EN    EN EN 
 
EN    EN  EUROPEAN COMMISSION 
Brussels, 12.5.2010 
SEC(2010) 590 final 
  
REPORT FROM THE COMMISSION 
Cyprus 
 
Report prepared in accordance with  Article 126(3) of the Treaty 
 
 
EN 2   EN REPORT FROM THE COMMISSION 
Cyprus 
 
Report prepared in accordance with  Article 126(3) of the Treaty 
 
1. T HE APPLICATION OF THE STABILITY AND GROWTH PACT IN THE CURRENT CRISIS 
SITUATION  
Many EU countries are presently facing genera l government deficits above the 3% of GDP 
reference value set in the Treaty. The often stro ng deterioration in the deficit as well as the 
debt positions must be seen in the context of the unprecedented global financial crisis and 
economic downturn. Several factors are at play . First, the economic downturn brings about 
declining tax revenue and rising social bene fit expenditure (e.g. unemployment benefits). 
Second, recognising that budgetary policies have an important ro le to play in the current 
extraordinary economic situation, the Commission called for a fiscal stimulus in its November 
2008 European Economic Recovery Plan (EERP), endorsed by the European Council in December. The Plan explicated that the stimulus should be differentiated across Member 
States to reflect their different positions in  terms of public finance sustainability and 
competitiveness and should be reversed when economic conditions improve. Finally, several 
countries have taken measures to stabilise the financial sector, some of which impact on the 
debt position or constitute a risk of higher defic its and debt in the future, although some of the 
costs of the government support co uld be recouped in the future. 
The Stability and Growth Pact requires the Comm ission to prepare a report such as the present 
one whenever an actual or planned deficit of a Member State exceeds the 3% of GDP 
reference value. This report, which represents the first step in the “excessive deficit procedure” (EDP), analyses the reasons for the breach of the reference value with due regard 
to the economic background and all other relevant  factors. The amendmen ts to the Stability 
and Growth Pact in 2005 aimed specifically at ensuring that in partic ular the economic and 
budgetary background was fully taken into account in all steps in the EDP. This means for 
instance that, if an “excessive deficit” is deemed to exist, adequate attention needs to be paid 
to the economic background and outlook when making recommendations on the pace of the correction. In this way, the Stability and Growth Pact provides the framework supporting 
government policies for a prompt return to so und budgetary positions taking account of the 
economic situation. 
2. L
EGAL BACKGROUND  
This report, which assesses recent and current budgetary developments in Cyprus and reviews 
the short- and medium-term pr ospects in the light of overa ll economic conditions and policy 
action taken by the government, is prepared acc ording to Article 126(3) of the Treaty on the 
Functioning of the European Union (TFEU). 
 
EN 3   EN Article 126 TFEU lays down an ex cessive deficit procedure (EDP).  This procedure is further 
specified in Council Regulation (EC) No 1467/97 “on speeding up and clarifying the 
implementation of the excessive deficit procedure”1, which is part of the Stability and Growth 
Pact. According to Article 126(2) of the Treat y, the Commission has to monitor compliance 
with budgetary discipline on the basis of two cr iteria, namely: (a) whether the ratio of the 
planned or actual government deficit to gross domestic product (GDP) exceeds the reference 
value of 3% (unless either the ratio has declined substantially and continuously and reached a 
level that comes close to the reference value; or, alternatively, the excess over the reference value is only exceptional and te mporary and the ratio remains close to the reference value); 
and (b) whether the ratio of government debt  to GDP exceeds the reference value of 60% 
(unless the ratio is sufficien tly diminishing and approachi ng the reference value at a 
satisfactory pace). 
Article 126(3) stipulates that, if a Member St ate does not fulfil the requirements under one or 
both of these criteria, the Commi ssion has to prepare a report. Th is report also has to “take 
into account whether the government deficit ex ceeds government investment expenditure and 
take into account all other relevant factors, including the medium-term economic and 
budgetary position of the Member State”. 
Immediately following its accession to the EU in May 2004, an EDP for Cyprus was initiated 
by the Commission
2 with the adoption of a report under Article 104(3) of Treaty Establishing 
the European Community (TEC) in view of a deficit of 6.3% of GDP in 2003, i.e. above the 
reference value of 3% of GDP. In July 2004, following recommendations from the Commission, the Council decided, in accordance w ith Article 104(6) TEC, that an excessive 
deficit existed in Cyprus and addressed a r ecommendation in accordance with Article 104(7) 
TEC to Cyprus with a view to bringing the excessi ve deficit situation to an end as rapidly as 
possible and by 2005 at the latest. In July  2006, following an overall assessment which 
showed that the deficit was reduced to 2.4% of  GDP in 2005, the Council decided to abrogate 
its decision on the existence of an exce ssive deficit under Ar ticle 104(12) TEC. 
According to data notified by the authorities in March 2010
3 and subsequently validated by 
Eurostat4 the general government deficit in Cy prus reached 6.1% of GDP in 2009, thus 
exceeding the 3% of GDP reference value, wh ile general government gross debt stood at 
56.2% of GDP, below the 60% of GDP reference value but on a rising trend. 
                                                 
1 OJ L 209, 2.8.1997, p. 6. The report also takes into account the “Specifications on the implementation 
of the Stability and Growth Pact and guidelines on the format and content of stability and convergence 
programmes”, endorsed by th e ECOFIN Council of 10 November 2009, available at 
http://ec.europa.eu/economy_finance/sgp/legal_texts/index_en.htm. 
2 Documents related to the excessive defic it procedure for Cyprus are available at: 
http://ec.europa.eu/econo my_finance/sgp/deficit/c ountries/index_en.htm  
3 According to Council Regulation (EC) No 479/2009, Member States have to report to the Commission, 
twice a year, their planned and actual government deficit and debt levels. The most recent notification 
of Cyprus can be found at:  http://epp.eurostat.ec.europa.eu/portal/page/portal/g overnment_finance_statistics/procedure/edp_notific
ation_tables 
4 Eurostat news release No 55/2010 of 22 April 2010. 
 
EN 4   EN Table 1 : General government deficit and debt a 
 2005 2006 2007 2008 2009 2010 2011 
      COM CY COM CY 
General government 
balance -2.4 -1.2 3.4 0.9 -6.1 -7.1 -6.0 -7.7 -4.5 
General government 
gross debt 69.1 64.6 58.3 48.4 56.2 62.3 61.0 67.6 63.2 
 
Note : 
a In percent of GDP.  
Source : Eurostat, Commission services’ spring 2010 foreca sts and Stability Progra mme of Cyprus 2009-2013. 
The figure for the 2009 deficit provides prima facie  evidence on the existence of an excessive 
deficit in Cyprus in the sense of the Trea ty and the Stability and Growth Pact. The 
Commission has therefore decided to initiate th e excessive deficit procedure for Cyprus with 
the adoption of this report. Section 3 of the re port examines the deficit criterion and section 4 
the debt criterion. Section 5 deals with public investment and other relevant factors.  
This report takes into account the Commission services’ spring 2010 for ecast, released on 5 
May.  
3. D EFICIT CRITERION   
In 2009, the general government deficit reached 6.1% of GDP. Well in ex cess of 3% of GDP, 
the deficit is not close  to the Treaty reference value.  
The excess over the 3% of GDP reference value is exceptional . In particular, it does result 
from a severe economic downturn in the sense of the Treaty and the Stability and Growth 
Pact. According to data published by the statisti cal service of Cyprus, re al GDP contracted in 
the year 2009 by 1.7%. An adverse external environment, as a consequence of the financial 
crisis and the global downturn – in particul ar, the worsening growth outlook of the key 
trading partners (euro area, UK and Russia)- and weak domestic de mand weighed strongly on 
growth in 2009. In particular, exports of bot h goods and services declined due to lower 
external demand and a weak perf ormance of tourism. Shipping services also declined with the 
collapse of world trade. Investment recorded  a strong correction, amidst a fall in foreign 
demand for housing, low capacity util isation and the restructuring of corporate balance sheets. 
In parallel, high household indebtedness together with tight lending conditions, a worsening 
labour market and negative confidence effects led to a decline in private consumption. 
Government consumption was the only de mand component supporti ng economic activity.  
 
EN 5   EN Table 2 : Macroeconomic and budgetary developments a 
 2005 2006 2007 2008 2009 2010 2011 
      COM CY3 COM CY3 
Real GDP (% change) 3.9 4.1 5.1 3.6 -1.7 -0.4 0.5 1.3 1.5 
Potential GDP (% change)  3.9 3.3 2.9 2.6 2.2 1.1 2.8 0.7 2.8 
Output gap (% of potential 
GDP) -0.6 0.2 2.4 3.4 -0.7 -2.1 -2.4 -1.6 -2.5 
General government 
balance -2.4 -1.2 3.4 0.9 -6.1 -7.1 -6.04 -7.7 -4.5 
Primary balance 1.1 2.1 6.4 3.7 -3.6 -4.4 -3.7 -4.8 -2.1 
One-off and other 
temporary measures 0.9 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.1 
Government gross fixed 
capital formation 3.1 3.0 2.9 3.0 4.1 4.1 4.1 4.1 4.1 
Cyclically-adjusted balance -2.2 -1.3 2.5 -0.4 -5.8 -6.3 -5.2 -7.1 -3.6 
Cyclically-adjusted primary 
balance 1.3 2.0 5.5 2.4 -3.3 -3.6 -2.8 -4.2 -1.1 
Structural balance b -3.1 -1.3 2.5 -0.4 -5.8 -6.3 -5.2 -7.1 -3.6 
Structural primary balance 0.5 2.0 5.5 2.4 -3.3 -3.6 -2.9 -4.2 -1.2 
 
Notes : 
a In percent of GDP unless specified otherwise. 
b Cyclically-adjusted balance excluding on e-off and other temporary measures. 
3 Output gap (in % of potential GDP) and cyclically-adjuste d balance according to the programme as recalculated by 
Commission services on the basis of the information in the programme. 
4 For 2010, the updated Stability Programme of Cyprus reported a planned deficit of 6.0% of GDP compared to 6.2% of GDP 
included in the March 2010 EDP notification. 
Source : Eurostat, Commission services’ spring 2010 foreca sts and Stability Progra mme of Cyprus 2009-2013. 
The excess over the 3% of GDP re ference value is not temporary  in the sense of the Treaty 
and the Stability and Growth Pact. The budgeta ry forecasts as provi ded by the Commission 
services indicate that the budge tary deficit would reach ab out 7% of GDP in 2010, on the 
basis of a macroeconomic scenario that is si gnificantly less favourable than projected in the 
April 2010 update of the Stability Programme. This  projection includes a dopted or legislated 
measures. Potential extra-budgeta ry measures still under disc ussion with uncertain or no 
information on their modalities and timing of im plementation, are not taken into account. For 
2011, based on the customary no-polic y-change scenar io assumption5, the deficit is forecast to 
increase further to about 7¾% of GDP. 
In sum, the deficit is not close to the 3% of  GDP reference value. While the planned excess 
over the reference value is exceptional, it is not  temporary in the sense of the Treaty and the 
Stability and Growth Pact. This analysis suggests that the deficit criterion in the Treaty is not 
fulfilled.  
4. D EBT CRITERION  
During the period 2004 a nd 2008, the general government gr oss debt ratio declined by over 
20 percentage points to 48.4% in 2008, well be low the 60% Treaty reference value. The 
reduction of debt commenced in 2005 but accelerat ed in the subsequent years. The declining 
trend was mainly driven by favourable cyclic al conditions on the back of high economic 
growth and substantial primary surpluses. Mo reover, a significant debt-reducing stock-flow 
                                                 
5 The no-policy change forecast takes into account the (partial) withdraw al of measures of extraordinary 
nature linked to the crisis. 
 
EN 6   EN adjustment took place in 2008, associated to the de pletion of the sinking fund deposits held in 
the Central Bank, leading the declin e of debt to 48.4% of GDP.  
Table 3 : Debt dynamics a 
 2004 2005 2006 2007 2008 2009 2010 2011 
       COM CY COM CY 
Government gross debt ratio  70.2 69.1 64.6 58.3 48.4 56.2 62.3 61.0 67.3 63.2 
Change in debt ratio b (1 = 
2+3+4) 1.3 -1.1 -4.4 -6.3 -9.9 7.8 6.1 4.8 6.3 2.2 
Contributions:           
• Primary balance (2) 0.8 -1.1 -2.1 -6.4 -3.7 7.7 8.5 3.7 9.6 2.1 
• “Snowball” effect (3) -1.5 -0.6 -1.3 -2.7 -1.7 -0.8 -2.3 1.1 -3.1 0.4 
 of which:                      
Interest expenditure 3.3 3.5 3.3 3.0 2.8 -1.6 -1.4 2.3 -0.7 2.4 
Real GDP growth -2.7 -2.6 -2.7 -3.0 -1.9 0.9 0.2 -0.3 -0.8 -0.9 
Inflation (GDP deflator) -2.1 -1.6 -1.9 -2.7 -2.6 0.0 -1.2 -0.9 -1.6 -1.2 
• Stock-flow adjustment (4) 2.0 0.7 -1.0 2.9 -4.4 0.9 -0.1 0.0 -0.2 -0.2 
 
Notes : 
a In percent of GDP.  
b The change in the gross debt ratio can be decomposed as follows: 
 
tt
tt t
tt
tt
tt
tt
YSF
yyi
YD
YPD
YD
YD+⎟⎟
⎠⎞
⎜⎜
⎝⎛
+−+=−
−−
−−
1*
11
11 
where t is a time subscript; D, PD, Y  and SF are the stock of government debt, the primary deficit, nominal GDP and the 
stock-flow adjustment  respectively, and i and y represent the average cost of debt and nominal GDP growth. The term in 
parentheses represents the “snow-ball” effect, measuring the comb ined effect of interest expenditure and economic growth on 
the debt ratio. 
Source : Eurostat and Commission servic es’ spring 2010 forecasts. 
However, in 2009, the general government gross de bt increased again to 56.2% of GDP. This 
increase of 7¾ percentage points of GDP was mainly the result of the significant deterioration 
in the primary balance and debt-increasing "snowball" effects on the back of falling nominal GDP. Stock-flow adjustments also had a negative contribution to the debt level equivalent to 
about 1 percentage point of GDP, due to accumu lation of government assets at the end of the 
year in order to meet debt ma turity obligations arising earl y in January of 2010, as well as, 
differences between cash and accruals. For 201 0, Cyprus notified a planned debt of 62% of 
GDP, thus exceeding 60% of GDP Treaty refe rence value. The April 2010 stability 
programme plans a slightly lower figure (61%) and foresees a further increase to 63.2% of 
GDP in 2011.  
The Commission services spring 2010 forecasts pr oject debt to rise fu rther to 62.3% of GDP 
in 2010 and 67.6% in 2011on the back of a deteriorated primary balance. 
In view of these trends, the debt ratio cannot be considered as “suffi ciently diminishing and 
approaching the reference value at a satisfactory pace ” in the sense of the Treaty and the 
Stability and Growth Pact.  
This analysis suggests that the debt criterion in the Treaty is not fulfilled. 
5. R ELEVANT FACTORS  
Article 126(3) of the Treaty provides that the Commission report “shall also take into account 
whether the government deficit exceeds governme nt investment expenditure and take into 
account other relevant factors including the medium-term economic and budgetary position of the Member State”. These factors are further cl arified in Article 2(3)  of Council Regulation 
 
EN 7   EN (EC) No 1467/97, which also spec ifies that “any other factors which, in the opinion of the 
Member State concerned, are relevant in order to comprehensively assess in qualitative terms 
the excess over the reference value and which the Member State has put forward to the 
Commission and to the Council” need to be given due consideration.  
In view of the above provision s, the following four subsections consider in turn (1) the 
medium-term economic position; (2) the medi um-term budgetary position (including public 
investment); (3) other factors put forward by the Member State; [and] (4) other factors 
considered relevant by the Commission. 
5.1. Medium-term economic position 
Cyclical conditions an d potential growth. According to provisional estimates released by 
the Cypriot Statistical Service, the Gross Domestic Product (GDP) of Cyprus appears to have 
contracted by 1.7% in real terms in 2009. This is the first time economic activity in Cyprus 
recorded a negative growth rate in the last  35 years. The Commission services' spring 2010 
forecast projects a further shrinking, although to a lesser extent, of the economy in 2010 with 
activity projected to decline by almost ½%. S ubdued private consumption and investment in 
tandem with sluggish demand from Cyprus' main trading partners weigh on growth. This is 
followed by a moderate recovery of real GDP by 1¼% in 2011 on the back of an improving 
outlook of domestic demand concurrently w ith a rebound in world trade and the positive 
effects of the fiscal stimulus measures. Cycli cal conditions showed a rapid widening of the 
positive output gap since 2006 and a sharp reversal in 2009, with the output gap turning strongly negative in 2009 and 2010. In 2009, th e Cypriot economy was clearly below its 
potential, with an estimated output gap of - 0.7 percentage points. The Commission services' 
spring 2010 forecast project a further widening  of the output gap to –2.1%, reflecting a 
decrease in labour contribution and lower cap ital accumulation as a result of a drop in 
investment. 
Recent structural reforms.  At microeconomic policy level,  the revised National Reform 
Programme 2008-2010 (NRP) aims at unlocking the business potential through enhancement 
of competition and entrepreneurship as well as investing in knowledge and innovation in 
order to boost Cyprus’ attrac tiveness as business location fo r both investors and the labour 
force. Given the low levels of private investme nt on R&D, due to the small size and services-
orientation of the economy, the government in troduced a series of measures to encourage 
stronger industry participation. Given the de facto limitations though, the government has 
reinforced the role of the Re search Promotion Foundation and invests more on the promotion 
of innovation. Cyprus being heavily dependant  on imported oil for its energy supply and 
having a small and isolated isla nd system has set energy efficien cy as a top priority alongside 
addressing climate change. For this purpose, an energy centre that would enable the 
importation of natural gas to th e island is under construction and expected to commence its 
operation by 2013. Regarding measures to further improve labour market performance, the educational reform is progressing with init iatives in primary, s econdary, and tertiary 
education as well as the preparation of the new apprenticeship scheme. However, the gender 
pay gap remains high. So do also gender ga ps in employment and unemployment. 
Furthermore, the action plan for the integration of migrants in the Cypriot society is still in the 
preparatory phase.  
5.2. Medium-term budgetary position 
Structural deficit and fiscal consolidation in good times. During the period 2005-2009, the 
Cypriot economy made significant progress in consolidating public finances in conditions of 
good economic times, supported by an asset boom and buoyant tax receipts partly owing to 
 
EN 8   EN tax-rich composition of growt h. From a deficit of 2.4% of GDP in 2005 the government 
balance turned into a surplus of almost 1% of GDP in 2008, after reaching a surplus of 3.4% 
in 2007. In parallel, the debt ratio declined  from 69.1% of GDP do wn to 48.4%. This was 
contemporaneous to a continued improvement in the structural balance (i.e., the cyclically-
adjusted balance net of one-off and other temporary measures)6 from a deficit of around 3% 
of GDP in the year 2005 to a surplus of 2½% of GDP in 2007, well above the MTO (of a 
balanced budget in structural terms). However,  already in 2008 (which was still characterised 
by economic good times), the structural balan ce decreased to a deficit of ½% of GDP, 
implying a procyclical fiscal policy. In 2009 th e structural balance further deteriorated 
markedly to a deficit of almost 6% of GDP. This was the result of  not only a number of 
discretionary measures in response to the econo mic downturn (in line with the EERP) but also 
of rather large composition e ffects on account of a much less tax-rich GDP growth pattern. 
According to the Commission services' spring 2010 forecast, the fiscal stance is expected to 
deteriorate further in 2010 and 2011 with the struct ural deficit projected to rise to 6¼ % of 
GDP in 2010 and, based on the assumption of uncha nged policies, to incr ease even further to 
about 7% of GDP in 2011. 
Public investment . Government investment has been relati vely constant in terms of GDP at 
about 3½% between 2005 and 2008. In 2009, the government investment-to-GDP ratio 
increased by 1¼ percentage points, reaching al most 5% of GDP, reflecting the discretionary 
fiscal stimulus package in response to the EERP. According to the Commission services’ 
spring 2010 forecast, in 2010 and 2011, the public i nvestment ratio is expected to remain at 
similar levels because of the continuation of infra structure projects. In both years, the general 
government deficit ratio in both headline and structural terms would exceed the government 
investment-to- GDP ratio.  
Quality of public finances.  Between 2003, when the deficit reached the peak of the decade at 
6.5% of GDP, and 2008, Cyprus implemented a fi scal adjustment of about 7½ pp of GDP. 
Consolidation has been mainly revenue-driven, 5% of GDP, on the back of sizeable deficit-
reducing one-offs, especially between 2003 and 2005. However, the tax amnesty launched 
during those years, together with improvements in tax administration, might have led to a 
broadening of the tax bases and, thus, to a permanent increase of tax revenues. On the 
expenditure side, general govern ment expenditure has fallen from 45% of GDP in 2003 to 
42½% in 2008. In particular, curre nt primary expenditure declin ed by 1¼ percentage points. 
Nevertheless, in 2009 expenditure increased by a bout 3¾ percentage points of GDP, partly 
due to measures in response to the economic a nd financial crisis and additional expenditure 
due to automatic stabilisers. As a result, public  investment increase by about 1 percentage 
point of GDP while social payments also in creased by 1¾ percentage points due to social 
cohesion measures in line with objectives of  the National Reform Programme. In the recent 
past, Cyprus' budgetary framework has been imp roved with the adopti on of the Financial 
Management Accounting System (FIMAS). As from 2006, Cyprus also enacted the gradual 
adoption of a 3-year medium term budgeta ry framework (MTBF) and as from 2007 it 
introduced a Programme and Performance Budgeting (PPB). Nevertheless, the new 
framework is still phasing in and it is only foreseen to be fully in place in 2012. The hitherto practice of adopting supplementa ry budgets during the course of the year, has implied an 
increase in current expenditure beyond the intended reallocation of funds. Once the new 
budgeting framework is fully implemented, it is e xpected to cease this pr actise and lead to a 
more effective and efficient budgeting proce ss, contributing to co ntain expenditure by 
                                                
 
6 Estimated by the Commission services on the basi s of the commonly agreed methodology on estimating 
output gaps. 
 
EN 9   EN ministry according to the ceilings  set. At the same time, th e new budgeting process would set 
a sound basis for reallocating expenditure in fav our of growth enhancin g activities consistent 
with the priorities set by the National Reform Programme. 
Long-term sustainabilit y of public finances. The long-term budgetary impact of ageing is 
well above the EU average, mainly as a resu lt of a relatively hi gh increase in pension 
expenditure as a share of GDP over the coming decad es partly due to the fact that the pension 
scheme is still in a maturing phase. The progr amme introduces a recently adopted pension 
reform that is projected to reduce the increase in  pension expenditure. In view of the projected 
impact of ageing on government expenditure, th e Council invited Cyprus to "strengthen the 
long-term sustainability of public finances by pursuing th e reform of the pension and 
healthcare systems". The assessment of long-term  sustainability has not changed since the 
adoption of the Council opinion.  
5.3. Other factors put forwar d by the Member State 
In a letter of 27 April 2010, the authorities of  Cyprus listed some relevant factors in 
accordance with Article 2(3) of Council Regula tion (EC) No 1467/97. The analysis presented 
above already covers most of the it ems put forward by the authorities.  
5.4. Other factors considered relevant by the Commission 
Recent public finance developments in Cyprus we re also influenced by the following factors 
in the area of budgetary institutions and proc edures. As a response to the economic crisis, 
Cyprus has adopted some fiscal stimulus and stru ctural measures in line with the European 
Economic Recovery Plan (EERP). The overall imp act of the total of recovery measures is 
estimated to have been about 2¼% of GD P in 2009 and almost 2% in 2010, excluding the 
impact of the pension reform. Of these, about three fourths are tempor ary measures, which at 
their expiry will auto matically reduce government expenditure. 
As regards financial markets, the Cypriot govern ment has not adopted any specific package to 
stabilise the financial sector. Ho wever, the Government issued tr easury bills in early January 
2009, with maturity December 2009, for refinancing its short-term (cash flow) needs and for increasing the liquidity conditions in the banking system. The total value is of the order of 
almost 8% of GDP, of which about one half has been deposited in banks and credit institutions. 
In its opinion of 27 April 2009 on the previ ous update of the Stability Programme, the 
Council considered that the expansionary fiscal measures  were in line with the EERP. 
However, against the background of a sh arp deterioration in  the global economic 
environment, the budgetary strategy was subj ect to significant downs ide risks, with the 
growth assumptions underlying the macroec onomic scenario of the programme being 
favourable. In the light of the high external  imbalances, maintaining prudent policies and 
strengthening fiscal sustainabili ty should be a major priority. In  particular, controlling current 
expenditure represented a major challenge for the fiscal policy in Cyprus while fostering the 
quality of public finances wa s also important with a vi ew to underpinning a smooth 
adjustment of the economy in the light of the imbalances it is faced with.  
Therefore, the Council invited Cyprus to (i) im plement the measures in line with the EERP as 
planned, while avoiding further deterioration of public finances in 2009 compared to the 
target; (ii) reverse the projected fiscal  loosening in 2010 and beyond, by restraining 
expenditures in order to ensure a sound fiscal pos ition in the medium term; (iii) in view of the 
ongoing fiscal deterioration and of the projec ted impact of ageing on government expenditure, 
 
EN 10   EN improve the long-term sustainability of public finances by pursuing the reform of the pension 
and health care systems. 
6. C ONCLUSIONS  
According to the April 2010 EDP notification the general government deficit in Cyprus 
reached 6.1% of GDP in 2009, above and not clos e to the 3% of GDP reference value. The 
planned excess over the reference value can be qualified as excep tional within the meaning of 
the Treaty and the Stability a nd Growth Pact. However, it cannot be considered temporary. 
This suggests that the deficit criter ion in the Treaty is not fulfilled. 
General government gross debt remains belo w the 60% of GDP reference value in 2009. 
However it is on a rising trend and it is planned to exceed the reference value in 2010. The debt ratio cannot be considered  as diminishing sufficiently and approaching the reference 
value at a satisfactory pace within the meaning of the Treaty and the Stability and Growth 
Pact. This suggests that the debt cr iterion in the Treaty is not fulfilled. 
In line with the Treaty, this report has also examined “relev ant factors”, which, according to 
the Stability and Growth Pact, can only be taken into account in the steps leading to the 
decision on the existence of an excessive defi cit if the double condi tion - that the deficit 
remains close to the reference value and that its  excess over the reference value is temporary - 
is fully met. Considered on their own merit, the relevant factors in the current case on balance 
present a mixed picture.