The availability of data regarding the performance of the Turkish Cypriot economy is limited. However, should efforts to resolve the Cyprus problem intensify, the economic dimension will prove to be a key parameter for the viability of a reunified Cyprus.

The World Bank publishes an interesting analysis of the Turkish Cypriot economy on an annual basis. The data indicated growth of 6.4 per cent in 2024, following growth of 7.3 per cent in 2023. Key drivers include the construction sector, which benefits from foreign demand, particularly from Turkey and various other countries. The tourism sector is also gaining momentum, with Turkey being the main market. At the same time, higher education continues to be a significant driver of the economy despite its recent relative stagnation.

The contribution of Green Line trade is also noteworthy, mainly through sales of Turkish Cypriot products (primarily construction materials and edibles) to the areas controlled by the Republic of Cyprus, accounting for approximately 10 per cent of total exports. It should be noted that Green Line trade remains well below its true potential due to institutional and political constraints.

The labour market is characterised by relatively low unemployment and increasing dependence on foreign workers, especially in low-skilled occupations.

A key element of the Turkish Cypriot economy is its excessive dependence on Turkey in terms of production, exports, labour market and financing, including financing of the “public” sector.

One aspect of this dependency is the use of the Turkish lira as the “official” currency. A crucial side effect is imported inflation, which reached 84 per cent in 2023 and fell to 53 per cent in 2024. The Turkish lira is subject to continuous devaluations which fuel inflation, erode employees’ incomes and negatively affect competitiveness. The Central Bank of Turkey’s policy of tackling inflationary pressures by keeping interest rates high has not, so far, proven to be an effective remedy.

As for “public” finances, relatively large deficits over time have been observed (currently almost 10 per cent, excluding aid from Turkey). The deficits are covered by Turkey. Another characteristic feature of the fiscal situation is the constant fluctuations in revenues and expenditures resulting from corresponding fluctuations in funding from Turkey.

The banking sector presents, based on published data, a relatively balanced picture. However, there is a lack of in-depth analysis of banks’ exposure to non-performing loans in the construction and “public” sectors, as well as to foreign exchange risks.

Despite the growth of recent years, the prospects for the Turkish Cypriot economy remain uncertain. High inflation is negatively affecting the competitiveness of key sectors of the economy, including tourism. It is also believed to have a dampening effect on visitor spending from the government-controlled areas.

Moreover, the Turkish Cypriot economy’s development model is considered highly distorted, characterised by excessive reliance on construction and tourism, partly related to casino activities.

Upside risks are mainly linked to a possible improvement of the economic situation in Turkey, particularly in combating inflation.

Ultimately, the failure to resolve the Cyprus problem creates an ever-widening gap in the standard of living between Greek Cypriots and Turkish Cypriots due to competitiveness and sustainability challenges within the Turkish Cypriot economy. At the same time, it intensifies dependence on Turkey, as a “last resort” solution for addressing structural problems. The prolonged lack of a political solution ultimately harms the Turkish Cypriot community, preventing the enhancement of its competitiveness and, consequently, its standard of living.