OF THE
COVID-19 PANDEMIC:
A PATH TO BUILDING BACK BETTER
SPECIAL ISSUE: IMPROVING THE EFFECTIVENESS OF
PUBLIC FUNDS IN AGRICULTURE
March 2021
Document of the World Bank
This report is part of the Economic Analysis Programme for Growth and Sustainable Development which is
funded through the European Union’s aid regulation ‘Council Regulation (EC) No. 389/2006’ of 27 February
2006. The opinions expressed in this study do not reflect any official opinion by the European Commission
and the World Bank’s Board of Executive Directors, nor do they in any way constitute recognition of
boundaries or territories.
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IMPACT OF THE COVID-19 PANDEMIC: A PATH TO BUILDING BACK BETTER
© 2021 International Bank for Reconstruction and Development / The World Bank
1818 H Street NW
Washington DC 20433
+1 202-473-1000
www.worldbank.org
Disclaimer
The contents of this document are the sole responsibility of its authors and should in no way be taken
to reflect the official views of the World Bank or the European Commission financing this report. The
term ‘Turkish Cypriot community’ refers, solely for the purposes of this study, to the areas in which the
Government of the Republic of Cyprus does not exercise effective control. If reference is made in the
report to any ‘ministries’, ‘departments’, ‘services’, ‘bodies’, ‘organizations’, ‘institutions’, and ‘authorities’
in the areas not under the effective control of the Government of the Republic of Cyprus, or respective
acronyms or abbreviations are used, this is done to allow a clear factual understanding of the administrative
structures in the Turkish Cypriot community and shall not imply recognition of any public authority in the
areas other than the Government of the Republic of Cyprus. Similarly, comparisons between the areas
where the Government of the Republic of Cyprus exercises effective control and those areas where it does
not are factual only.
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TURKISH CYPRIOT ECONOMY MACROECONOMIC MONITORING NOTE
TABLE OF CONTENTS
Acknowledgements............................................................................................................................v
Abbreviations and Acronyms............................................................................................................ vii
Executive Summary........................................................................................................................... ix
Chapter 1: Recent Economic Developments and the Short-term Outlook............................................1
1.1 Recent Economic Developments...........................................................................................1
1.1.1 The impact of COVID-19 pandemic..................................................................................... 1
1.1.2 The current account and fiscal balances.............................................................................8
1.1.3 Policy responses to mitigate the impact of the COVID-19 pandemic...............................10
1.2. The Impact of the COVID-19 Pandemic on Jobs and Firms..............................................14
1.2.1 The COVID-19 pandemic has had a significant, and unequal, impact on jobs..................14
1.2.2 Insights from the World Bank Enterprise Survey.............................................................. 21
1.3. Short-term Outlook and the Path to Recovery...............................................................25
1.3.1 A slow recovery is expected in 2021................................................................................. 25
1.3.2 Risks to the baseline are tilted toward the downside.......................................................26
1.3.3 Path to building back better.............................................................................................26
Chapter 2: Special Issue: Improving the Effectiveness of Public Funds in Agriculture.........................30
2.1 Trends in Turkish Cypriot Agricultural Development............................................................30
2.2 Turkish Cypriot Agriculture Policy and its Impact................................................................33
2.3 Shifting Agricultural Support toward Public Goods..............................................................34
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IMPACT OF THE COVID-19 PANDEMIC: A PATH TO BUILDING BACK BETTER
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TURKISH CYPRIOT ECONOMY MACROECONOMIC MONITORING NOTE
ACKNOWLEDGEMENTS
T
his report was prepared by Natasha Rovo (Economist, World Bank), Vincent Tsoungui
Belinga (Senior Economist, World Bank) and Stefano Curto (Senior Economist, World
Bank), with inputs from Metin Nebiler (Economist, World Bank), İzge Arısal (Local Technical
Coordinator, World Bank), Mertkan Hamit, Maria Ines Badin and Domenico Viganola (all
Consultants, World Bank). The Special Topic was prepared by Ulrich Schmitt (Lead Agriculture
Economist, World Bank), Xueling Li (Agriculture Economist, World Bank), and Hans Christoph
Kordik (Consultant, World Bank).
The team received managerial guidance from Jasmin Chakeri (Practice Manager, World Bank),
Frauke Jungbluth (Practice Manager, World Bank), and Goran Tinjic (Program Manager for
Southern Europe, World Bank). The team is grateful to Julie Biau (Operations Officer, World Bank)
and to the peer reviewer Pınar Yaşar (Senior Economist, World Bank) for helpful comments.
The team is also grateful to Suay Anıl and Oya Koçak Barçın (Consultants, World Bank), who
supported the team to gather additional data, and to Peter Kjaer Milne (Consultant, World Bank)
for editorial support.
The team is thankful to Pelin Maneoğlu (European Commission) and Alain Joaris (European
Commission) for their useful comments and feedback, and to Tuğyan Atıfsoy from the European
Union Coordination Centre for his support to the preparation of this report.
The team is also grateful for the good collaboration with the Turkish Cypriot administration and
business chambers in the preparation of this report, including the Chamber of Commerce, the
Chamber of Industry, Chamber of Shopkeepers and Artisans, the Building Contractors Association,
and the Animal Breeders Association.
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IMPACT OF THE COVID-19 PANDEMIC: A PATH TO BUILDING BACK BETTER
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TURKISH CYPRIOT ECONOMY MACROECONOMIC MONITORING NOTE
ABBREVIATIONS and ACRONYMS
CAB Current Account Balance
CAP Common Agricultural Policy
CATI Computer Assisted Telephone Interview
CAWI Computer Assisted Web Interview
CBRT Central Bank of the Republic of Turkey
EC European Commission
ECA Europe and Central Asia
ES Enterprise Survey
EU European Union
GoC Government of Cyprus
GDP Gross Domestic Product
GVA Gross Value Added
HBS Household Budget Survey
KIB-TEK Cyprus Turkish Electricity Authority
LCB Local Community Body
LFS Labor Force Survey
MSMEs Micro, Small, and Medium Enterprises
NPL Non-Performing Loan
OECD Organisation of Economic Co-operation and Development
PCR Polymerase Chain Reaction
PPG Public and Publicly Guaranteed
RoC Republic of Cyprus
SMEs Small and Medium Enterprises
SÜTEK Turkish Cypriot Milk Industry Board
TC Turkish Cypriot
TCc Turkish Cypriot Community
TL Turkish Lira
UNWTO United Nations World Tourism Organisation
US$ United States Dollar
WHO World Health Organization
WTO World Trade Organization
yoy Year-on-Year
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IMPACT OF THE COVID-19 PANDEMIC: A PATH TO BUILDING BACK BETTER
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TURKISH CYPRIOT ECONOMY MACROECONOMIC MONITORING NOTE
EXECUTIVE SUMMARY
The COVID-19 pandemic is placing an The impact of the COVID-19 pandemic on the
unprecedented strain on the Turkish Cypriot TC economy is expected to affect both external
(TC) economy, with GDP expected to contract and fiscal accounts. On the external front, the
by almost 14 percent in 2020—one of the large ‘import’ compression due to the crisis,
largest contractions in Europe. The number of accompanied by increasing goods ‘export’,
COVID-19 cases has reached over 3,759, with 24 is expected to result in an improvement of
deaths as of March 12, 2021, creating health and the balance of the net ‘exports’ of goods. The
social emergencies, and placing the economy significant drop in ‘export’ of services, instead,
under great strain. The containment measures will put a downward pressure on the overall
and travel restrictions, both domestically and current account balance, compensated by
at the international level, have triggered a dual increasing foreign grants. On the fiscal front,
shock by compressing aggregate demand and following the detection of the first COVID-19
reducing the supply of goods and services. case in early March 2020, a series of measures
This has impacted the entire economy, albeit were taken with a view to preventing, detecting
with large heterogeneity across sectors, firms, and responding to the health threat posed
workers and households. According to the by the pandemic, and strengthening the
latest Pulse survey, the COVID-19 pandemic, preparedness of the TC ‘public’ health system.
together with the economy and jobs, are the Aside from the health response, economic
top three issues on the minds of Greek Cypriots measures were introduced to first mitigate the
and Turkish Cypriots alike.1 impact of the crisis on firms and households
during the economic lockdown and later to
The 2020 economic contraction is expected to support a quick rebound of economic activities.
be particularly severe given the TC economy’s Aid received from the European Union and
overreliance on the ‘export’ of services, in par- Turkey has constituted the most important
ticular tourism and higher education—the two source of funding, together with account
hardest hit subsectors. According to the Unit- receivables from the Turkish Cypriot ‘Central
ed Nations World Tourism Organization’s (UN- Bank’ which have sustained total revenues.
WTO) Tourism Recovery Tracker, inter-national
tourist arrivals fell on average by more than 70 GDP growth is expected to rebound slowly in
percent yoy in October 2020 worldwide.2 In the 2021, but risks remain high. The forecast builds
Turkish Cypriot community (TCc), where retail on the assumption of a smooth vaccination
trade and tourism accounted for 20 percent of process going forward and a more contained
GDP in 2019, tourism activity fell by an over- spread of infections subsequently—one that
whelming 80 percent yoy based on the number allows for the resumption of international
of ‘tourists’ staying in the TCc. Given the large travel. At the time of writing this report,
indirect impact of tourism and its interlinkages 100,000 doses of vaccine have been received
with other sectors of the economy, including allowing for a 15 percent coverage of the
manufacturing and the large-scale production population. Under these assumptions,
of dairy products, the GDP contraction is ex- economic activity is expected to rebound in
pected to be deep and prolonged. In addition, 2021 but only modestly, mostly driven by
the higher-education subsector has been espe- tourism and industry. However, only over the
cially hard hit, with more than half of its stu- medium term is growth finally expected to
dents leaving TCc shortly after the outbreak of return to pre-crisis levels. The extent of the
the pandemic on the island in March 2020, and recovery and subsequent growth will depend
with enrolments halving in October 2020 com- first of all on how the pandemic evolves, the
pared with October 2019. Finally, agricultural reactive capacity of the economic actors,
production is expected to be particularly low, and the effectiveness of the policy support.
weighing on the overall recession. As fiscal space shrinks, the deterioration of
1 Source: https://www.abbilgi.eu/en/assets/docs/embed-pulse-september2020.pdf
2 Source: https://www.unwto.org/unwto-tourism-recovery-tracker
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IMPACT OF THE COVID-19 PANDEMIC: A PATH TO BUILDING BACK BETTER
‘public’ finances and the rise of NPLs may also The COVID-19 crisis has highlighted the
constitute sources of risk. In addition, external weaknesses of the TC health system. The
risks, due to the high dependence on tourism performance of the TC health system has
and higher education, further pressure on the been significantly stretched by the COVID-19
exchange rate and the resurgence of tensions in crisis, which has also revealed some important
the Eastern Mediterranean may also endanger weaknesses (e.g., the number of beds per 1000
the recovery. population is 4.2 versus the OECD average of
The COVID-19 pandemic has had a negative 4.5 as of 2018). Moreover, due to the limited
and highly unequal impact on both jobs and health infrastructure in the TCc, a significant
firms. The services and agriculture sectors number of people benefit from the RoC or
have been the most adversely affected by the Turkish health services.
COVID-19 pandemic, accounting for about
82 percent of total job losses. Meanwhile, The current crises can be used as an oppor-
women and informal workers have been tunity not only to advance key structural
disproportionately affected by the pandemic reforms to facilitate a swift recovery and
compared with men and formal sector workers. sustainable growth going forward, but also
Regarding the regional distribution of job losses, to support a long-waited resolution of the
Kyrenia and Trikomo/Iskele have been the most Cyprus problem. On the one hand, ensuring
affected regions. As labor market conditions a swift and equitable recovery would require
deteriorated during the COVID-19 pandemic, the TC administration not to lose its focus on
household welfare has also been adversely fundamental structural challenges, and to
affected in the TCc. According to the World continue to advance reforms in the key areas of
Bank simulations, low- and middle-income private sector development, the energy sector,
households and young workers are expected to the agriculture sector, and the social protection
be the most affected. The gradual recovery that system. On the other hand, the pandemic and
is expected in 2021 should bring a modest 1 recent developments may also have a bearing
percent increase in employment, although this
on the long-term prospects of the island, as
will be insufficient to return employment to its
new settlement talks are expected to resume in
pre-COVID-19 crisis level.
the Spring 2021.
According to the latest results from the
World Bank’s Enterprise Survey, two-thirds of The special topic of this edition of the
surveyed firms in TC economy benefited from Macroeconomic Monitoring report focuses
external support in mitigating the negative on the TC administration’s ‘public’ financial
impacts of the COVID-19 crisis, although more support to the agriculture sector. Due to the
and better targeted support is needed. Private Turkish lira depreciation, the recent adverse
enterprises in the TC economy have suffered climate conditions, and exacerbated by the
the effects of the COVID-19 crisis on a variety COVID-19 crisis, the agriculture sector suffered
of fronts: almost 60 percent of respondents significantly in 2020. However, the severe
experienced a decrease in sales and almost 90 impact on the sector was also the result of
percent faced liquidity constraints. More than several long-standing inefficiencies and low
one third of firms had to reduce their workforce productivity. Financial support from the central
and more than one-fifth cut the number of budget for agriculture comes at a significant
weekly hours worked. Manufacturers and small fiscal cost to the overall TC economy, while at
and medium enterprises (SMEs) have been the same time agricultural productivity has been
among the hardest hit. Almost two thirds of
stagnating. The COVID-19 pandemic has served
firms received, or expect to receive, some form
to exacerbate these existing challenges through
of ‘public’ support to mitigate the negative
effects of the COVID-19 crisis. Respondents see disruptions along the food value chain. These
tax relief (34.7 percent of respondents) and problems have affected small-sized farmers the
cash transfers (23.7 percent of respondents) most, given that they are the most vulnerable
as the most effective measures to help with to income shocks and higher retail prices.
liquidity constraints and sales drop. Access Reforming the subsidy system for agriculture
to new credit, the deferral of payments, and could help generate greater fiscal space in the
wage subsidies are the other types of desired medium term, and also help foster economic
measures. diversification and enhance productivity.
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TURKISH CYPRIOT ECONOMY MACROECONOMIC MONITORING NOTE
Chapter 1: Recent Economic Developments and the
Short-term Outlook
1.1 Recent Economic firms, workers and households. In Europe,
Developments the TCc’s economic contraction is one the
largest contractions and comparable only to
1.1.1 The impact of the COVID-19 that suffered by Montenegro, which is also
pandemic3 heavily dependent on tourism. Other major
tourist destinations in the Mediterranean
The3 COVID-19 pandemic is placing an region are expected to suffer single-digit
unprecedented strain on the Turkish Cypriot GDP contractions, as they have broader-
(TC) economy, with GDP expected to contract based economies. The European Union (EU)
by almost 14 percent in 2020—one of the economy, on average, is expected to shrink by
largest contractions in Europe. The number 7.4 percent,4 while Turkey’s economy appears
of COVID-19 cases in the TCc has reached over to have barely avoided a GDP contraction in
3,759, with 24 deaths as of March 12, 2021, 2020, with economic activity growing at an
creating health and social emergencies, and estimated 0.5 percent, its outlook has however
placing the TC economy under great strain subsequently deteriorated (Figure 1.3).5
(Figure 1.1 and 1.2). The containment measures
and travel restrictions, both domestically The 2020 recession has exacerbated an
and at the international level, have triggered already fragile and decelerating TC economy.
a dual shock affecting global demand and Pre-COVID-19 pandemic, the TC economy
constraining domestic supply. While the entire was already suffering a deceleration, with
economy is being affected, the impact of the real GDP growth in 2019 at just 0.2 percent,
crisis is highly heterogenous across sectors, down from 1.3 percent in 2018. The weak
Figure 1.1: Number of monthly confirmed Figure 1.2: Cumulative number of confirmed
COVID-19 cases and deaths in TCC cases since the beginning of the COVID-19
pandemic, log scale
Source: World Bank staff estimates; TC ‘Ministry’ of Health; COVID-19 Data Repository by the Center for Systems Science
and Engineering (CSSE) at Johns Hopkins University
Note: Data are until February 16, 2021.
3 The macroeconomic data on the TC economy in 2020 is still in process and should be released in Summer 2021.
4 European Commission. 2020. Autumn 2020 Economic Forecast.
5 World Bank. 2021. Global Economic Prospects. January. Washington, DC: World Bank.
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IMPACT OF THE COVID-19 PANDEMIC: A PATH TO BUILDING BACK BETTER
economic activity observed in 2019 was driven Income per capita of Turkish Cypriots is in 2019
by a continued contraction of manufacturing only 36 percent that of Greek Cypriots and 28
and a sharp decline in services, especially in percent of the EU average, down from 50 and
the wholesale and retail trade, and in higher- 38 percent, respectively, in 2014 (Figure 1.4).
education services.6 It was also due to weak
On the demand side, consumption,
external environment, particularly Turkey7,
investment, and the ‘export’ of services
which is the destination for more than 50 fell in 2019, and are expected to have
percent of total ‘exported’ goods from the TC declined further in 2020, although growth
economy, as well as the country of origin of of merchandise ‘exports’ has remained
almost 80 percent of tourism activity in 2019. robust.8 Consumption, which was previously
Exacerbating the impact of the 2018–19 an important driver of growth, contributed
negatively to GDP growth in 2019 and is
economic slowdown, the deep COVID-19-
expected to have fallen by more than 10
related recession in 2020 is expected to
percent in 2020. Job losses, together with
further widen the income gap within the
the decline in wages and rented dwellings,
island and delay income convergence, unless
exacerbated by high uncertainty created
structural measures are put in place. With by the ongoing COVID-19 crisis, have led to
the TC population estimated to maintain its a reduction in total consumption, despite
steady growth, real GDP per capita contracted financial support from the TC administration.
by about 5 percent in 2019. When converted In addition, many foreign workers in the TCc
into US dollars using the Atlas method for have left the island during the pandemic,
international comparison, TC income (GDP further reducing the consumption base and
plus net factor income, which is negligible aggregate demand. Increasing uncertainty
for the TCc) per capita is estimated to have has further compressed private investment,
declined to less than US$10,000 in 2019, already on a decelerating path since 2012
from about US$10,800 in 2018, prolonging due not only to a constant reduction in capital
a downward trend that first started in 2015. formation, but also to a growing tendency to
Figure 1.3: Real GDP growth Figure 1.4: Income convergence
7 Income convergence
5,2
4,5 4,1
3,7 3,7 14 50
3,1 3,0
Binler
2,1
1,3 1,5 13
2 0,9 0,5
GNI per capita, Atlas method($US)
0,2 45
12
11
40
Percent
-3 10
Percent
9 35
8
-6,2
-8 30
-7,4 7
6
25
2018 2019 2020e 2021f 5
-13
4 20
-13,8
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
-18
TC economy GC economy Turkey EU ECA (high-income TC income per capita High-income threshold
excl.) TC-GC relative per capita income(right) TC-EU relative per capita income(right)
Source: World Bank staff estimates, TC ‘Statistics Office’, EC Autumn 2020, World Bank GEP 2021.
Source: World Bank staff estimates, TC ‘Statistics Office’.
6 World Bank. 2020. Turkish Cypriot Economy: Looking Ahead to Steer the Economy toward a Higher Growth Path. A Macroeconomic Monitoring
Note. January 2020. Washington, DC: World Bank.
7 Following the 2018 economic turmoil in Turkey, Turkish growth decelerated from 7.5 percent in 2017 to 3.0 and 0.9 percent in 2018 and 2019,
respectively.
8 At the time of writing, actual data on the demand side for 2019 was not available. Therefore, the estimates for 2019 are based on 2018 shares of GDP.
2 l
TURKISH CYPRIOT ECONOMY MACROECONOMIC MONITORING NOTE
allocate investment to lower-return sectors of 10 percent, respectively. Finally, agricultural
the economy.9 ‘Exports’ of goods registered production, which is expected to have fallen
positive growth in 2019 and remained strong by 4 percent in 2020, would have contributed
in 2020, while ‘exports’ of services have been negatively to both economic growth and
falling behind and are expected to have further employment (see Section 1.2), after years of
declined in 2020. ‘Imports’ have declined, positive, albeit weak, contributions.
although a significant increase in ‘imports’ of
pharma was recorded in 2020 to cope with the The agriculture sector is expected to contract
COVID-19 emergency. by 4 percent in 2020, reflecting weaker crop
and livestock production, notwithstanding
On the production side, sectors that registered
robust ‘export’ growth mostly driven by citrus.
a decline in 2019, namely industry, the retail
Crop and livestock production represent about
trade, and hospitality (hotels, restaurants
and catering) are expected to bear most of 92 percent of agriculture value-added, which
the burden of the COVID-19-related 2020 in turn accounted for 8.4 percent of GDP and
crisis too. In 2019, industry, the retail trade, 4 percent of employment in 2019. In addition
and hospitality reduced overall economic to the continued depreciation of the Turkish
growth by 2 percentage points (Figure 1.5). In lira, which increases the cost of ‘imported’
2020, the needed containment measures to inputs (seeds, animal feed, equipment,
combat the COVID-19 pandemic have further packaging, energy), the consequences of
dampened economic performance in these the COVID-19 pandemic—including reduced
sectors. Industry is expected to have contracted aggregate demand, reduced tourism, and
by more than 13 percent in 2020, while retail reduced labor supply—have dragged down
trade and tourism are expected to have fallen economic activity in the agriculture sector. In
by almost 40 percent overall. In addition, the livestock subsector, production is expected
construction and other services (including also to have declined by 20 percent in 2020, and
personal and professional services) are also domestic demand for milk would have fallen
expected to have contracted by about 15 and by more than half from its historical share
Figure 1.5: Contribution to real GDP growth, production side
6,0
Contributions to real GDP growth (%points)
1,0
-4,0
-9,0
-14,0
-19,0
2017 2018 2019 2020e
Agriculture Industry Construction
Services, private Services, public Import duties
Real GDP growth (percent)
Source: World Bank staff estimates, TC ‘Statistics Office’.
9 See World Bank (2020) for a fuller discussion of the declining trend in private investment.
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IMPACT OF THE COVID-19 PANDEMIC: A PATH TO BUILDING BACK BETTER
of 45 percent of total milk production.10 The 2019 (Figure 1.5), bringing its share to only
dramatic decline in the latter is due to reduced 8.1 percent of total GDP in that year, almost
demand by industrial producers (namely, milk 3 percentage points lower than its share in
processors), as a result of diminished demand 2017.12 The COVID-19 pandemic has further
from their own customer base (both in internal affected industry through twin demand- and
and external markets) and increasing input supply-side shocks.13 On the supply side,
costs.11 Despite reduced internal demand, companies had to cope with disruptions along
growth of ‘exports’ was robust, with a 7 the supply chain and stock management, and
percent increase in US dollar terms over the a lack of and delays in raw material supplies,
first 10 months of 2020 (Figure 1.6). This was coupled with increased input prices and a
mostly driven by citrus, which reached US$27 scarcity of the workforce available.14 All of
million in 2020 (January to October data)—a these factors contributed toward constraining
more than 40 percent increase compared with capacity and increasing costs. On the demand
2019 (Figure 1.7). side, lockdown measures, together with travel
restrictions, affected both local and external
The COVID-19 pandemic is expected to demand for agrobusiness products, especially
exacerbate the weak performance of the from tourists and foreign students. While sales
industry sector, with value added estimated of firms supplying the construction industry
to have shrunk by 13 percent in 2020. The have remained stable, sales of firms supplying
manufacturing subsector, which accounts the food and beverages sector has suffered
for almost 80 percent of the industry sector, significantly. Grant support was directed by the
contracted by 20.2 percent in 2019, following EU to this sector, as further detailed in Section
a 16.2 percent contraction in 2018. As a 1.1.3. Section 1.2 discusses instead in greater
result, the industry sector dragged down GDP detail the estimated impact on firms and jobs
growth by around 1.4 percentage points in of the COVID-19 crisis in the TC economy.
Figure 1.6: ‘Exports’ of goods Figure 1.7: Top five ‘exports’ 2019–20
40
35
120
30
Export value, mln USD
100
Total 'Exports', mln USD
25
80
20
60
15
40 10
20 5
0 0
2017 2018 2019 2020* DAIRY CITRUS SCRAPS BARLEY POULTRY
2019 2020 (Jan-Oct)
Source: World Bank staff estimates, TC ‘Department of Trade’. *2020 data covers January-October.
10 In November 2020, several interviews were held with business representatives from different sectors, including among others the Animal Breeders
Association.
11 Because of the Turkish lira depreciation, businesses were unable to meet the cold chain requirements or afford increased feed costs, leading to a
reduction in livestock
12 The previous Macroeconomic Monitoring Note discussed the structural and cyclical challenges facing the manufacturing sector: https://www.abbilgi.
eu/en/assets/docs/tccmacromonitoring-2020-en-final-4.pdf
13 In November 2020, several interviews were held with business representatives from different sectors, including among others the Chamber of
Industry.
14 Thousands of foreign workers have left the island because of the COVID-19 pandemic.
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TURKISH CYPRIOT ECONOMY MACROECONOMIC MONITORING NOTE
In the construction sector, a significant from the number of tourism activities and
demand shortage led to an excess of available crossings over the Green Line. In 2020, the
construction units and an overall contraction total number of ‘tourists’ staying in TC touristic
of about 15 percent in 2020. While existing accommodations contracted by 79 percent.
projects—which had pre-allocated funds, Due to the restrictions imposed on crossings
including public contracts—have continued, over the Green Line, starting in March 2020
also supporting the required supplementary monthly crossings were also severely impacted
services such as painting, quarrying, cement compared with monthly crossings in 2019
production, and subcontracting businesses, (Figure 1.8). Taking into account that retail
the rest of the construction sector has suffered trade and tourism represent alone a fifth of
from a substantial drop in demand. According GDP in 2018–19 with many linkages to other
to an estimation by the Building Contractors sectors, the sharp contraction of this subsector
Association, sales of houses slowed by is expected to severely impact restaurants, and
almost 10 percent compared with 2019, wholesale and retail trade economic activities
with an estimated excess of around 25,000 and employment, as discussed in more detail
properties.15 in Section 1.2.
The overall services sector, excluding ‘public’ Similarly, the higher-education services
services, has been badly impacted by the crisis subsector has also been severely impacted by
and is expected to contract by more than 15 the COVID-19 pandemic, with large indirect
percent in 2020. Private sector services had effects spreading across the entire economy.
already been slowing down since 2018, with Growth in higher-education services had
their contribution to growth dropping from already started to decline well before the
1.3 percentage points in 2018 to only 0.2 of COVID-19 crisis hit, from 7.5 percent in 2018
a percentage point in 2019. Among others, to only 2.3 percent in 2019, resulting in a
wholesale and retail trade services shrank by contribution to GDP growth of just 0.2 of a
5 percent, reducing GDP growth by 0.8 of a percentage point in 2019. The number of
percentage point in 2019. The COVID-19 crisis foreign students for the 2019/20 academic
has further aggravated the situation in the year increased by only 1.2 percent, to 91,505.17
wholesale and retail trade, and in particular However, shortly after the spread of the first
in hotel and restaurant activities, to the point wave of the COVID-19 pandemic in March
that the retail trade and tourism subsectors 2020, about 45 percent of all foreign students
as a whole are estimated to have contracted left the TCc. In addition, enrolments for the
by almost 40 percent in 2020. In addition, 2020/21 academic year have so far been well
personal and professional services are below expectations. As of end-October 2020,
estimated to have contracted by 10 percent.16 only about 22,800 students had enrolled,
half of the number that had enrolled as of
Tourism – an important driver of growth and end-October 2019. Due to the containment
source of foreign exchange – is expected to measures put in place, a significant share of
bear the brunt of the COVID-19 crisis. The teaching is now being provided virtually, and
lockdown and international travel restrictions this will continue at least until March 2021, if
have had a massive impact on tourism, as seen not well beyond.
15 In November 2020, several interviews were held with business representatives from different sectors, including among others the Building Contractors
Association.
16 According to business associations, restaurants/cafes have been operating at lowest capacity since the crisis, small shopkeepers and business in
downtown Nicosia and Famagusta had closed down. It is estimated a decline of more than 30 percent in sales of foodstuff, and a stronger impact the
hair and beauty services. While the branded retail stores, automotive repair services sector, and similar services providers had coped better with the
crisis, about 9,500 out of 10,000 closed businesses are shopkeepers and artisans.
17 While higher education ‘exports’ has become a growth driver for the TC economy over the past decade, with increasing number of foreign students
and higher education institutions, this rapid expansion was achieved at the cost of quality education.
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IMPACT OF THE COVID-19 PANDEMIC: A PATH TO BUILDING BACK BETTER
Figure 1.8: Change in number of crossings (other than TCs) over the Green Line (yoy), thousands
150
90 54 54
Change in GL crossings (other than TCs), yoy
30
-30
-90
-150
-210
-270 - 246
-330
-390 - 345
- 387 - 400 - 398 - 390
-450 - 423 - 423
Diff. 2020 vs 2019 - 475
-510
- 491
-570
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: World Bank staff estimates, TC ‘Tourism Planning Department’.
The recent sharp depreciation of the Turkish basket as of mid-December.20 Given the
lira has raised the price of ‘imported’ goods high level of exchange rate passthrough,
and domestic inflation, further curtailing the depreciation is expected to increase
an already depressed private consumption. inflation despite the large negative output
The Turkish lira initially depreciated by about gap. With average yoy inflation at almost
20 percent between March 1 and early May 12 percent in 2020 (Figures 1.9 and 1.10),
202018,19 but the depreciation continued further compression of private consumption
throughout the year, reaching about a 40 and increase in production input prices are
percent depreciation against the currency expected.21
Figure 1.9: Inflation Figure 1.10: Contribution to headline inflation
45,00
40,00
35,00
30,00
Percentage Points
25,00
20,00
15,00
10,00
5,00
0,00
-5,00
Food inflation Energy inflation
Core inflation Headline inflation(percent)
Source: World Bank staff estimates, ‘Statistics Office’, CBRT. Source: World Bank staff estimates, ‘Statistics Office’.
18 World Bank. 2020. Turkey Economic Monitor. Adjusting the Sails. August 2020. Washington, DC: World Bank.
19 The Central Bank of the Republic of Turkey has intervened in foreign exchange markets to stabilize the currency and mitigate the volatility. World
Bank GEP 2021.
20 The Central Bank of the Republic of Turkey (CBRT). 2020. Monetary and Exchange Rate Policy for 2021. 16 December 2020.
21 To learn more about the potential impact of the lira depreciation on the TC economy, see the 2018 Macroeconomic Monitoring report: https://www.
abbilgi.eu/en/assets/docs/eu-funded-wb-tcc-macroeconomic-note-november-2018.pdf
6 l
TURKISH CYPRIOT ECONOMY MACROECONOMIC MONITORING NOTE
High inflation poses further risks for poor and relating to the TC banking sector. At the end of
vulnerable households in the TCc. The rates of Q3 2020, NPLs had increased by 34.3 percent
price inflation on food (14.6 percent), housing compared with Q3 2019, and reached TL 1,481
(11.6 percent) and transport (21.7 percent) are million.24,25 The share of NPLs owned by private
particularly important for poor and vulnerable banks increased by 10 percentage points to
households, since these items comprise a almost 68 percent of total NPLs, while the
relatively larger share of their budgets (Figure share owned by ‘publicly’ managed banks
1.11). Poor households spent around two- decreased from 22.24 to 16.60 percent. The
thirds of their consumption expenditure remaining share owned by branch banks also
on food, housing and transportation, while increased. Moreover, between September
this share is only half among non-poor TC 2019 and September 2020, the ratio of NPL
households.22 reserve provisions to total NPLs decreased by
Figure 1.11: Price inflation in the TCc, December 2020
30
26,7
25
21,7
20,6
20 17,1
14,6 15,1 15,0
15
11,6
9,6 9,4 10,1
10 8,3 7,4
5
0
Alcoholic Beverages and Tobacco
Recreation and Culture
Food and Non-alcoholic Beverages
Housing, Water, Electricity, Gas and
Transport
Restaurants and Hotels
Miscellaneous Goods and Services
Furnishings, Household Equipment
Communication
Education
Total
Health
Clothing and Footwear
and Routine Household
Maintenance
Other Fuels
Source: TC ‘Statistics Office’
Financial risks are expected to grow due to almost 10 percentage points from 64.9 to 55.8
increasing financial liabilities in tourism and percent. Although the overall capital adequacy
construction, which account for the highest ratio of the banking sector has decreased, it
shares of non-performing-loans (NPLs), nonetheless remains above 16 percent. The
at almost 19 and 16 percent of the total, hardest hit economic activities – namely the
respectively, as of August 2020. The monetary wholesale and retail trade; food, beverages
stance of the Central Bank of the Republic of and tobacco; construction; and hospitality –
Turkey (CBRT) was initially accommodative together also account for the largest share of
in responding to the COVID-19 shock, but overall NPLs, at around 60 percent of the total
the CBRT partially reversed this decision (Figure 1.12).
to stabilize the currency and inflation.23
Additional risks are expected to lie ahead
22 World Bank. 2019. Poverty and Social Assistance in the Turkish Cypriot Community. World Bank: Washington, DC.
23 The Monetary Policy Committee of the Central Bank of the Republic of Turkey decreased the policy interest rate from 12 to 8.25 percent during
January to May 2020. On the back of falling oil prices and domestic demand, and Turkish lira depreciation, as already anticipated, inflation accelerated
markedly in 2020, breaching the lower band of the corridor in August. In response, in September 2020, the Monetary Policy Committee of the
Central Bank of the Republic of Turkey raised the policy rate by 200 basis points, from 8.25 to 10.25 percent.
24 According to a TC regulation, NPLs do not include non-serviced ‘public’ debt, which is at odds with the international definition of NPLs. If these
‘public’ loans are accounted for, the actual NPL ratio will be much higher.
25 World Bank. 2018. Turkish Cypriot Community: Coping with the Turkish Lira Depreciation Shock. A Macroeconomic Monitoring Note. World
Bank: Washington, DC.
l 7
IMPACT OF THE COVID-19 PANDEMIC: A PATH TO BUILDING BACK BETTER
1.1.2 The current account and expected sharp reduction in the ‘export’ of
fiscal balances services, the surplus in net services ‘exports’ is
expected to shrink from 45.5 in 2019 to about
The current account balance (CAB) excluding 32 percent of GDP in 2020.
grants from Turkey, is projected to show
a small deficit in 2020. In 2019, the CAB, After the fiscal surplus registered in 2018,
including grants from Turkey, continued to be the fiscal situation has deteriorated with the
positive at 5.3 percent of GDP, and is expected fiscal deficit registered in 2019 expected to
to remain at around 5 percent of GDP in 2020. widen in 2020. The fiscal consolidation that
However, if one excludes grants from Turkey, had resulted from declining budget support
the CAB is expected to decline to negative from Turkey over the past decade led to a
territory, from +2.5 to about -0.3 percent of positive budget balance in 2018. In 2019, the
GDP. The net ‘exports’ of goods is estimated substantial increase in recurrent expenditures
to remain in deficit but shrinking from 40.2 (personnel expenditures, current transfers,
percent of GDP to slightly below 27 percent and the purchase of goods and services) led
in 2020, mostly due to compressed imports to an increase in total expenditures of about
and increased ‘exports’. Based on the available 6.2 percentage points of GDP, from about 30
data up to November 2020, imports declined percent of GDP in 2018. Meanwhile, total
by 23 percent or by US$302 million compared revenues increased by only 4.8 percentage
with the same period in 2019 as a result of points of GDP, mostly driven by direct tax
weaker demand for foreign goods. Meanwhile, collection and non-tax revenues.26 A budget
‘exports’ increased by about 22 percent or by deficit of 1.3 percent of GDP was therefore
US$17.1 million, resulting in an improvement registered in 2019, which rises to more than 4
in the deficit, which shrank to US$902 million, percent if grants are not included (Figure 1.14).
down from US$1,221 million during the As expected, in 2020, nominal expenditures
same period in 2019 (Figure 1.13). Given the outpaced the corresponding level over the
Figure 1.12: Composition of NPLs Figure 1.13: ‘Trade’ component, 2019–20
(August 2020)
1.500
1.297,9
Hospitality
996,2
1.000
Construction
21 19 500
Private Loans and Credit
Millions USD
Cards 77,2 94,2
0
Wholesale and Retail, and
6 Motorized Vehicle
16 Maintenance Services
Food, Beverages and -500
8 Tobacco Industry
Jan-Nov 2019 Jan-Nov 2020
Education
15 15 -1.000 -902,0
All the others
-1.220,8
-1.500
Imports (USD) Exports (USD) Trade balance (USD)
Source: World Bank staff, TC ‘Central Bank’. Source: World Bank staff, TC ‘Department of Trade’.
26 The fiscal balance ended up in deficit in 2019 because total expenditures reached about TL 1.3 billion only in December 2019, while the total
expenditure from January to November stood at TL 6.4 billion, a monthly average of TL 580.4 million.
8 l
TURKISH CYPRIOT ECONOMY MACROECONOMIC MONITORING NOTE
Table 1.1: Turkey’s Financial assistance to the TCc in 2019 and 2020 (million TL)
2019 2020
Amount agreed Amount received Amount agreed 29
Amount received
Grants 749 578.7 1,038 1,050
Defense 547 512.0 650 704
Investment 156 53.7 273 283
Private sector 47 13.0 115 62
Loans 0 - 1,251 564
Budget support 0 - 1,150 564
Other 0 - 100 0.0
Total 749 578.7 2,289 1,614
Source: Turkey’s ‘Embassy’ in the TCc and ‘TC Ministry of Finance’
same period of 2019 by more than TL 1.0 to 111 percent in 2018, and to about 96
billion. The fiscal stimulus in response to the percent of GDP in 2019. Meanwhile, total
COVID-19 crisis led to an increase in current internal debt declined from 48.5 percent
transfers and personnel spending, while the of GDP in 2016 to 33.4 and 29.9 percent of
TC administration also allocated about TL GDP in 2018 and 2019, respectively. Despite
260 million for interest payments compared these improvements, the recent depreciation,
with only TL 34 million over the whole of together with the contraction in nominal GDP
2019. Section 1.1.3 describes in more detail and fiscal pressures resulting from the ongoing
the recent policy measures implemented COVID-19 crisis are expected to reverse this
by the TC administration. As a result of the trend, with the overall debt-to-GDP ratio
contraction in economic activity, tax collection expected to have increased to almost 106
decreased compared with the same period in percent of GDP by the end of 2020. The TC
2019 by 2 percent, with VAT experiencing the administration contracts most of its debt in
largest drop at 11 percent. However, thanks foreign currency, which represents around
to a substantial increase in collections from three quarters of total debt exposure.27,28 29
account receivables (namely, transfers from
the Turkish Cypriot ‘Central Bank’) and grants Aid received from Turkey constitutes
from Turkey, total revenue was larger by more the most important source of funding in
than TL 750 million. The deficit, excluding alleviating the financing gap between local
foreign aid, is expected to have reached almost revenues and budget expenditures. While the
10 percent of GDP by end-2020. TC administration started issuing ‘Treasury’
bills for the first time at the end of February
The downward trend in total ‘public and 2020 to support spending needs and to take
publicly guaranteed’ (PPG) debt is expected advantage of the ample liquidity held in
to reverse. Both the high level of inflation Turkish Cypriot banks, support from Turkey
experienced in 2018 and 2019, and the fiscal represents the lion’s share of budget funding.
consolidation efforts—partly motivated by Moreover, since July 2020, grants from Turkey
reduced grant receipts from Turkey (Figure have resumed on a monthly basis. In particular,
1.15)—have resulted in a reduction of total the total amount – both in the form of grants
PPG debt from 148 percent of GDP in 2016 and loans - from the Republic of Turkey was
27 As of end of 2017, almost 15 percent of domestic debt was in US dollars, and official debt with Turkey, the majority of which is in US dollars,
amounted to more than 99 percent of total external debt. Turkey’s ‘Embassy’ in the TCc. 2018 Economic Report for TCC. Available here: www.kei.
gov.tr
28 For a fuller discussion of implications of depreciation, see the 2018 Macroeconomic Monitoring Note.
29 Source: http://www.kei.gov.tr/anla%C5%9Fmalar/
l 9
IMPACT OF THE COVID-19 PANDEMIC: A PATH TO BUILDING BACK BETTER
Figure 1.14: Fiscal deficit and financing Figure 1.15: External financing from Turkey
External financing from Turkey
(%GDP)
15
10
5
0
2014 2015 2016 2017 2018 2019 2020e
Loans for budget support (%GDP)
Current transfers to real sector (%GDP)
Defense-related grants (%GDP)
Investment grants (%GDP)
Total grants from Turkey (%GDP)
Total external financing from Turkey (%GDP)
Source: World Bank staff, TC ‘Ministry of Finance’. Source: World Bank staff, TC ‘Ministry of Finance’.
TL 1,614 million in 2020, of which more than and (iv) strengthening coordination across the
60 percent in the form of grants and more relevant authorities by establishing a scientific
than 40 percent of the total for defense (Table board responsible for communicable diseases.
1.1). In 2020, the EU also mobilized support to The emergency health measures proved to be
the TCC, of which part was directly targeted to expedient in slowing down the spread of the
TC businesses. Section 1.1.3 discusses more in virus and received support to a large extent
details the support package. from the wider public.
Aside from the health response, two
1.1.3 Policy responses to mitigate consecutive sets of economic measures
the impact of the COVID-19 aimed at mitigating the impact of the
pandemic COVID-19 crisis on firms and households were
introduced during the economic lockdown
Since the first COVID-19 case in early March and later to support a quick rebound of
2020 in the TCc, a series of measures were
economic activities. As part of the first set
taken to prevent, detect and respond to
of economic measures issued on March
the health threat posed by the pandemic,
25, 2020, the TC administration reallocated
and strengthen the preparedness of the
budgetary resources by temporarily cutting
TC ‘public’ health system. The emergency
health response of the TCc mainly included: both ‘public employee’ salaries and transfers
(i) an economic lockdown, travel restrictions, to Local Community Bodies (LCBs) to support
contact tracing and quarantining; (ii) higher health expenditures, and provided
reinforcing equipment and logistics of the temporary relief to businesses and vulnerable
‘public’ hospitals through supplying PCR testing households. The second set of economic
kits, ventilators, beds for intensive care units, measures issued on June 22, 2020, introduced
and strengthening ambulance centers; (iii) additional interventions aimed at enhancing
allocating funds for hiring additional medical the measures of the first package through
staff, and procuring services from private more structured financial incentives. Box 1.1
hospitals in order to ensure continuous access contains a detailed description of the adopted
to preventive and essential health services; measures.
10 l
TURKISH CYPRIOT ECONOMY MACROECONOMIC MONITORING NOTE
Measures supporting the private sector have cash transfer program to mitigate the impact
served as a lifeline for many MSMEs, enabling of pandemic on the poor. Equally, the only
them to remain in the market; however, employability measures introduced have
unless these measures are supported by been to subsidize social security contributions
actions to address the structural challenges and to provide wage support to TC workers
in the economy, a swift recovery of the TC recruited through the işbul/find-a-job portal30
economy and sustainable business growth for a period of 12 months, and for newly
are unlikely to take root. Similar to many other established (up to two years old) enterprises
economies around the world, the COVID-19 and their employees for 24 months. During
pandemic has placed extraordinary strains on the lockdown period, the LCBs made some
the TC economy, causing severe disruptions to fragmented efforts to strengthen social care
economic activities, particularly in the tourism services at the local level and to provide
and higher-education services subsectors, food support for vulnerable households,
exposing the population to job and income but these efforts were not coordinated or
losses, and further delaying the convergence managed using a holistic approach by the
of incomes and standards of living across the central administration and, thus, could not be
island. TC economic measures introduced in extended across all LCBs.
response to these challenges through two
consecutives ‘communal solidarity packages’ Efforts to slow down the spread of the
can be broadly summarized as follows: (i) rent COVID-19 virus and mitigate its negative social
deferrals; (ii) tax discounts and tax deferrals; and economic impacts were supported by
(iii) loan support; (iv) support for social security both the EU and Turkey. The EU immediately
payments; (v) wage support; and (vi) sector- mobilized a COVID-19 support package of
specific support, particularly to farmers, dairy €5 million for the fight against the COVID-19
producers, and other agricultural businesses. In virus in the TCc for urgent medical equipment
addition, in the context of the second package and supplies. In May, the EU initiated a series
of economic measures, the TC administration of new economic measures to help address
accelerated payments with a view to clearing the broader socio-economic impact of the
any arrears to private suppliers and reallocating COVID-19 pandemic in the TCc. As part of
resources for capital investments. While firms this second package, €3 million was allocated
were highly appreciative of these efforts to roll for micro-enterprises under a program
out the stated measures under very limited called the ‘Lifeline Support for Businesses’
fiscal space and financing tools, a consensus and implemented in partnership with NICO
nonetheless exists on the need to undertake and the TC Chamber of Shopkeepers and
fundamental structural reforms that are Artisans, while €7.2 million was allocated
crucial to unlocking private sector dynamism. for small-sized industrial enterprises, is
The response in terms of protecting poor currently still awaiting disbursement. The EU
and vulnerable people and households has also contributed to the LCBs’ efforts to carry
been limited in scope and has struggled to out the daily sanitation of public spaces by
embrace the highly diverse range of potential providing hygiene and sanitation equipment.
beneficiaries including migrants, refugees and Support from Turkey was similar to that of the
ethnic minorities. The measures introduced EU, covering financial support for firms and
as part of the two economic packages mainly vulnerable households, supporting ‘public’
focused on the deferral or facilitation of credit health infrastructure through supplying
card repayments and incentives for the timely testing equipment, ventilators, and personal
payment of electricity bills. Lack of an updated protective equipment, and also financing the
and precise record system on the poor and construction of a ‘pandemic hospital’ with a
vulnerable impeded the establishment of a capacity of 100 beds.
30 “Find-a-job” is an official portal of the TC ‘Ministry of Labor’ to help unemployed to find a job.
l 11
IMPACT OF THE COVID-19 PANDEMIC: A PATH TO BUILDING BACK BETTER
Box 1.1 Economic measures and support packages for communal solidarity
Aside from the health response, two sets of economic measures aimed at mitigating the impact of the COVID-19
crisis on firms and households were introduced during the economic lockdown, and later to support a quick
rebound of economic activities. The authorities estimated the envelope of the two packages to be around TL 1.8
billion, around 9 percent of GDP. In addition, the estimated total value of the credit scheme (aggregated value of
first and second packages) was TL 1.5 billion.31 Insights from the World Bank Enterprise Survey report that almost
66 percent of TC businesses received assistance, or expect to do so (see Section 1.2 for a fuller discussion).
A new scheme to support the most vulnerable groups in the TCc was introduced in early 2021. As announced
on February 13, 2021, by the TCc authorities responsible for Labor and Social Security, the scheme aims at
providing food, hygiene and cleaning materials for targeted vulnerable groups: workers who are unemployed
or unregistered due to the pandemic; single-parent households with children who suffer economically because
of the pandemic; elderly and disabled people who are unable to get their care services; and women, LGBT+ and
international students who do not have any income. The support system will be managed in cooperation with
the Red Crescent, local administrative bodies, higher education institution, chambers, NGOs, Labor unions and
women’s organizations.32
First economic measures and support package for communal solidarity
Announced March 25, 2020 Covering March – May 2020
Policy response Description
Pillar I: Support to the private sector
Deferral of rents • Deferral of rents for April and May 2020, and option to pay in six months in equal
instalments.
Tax discounts and • Discount for timely payment of income tax, corporate tax, VAT, tax on games of
deferrals chance and rent receivables of the administration.
• Postponement of returns and payments for income tax, banking and insurance
transactions tax, VAT, special communication services tax, and tax on games of
chance without default interest.
Loan support • Payment of interest by the administration of deferred loans of enterprises that
were closed during the lockdown, and of their employees.
• Provision of low interest loans for enterprises in priority production sectors.
Support to social • Provision of credit interest support to employers with one to ten employees from
security payments May 2020.
• Deferral of social security contributions for enterprises closed during lockdown
without any penalty and interest charges, and the provision of a 10 percent
discount for timely payment.
• Freezing repayments of social security contribution advances for three months.
Wage support • Provision of wage support for Turkish Cypriot and Turkish employees of
businesses that were closed during the lockdown.
Sector-specific • Development of a credit and grant scheme to address shortages in crop and
support animal production.
• One-time call-off of collection of cost of milk due on March 30, 2020, from milk
processors by the Milk Board (SÜTEK) until April 15, 2020.33
Pillar II: Support to people in need and households
Support for personal • 25 percent increase of credit card limit levels without requirement of proof of
and household income.
expenses • Postponement of repayment of credit card expenditures on fuel, food and health-
care expenses made between March 26, 2020, and April 26, without any interest
rate charges.
• Setting the credit card minimum payment rate to 1 percent for three months and
monthly contractual rate of interest to 1 percent, with no default interest for a
period of three months.
• Discount of 18 to 15 percent for the timely payment of electricity bills for three
months.
31 https://www.kibrispostasi.com/c35-KIBRIS_HABERLERI/n333475-iste-ikinci-toplumsal-dayanisma-paketi
32 https://pio.mfa.gov.ct.tr/calisma-ve-sosyal-guvenlik-bakanligi-gida-ve-temizlik-malzemesi-yardimi-baslatiyor/
33 The milk sector is regulated by the Milk Board, which is responsible for central collection of milk and for selling it to milk processors according to
pre-agreed milk quotas. As part of the measures to support the private sector, the TC administration decided to cover the milk price on behalf of the
milk processors and allow them produce dairy products at a more reasonable cost.
12 l
TURKISH CYPRIOT ECONOMY MACROECONOMIC MONITORING NOTE
Second economic measures and support package for communal solidarity
Announced June 22, 2020 Covering June – October 2020
Policy response Description
Pillar I: Support to the private sector
Payment of • Allocation of TL 885 million for the payment of outstanding debts to the private
outstanding arrears sector (TL 385 million) and infrastructure investments (TL 500 million).
and increasing
capital investments
Loan support • Introduction of a credit package of TL 1.5 billion through the Credit Guarantee
Fund. The package includes:
o Extension of maturity period from 15 to 36 months for all credit,
including those already extended.
o Continuation of the six-month non-payment period with interest
support.
• Facilitation of restructuring of the existing loans in terms of adjustment of the
interest rate applicable, maturity, and non-payment periods, as well as transfer of
loans to another bank for restructuring.
• Deferral of repayments to ‘Development Bank’, in particular for tourism- and
student residence-related loans, and other sectors.
Support to social • Subsidizing 75 percent of earnings subject to premiums for the rest of 2020.
security payments Businesses that have no outstanding contribution payments to TC employees
until January 2020 are eligible.
• Financial contribution to businesses with five or more employees (including the
employer) with regular premium payment records.
Wage support • Extension of wage support to cover businesses closed in May 2020.
Sector-specific • Discounts on title deed fees until the end of the year for all housing and
support commercial property purchases.
• Allocation of TL 5 million from central budget to control the Soil Production
Board prices.
• Provision of incentives for dairy products to compensate for the decline in local
and overseas demand, for the packaging cost of potatoes for export purposes,
and grain harvest support.
• Provision of incentives for electricity for industry, tourism, agriculture and higher-
education sectors until the end of the year.
• Application of a 50 percent discount to banking and insurance transaction tax
rates for the purchases of real estate.
Pillar II: Support to people in need and households
Support for personal • Provision of interest rate support for a period of three years to local buyers
and household applying for real estate loans.
expenses • Enabling instalment loans for credit card debts.
• Extending further the credit card minimum payment rate of 1 percent and
monthly contractual rate of interest of 1 percent with no default interest.
Support to • Subsidizing social security contributions and wage support for Turkish Cypriot
employment and workers recruited through the işbul/find-a-job portal for a period of 12 months,
employability and for newly established enterprises and their employees for 24 months.
l 13
IMPACT OF THE COVID-19 PANDEMIC: A PATH TO BUILDING BACK BETTER
1.2. The Impact of the during the pandemic.34 Employment dropped
COVID-19 Pandemic on Jobs during the pandemic, with job losses reaching
4 percent of total employment in the TC
and Firms
economy in 2020 (Figure 1.16, Panel a. and
1.2.1 The COVID-19 pandemic has b.) with the private sector hit the hardest with
had a significant, and unequal, around 5,500 job losses.35 In addition, since
impact on jobs the beginning of the COVID-19 crisis, The
2,000 workers from the TCc who are employed
The COVID-19 pandemic is having a significant
impact on jobs in the TC economy. Overall, the in RoC encountered additional difficulties due
labor force maintained its 2019 levels of around to the restrictions of Green Line crossings. Not
147,000 people, unlike other economies such being registered under the TC Social Security
as Turkey and the United States, which both System, these workers could not benefit from
saw many workers leaving the labor force support mechanisms either.
Box 1.2: 2020 Labor Force Survey results
Three main caveats should be kept in mind when interpreting the results from the 2020 Labor
Force Survey (LFS). First, due to the COVID-19 pandemic, the 2020 survey was conducted via
phone interviews (CATI) and the information gathering followed a different methodology,
which may not provide an accurate picture of the situation and alter the comparison with
previous years. Second, the projections in the LFS rely on the population growth based on
the birth and death rates and on the baseline population census data, but do not consider
migration flows which due to the pandemic could have been substantial. Finally, the sampling
of the LFS relies on the 2011 population census which may provide an outdates picture.
These caveats notwithstanding, the survey provides useful information, especially on the
evolution of indicators over subsequent periods despite these potential drawbacks.
Figure 1.16: Employment in the TCc, October 2019 to October 2020 Labor market outcomes
17.000
150.000
14.950
147.755 15.000
147.835
145.000
13.000
140.000 142.283
138.438 11.000
135.000 132.885
9.873
132.411 9.000
130.000 9.317
125.000 7.000
120.000 5.000
2018 2019 2020 2018 2019 2020
Unemployment
Labor Force Employment
Source: TC ‘Statistics Office’
34 World Bank. 2020. Turkey Economic Monitor, August 2020. Adjusting the Sails. World Bank: Washington, DC.
35 The latest figures from the ‘Social Security Department’ show a 20 percent drop in registration in 2020 compared to 2019.
14 l
TURKISH CYPRIOT ECONOMY MACROECONOMIC MONITORING NOTE
Figure 1.17: Employment, unemployment and labor force participation rate,
October 2019 to October 2020
60
51,3 51,1
50,9
50
47,3 48,1
45,9
40
30 29,3
22,0
19,4
20
10,1
10 6,9 6,3
0
2018 2019 2020
Labor Force participation rate Employment rate
Unemployment rate Youth unemployment rate
Source: TC ‘Statistics Office’
Note: negative values correspond to an increase in jobs.
As a result, the TC unemployment rate rose total job losses. The services sector is the
sharply from 6.3 to 10.1 percent over the largest employer in the TCc, with around 80
past year. The COVID-19 pandemic pushed the percent of total employment. Around 3,000
youth unemployment rate to a peak of 29.3 jobs disappeared over the past year in the
percent in October 2020, significantly higher services sector, which is equivalent to half of
than the 19.4 percent in October 2019 (Figure the overall job losses in the TCc (Figure 1.18,
1.17). The overall employment rate declined Panel a). Meanwhile, the agriculture sector
from 48.1 to 45.9 percent over the year, while experienced the largest employment cuts in
labor force participation stagnated at around relative terms, with 1,600 workers losing their
51 percent over the same period. jobs, or equivalent to a loss of 27.7 percent of
employment in the sector over the same period
Services and agriculture were the two sectors (Figure 1.18, Panel b). A significant number of
most affected by the COVID-19 pandemic, workers have also become unemployed in the
accounting for about 82 percent of the construction and industry sectors.
Figure 1.18: Employment by sector in the TCc, October 2019 to October 2020
Panel a. Sectoral employment Panel b. Job losses (% of sectoral employment),
October 2019 to October 2020
20.000 110.000
30%
17.500 107.500 27,7%
107.518 108.125
105.112
15.000 105.000 25%
12.500 12.042 13.787 102.500
13.603
20%
10.000 10.906 100.000
10.104
9.303 15%
7.500 97.500
5.000 5.620 95.000 10%
7,4%
4.066
2.500 3.547 92.500
5% 4,0%
2,8%
0 90.000 1,3%
2018 2019 2020
0%
Total Agriculture Industry Construction Services
Agriculture Industry Construction Services
Source: TC ‘Statistics Office’
l 15
IMPACT OF THE COVID-19 PANDEMIC: A PATH TO BUILDING BACK BETTER
Figure 1.19: Employment by gender and type in the TCc, October 2019 to October 2020
25.000 Panel a. Employment by gender 115.000 Panel b. Employment by type
22.500
110.736
100.000
20.000 110.000
89.270 87.955
90.000 84.256
17.500 107.112
106.341
80.000
15.000 105.000
70.000
14.816
13.928 14.311
12.500 60.000
48.155 49.169
10.000 100.000 50.000 44.930
7.348 6.717 40.000
7.500 6.724
30.000
5.000 4.639 95.000
4.292 20.000
3.189
2.500 10.000
1.126 1.405 1.051
0 90.000 0
2018 2019 2020 Male Female
Casual worker Employer Self-Employed Unpaid family worker Wage worker 2018 2019 2020
Source: TC ‘Statistics Office’
Women have been disproportionately workers, as these are more insecure forms
affected by the pandemic compared with of employment. The numbers of causal and
men; although women make up only 35.3 unpaid family workers decreased by 31.2 and
percent of the workforce in the TC economy, 25.2 percent, respectively. As some businesses
they account for 76.3 percent of the job shut down during the pandemic, the number
losses over the past year. From the total loss of employers also dropped by 631, from 7,348
of 5,500 jobs in the TC economy, around 4,200 in October 2019 to 6,717 in October 2020.
of these lost jobs were by women workers, However, more people started generating
concentrated mainly in the services sector, income as self-employed workers in the past
while only 1,300 men lost their jobs, mainly 12 months, suggesting that the scarcity of job
in the agriculture sector (Figure 1.19, Panel opportunities may have pushed people into
a). The pandemic has led to a significant greater self-reliance through self-employment.
deterioration of labor market outcomes;
the labor force participation rate of women Regarding the regional distribution of job
losses within the TC economy, Kyrenia and
declined from 39.7 to 37.9 percent, the
Trikomo/Iskele are the most affected regions.
employment rate of women dropped from
Although Trikomo/Iskele and Kyrenia represent
36.5 to 33.3 percent, the unemployment rate
only 33 percent of total employment, these
of women increased sharply from 8.0 to 12.2
two regions made up most of the job losses
percent, and the youth unemployment rate
in 2020, with a drop in employment of 10.2
of women reached a peak of 34.8 percent in
and 30.8 percent, respectively. In comparison,
October 2020, up from only 20.7 percent one
and perhaps surprisingly, Nicosia, Lefka/Lefke
year ago.
and Morphou/Guzelyurt, experienced a flat
Almost all forms of employment have been trend while Famagusta a slight increase in jobs
impacted by the COVID-19 pandemic. Wage- (Figure 1.20). Given the sectoral distribution
earning workers faced the highest number of job losses in the services sector, as well as
of job cuts in the TC economy over the past in agriculture, workers from urban and rural
year, from 110,736 to 107,112 (Figure 1.19, areas are expected to be similarly affected,
Panel b). Job losses were also relatively with employment losses in rural areas
higher among casual and unpaid family accounting for half of total job losses.
16 l
TURKISH CYPRIOT ECONOMY MACROECONOMIC MONITORING NOTE
Figure 1.20: Job losses by region in the TCc, October 2019 to October 2020
4.000
3.541
3.500 3.361
3.000
2.500
2.000
1.500
1.000
500 333
0
-500
-409 -457
-1.000 -815
-1.500 le
ke
o/
Is fke
m /Le
ko fka
Tri Le
Source: TC ‘Statistics Office’
Note: Negative values correspond to an increase in jobs
The COVID-19 pandemic hit informal workers increased significantly in the industry sector.
particularly hard. Informal employment Meanwhile, around 3,000 formal jobs were
decreased significantly, despite representing lost, amounting to 2.3 percent of total formal
only a relatively small share (6.5 percent) of the employment in the TCc.
TC workforce. Around 2,500 informal workers
lost their jobs over the past year, corresponding As labor market conditions have deteriorated
to 28.5 percent of total informal employment during the COVID-19 pandemic, household
(Figure 1.21, Panel a). A significant share of welfare also has been adversely affected in
informal job losses originated from services the TCc. Employment losses in sectors such as
and agriculture (Figure 1.21, Panel b). While agriculture, construction, and services, in which
informal employment also decreased in the many members from poor and vulnerable
construction sector, informal employment households work, have had a direct adverse
Figure 1.21: Employment by formality in the TCc, October 2019 to October 2020
Panel a. Employment by formality Panel b. Informal employment
150.000 6.000
4.907
5.000
140.000
3.918
8.930 4.000 3.627
130.000 6.742 6.382
3.000
2.302
120.000
2.000
1.485
129.509 1.155
125.667 126.503 1.024
866 864
110.000 1.000 636 566 703
0
100.000 Agriculture Industry Construction Services
2018 2019 2020
Registered Non-registered 2018 2019 2020
Source: TC ‘Statistics Office’
l 17
IMPACT OF THE COVID-19 PANDEMIC: A PATH TO BUILDING BACK BETTER
Figure
50 1.22: Sector of employment of household heads in the TCc, 2015
44,2
45
39,6
40
35
30
25
20 17,6 17,6
16,1
15
11,2
8,6 8,6 9,2
10
6,1 5,4
3,6 3,9
5 1,5 2,1 2,3
0
Agriculture, Mining, Water supply Construction Services Public Admin Education Other
fishing and manufacturing and swerage
forestry and electricity
Poor Non-Poor
Source: Household Budget Survey 2015.
impact on household incomes (Figure 1.22). the past year. As a result, it is expected that
As already observed, poor and vulnerable poor and vulnerable households have borne
households tend to depend on income from the brunt of this burden, with the incidence
informal wage employment and casual jobs— of poverty expected to increase in the TCc.36
the most impacted forms of employment over However, it is important to note that several
Box 1.3: Measurement of Poverty in the TCc
Poverty in the TCc is measured and monitored by the ‘Statistics Office’ (‘SO’) using HBS data. ‘SO’
defines poverty in relative terms (i.e. uses a relative poverty line as per EU methodology). However,
‘SO’ defines a household as poor if its equivalized adult income falls below 50 percent of the median
equivalized disposable income of the TCc, a more stringent definition than that adopted by EUROSTAT.
Poverty is calculated differently for urban and rural areas. According to this measure, in 2015, the
poverty rate in the TCc was 15.4 percent, and the rate was higher in rural areas than in urban areas,
measuring 17.2 and 14.0 percent respectively.
Poverty in the TCc cannot be estimated every year due to lack of data. The most recent HBS was
conducted in 2015. The HBS is in fact carried out every seven to eight years due to budget constraints.
This does not allow close monitoring of poverty in the TCc and hampers the evaluation of implemented
projects and policies. Moreover, it prevents policymakers from taking informed decisions and
implementing evidence-based policies to reduce poverty and inequality.
The decision to use a relative poverty measure is linked to data limitations and for comparability
purposes. First, using a relative poverty line allows to compare the TCc’s poverty indicators with EU
economies. Second, absolute poverty (defined by the World Bank Upper Middle-Income Countries as
living with less than US$ 5.5 2011 PPP per capita per day) cannot be calculated in the TCc since there is
no official Purchasing Power Parity (PPP) index defined for the TC economy. Similarly, the “cost of basic
needs approach” (which defines an absolute poverty threshold in monetary terms) is not adopted by
the TCc authorities.
The relative poverty rate in the TCc was high compared with EU economies (Figure 1.23). While EU
averages were around 10 percent, poverty rate varied from 4.9 percent in Iceland to 20.4 percent in
Serbia. The TCc ranked among the economies with the highest relative poverty incidence, after Serbia,
Montenegro, Romania, Spain, Turkey, North Macedonia and Bulgaria. When compared with island
economies, the TCc’s relative poverty rate was significantly higher than in Iceland (4.9 percent), and
Malta (8.6 percent). Relative poverty in the TCc is also higher relative to the GCc (9 percent).
36 A more detailed assessment of the poverty impact could not be provided due to data limitations in the TCc. Box 1.3 provides a discussion of the
measurement of poverty in the TCc.
18 l
TURKISH CYPRIOT ECONOMY MACROECONOMIC MONITORING NOTE
Figure 1.23: At risk of poverty rates in the TCc and EU, 2015
At risk of poverty rates in the TCc and EU, 2015
25
20
15,4
15
10,7 10,8
10
5
0
Germany (until 1990 former…
Iceland
Finland
Netherlands
France
Norway
Austria
Latvia
TCc
Turkey
Denmark
Euro area - 19 countries
Serbia
Cyprus
Hungary
Poland
Croatia
Greece
Romania
Montenegro
Slovenia
Ireland
Bulgaria
Spain
Czechia
Belgium
Luxembourg
Switzerland
Slovakia
Sweden
European Union - 28 countries
Estonia
Italy
Portugal
Lithuania
Malta
North Macedonia
United Kingdom
Source: Eurostat
Note: Poverty rate is defined as the share of people who have equivalized adult income below 50 percent of the median
equivalized disposable income.
measures have been taken to support those in affected in Nicosia and Kyrenia (Figure 1.21,
needs, as also discussed in Box 1.1. panel a). When we analyze the agriculture
and construction sectors, lower-income
Low-and middle-income households and
households are the most affected in all regions,
young workers are expected to be the
most affected in the TCc by the COVID-19- compared with the services sector where
related recession. We complement the 2020 higher quintiles are more impacted in almost
LFS analysis using shares of employment all regions, with the exception of Trikomo/
by income quintiles and age groups from Iskele. In terms of age group, mostly young
the 2015 Household Budget Survey (HBS). workers aged 35 to 44 years are expected to
According to the results, low- and middle- bear the brunt of the crisis and, together with
income households bear most of the burden workers aged 25 to 34 years, represent more
in Famagusta, and Trikomo/Iskele while than 60 percent of the total job losses (Figure
higher-income households are most badly 1.24, Panel b).
Figure 1.24: Job losses by income quintiles, region and age groups in the TCc,
October 2019 to October 2020 in percentage of total job losses
Panel a. Job losses by income quintiles and region Panel b. Job losses by age group
Quintile Quintile Quintile Quintile Quintile
Region Total 35 33
1 2 3 4 5
30 29
TCc 100.0 23.6 19.0 29.4 18.2 10.2
25 24
Nicosia 6.0 -0.7 -0.4 1.8 1.0 4.4
Famagusta -14.7 0.4 -2.7 2.8 -4.2 -11.0 20
Kyrenia 63.8 7.6 11.2 16.4 15.2 13.5 15
Morphou -7.4 0.0 -1.0 -0.3 -3.4 -2.3 10 8
6
Trikomo/Iskele 60.5 16.9 14.2 10.4 11.7 7.4
5
1
Lefka/Lefke -8.2 -0.6 -2.2 -1.6 -2.0 -1.7
0
15-24 25-34 35-44 45-54 55-64 65 and over
Source: World Bank staff estimates based on the 2015 HBS.
l 19
IMPACT OF THE COVID-19 PANDEMIC: A PATH TO BUILDING BACK BETTER
In 2021, a gradual recovery is expected accounted for more than half of total job
in the TC economy, and employment is losses in 2020 (Figure 1.25 Panel a) - followed
expected to slightly recover by 1.2 percent, by manufacturing and construction (Figure
albeit not yet returning to pre-crisis levels. 1.25 Panel b). In relative terms, the agriculture
We simulate a model of the jobs recovery in sector would experience the largest impact,
2021 across sectors and several dimensions. with an increase of 6 percent of employment
Box 1.4 provides a brief explanation of the in the sector compared with 2020, followed
methodology. According to the model, in by industry, construction and services (Figure
2021, more than 1,500 jobs are expected to 1.25 Panel c). Employment growth in Nicosia
be created, of which 84 percent in the formal is set to contribute to more than 33 percent of
sector. This anticipated increase in jobs for 2021 the total new jobs, followed by the Famagusta
is expected to be mainly driven by the recovery and Kyrenia regions, with 27.1 and 20.5
in the trade and hospitality subsectors - which percent, respectively.
Figure 1.25: Share of job losses in 2020 and expected job increases in 2021 by sector in the TCc,
as a percentage of total job losses/increases
Panel a. Job losses in 2020 by sector Panel b. Expected Job Increases in 2021 by sector,
(%total job losses) (%total new jobs)
Agriculture
16%
Agriculture
28%
Services
42%
Services
54% Industry
Industry 25%
3%
Constructio Construction
n 17%
15%
Panel c. Expected Job Increases in 2021 (% of sectoral employment)
8%
6,1%
6%
4%
2,8% 2,5%
2% 1,2%
0,6%
0%
Source: 2020 LFS; World Bank staff estimates based on 2019 LFS.
20 l
TURKISH CYPRIOT ECONOMY MACROECONOMIC MONITORING NOTE
Box 1.4: Impact on employment of a slow rebound in 2021, using the LFS model
The projected changes in sectoral GVA from the macroeconomic model, feed into the 2019 Labor Force Survey
(LFS) to simulate the impact at a more micro level.
In order to assess the potential impact of a slow rebound in 2021 on employment, we employ Okun coefficients
by economic sector and formal/informal obtained by using the equation below and sectoral Gross Value Added
(GVA) and Labor Force Survey (LFS) employment data for the period 1983 to 2019, and calibrating the model to
the observed 2020 data from the LFS. Okun’s coefficients provide a standard relationship between employment
and output:
∆ei,t = c * ∆yi,t + εi,t
where ∆ei,t is the change in (log) employment in sector i and time t; ∆yi,t is the assumed change in sectoral
gross value added (GVA) in sector and time, and is the estimated Okun coefficient.
We complement the model with the impact on jobs by rural/urban areas, formal/informal sector (informal em-
ployees are defined as those not registered to the ‘Social Security Department’ and ‘Retirement Fund’), regions,
gender and type of worker. We use the 2015 Household Budget Survey (HBS) to estimate the impact by age group
and income quintile using annual household income per capita. Both the methodology and employment popula-
tion covered in the 2015 HBS and LFS surveys are comparable.
1.2.2 Insights from the World Bank in the ES in 2019 were then re-contacted
Enterprise Survey and invited to participate in two subsequent
follow-up COVID-19 impact surveys between
The World Bank conducted a series of June 3 and June 30, 2020 (round 1), and
Enterprise Survey (ES) in several economies, between November 11 and December 18,
including the TC economy, to measure the 2020 (round 2) for a total of 89 enterprises.
impact of the COVID-19 pandemic on the TC Box 1.5 describes the methodology in greater
private sector. For the TC economy, business detail.
owners and senior managers from 120
enterprises were interviewed between January Most enterprises in TC economy reported
2019 and May 2019 as part of the standard a significant impact on sales, with
ES. The 120 enterprises that had participated manufacturing firms reporting being the most
Box 1.5: The Enterprise Survey and its follow-ups – Methodology
Interviews were conducted in June 2020 (round 1), and between November and December 2020 (round 2) by
telephone and online. The universe of inference of the Enterprise Survey (ES) includes all registered enterprises
with five or more employees that are engaged in one of the following activities, as defined using the International
Standard Industrial Classification developed by the United Nations (ISIC Rev. 3.1): (i) manufacturing (group D); (ii)
construction (group F); (iii) wholesale and retail trade, repair of motor vehicles, motorcycles, and personal and
household goods (group G); (iv) hotels and restaurants (group H); (v) transport, storage and communications
(group I); and (iv) information technology (division 72 of group K). The universe excludes firms with 100 percent
government/state ownership and cooperatives. Enterprises are selected to participate in the ES using a stratified
random sampling methodology: all population units are classified within homogeneous groups, determined on
the basis of the size and sector of enterprises, and simple random samples are selected within each group. An
enterprise’s size is defined in terms of full-time equivalent workforce as follows: small enterprises (five to 19
employees), medium enterprises (20 to 99 employees), and large enterprises (100+ employees). The follow-up
interviews were implemented via Computer Assisted Telephone Interviews (CATI) and Computer Assisted Web
Interviews (CAWI). The reference month for most of the questions of the first round of the impact survey is May,
while October and November are the reference months for the second round, spanning two months. All the inter-
views were conducted in the Turkish language with an average duration of 23 minutes for both rounds.
In total, 89 enterprises were re-contacted to complete the second round of the follow-up surveys, of which
three had permanently discontinued their business activities. The realized sample of enterprises that complet-
ed the follow-up survey comprises 46 small enterprises, 32 medium enterprises, and eight large enterprises. In
terms of business activity, 29 enterprises are manufacturing firms, while 57 are service providers (of which 22 are
retailers and three are restaurants). Survey weights are calculated and applied to all statistics discussed below.
Weights ensure that estimates are inferences with a pre-determined level of precision to the universe of the ES.
The full dataset is available on the Enterprise Survey web portal.
l 21
IMPACT OF THE COVID-19 PANDEMIC: A PATH TO BUILDING BACK BETTER
Figure 1.26: Experienced change in sales compared with 2019, by firms’ sectors
70
61,9
57,0 % experienced decrease sales
60 54,7
% experienced increase sales
50 % no change in sales
40
PERCENTAGE
30 26,2 26,9 25,9
19,4
20 16,8
11,2
10
0
TC ECONOMY MANUFACTURERS SERVİCES
Figure 1.27: Average change in monthly sales compared with previous year for the two rounds of
the surveys (%)
TC Economy Small Medium Large Manuf. Serv.
0
% Change in sales
-10
-20
-23,6 -22,6 -22,1 -21,8
-30 -26,3 -24,4
-30,2 -28,4
-31,5 -30,9
-40
-39,2
-50
R-1 R-2
affected. Overall, the majority of enterprises with the previous year, while 11.5 percent
(56.9 percent) experienced a decrease in sales, experienced an increase. However, the impact
26.2 percent of the interviewed businesses across manufacturing firms and service
saw no change in sales on an annual basis, providers is more equal, with declines of 55.9
while the remaining 16.8 percent of firms saw and 53.3 percent, respectively.
an increase in sales. As Figure 1.26 shows,
While TC firms reported that sales decreased
among manufacturing firms the share of by almost 25 percent compared with 2019,
respondents that experienced a decrease in the gap between large enterprises and SMEs
sales (61.9 percent) is almost 7 percentage has narrowed remarkably with respect to
points higher than that of service providers the first few months of the crisis. Average
(54.7 percent). Accordingly, the share of decreases in terms of monthly sales as
firms that experienced an increase in sales measured in the second round of the follow-
is higher among service providers (19.4 up survey have reduced since May (23.6 versus
percent) compared with manufacturing firms 30.2 percent), suggesting a marginal recovery
(11.2 percent). Greek Cypriot businesses of the TC economy over the past six months
experienced similar patterns of decrease (Figure 1.27). Moreover, while in May large
in sales: overall, 54.9 percent of firms saw firms experienced smaller adverse impacts on
decreases in their monthly sales compared sales than SMEs, this result is not confirmed by
22 l
TURKISH CYPRIOT ECONOMY MACROECONOMIC MONITORING NOTE
Figure 1.28: Share of firms experiencing a decrease of weekly hours worked relative to
one year ago (%)
30 25,3
23,4
25 21,8 21,0
18,4
% of Firms
20
14,6
15
10
5
0
TC Economy Small Medium Large Manuf. Serv.
the most recent findings. Overall, this suggests large firms (-1.1 percent). Similar findings
that large enterprises were better equipped emerge in the Greek Cypriot economy, which
to face the crisis in the short term, but this is characterized by a total of 28.0 percent of
advantage compared with SMEs diminished firms reducing their workforce, and by an
over time. Overall, the average decrease in estimated overall reduction of the permanent
sales within the TC economy were higher in full-time workforce of 4.2 percent compared
magnitude compared with those registered with the pre-pandemic period. Across the TC
in Greek Cypriot economy, where the average economy, 21.8 percent of firms reported a
decrease in sales as measured in the second decrease in weekly hours worked compared
round of the follow-up interviews amounted with the pre-pandemic period (Figure 1.28).
to 15 percent compared with the same period In line with the results regarding the reduction
of the previous year. in the workforce, the number of hours worked
also decreased more markedly for smaller
One-third of TC firms reduced their workforce, firms (25.3 percent) compared with medium
and more than one-fifth cut the number of and large firms (14.6 and 18.4 percent,
weekly hours worked, with employment respectively).
expected to drop by more than 4.5 percent
in 2020. One in three TC firms (32.3 percent) The financial distress among TC firms has
cut the total number of workers compared worsened since June 2020, with firms facing
with the pre-outbreak period. In particular, increasing liquidity constraints and becoming
the average reduction of the permanent full- more likely to delay paying suppliers than
time workforce between December 2019 and other creditors. Of the firms interviewed
October/November 2020 is estimated to be in the TCc, 85.9 percent had experienced a
4.7 percent. Small firms (-6.1 percent) suffered decrease in cash flow and available liquidity
more than medium firms (-2.5 percent) and since the start of the pandemic. The condition
Figure 1.29: Share of firms delaying payments for more than one week due to COVID-19 (%) by round
R-1 R-2
80 74,7
71,6
70 65,2 68,1
60,0 60,4
60 56,4 56,5 58,4
52,0
50 41,9
% of Firms
40 36,5
30
20
10
0
TC Economy Small Medium Large Manuf. Serv.
l 23
IMPACT OF THE COVID-19 PANDEMIC: A PATH TO BUILDING BACK BETTER
Figure 1.30: Share of firms that received or expect COVID-19 pandemic-related support (%) by rounds
100
R-1 R-2
76,5
80 70,9
65,8 65,9 66,7 64,0 65,5 66,6
60,9 58,0 60,4
% of Firms
60 50,5
40
20
0
TC Economy Small Medium Large Manuf. Serv.
of reduced liquidity is confirmed by the with service provides (68.1 percent). When
finding that a substantial share of firms had facing liquidity constraints, firms were more
to postpone the payment of some of their likely to delay payments to suppliers than to
obligations. Figure 1.29 displays the share tax authorities or landlords.
of firms delaying payments to suppliers,
Similar to other economies, the TC
landlords, or tax authorities for more than
administration, with support from de-
one week due to the COVID-19 outbreak,
velopment partners, put in place different
comparing the responses to the first round of measures aimed at mitigating the economic
the survey (R-1) with those from the second effects of the pandemic. The share of firms
round (R-2): this share increased from 56.4 that received, or expect to receive, assistance
percent during the first round to 60.0 percent increased over time, from 60.9 percent in
in the second round, suggesting that liquidity June to 65.8 percent in the second round
shortages became increasingly pressing as the of the follow-up interviews with up to a
duration of the crisis lengthened. This trend total of 85.9 percent of firms experiencing
is confirmed by looking at the sub-categories, liquidity constraints (Figure 1.30). The policy
with the exception of large firms, which measures were distributed fairly equally
is the only sub-category that experienced among the various categories of the private
a reduction in the share of firms delaying sector. From the firms’ perspective, the most
payments. Manufacturers (41.9 percent in the needed measures are regarding tax relief (34.7
second round) show lower rates compared percent) and cash transfers (23.7 percent).37
Figure 1.31: Average number of months firms expect it will take to return to a normal level of sales
10 9,4
R-1 R-2
8 7,5
6,4
5,9 5,8 6,0 5,9
6 5,4 5,1
5,0
Month
4,6
4,0
4
2
0
TC Economy Small Medium Large Manuf. Serv.
37 The survey asks about the following range of policy measures: cash transfers for businesses; deferral of credit payments, utility bills, rent or mortgage,
suspension of interest payments, or rollover of debt; access to new credit; tax reductions or tax deferrals; wage subsidies; support (technical assistance
or subsidies) for adoption of digital technologies; other.
24 l
TURKISH CYPRIOT ECONOMY MACROECONOMIC MONITORING NOTE
Access to new credit (20.0 percent), the contained spread of infections, together with
deferral of payments (10.6 percent), and wage a resumption of international travel, economic
subsidies (9.4 percent) are the other types of activity is expected to start recovering during
desired measures. the summer of 2021, mostly driven by a
resurgence in tourism and industry. At the time
While TC firms expected to return to of writing this report, the TC administration
normal levels of sales in five months, about
secured supply of around 100,000 vaccines
one third expected to fall into arrears on
from two main sources, Turkey and the EU.
outstanding liabilities within six months
The vaccination program started on January
from the interviews. Firms make decisions on
15, 2021 with the creation of 27 vaccination
production, investments, workforce, and all
centers and based on a phased approach, with
other aspects of their activities based on their
the intent to vaccinate up to 300,000 people
expectations on the evolution of the crisis.
by Spring 2021. Higher-education studies are
Half of the respondents in the TCc anticipated
expected to return gradually from an online to
falling into arrears on outstanding liabilities
within the six months following the first round a face-to-face modality, with foreign students
of interviews (i.e., in the months from July to returning to the island. The gradual recovery of
December 2020). This share decreased to 30 the tourism and higher education subsectors
percent when focusing on the responses of will also help to support a recovery across the
the second round of interviews (i.e., when the wider economy. Under these assumptions,
question was about falling into arrears in the GDP growth is projected to rebound at 3.7
months from December 2020 to May 2021), percent in 2021.
pointing at a more optimistic outlook. As Figure As production and trade start to return
1.31 shows, on average, that firms expect to to normal, the current account balance is
return to their normal sales in five months, expected to narrow, while the fiscal position is
compared with the six months expected at
expected to improve. As the recovery picks up,
the time of the first round of interviews.
increased merchandise ‘imports’ are expected
With the exception of large enterprises, the
to worsen the trade of goods deficit, but the
majority of the respondents at the time of the
expected rebound in tourism and the receipt
second round of interviews were slightly more
of grants from Turkey are expected to help
optimistic regarding the period needed to get
improve the overall balance. As the exchange
back to normal (i.e., pre-pandemic) compared
rate stabilizes, the inflation rate is nonetheless
with the expectations elicited at the time of
projected to remain high. Going forward, the
the first round.
fiscal stance is expected to be challenging
1.3. Short-term Outlook and due to a decline in revenues as businesses
struggle and households suffer from weak job
the Path to Recovery creation and wage growth. Based on the draft
1.3.1 A slow recovery is expected 2021 budget, local revenues are expected
in 2021 to decrease compared with 2020, while
expenses are expected to rise driven both by
The TC economy is projected to rebound in social, goods and services and capital. Overall
2021 by less than 4 percent mainly due to a low fiscal deficit is expected to remain high, but
base effect. The 2021 forecast is based on the below 2020 level. The 2021 budget considers
assumption of vaccine distribution gathering also increasing aid in the form of grants and
pace in early 2021 in advanced economies and loans from Turkey. On March 3, 2021, the
major emerging economies, followed by other 2021 “Economic and Financial Cooperation”
developing economies later in the year. It also agreement with Turkey was signed. The
assumes that geopolitical tensions will not re- protocol foresees an amount of TL 2.5 billion
escalate in the region.38 Assuming a smooth – which reaches TL 3.25 billion with the
vaccination roll-out process and a more carry-over balance from 2020 - to be used to
38 World Bank. 2021. Global Economic Prospect. January 2021. Washington, DC: World Bank.
l 25
IMPACT OF THE COVID-19 PANDEMIC: A PATH TO BUILDING BACK BETTER
upgrade TC infrastructure and provide support 1.3.3 Path to building back better
to the private sector affected by the COVID-19
The COVID-19 crisis has highlighted some of
pandemic as well as the implementation of
the weaknesses of the TC health system, the
new projects such as e-governance. Sustained
lack of strategic planning for health services
by the signed protocol, capital expenditures,
and the need for improved collaboration
along with private investments, are expected
on health issues. The performance of the TC
to increase and support the overall recovery.
public health system has been significantly
1.3.2 Risks to the baseline are stretched by the COVID-19 crisis. Moreover,
due to the limited health infrastructure in the
tilted toward the downside TCc, a significant number of people obtain
Although, over the medium term, growth is health services in RoC or in Turkey.
expected to return to pre-crisis levels, both The TC health system needs to better tackle
domestic and external risks to this outlook new COVID-19 cases and to be ready for the
remain high. The extent of the recovery and roll-out of the vaccine. For example, the new
subsequent growth will depend first of all pandemic hospital that opened recently still
on how the pandemic evolves, the reactive requires doctors, and technical and professional
capacity of the economic actors, and the staff in order to operate effectively. To manage
effectiveness of the policy support. As fiscal better in the coming months, priorities should
space shrinks, the deterioration of ‘public’ be given to: (i) prioritize the hiring process;
finances and the rise of NPLs may also (ii) improve the availability and frequency of
constitute sources of risk. In terms of external PCR tests; (iii) ensure effective inspections on
risks, due to the high dependence on tourism the implementation of social distancing rules
and higher education, and a delayed recovery and necessary preventive measures; and (iv)
in Turkish economy, this would further weigh secure vaccines and an action plan for their
on the domestic recovery. In addition, pressure distribution.
on the exchange rate may result in increasing Better collaboration through the Bicommunal
prices for ‘imports’ and domestic goods. On top Technical Committee on Health and mobility
of the risks brought by the ongoing COVID-19 across the Green Line are also needed.
crisis, domestic instability, the under execution The Bicommunal Technical Committee on
of planned budget and investment under the Health would need to continue its efforts
2021 protocol, and the resurgence of tensions to exchange epidemiological data related
in the Eastern Mediterranean may also to the COVID-19 pandemic in a timely and
endanger the recovery. Although the adoption accurate manner. Based on the evidence and
of a common long-term economic reform the guidance of the Bicommunal Technical
program in April 2020 is a step in the right Committee on Health, the parties could work
direction and is expected to help the dialogue together toward the normalization of the
with TC development partners, the extent of crossing of people over the Green Line by
ownership from the new administration is not also adopting innovative solutions to facilitate
yet clear. contact tracing. New measures to implement
‘contactless exchange’ also could be put in
Although downside risks dominate, the place to enhance the crossing of goods over
outlook is also associated with some upside the Green Line. As also suggested in the latest
risks. The hope for the potential reopening Cyprus Report of the UN Secretary General39,
of settlement talks may boost consumer and restrictions on crossings have been directly
investor confidence on the way toward an affecting both Greek Cypriots and Turkish
integrated island and a more prosperous near- Cypriots; with the rollout of the vaccination
term future. a normalization process on crossings should
be ensured. As discussed in Section 1.2,
39 https://www.securitycouncilreport.org/atf/cf/%7B65BFCF9B-6D27-4E9C-8CD3-CF6E4FF96FF9%7D/s_res_2561.pdf
26 l
TURKISH CYPRIOT ECONOMY MACROECONOMIC MONITORING NOTE
Box 1.6: Boost-150
Boost-150 was prepared in collaboration with business associations [and with support from the EU and the World
Bank team] to identify immediate actions in four key areas to ensure a swift economic recovery:
• Tackling regulatory bottlenecks that could hold back private sector-led recovery. Specific measures have been
identified that will make it easier to: start a business; simplify and streamline ‘import’ procedures; improve the
framework for insolvency; improve contract enforcement; simplify tax payments; and improve access to credit.
Some of these measures are particularly relevant during the current crisis and its aftermath to facilitate firms
encountering liquidity challenges and restructuring.
• Improving access to clean efficient, reliable and affordable energy. Improving energy efficiency is expected to
benefit the TC economy by enhancing private sector productivity and competitiveness Beyond energy efficien-
cy, strengthening the transparency, governance and accountability of the power sector.
• Supporting the agriculture sector, which remains characterized by very low productivity despite significant
‘public’ financial support. Beyond the launch of an ‘agriculture recovery plan’, as discussed in Chapter 2, re-
forming agricultural subsidies is critical to spurring economic growth and strengthening the sector’s resilience
to external shocks.
• Strengthening the social protection system to better identify and protect the most vulnerable. Specific short-
term actions could be taken to develop better targeting practices in the social welfare system. At the same time,
it is also essential to facilitate the creation of more job opportunities and formalize and develop an employabil-
ity program for vulnerable groups, particularly for youth and women.
restrictions on crossings had also a significant for a sustainable economic recovery and
impact to those workers from TCc employed long-term growth, particularly by enhancing
in RoC, and vice versa. At the time of writing private sector development. Continuing
this report, residents from the two sides are with the simplification of the trade regime
allowed to cross daily without quarantine for across the Green Line, cutting red-tape
work and study reasons, provided that they and administrative burdens, and improving
submit a valid PCR test carried out within a contract enforcement and access to credit, will
specified timeframe before crossing. make it easier for firms to do business and help
them to become more productive. Decoupling
The current crisis can provide an opportunity agricultural subsidies from production,
to address a wider set of structural challenges addressing reported corrupt practices,
and institutional weaknesses that are and facilitating the exit of non-competitive
crucial to unlock private sector dynamism, firms will help reduce the inefficient use of
facilitating both a swifter economic recovery resources in the agriculture sector. Other key
and more sustainable long-term growth. areas of intervention in the agriculture sector
This opportunity also comes at a time when include technological upgrading and skills
the TC administration has embarked upon an development. Finally, enhancing planning and
inclusive process to design a common long- brand-building, enabling stronger coordination
term economic reform program. The ambitious both within the private sector and with the
plan provides a solid foundation to guide and TC administration, and reforming the subsidy
direct new initiatives and reform efforts as program for tourism will also be important.
part of mid-term development strategies and
Strengthening human capital remains a key
associated short-term action plans. In this
priority, and reforms in higher education
context, the first step would be to implement
and in the social welfare system are needed.
Boost-150. Boost-150 was an action plan that
In the higher education subsector, not only a
comprises measures deemed critical by the
strategy for the subsector is recommended,
private sector to support economic recovery
but also measures to improve the quality of TC
(see Box 1.6).
higher-education institutions. A review of the
Short term efforts should be built on and funding system of these institutions would help
complemented with medium term measures to make the system more sustainable through
l 27
IMPACT OF THE COVID-19 PANDEMIC: A PATH TO BUILDING BACK BETTER
the balanced involvement of the private to invest further in energy efficiency, and
sector, with an emphasis on an institutional diversifying energy generation toward
performance-based and innovation-oriented greener sources. With the long-term objective
approach. Meanwhile, reforms of the of creating an environmentally friendly energy
social welfare system will need to combine sector that enjoys low costs and security of
active labor market measures to improve supply, the main reforms include strengthening
employability, including of female workers and the performance of the Cyprus Turkish
youth, with the establishment of a sustainable Electricity Authority (KIB-TEK), reviewing and
and just welfare system capable of identifying modernizing the regulatory framework, and
and protecting the most vulnerable people, further promoting renewable energy.
through effective poverty reduction assistance
Finally, there is a need to replenish fiscal
and enhanced governance.
buffers in the medium term after their
With the intent to improve infrastructure depletion to mitigate the impact of the
and climate resilience, it is also paramount COVID-19 pandemic. Fundamental reforms
Table 1.2: Key economic indicators of the TC economy
2016 2017 2018 2019 2020e 2021f
Real economy
Real GDP, % change 3.6 5.4 1.3 0.2 -13.8 3.7
Agriculture, % volume change -7.3 4.9 2.6 2.7 -4.0 3.8
Industry, % volume change 7.3 4.4 -12.4 -14.6 -13.4 8.0
Services, % volume change 3.7 6.5 3.2 1.4 -15.0 2.8
CPI (pa), year average, % change 8.3 15.1 22.9 20.5 11.7 11.8
Fiscal accounts
Revenues, % GDP 34.1 33.5 29.8 34.6 37.1 35.0
Expenditures, % GDP 35.9 37.5 29.8 35.9 42.5 39.7
Capital, % GDP 2.9 3.8 2.4 3.5 3.0 3.6
Fiscal Balance, % GDP -1.7 -4.0 0.1 -1.3 -5.4 -4.7
excluding foreign aid, % GDP -6.1 -8.8 -2.4 -4.0 -10.5 -10.1
Local Balancea, % GDP -1.1 -2.9 0.9 1.9 -4.1 -3.1
Financing, percent GDP 1.7 4.0 -0.1 1.3 5.4 4.7
External, % GDP 1.9 1.5 0.2 0.0 2.8 1.8
Internal, % GDP -0.2 2.4 -0.3 1.3 2.6 3.0
Public and public guarantees debt, % GDP 147.9 138.7 110.8 96.2 105.9 99.7
Internal, % GDP 48.5 41.5 33.4 29.9 33.9 33.4
Balance of Payments
Current Account Balance, % GDP 7.5 7.4 5.5 5.3 4.8 4.7
Excl. foreign grants, % GDP 3.1 2.5 5.2 2.5 -0.3 -0.6
Net merchandise exports, % GDP -37.8 -42.0 -45.3 -40.2 -26.8 -27.9
Net services exports and other transfers, % GDP 45.3 49.4 50.8 45.5 31.6 32.6
Source: ‘SPO’, ‘Statistics Office’ and World Bank staff.
Note: e=estimate; f=forecast
a
Local Balance is computed as the difference between local revenues (total revenues, excluding grants from Turkey) and local
expenditures (total expenditures, excluding the ones financed by Turkey).
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TURKISH CYPRIOT ECONOMY MACROECONOMIC MONITORING NOTE
would need to be advanced in the areas productivity and enhancing competitiveness,
of ‘public’ finance management, debt helping to better exploit the EU single market
management, tax policy, the pension system, and diversify the economy.
and ‘public’ investment management. For With a resolution of the Cyprus problem, the
example, rebalancing expenditures for greater benefits of a larger economy, increased trade,
‘public’ investment, while preserving the
and greater investment will create many
provision of services and improving ‘public’
jobs across the island and lead to higher
investment management, are expected to
incomes to all Cypriots. With the support
improve productivity in an efficient way. This
of the UN and international community, an
would also have a positive impact on private
informal “five plus UN” meeting between
sector development. Efforts to upgrade the tax
the leaders of the two Cypriot Communities
administration, while broadening the tax base
and the Guarantor Powers is expected to
and simplifying the tax system, are expected
be held in the Spring of 2021. A settlement
to boost revenue collection and easy the fiscal
accompanied by supportive policies and
constraints.
institutions could boost economic growth
Promoting these structural reforms in in the island, with average annual real GDP
the TCc would not only contribute to growth rate increasing by an additional 0.4 of
economic recovery and long-term growth a percentage point and 1.8 percentage points
but would also fit with the objective of in the GC and TC economies, respectively. The
implementing reforms aligned with the
normalization of relations and harmonization
EU acquis communautaire and narrowing
of tax systems and product standards are
the development gap between the two
communities in Cyprus. Pursuing structural expected to triple intra-island commerce
reforms will help the TC economy prepare and increase competitiveness of firms in the
to become an effective and prosperous international markets. Reduced economic
part of a united Cyprus, lowering the cost uncertainties are expected to allow for greater
associated with diverging the socioeconomic investment. Poor and vulnerable groups and
structures of the two communities. Such a women are expected to benefit particularly
reform agenda would bear substantial fruit in from enhanced economic opportunities from
terms of spurring fair competition, improving a reunited Cyprus.40
40 UN-World Bank. 2020. Economic Impact of a Settlement in Cyprus through the Gender Lens. Nicosia. 2020.
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IMPACT OF THE COVID-19 PANDEMIC: A PATH TO BUILDING BACK BETTER
Chapter 2: Special Issue: Improving the Effectiveness
of Public Funds in Agriculture
2.1 Trends in Turkish Cypriot provides direct employment to 4.1 percent of
the workforce on 12,600 farms that manage
Agricultural Development 130,000 hectares of land. The share of the
Agriculture in the TCc can play a significant agriculture labor force in total employment in
role both socially and economically in the the TC economy is higher than the GC level, but
recovery period. The sector is important slightly lower than in the EU-27 (4.4 percent)
for local food production and for supporting (Figure 2.2).
decent livelihoods in rural areas and
Despite its potential, the contribution of
generating incomes that are comparable
agriculture to GDP growth remains small.
to those in urban areas. Beyond these
Agriculture added a mere 0.2 of a percentage
functions, agriculture accounts for nearly 90
point to total GDP growth in 2019 (Figure 2.3),
percent of total goods ‘exported’ (2019) and
while industry contributed 0.8 of a percentage
is therefore an important source of foreign-
point and the services sector contributed 15.8
exchange earnings. Dairy and citrus and their
percentage points to GDP growth, respectively.
derivatives are the flagship products. The
The GC agriculture sector saw stronger
agriculture sector has also important linkages
growth of 3.2 percent in 2019, resulting from
with other sectors in the TC economy, such
targeted investments in recent years aimed at
as manufacturing and hospitality. While the
increasing sheep and goat production.43
TC economy has gradually shifted to become
a services-driven economy, the share of Numerous constraints hold back growth in
agriculture in GDP has remained consistently the agriculture, including low productivity.
above 5 percent41 (Figure 2.1). In comparison, Average yields for most crops lag behind
the role of agriculture for the TC economy yields in the EU-27 countries. For example, the
is larger than in the GC economy, where average yields of the TCc’s major cereal crop,
agriculture accounts for 2 percent of GDP, barley, which covers over 64 percent of the
and in the EU-27, where agriculture accounts arable land, reached only one-quarter of the
for just 1.6 percent of GDP.42 TC agriculture EU’s average yields during the past decade.44
Figure 2.1: TC agriculture share of GDP out- Figure 2.2: Share of TC agricultural workforce
weighs the EU-27 and the RoC matches the EU-27
Agriculture, forestry, and fishing, value added Employment in agriculture
6 6
5 5
% of total employment
4 4
% of GDP
3 3
2 2
1 1
0 0
TCc ROC EU27 TCc ROC EU27
2008 2019 2008 2019
Source: ‘State Planning Organization’, World Bank Development Indicators, 2020.
41 ‘State Planning Organization’, October 2020.
42 European Commission: Statistical Factsheet Cyprus, June 2020.
43 The EU-27 average value of agricultural output grew by 1.5 percent in 2019.
44 Eurostat, 2020.
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TURKISH CYPRIOT ECONOMY MACROECONOMIC MONITORING NOTE
Box 2.1: Benchmarking the Turkish Cypriot agriculture sector
Benchmarking the TC economy against comparators allows an assessment of the economy’s performance and
the identification of factors that differentiate it from its peers. TC benchmarks are determined by taking into ac-
count the share of agriculture in GDP, employment, GDP growth, incomes, capital investments, and agricultural
productivity in the EU-27 and the GC economy. The indicators of the EU-27 represent an average figure, while
larger variations among member states also exist. However, while the benchmarking is performed at an aggregat-
ed level, it still provides a useful international comparison, and guidance for sharing knowledge and experience.
These low yields are primarily due to the growth has also resulted in stagnation of
challenging agro-climatic conditions, including most farmer incomes in previous years,
frequent droughts, the suboptimal use of which in turn affects the capacity of farmers
production factors, outdated technologies to invest, for example, in health, education,
and deficient farming practices. Furthermore, and more critically in the modernization
livestock production in the TCc has been and technological upgrading of their farms.
impacted by the outbreak of animal diseases In the EU-27 and in the RoC, farm incomes
over the past two years, which has required have already converged with non-agricultural
the culling of local cattle, sheep and goat incomes, and thereafter developed in line
herds. In 2017 and 2018, brucellosis led to with wages and salaries of other sectors of the
slaughtering of 18.5 percent of the sheep and economy.46
goat population and 12.5 percent of cattle.45
As a result, milk production declined by about The TC agriculture sector shows a low
20 percent. propensity toward investments. Gross
investments in the TC agriculture were very
Most farms in the TCc are family-run farms that at just 4.6 percent of agricultural gross value
heavily depend on incomes from agriculture. added (GVA) in 2018.47 In comparison, the EU-
The 2015 TC Household Survey revealed that, 27 invested 31 percent of agricultural GVA in
despite a higher growth rate of farm incomes, physical assets,48 which is a key determinant
non-agricultural salaries and wages were 35 of productivity and competitiveness. During
percent higher, representing a significant the past decade, agriculture output in the
income gap (Figure 2.4). Low agricultural TCc has been subject to much higher volatility
Figure 2.3: Agricultural growth is slow and Average
Figure annual
2.4: Farm income
incomes of households
lag behind wages
GVA Growth
volatile by economic
and salaries activities
30
25
Percentage points
20 40000
15 30000
Turkish lira
10 20000 Industry
Services
5 10000
Construction
0 0 Agriculture
-5 2008
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2015
Agriculture Industry Services GDP growth % Agriculture Construction Services Industry
Source: State Planning Organization, 2020.
45 Brucellosis is a widespread disease of farm animals caused by bacteria genus Brucella.
46 European Commission: EU Agriculture Factsheet, June 2020.
47 State Planning Organization, 2020.
48 European Commission: CAP context indicators 2014-2020. 28. Gross Fixed Capital Formation in Agriculture. https://ec.europa.eu/info/sites/info/
files/food-farming-fisheries/farming/documents/cap-indicators-doc-c28_2018_en.pdf.
l 31
IMPACT OF THE COVID-19 PANDEMIC: A PATH TO BUILDING BACK BETTER
Figure 2.5: Share of high-value agri-food stronger demand for food, notably through
‘exports’ declining restaurant services. However, growth in local
food consumption has reduced agri-food
140,0
exports by 33 percent since 2015. While
120,0 ‘exports’ of primary agriculture products, such
100,0
as pomegranate or artichokes, have remained
stable, the value of processed agri-food
‘exports’, such as halloumi/hellim, has been
Million USD
80,0
60,0
declining (Figure 2.5). The share of higher-
valued processed agri-food products in the
40,0
TC ‘exports’ (75 percent) in 2015 was about
20,0 the same as in the GC economy (78 percent),
and exceeded the EU-27 (64 percent), but
0,0
2015 2016 2017 2018 2019 growth in domestic consumption in the TCc
Agricultural products Processed Agricultural Products Others
has reduced this share to 46 percent today. As
the dependency on ‘imports’ for animal feed
Source: 2015–18: SPO Macroeconomic Indicators, 2018;
and high-valued processed foods grows, so
2019: Own calculations using ‘Department of Trade’ Export/ the negative agri-food trade balance has been
Import Statistics, 2020. expanding.
than the EU-27, also hinting at a lack of Weak compliance with food safety and
capital investments in more climate-resilient quality standards prevents the TCc from
technologies and drought-resistant crop accessing the higher-value EU market. Agri-
varieties. food producers and processors have difficulty
in seizing new market opportunities despite
Domestic consumption has increased and the proximity of the EU single market. While
impacted agri-food availability for ‘export’. the EU is one of the largest ‘importers’ of fruits
Tourism and higher education in the TCc have and vegetables, and demand from the EU
an important influence on agriculture as they continues to grow, the TCc has been unable to
drive domestic demand for food. Since 2014, benefit from accessing the EU internal market.
the number of foreign students enrolled in The gap with the EU in terms of food and feed
Turkish Cypriot higher-education institutions safety, quality, sanitary, and phytosanitary and
has increased by 41 percent. The Turkish environmental standards poses and presents
lira depreciation has also led to an increase not only a threat to consumer health, but also
in Green Line crossings by 28 percent since presents a significant barrier to the EU’s single
2014. The agriculture sector benefits from market, with over 500 million consumers and
Figure 2.6: Direct income support outweighs capital investments
1,4
1,2
1
Percent of GDP
0,8
0,6
0,4
0,2
0
2015 2016 2017 2018 2019
Direct income support Capital investments Total spending by 'MoA'
Source: ‘State Planning Organization’, Macroeconomic Indicators 2018; ‘Ministry of Agriculture’.
32 l
TURKISH CYPRIOT ECONOMY MACROECONOMIC MONITORING NOTE
high purchasing power. As a consequence, TC The ‘public’ support to TC agriculture lacks
‘exports’ of livestock products are currently effective prioritization, serves all farmers
excluded from the EU market. and practically all commodities. The support
program comprises a mix of area payments,
2.2 Turkish Cypriot livestock-headage payments, input and
Agriculture Policy and its ‘import’ subsidies, and regulated producer
Impact prices in the dairy subsector that are loosely
modelled on the EU support system from the
The TC agriculture support system has become 1980s and early 1990s. ‘Export’ subsidies in
increasingly difficult to sustain. With budget the dairy, citrus, and potato sub sectors remain
costs growing, financial inflows from Turkey in place in the TCc, despite international
becoming smaller and more irregular, and commitments in the Agreement on Agriculture
effective support to farmers declining, there of the World Trade Organization49 to phase out
is a strong case for rethinking the TC ‘public’ such subsidies by 2015 in order to create fairer
support system to the agriculture sector. The competition. Especially in livestock production,
current system is vulnerable to shocks, as some the prices for cattle, sheep and goat products
of the key determinants of its performance are highly regulated, and frequently adjusted
originate offshore—such as the Turkish lira by the central administration to shield TC
depreciation, climate variability, and now farmers and consumers from volatile markets
the impacts of the COVID-19 pandemic—and caused by depreciation-led inflation. In
underline the need for a paradigm shift in the order to cover farmers’ production costs and
current support system. lower the prices paid by processors and end
consumers, a portion of farmers’ revenues
Reflecting its commitment to agriculture, comes from direct income support payments
the TC administration spends relatively linked to the output produced.
large ‘public’ resources on agriculture, but
most of these resources go toward direct The ‘public’ support program has resulted in
income support rather than investments and a high dependency on direct income support,
incentives to increase agricultural productivity while agricultural productivity remains
and competitiveness. During the period from relatively low. Dependency on direct income
2015 to 2019, the TC administration spent on support (Producer Support Estimate50 is 26
average 1.11 percent of GDP on agriculture, percent) is higher compared with farmers in
more than three times the share of spending Turkey (20 percent), the EU-27 (19 percent)
on agriculture in the RoC (0.33 percent) and or the United States (9 percent). At the
same time, productivity of many agricultural
the EU-27 average (0.36 percent). The level of
products is reported only one quarter of that
spending has increased by 45 percent since
in the EU, as stated in Section 2.1.
2015 in absolute terms. The lion’s share of this
spending is funded through the local budget, The ‘public’ agriculture support program in
while Turkey and the EU contribute to nearly the TCc has become increasingly costly and
10 percent of the outlays in agriculture. The TC unsustainable. The program has provided a
administration allocates 68 percent of the total safe and profitable environment, particularly
agricultural budget, or 0.58 percent of GDP, to for dairy producers and, as a result, milk
go toward direct income support. Only 0.29 production in TCc has grown steadily. In turn,
percent of GDP is spent on capital investments subsidized milk volumes have grown, leading to
for farms and on agri-food processing (Figure growth in dairy-related budget expenditures.
2.6). In addition, the sharp depreciation of the
49 WTO: Marrakech Agreement, Article 8 on Export Competition Commitments, https://www.wto.org/english/docs_e/legal_e/14-ag_02_e.
htm#articleVIII
50 OECD: PSE is an indicator of the annual monetary value of gross transfers from consumers and taxpayers to support agricultural producers.
l 33
IMPACT OF THE COVID-19 PANDEMIC: A PATH TO BUILDING BACK BETTER
Figure 2.7: Turkish lira-euro exchange rate and Figure 2.8: The purchasing power gap is
inflation widening
7 18
16
6
14
5
12
Inflation rate %
Exchange rate
4 10
3 8
6
2
4
1
2
0 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Annual Turkish inflation rate Lira per Euro
Source: World Bank Development Indicators and OFX.com, 2020.
Turkish lira has required the TC administration now being transmitted to them through an
to compensate for high inflation to maintain unsustainably designed dairy program.
stable incomes during the past decade, with
the cost for the euro increasing from TL 2/€1 Besides the unsustainable costs of the ‘public’
support, the delivery of the TC agricultural
in 2010 to TL 6 to 7/€1 in 2019. As the TC
support program itself is unduly costly and
administration tries to keep pace with the
burdensome. The bureaucratic procedures
consequences of the volume increases and
that farmers face in accessing ‘public’ support
depreciation, the agricultural support program
are complex. Within the TC agriculture
transfers the market risk from producers
administration, 40 percent of staff, divided
and consumers to the TC budget (Figure
among 11 different departments or attached
2.7). However, even as the TC administration
institutions (e.g., marketing boards) with 42
continues to support frequent increases in
branch offices in the five districts, are involved
domestic milk prices, farmers are less able in the administration of the TC agricultural
to purchase euro-denominated goods with support program. This results in farmers
income generated through milk sales (Figure having to submit different subsidy applications
2.8). to different entities depending on the type of
While TC farmers have been shielded from the support measure, and this has made the
market price risks, they now face the risks administration of the TC agricultural support
associated with ‘public’ support volatility. program both costly and burdensome.
Given the limited ‘public’ resources and
2.3 Shifting Agricultural
irregular financial contributions to the
agriculture budget made by Turkey, the TC Support toward Public Goods
administration has had to make frequent The TC administration needs a paradigm shift
adjustments to its subsidy program in recent in ‘public’ support, as its current framework
years, revising prices and support levels to is too costly and not effective in achieving the
keep up with Turkish lira depreciation-led objectives of the ‘Agriculture Master Plan’. This
inflation. Even so, the earning power of milk shift calls for the design and implementation
has fallen steeply relative to internationally of a smarter ‘public’ support program that
priced goods. Moreover, to contain costs, the uses the available ‘public’ resources in a more
TC administration has taken steps that limit targeted and efficient way for forward-looking
the share of produced milk eligible for direct agricultural development. A greater focus on
income support. In short, the protection ‘public’ goods, such as infrastructure, and
afforded to farmers from market vagaries has veterinary and phytosanitary support services,
become frayed, and the consequences of the research and innovation, and agricultural
external Turkish lira-depreciation shock are extension, along with investment support
34 l
TURKISH CYPRIOT ECONOMY MACROECONOMIC MONITORING NOTE
to help farmers to invest at the farm level, decoupled payments are production-neutral
could contribute to improving productivity, and thus perceived as an agricultural policy
strengthening competitiveness, improving instrument that does not distort production,
resilience to shocks, and enabling producers consumption and international trade. For this
and processors to better meet the demands of reason, decoupled payments are consistent
local consumers and access export markets. with domestic support of the WTO Green Box.
Access to the EU single market can be expected
The TC administration could model its to drastically improve the outlook for the TC
agriculture support program on the EU’s agriculture sector with regards to growth, jobs
Common Agricultural Policy (CAP) to achieve and incomes.
its strategic objectives (Box 2.2), while
enabling smooth access to the EU single Modeling after the EU CAP could also bring
market in the future. The TCc is not obliged to many positive spillovers for the TC agriculture
align its agriculture policy with the CAP prior sector. To start with, the policy measures
to any future settlement, but the experience of the CAP are designed to promote, among
of recent accessions show that early other objectives, agricultural productivity
preparedness helps countries to succeed in and competitiveness. Aligning the TC support
the EU single market. Aligning the TC support system with the principles of the CAP would
program with the architecture of the EU’s also enable farmers to take decisions based
acquis communautaire51 would also meet the on the developments on the local and global
criteria stipulated under the WTO. The CAP’s markets. Decoupling farmer support from the
Box 2.2: Overview on the EU Common Agricultural Policy
The EU Common Agricultural Policy (CAP) is one of the oldest and comprehensive policies of the EU. At nearly 40
percent of the EU’s budget, it is by far the largest budget item. While the member states benefit every year from
financial inflows of about €50 billion into their agriculture sectors, it represents a transfer of just 0.36 percent
of GDP. During its nearly 60-year existence, the CAP has undergone several waves of reform, trying to respond
to various market drivers and growing public expectations: it shifted from food security in the 1960s, market
support in the 1970s and 1980s, producer support in the 1990s, before becoming “greener” in the past decade.
The CAP has responded to global commitments, such as adhering to the trade agreements of the WTO, climate
change goals of the COP21, broad aspects of sustainable development based on the UN Sustainable Develop-
ment Goals (SDGs), or geopolitical developments, such as migration.
With the objectives of becoming competitive on the global markets, producing healthy foods at affordable prices,
managing natural resources in a sustainable manner, and improving living conditions in the rural areas, the CAP
has two policy instruments, also called pillars:
1. Pillar I consists of fully EU-funded support measures to stabilize markets in case of economic or cli-
mate-induced volatilities, and direct payments to secure farmers’ incomes; and
2. Pillar II is the EU’s co-financed Rural Development Policy, which aims to improve competitiveness through
on- and off-farm investment support, promote agri-environmental farming, compensate for agriculture in
areas of natural constraints, and support income diversification.
The CAP is designed based on a three-layered architecture that was introduced with the CAP reform in 2003 and
still applies (Figure 2.9). At its core, the CAP is decoupled income support (Direct Payments Pillar), which is a pro-
duction-neutral direct payment to eligible farmers. Today’s CAP is centered around decoupled direct payments,
which account for nearly two-thirds of the EU’s agriculture expenditure. Instead of granting payments by target-
ing production of particular commodities (e.g., cereals, milk, cattle), which led to market imbalances in the past,
decoupled direct payments provide income support independent of the type and volume of production. Second,
farmers have to comply with a set of safety and quality standards, as a pre-condition for the receipt of decoupled
payments (cross-compliance). International observers would agree that the EU standards in food safety, animal
health, hygiene and agri-environmental production are high, which benefits the positioning of agri-food produce
on global markets. Finally, the Rural Development Pillar provides grants to farmers to stimulate on- and off-farm
investments.
51 The acquis communautaire constitutes the EU body of law.
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IMPACT OF THE COVID-19 PANDEMIC: A PATH TO BUILDING BACK BETTER
Proposed Architecture for Future TC Agricultural Support
Figure 2.9: The basic CAP architecture as model for the TCc
Implementation
mechanism
Improves Competitiveness
Modernize agriculture/agri-food
Boost knowledge & skills
Environmental sustainability
Young farmers, income diversification
Cumulative benefits of
Rural Development
standards and thus
competitiveness
Enhances Market-Orientation
Pha sing-out production barriers
Decoupled Direct Payments Publ ic goods support
Cross compliance Closes Standards-Gap with EU
Conditionality for receipt of
Decoupled payments
Applicable to farmers & agricultural area Improves production standards for
healthy, safe and quality foods
1
Source: World Bank design, 2020.
type and amount of production could allow for greater market orientation. The instruments
a transition to a market-oriented sector that of the CAP could be well suited to supporting
does not abandon current producers. While a the TC agriculture sector to increase its
farmer would receive the same level of support productivity and better respond to market
as before (as of a certain baseline date), developments. Three areas that are integrated
the farmer could make business decisions in the CAP support regime are of particular
based on market developments and new interest:
opportunities. It would also allow the farmer to (i) Productivity: Drawing on EU-13
generate income from market-based activities (newer member states) experiences,
in local and global markets, instead of being implementation of decoupled payments
dependent on output-based subsidies. Such is generally associated with agricultural
a system would make the agricultural budget productivity growth (World Bank’s EU
more predictable and, while not eliminating Regular Economic Report, 2018). Decoupled
exchange-rate risk entirely, it would reduce the payments help reduce farmers’ income risk
overall budget risk for the TC administration. and mitigate credit constraints, allowing
Moreover, the subsidy reform could facilitate them to invest more. Decoupled payments
a better response to actual market demands also have a positive effect on agricultural
thanks to the combination with compliance employment through improvements in
rules and an investment strategy promoting agriculture productivity. Finally, decoupled
better food safety and quality, sustainable land payments are associated with a decrease in
management and animal health. Regardless income inequality at the local level.
of the final policy design, a well-thought-out (ii) Competitiveness: Including compliance
implementation scheme, with stakeholder rules as a condition for the receipt of
consultations, is crucial for a successful shift in decoupled direct payments has been
policy. shown to encourage farmers to adopt
environmentally sustainable farming
Experience from the EU-27 has shown that practices, and achieve higher animal health
the implementation of CAP measures can and food safety standards. A support
improve productivity, competitiveness and program in the TCc could be designed
diversification, as well as contribute toward in such a way as to also encourage the
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TURKISH CYPRIOT ECONOMY MACROECONOMIC MONITORING NOTE
adoption of improved agronomy and land (ii) Define a reference value for payment
management practices, better animal calculations. Mexico, for example, also
husbandry practices, and the adoption of transitioned toward decoupled support,
new technologies that improve food safety and payments were based on price support
and quality. programs that were already in place and
on-farm production estimates from a rapid
(iii) Market Orientation: The EU Rural
survey of crops covered by the programs.
Development Policy, reflected in the CAP’s
Similarly, EU payments are largely based
Rural Development Pillar, has shown that
on historic production-coupled support.
grants for productive investments at the
In the TCc, payments could be based on
farm level can help in strengthening the
average direct income support payments,
competitiveness of agricultural producers
but other possibilities could be considered,
through modernizing farm operations and
for example, an average based on producer
adjusting production models, including
herd size or acreage managed.
post-harvest facilities, to better meet the
demands of the market. (iii) Agree to a reference period. A common
approach to decoupling is to base the
For the TC administration, it will be important
eligibility of payments on past activities.
to calibrate and sequence the different
The definition of a past period can appear
reform components in a way that minimizes
arbitrary and could have distributional
disruptions to farmers. A well-structured
consequences. Averaging over three to
reform should aim to minimize the number
five years would help to mitigate the
of those who might be negatively affected by
distributional effects.
the reforms through complementary social
protection measures, while also focusing (iv) Prepare transitional arrangements.
on those farmers who have the capacity to With the objective of enabling a smooth
benefit from the new policy measures to transition into a new ‘public’ support
enable them to increase their productivity and policy approach, a transitional period (e.g.,
competitiveness. five years) has been shown to improve
the acceptance of the reform by farmers.
Most importantly, lessons from Turkey
During the transitional period, upholding
highlight that decoupled systems can only
the level of income support is important
succeed if they are well understood and are in order to compensate farmers who have
supported by key stakeholders. The following made investments. The payments during
activities have been applied in the EU member the transitional period could also help
states and in Mexico, for example, prior to farmers to exit the sector or to restructure
introducing decoupled income support: and modernize.
(i) Identify a roster of potentially eligible (v) Define eligibility criteria. Use of
farmers. A decoupled payment system environmentally sound land management,
delivers payments to a set of eligible food safety, and animal health practices
farmers. Doing so requires establishing are often required as a precondition
clear and transparent eligibility rules that for the receipt of decoupled payments,
can be used to build a roster of payment usually referred to as a cross-compliance
recipients. Sometimes the questions of condition. These cross-compliance
“who is a farmer?” and “what is a farm?” requirements are an ideal opportunity to
can be complicated. For example, an improve a broad set of standards required,
unanticipated eligibility question that often for example, to access high-value export
arises is whether the support payments markets.
go to farmers or to landowners. In the
case of the EU, the effective manager (vi) Identify commodities of strategic
of a farm is eligible to apply and receive importance. For strategically important
decoupled support that is independent of commodities in which the TCc has a
the ownership of the land. comparative advantage, coupled support
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IMPACT OF THE COVID-19 PANDEMIC: A PATH TO BUILDING BACK BETTER
could be earmarked. For example, the stakeholder support. It is therefore critical
Republic of Cyprus has selected sheep to phase and calibrate the different reform
and goat production as strategically components in a way that is not disruptive for
important for the production of halloumi/ farmers.
hellim cheese.
The reform may follow a phased approach.
(vii) Streamline ‘public’ service delivery. Starting with one sub-sector and phasing-
Policies are only as effective as the in the reform components would enable a
institutions that deliver them. By smooth transition and learning experience for
integrating the 11 entities involved with a comprehensive reform. A full-fledged reform
TC agricultural administration into one could be a burden for the administration and
entity, farmers would encounter a one-
challenge the planning perspective of farmers
stop-shop solution, which would help
in the short to medium term. The dairy sub-
reduce the budgetary and administrative
sector would be a good starting point, as it
burden. Rethinking the purpose of the
three marketing boards for dairy (SÜTEK), absorbs the lion’s share of the agriculture
cereals (TÜK), and citrus products budget (53 percent), leaving little room for
(CYPFRUVEX) might also be needed, as alternative expenditures. A well-thought-out
their market interventions prevent the strategy for the dairy sub-sector, which also
free movement of goods. provides the key ingredient for the flagship
‘export’ product of halloumi/hellim, should
(viii) Provide transparency and accountability. fit inside the aspirations of the agriculture
Designing a robust and transparent sector and the TC economy. In alignment with
administration to track and disperse
architecture of the EU CAP and preserving
direct payments, and manage investment
budget neutrality, the following policy options
grants is of paramount importance. Any
could be considered for the dairy sub-sector.
program charged with issuing ‘public’
funds to farmers should have a robust i) By transforming historic price support for
payments system in place that verifies milk, other forms of direct income support,
program eligibility and tracks payments. In as well as ‘export’ subsidies into income
the EU, managing the system of payment payments that are decoupled from the type
entitlements under the Integrated and amount of production enables farmers
Administration and Control System (IACS) to better respond to market conditions;
has proven to be successful.
ii) In case farmers are able to meet stringent
Stakeholder ownership is vital to the long-
environmental, food safety and animal
term success of any policy reform. Any
welfare standards, they could be rewarded
successful set of reforms must be based on
with a top-up premium;
a broad understanding of the policy and
the support of key stakeholders. Transitions iii) Farmers could also be rewarded through
in policy impose real costs, with potential high quality production of sheep and
winners and losers, especially in a subsector goat milk in view of responding to the
where production and investment decisions requirements stipulated in the PDO for
have been shaped by long-standing program halloumi/hellim; and
incentives. The experience in Turkey offers a
cautionary example of how a set of reforms iv) Introducing a grant support system
that included decoupled support failed to take to promote investments that aim at
hold because the conditions of implementing modernization of farms and post-harvest
reform were not ideal and lacked broad facilities, such as dairies.
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Contact Person: Goran Tinjic, Program Manager for Southern Europe, g�njic@worldbank.org