Cyprus

A former British colony, Cyprus was declared an independent Republic on 16 August 1960, following years of resistance to British rule. It is the third largest sland in the Mediterranean and this strategic location has been a major factor shaping Cyprus history throughout the centuries. 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. In 1974, Turkey's military intervention resulted in the occupation of more than a third of the island. In 1983, the Turkish-held area declared itself the "Turkish Republic of Northern Cyprus," but it is recognized only by Turkey.

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 Republic of Cyprus control, and is suspended in the areas administered by Turkish Cypriots. At present, every Cypriot carrying a Cyprus passport has the status of a European citizen; however, EU laws do not apply to north Cyprus.

The Central Bank of Cyprus was established on the 27 June, 1963 and has the sole right for the issue of notes and coins in the Republic. The monetary unit for the Republic was the Cyprus pound which, was divided into 1000 units. The new cent system, which was introduced in the third quarter of 1983, was also based on the Cyprus pound which was divided into 100 units known as cents.

Cyprus Coinage since 1878

In 1878 Cyprus was placed under British rule and the copper piastre was adopted as the currency unit with a fixed rate of 180 to the British gold sovereign. During the period 1879-1900 a bronze coinage was introduced consisting of three denominations: piastre, half and quarter. Foreign gold coins formed also the currency medium. But in 1900, after an Order in Council, the British gold sovereign became the sole legal tender for unlimited amounts: silver was limited to 540 copper piastres and bronze coins to 27 copper piastres. During this year new denominations were placed into circulation, the 18, 9, 4 1/2 and 3 piastres silver coins.

In 1928, the 50th anniversary of the British rule, a new silver denomination was issued, the 45 piastre piece. This was partly a commemorative coin, but it was also intended for circulation. In 1934 the bronze coins were replaced by smaller cupro-nickel coins, but during the wartime (1942-1945) bronze coins of 1 and 1/2 piastre were struck again. In 1947 the 18 and 9 piastre were denominated in shillings, the metal of which was cupro-nickel.

The currency system changed in 1955 from shillings - piastres to a three-place decimal currency system and new coins were struck in the denominations of 100, 50, 25, 5, 3 mils. All coins of the Colonial Era portray British Queens and Kings. They carry the portrait of Queen Victoria, Edward VII, George V, George VI and Elisabeth II. During the period 1960-1972, the pound was pegged to sterling and the first coinage of the Republic was issued in 1963 comprising five coins in the denominations of 100, 50, 25, 5 mills and 1 mill. The obverse of these coins bears the Coat of Arms of the Republic and the year of issue. Following the collapse of the Bretton Woods system in 1972 this link was terminated and the pound was pegged to the US dollar for a short period of time. The Cypriot currency was subsequently linked to an import-weighted currency basket during the period 1973-1984 and to a trade-weighted currency basket during the period 1984-1992.

Making inroads to the Eurozone

Cyprus's aspirations to become a member of the European Union led to a reconsideration of the choice of currency basket in 1992. As a result, on 19 June 1992 the Cyprus pound was unilaterally pegged to the ecu, with a central rate of CY£1 = €1,7086 and fluctuation margins of +/-2,25%. From a static point of view, the ecu basket did not fully reflect Cyprus's composition of commodity trade. Nonetheless the larger share of trade in services was with EU countries. Furthermore the choice of the ecu anchor was in part necessitated by the objective to tie the pound to a currency representing a group of countries whose primary goal was price and macroeconomic stability. Besides reinforcing economic ties with the EU, the choice of exchange rate policy was also driven by the desire to maintain price and macroeconomic stability in Cyprus as well as to safeguard the international competitiveness of the island's economy.

Following the successful ecu-peg policy, the Cyprus pound was pegged to the euro on 1 January 1999, the first day of the introduction of the new European currency. The central parity rate was maintained at CY£1 = €1,7086. Initially, the fluctuation margins were also maintained at ±2,25%. On 1 January 2001, however, wider bands of ±15% were introduced in order to enable the Central Bank to absorb any shocks from potential destabilising capital movements and to deter speculative capital flows, in the context of capital account liberalisation. At the same time, the narrower bands of ±2,25% were temporarily maintained in order to anchor prices and expectations.

On 1 May 2004 Cyprus became a full member of the European Union. The compliance with the acquis communaitare, which included among other things the liberalisation of the capital account, was accomplished very smoothly. On 2 May 2005 the Cyprus pound joined ERM II, at the pre-existing central parity of CY£1 = € 1,7086 (€1 = CY£ 0,585274) and at the pre-existing fluctuation margins of ± 15%. The participation of the pound in ERM II confirmed its sustainability, therefore satisfying the appropriate prerequisite for interest rate convergence. Indeed, in two consecutive meetings of the Monetary Policy Committee in May and June 2005, interest rates were reduced by 50 basis points in each case.

For further information, Central Bank of Cyprus, Nicosia, Cyprus, Tel.: +357 2271 4423, Fax: +357 2237 8151, E-mail:GeorgeSyrichas@centralbank.gov.cy, web: http://www.centralbank.gov.cy/