Historical background

A former British colony, Cyprus became independent in 1960 following years of resistance to British rule. Tensions between the Greek Cypriot majority and Turkish Cypriot minority came to a head in December 1963, when violence broke out in the capital of Nicosia. Despite the deployment of UN peacekeepers in 1964, sporadic intercommunal violence continued forcing most Turkish Cypriots into enclaves throughout the island. In 1974, a Greek Government-sponsored attempt to seize control of Cyprus was met by military intervention from Turkey, which soon controlled more than a third of the island. In 1983, the Turkish-held area declared itself the "Turkish Republic of Northern Cyprus" ("TRNC"), but it is recognized only by Turkey. The election of a new Cypriot president in 2008 served as the impetus for the UN to encourage both the Turkish and Cypriot Governments to reopen unification negotiations. In September 2008, the leaders of the Greek Cypriot and Turkish Cypriot communities started negotiations under UN auspices aimed at reuniting the divided island. The entire island entered the EU on 1 May 2004, although the EU acquis - the body of common rights and obligations - applies only to the areas under direct government control, and is suspended in the areas administered by Turkish Cypriots. However, individual Turkish Cypriots able to document their eligibility for Republic of Cyprus citizenship legally enjoy the same rights accorded to other citizens of European Union states.

Economic overview

The area of the Republic of Cyprus under government control has a market economy dominated by the service sector, which accounts for 78% of GDP. Tourism, financial services, and real estate are the most important sectors. Erratic growth rates over the past decade reflect the economy's reliance on tourism, which often fluctuates with political instability in the region and economic conditions in Western Europe. Nevertheless, the economy in the area under government control has grown at a rate well above the EU average since 2000. Cyprus joined the European Exchange Rate Mechanism (ERM2) in May 2005 and adopted the euro as its national currency on 1 January 2008. An aggressive austerity program in the preceding years, aimed at paving the way for the euro, helped turn a soaring fiscal deficit (6.3% in 2003) into a surplus of 1.2% in 2008, and reduced inflation to 5.1%. This prosperity will come under pressure in 2009, as construction and tourism slow in the face of reduced foreign demand triggered by the ongoing global financial crisis. Growth is expected to slow to less than 2%, which would be its lowest level since 2003. As in the area administered by Turkish Cypriots, water shortages are a perennial problem; a few desalination plants have been added to existing plants over the last year and are now on line. After 10 years of drought, the country received substantial rainfall from 2001-04. Since then, rainfall has been well below average, making water rationing a necessity.