13 Aug 2017: Retailers lose out if crossing points close

January-July this year, Turkish Cypriots spent €14.7 million using plastic cards south of the Green Line, while Greek Cypriots spent €5.1 million in the north, according to data from JCC Payment Systems. Another €1.8 million was spent by Greek Cypriots in Turkey.

JCC has been producing statistics on card spending across the Green Line for 10 years: enough to see some patterns.

Greek Cypriot and Turkish Cypriot card spending is my shorthand for JCC’s “use of Turkish credit cards in Cyprus” and “use of local credit cards in occupied areas and Turkey”. Since 2011, JCC has reported the data spent in the north separately from money spent in Turkey.

The first clear pattern is that Turkish Cypriots spend far more with their cards in the south than the other way round and always have done so.

In 2016, they spent €26.1 million for the whole year, whereas Greek Cypriots spent €7.4 million—less than a third as much.

The number of Turkish Cypriot transactions was also higher. Total card transactions by Turkish Cypriots amounted to 482,630, whereas total transactions by Greek Cypriots was 70,651.

One can see from these figures that Turkish Cypriots also spend on average more per transaction: €54 per transaction compared with €45 for the south.

TC spending up 55% in two years

What is even more interesting is that, despite the fall in the Turkish lira, Turkish Cypriot spending has been rising rapidly in the past couple of years.

In 2014, spending south of the Green Line was just €16.8 million. As noted above, in 2016 it was €26.1 million. In two years, therefore, it has grown 55%.

If you convert Turkish Cypriot spending back into Turkish lira, using the average exchange rate of the lira against the euro for each year, you can see that Turkish Cypriot spending has actually been rising every single year since records began.

By comparison, spending by Greek Cypriots in the north has been more volatile. It fell for three consecutive years in 2011-13, jumped by 33.8% in 2014 and then rose by a more steady 5.1% in 2015 and 8.9% in 2016.

It is only in the past two years that spending has risen so much. There are two possible reasons for the recent rise in spending. The first is that prices in the north are rising faster than the fall in the lira. For example, the lira fell by 32.0% against the euro between 2013 and 2016.

Cumulative inflation in northern Cyprus during the same period was 34.7%. This means that, on average, prices rose a little higher than one would expect just from the exchange rate. One can imagine that prices of certain goods rose even higher.

A second reason is that the south was experiencing deflation during this same period, owing to both recession and low oil prices. Between 2013 and 2016, prices south of the Green Line actually fell by a cumulative 2.6%. This will have made goods in the south more competitive relative to the north.

Add the fact that the south has greater competition anyway, because it is more open to the rest of the world, and you can see why Turkish Cypriots flock to the shops on Saturdays.

Broadbased spending

Another feature of Turkish Cypriot spending is that it is more broadbased than Greek Cypriot spending. In 2016, the top category was supermarkets (€6.3m), accounting for 24% of the total. This was followed by clothing (€5.3m), “other” (which I suspect includes IKEA and Jumbo) at €3.6m, and DIY and household items at €3.1m.

For Greek Cypriots, the top category in 2016 was hotels (€3.2m) and accounted for 43% of the total. The only other two categories of any size were “Entertainment” (probably mainly casinos) at €1.8m, and airlines, at just €786,393.

Airline spending saw a 37.5% drop compared with the previous year, no doubt because of concerns about security following the attempted coup in July last year.

In sum, a broader range of businesses benefit from Turkish Cypriot card spending in the south than Greek Cypriot card spending in the north and these businesses also earn around three times more in total than businesses in the north do.

EU rules

Lately, and especially since the collapse of negotiations to solve the Cyprus problem, there have been calls from some Greek Cypriot circles to close the crossing points, so that no one can cross north or south.

This would take us back to the pre-2003 days, when the Turkish army stopped most people from crossing. Indeed, a bikers’ group already succeeded in halting pedestrian and vehicle traffic for around an hour and a half across several crossings earlier this month.

Clearly, if this became a permanent feature, it would put a significant dent in the Greek Cypriot retail sector.

It would also put the Republic of Cyprus government at loggerheads with the EU. The EU recognises the whole island (minus the British bases) to be the territory of the republic of Cyprus.

While the acquis communautaire (body of EU law) is suspended in “the areas of the Republic of Cyprus in which the Government of the Republic of Cyprus does not exercise effective control”, the free movement of persons still applies.

This is made clear in the preamble to the Green Line Regulation (Council Regulation 866/2004), which says: “While taking into account the legitimate concerns of the Government of the Republic of Cyprus, it is necessary to enable EU citizens to exercise their rights of free movement within the EU”.

Article 10 of the same regulation says: “Any change in the policy of the Government of the Republic of Cyprus on crossings of persons or goods shall only become effective after the proposed changes have been notified to the Commission and the Commission has not objected to these changes within one month”.

In other words, it is the European Commission that makes the rules here, not the government. The retailers can breathe a sigh of relief.

By Fiona Mullen, Director, Sapienta Economics Ltd