In the past 20 years, the economy has shifted from agriculture to light manufacturing and services. The service sector, including tourism, contributes 76.2% to the GDP and employs 72.0% of the labor force. Industry and construction contribute 19.3% and employ 22.7% of labor. Manufactured goods account for approximately 58.0% of domestic exports. Agriculture and mining is responsible for 4.4% of GDP and 5.3% of the labor force. Potatoes and citrus are the principal export crops.

Following a classical pattern, growth rates have gradually begun to decline as the Cypriot economy has matured over the years. The average rate of growth went from 6.1% in the 1980s, to 4.4% in the 1990s to 3.4% from 2000 to 2004. In 2004, growth picked up to 3.6%, from 1.9% in 2003. Unemployment was fairly constant at 3.6% in 2004, while inflation declined to 2.3% in 2004 from 4.1% the year before. As in recent years, the services sectors, and tourism in particular, provided the main impetus for growth.

Trade is vital to the Cypriot economy: the island is not self-sufficient in food, and has few natural resources. The trade deficit increased by 18.4% in 2004, reaching $4.6 billion.

Cyprus must import fuels, most raw materials, heavy machinery, and transportation equipment. More than 50% of its trade is with the European Union, particularly with the United Kingdom.

The economic outlook remained bright in 2005: growth was expected to remain strong (around 4.0%), with low unemployment (less than 4.0%), and low inflation (around 2.3%). Equally important, public finances were expected to continue improving, with the fiscal deficit forecast to decline to 2.9% of GDP in 2005, from 4.2% in 2004, and 6.3% in 2003.

The inflow of approved foreign direct investment reached $1.22 billion in 2004, compared with $1.0 billion in 2003, and $1.06 billion in 2002. The sectoral allocation of this investment in 2003 was as follows: manufacturing 0.8%; construction 0.8%; trading 14.6%; hotels and restaurants 0.2%; transport and communications 11.1%; financial intermediation 24.7%; real estate and business 41.0%, other services 6.7%. In terms of geographical origin, the majority of new investments in 2003 (58.1% of total value) originated from the EU; 31.1% originated from other European countries; 4.6% from the United States of America; and the remaining 6.2% from various other countries.

The gradual liberalization of foreign direct investment regulations has made Cyprus progressively a more attractive destination for U.S. investors in recent years. Traditionally, U.S. direct investment in Cyprus consisted of relatively minor projects, mostly by Greek-Cypriot expatriates. New investment projects with U.S. involvement in 2003-2004 included a well-known U.S. coffee retailing franchise, an equestrian center, a hair products manufacturing unit, a firm trading in health and natural foodstuffs, and a financial services company. It should also be noted that the abolition of restrictions on investment originating from the EU allows U.S. investors to benefit as well, provided they work through subsidiaries in the EU.

Cyprus has good business and financial services, modern telecommunications, an educated labor force, good airline connections, a sound legal system, and a low crime rate. Cyprus's geographic location, tax incentives and modern infrastructure also make it a natural hub for companies looking to do business with the Middle East, Eastern Europe, the former Soviet Union, the European Union, and North Africa. As a result, Cyprus has developed into an important regional and international business center.

Principal U.S. exports to Cyprus include office machines and data processing equipment, electrical equipment, tobacco and cigarettes, passenger cars, and wheat. Principal U.S. imports from Cyprus consist of Portland cement, clothing, hunting rifle cartridges, canvas, dairy products, and fresh fish.

Bilateral business ties also encompass a healthy exchange in services. In 2004, the inflow of services (from the United States to Cyprus) was $585.9 million, against an outflow (from Cyprus to the United States) of $346.7 million, according to Government of Cyprus statistics.

The partial lifting of travel restrictions between the two parts of the island in April 2003 has allowed movement of persons--almost seven million crossings to date--between the two parts of the island with no significant interethnic incidents. In August 2004, new EU rules allowed goods produced in the north to be sold in the south provided they met EU rule of origin and sanitary/phyto-sanitary requirements. In May 2005, the Turkish Cypriot "authorities" adopted a new regulation "mirroring" the EU rules and allowing certain goods produced in the south to be sold in the north. Suppliers of imported products in the government-controlled area cannot directly serve the Turkish Cypriot market and vice versa. Despite these efforts, direct trade between the two communities remains very limited.

Turkey remains, by far, the main trading partner of the area administered by Turkish Cypriots, supplying 60% of imports and absorbing over 40% of exports. In a landmark case, the European Court of Justice (ECJ) ruled on July 5, 1994 against the British practice of importing produce from the area based on certificates of origin and phytosanitary certificates granted by "TRNC" authorities. The ECJ decision stated that only goods bearing certificates of origin from the Government of Cyprus could be recognized for trade by EU member countries. The ECJ decision resulted in a considerable decrease of Turkish Cypriot exports to the EU--from $36.4 million (or 66.7% of total Turkish Cypriot exports) in 1993 to $13.8 million in 2003 (or 28% of total exports). Even so, the EU continues to be the second-largest trading partner of the area administered by Turkish Cypriots, with a 25% share of total imports and 28% share of total exports. Total imports increased to $853.1 million in 2004 (from $477.7 million in 2003), while total exports increased to $61.5 million (from $50.6 million in 2003). Imports from the U.S. reached $7.1 million in 2004, while exports to the U.S. were less than $10,000.

Assistance from Turkey is crucial to the Turkish Cypriot economy. Under the latest economic protocol (signed in 2005), Turkey undertakes to provide Turkish Cypriots loans and financial assistance totaling $450 million over a three-year period for public finance, tourism, banking, and privatization projects. Turkey also provides millions of dollars annually in the form of low-interest loans to mostly Turkish entrepreneurs in support of export-oriented industrial production and tourism. Total Turkish assistance to Turkish Cypriots since 1974 is estimated to exceed $3 billion.

* Section refers to the government-controlled area unless otherwise specified.