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Cypriot Pound: Definition, Transition to Euro, and Economic Implications

Last updated 03/15/2024 by

Alessandra Nicole

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Summary:
The Cypriot pound (CYP) served as the official currency of Cyprus until its adoption of the euro (EUR) in 2008. Initially pegged to the British pound (GBP), it later shifted to the U.S. dollar before transitioning to a currency basket. The division of Cyprus into Greek and Turkish sectors further complicated its monetary landscape, with the Turkish lira (TRY) prevailing in the north while the euro dominates in the south.

Understanding the cypriot pound

The Cypriot pound (CYP) held the status of the official currency of Cyprus until the country’s accession to the European Union (EU) in 2004 and subsequent adoption of the euro (EUR) as its legal tender on January 1, 2008. Managed and issued by the Central Bank of Cyprus, the Cypriot pound had a rich history dating back to its introduction by the British in 1879, during the island’s colonial period under the Ottoman Empire.

Pegging of the cypriot pound

Initially, the Cypriot pound maintained a fixed exchange rate with the British pound (GBP). However, in 1972, Cyprus shifted its peg to the United States dollar (USD) before further diversifying its pegging mechanism. From 1973 onwards, the currency was pegged to a currency basket that reflected the nation’s import composition. This basket was later recalibrated in 1984 to align with Cyprus’s trading activities.

Transition to the euro

The decision to transition to the euro marked a significant milestone for Cyprus. A fixed exchange rate of 0.585274 Cypriot pounds per euro was established, facilitating a seamless shift to the new currency. The euro’s adoption as legal tender not only streamlined financial transactions within Cyprus but also enhanced economic integration with the broader European Union.

Impact on economic indicators

Cyprus, a nation characterized by its dynamic economic landscape, experienced notable GDP growth and inflation rates in the years preceding its transition to the euro. In 2019, the country achieved a GDP growth rate of 3.23%, accompanied by a modest inflation rate of 0.56%. These indicators underscored Cyprus’s resilience and economic stability amidst regional challenges.

A divided cyprus

Cyprus’s complex political history, marked by ethnic divisions and external interventions, has profoundly influenced its socio-economic dynamics. The island’s partition into Greek and Turkish sectors, stemming from historical grievances and geopolitical rivalries, continues to shape its economic landscape.

Historical context

Following its annexation by Britain in 1925, Cyprus witnessed persistent tensions between its Greek and Turkish communities. Calls for reunification with Greece or Turkey, coupled with sporadic outbreaks of violence, underscored the deep-seated ethnic divisions within the island.

Political divisions

The political schism culminated in a coup attempt in 1974, triggering Turkey’s military intervention and subsequent occupation of the northern part of Cyprus. Despite diplomatic efforts to broker peace and reunification, the island remains divided, with the United Nations overseeing a demilitarized buffer zone between the Greek and Turkish sectors.

Monetary implications

The division of Cyprus extends to its monetary realm, with the Turkish Republic of Northern Cyprus utilizing the Turkish lira (TRY) as its official currency. Despite its unrecognized status, the northern sector accommodates multiple currencies, reflecting its reliance on tourism and cross-border trade.
WEIGH THE RISKS AND BENEFITS
Here is a list of the benefits and the drawbacks to consider.
Pros
  • Stability: The Cypriot pound provided stability to Cyprus’s economy during its tenure as the official currency.
  • Integration: Adoption of the euro facilitated economic integration with the European Union, enhancing trade and investment opportunities.
  • Streamlined Transactions: The transition to the euro simplified financial transactions within Cyprus and reduced currency exchange costs.
Cons
  • Transition Costs: The switch from the Cypriot pound to the euro incurred administrative and logistical expenses for businesses and financial institutions.
  • Loss of Sovereignty: Adoption of the euro relinquished some control over monetary policy to the European Central Bank, limiting Cyprus’s ability to respond independently to economic challenges.
  • Market Uncertainty: The eurozone crisis exposed Cyprus to financial vulnerabilities, leading to a bailout package and economic restructuring measures.

Frequently asked questions

What was the exchange rate between the Cypriot pound and the euro?

The fixed exchange rate was set at 0.585274 Cypriot pounds per euro during the transition period to the euro.

How did the division of Cyprus affect its economic development?

The division created economic disparities between the Greek and Turkish sectors, hampering efforts for comprehensive economic development and integration.

Has there been any progress towards reunification?

Despite diplomatic initiatives and peace talks, a lasting resolution to Cyprus’s division remains elusive, with political complexities and historical grievances hindering progress.

Key takeaways

  • The Cypriot pound (CYP) served as Cyprus’s official currency until 2008 when it transitioned to the euro (EUR).
  • Initially pegged to the British pound (GBP), the Cypriot pound later shifted to the U.S. dollar before adopting a currency basket pegging mechanism.
  • Cyprus’s division into Greek and Turkish sectors further complicated its monetary landscape, with the Turkish lira prevailing in the north and the euro in the south.

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