EN   EN 
 
 
 EUROPEAN  
COMMISSION   
Brussels, 7.3.2018  
SWD(2018) 211 final  
 
COMMISSION STAFF WORKING DOCUMENT  
Country Report Cyprus 2018  
Including an In -Depth Review on the prevention and correction of macroeconomic 
imbalances  
 
Accompanying the document  
COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE 
EUROGROUP  
2018 European Semester: Assessment of progress on structural reforms, prevention and 
correction of macroeconomic imbalances, and results of in -depth reviews under 
Regulation (EU) No 1176/2011  
{COM(2018)  120 final}   
 
 
 Executive summary  1 
1. Economic situation and outlook  5 
2. Progress with country -specific recommendations  14 
3. Summary of the main findings from the Macroeconomic Imbalance Procedu re 
in-depth review  19 
4. Reform priorities  24 
4.1.  Public Finances and Taxation  24 
4.2. Financial sector  29 
4.3. Labour market, education and social policies  35 
4.4.  Investment  43 
4.5.  Sectoral policies  49 
Anne x A: Overview Table  53 
Annex B: Macroeconomic Imbalance Procedur e Scoreboard  60 
Annex C: Standard Tables  61 
References  67 
 
LIST OF TABLES  
Table  1.1: Key economic and financial indicators - Cyprus  13 
Table  2.1: Summary assessment of CSR impleme ntation  15 
Table  3.1 Macroeconomic Imbalance Procedure assessment matrix for Cyprus  22 
Table  4.2.1:  Financial soundness indicators for domestic and foreign banks"  29 
Table  4.2.2:  NPL and coverage ratios across main sectors of economic activity  30 
Table  B.1: The MIP scoreboard for Cyprus (AMR 2018)  60 
Table  C.1: Financial market indicators  61 
Table  C.2: Headline Social Scoreboard indicators  62 
Table  C.3: Labour market and education indicators  63 
Table  C.4: Social inclusion and health indicators  64 
Table  C.5: Product market performance and policy indicators  65 
Table  C.6: Green growth  66 
 CONTENTS  
 
 LIST OF GRAPHS  
Graph  1.1: Real GDP and contribution to growth  5 
Graph  1.2: Investment (in current prices)  5 
Graph  1.3: Housing sales by residency and housing credit to residents  6 
Graph  1.4: Labour market situation  7 
Graph  1.5: Real effective exchange rates  7 
Grap h 1.6: Total factor productivity  8 
Graph  1.7: Current account developments, SPEs and  non -SPEs (based on 4 quarters rolling sum)  8 
Graph  1.8: Private sector indebtedness  9 
Graph  1.9: Private sector NPLs and coverage ratios, June 2017  10 
Graph  1.10:  Private sect or debt  10 
Graph  2.1: Overall multiannual implementation of 2011 -2017 CSRs to date  14 
Graph  4.1.1:  Public debt projections  25 
Graph  4.1.2:  Tax structure in 2015  27 
Graph  4.2.1:  Development of restructured loans  30 
Graph  4.2.2:  Private sector debt gap compared with prudential and fundamen tals-based 
benchmarks  31 
Graph  4.2.3:  MFI loans to domestic residents, annual changes  31 
Graph  4.2.4:  Ratio of loans to gross value added across sectors of economic activity  32 
Graph  4.2.5:  Cypriot households savings gap  32 
Graph  4.3.1:  Adjusted wage  gap between public and private employees by age group  35 
Graph  4.3.2:  Adjusted wage gap between permanent and temporary employees  (% of the 
average hourly earnings of temporary employees)  37 
Graph  4.3.3:  NEET rate (15 -24 years old) by educational attainment, 2008 -2016  38 
Graph  4.3.4:  Expenditure on Education (% of GDP) compared to PISA results, 2015  39 
Graph  4.3.5:  Change in income inequality and its components, 2008 -2015  41 
Graph  4.3.6:  At risk -of-poverty  or social exclusion rate, age groups  41 
Graph  4.3.7:  Share  of healthcare in public expenditure  42 
Graph  4.4.1:  Investment by category (2000 -2016)  43 
Graph  4.4.2:  Interest rates on loans to NFCs  43 
Graph  4.4.3:  Environmental investment  47 
Graph  4.5.1:  Changes in number of tourist arrivals  51 
 
 
 LIST OF BOXES  
Box 1.1: The impact of special -purpose entities on statistics and the real economy  12 
Box 2.1: Tangible results delivered through EU support to structural change in Cyprus  17 
Box 2.2: Technical support for the implementation of structural reforms in Cyprus  18 
Box 4.3.1:  Monitoring performance in light of the European Pillar of Social Rights  36 
Box 4.3.2: Policy highlights: Undeclared Work  38 
Box 4.4.1: Investment challenges and reforms in Cyprus  48 
 
 
 
 
1 Cyprus' robust economic recov ery can help 
accelerate the correction of excessive 
macroeconomic imbalances and provide a 
window of opportunity to implement growth -
enhancing reforms.  Macroeconomic imbalances 
are declining but remain significant in several 
areas. These include high level s of public, private 
and external debt, a large negative net international 
investment position and a high stock of non -
performing loans. Unemployment is also declining 
but remains high, in a context of weak potential 
growth. Amid positive macroeconomic 
developments, a renewed reform momentum in 
key areas – e.g. the insolvency and foreclosure 
frameworks, the judicial system, the business 
environment, the public sector, education and the 
labour market – could help improve potential 
growth, reduce vulnerabilit ies and the risk of a 
slowdown, should the external environment and 
financial conditions become less supportive. (1) 
Cyprus is experiencing strong economic growth 
and the labour market is rapidly improving. 
Real GDP growth was robust in 2017 at 3.8  % 
drive n by domestic demand, in particular private 
consumption. Investment was mainly concentrated 
on construction linked to the tourism boom and the 
recovery of the real estate sector. Employment rate 
rose by 2.5  pps in 2017Q3 year on year, standing 
at around 71 .5 %, while the unemployment rate 
decreased significantly to 10.5  %. Inflation started 
to turn positive albeit at low level. In 2018, 
economic growth is forecast to remain strong but 
decelerate to 3.2  %.  
Overall, Cyprus has made limited progress with 
impl ementing the 2017 country -specific 
recommendations. After the government’s 
adoption and implementation of an ambitious 
reform agenda during the economic adjustment 
                                                           
(1) This report assesses Cyprus’ economy in the light of the 
European Commission’s Annual Growth Survey published 
on 22 November 2017. In the survey, the Commission calls 
on Member States to implement reforms to make the 
European economy more productive, resilient and 
inclusive. In so doing, Member States should focus their 
efforts on the three elements of the virtuous triangle of 
economic policy — boosting investment, pursuing 
structural reforms and ensuring responsible fiscal policies. 
At the same time, the Commission published the Alert 
Mechanism Report (AMR) that initiated the seventh round 
of the macroeconomic imbalance procedure. The 2018 
AMR concluded that an in -depth review should be 
undertaken for the Cypriot economy. The review is 
presented in this report.  programme, the reform momentum has been more 
modest since 2016. Key public sector reforms ar e 
pending, notably those concerning public 
administration, local government and state -owned 
entities. Some measures have been taken or 
announced to improve the efficiency of the judicial 
system, but a more comprehensive reform is still at 
an early stage. A dministrative measures have been 
taken to reduce the backlog in issuing title deeds. 
Yet, a structural solution to address the 
inadequacies of the property transaction system is 
still lacking. Progress on reducing non -performing 
loans and effectively imple menting the insolvency 
and foreclosure frameworks is also limited. While 
the privatisation plan remains largely on hold, the 
action plan for growth is gradually being 
implemented, focussing on improving the business 
environment and boosting strategic inves tments. 
Concrete steps were taken to increase the capacity 
of the public employment services, while only 
limited progress was made on education. Finally, 
key legislation establishing a National Health 
System was adopted in June 2017 and its 
implementation is under way.  
Regarding progress in reaching the national targets 
under the Europe 2020 strategy, Cyprus has 
reached its objectives for R&D expenditure and is 
making progress in increasing the proportion of 
renewable energy. The rise in energy consumption, 
in line with the economic recovery, weighs on the 
capacity to reduce greenhouse gases emissions and 
meet the energy efficiency target. Cyprus over -
achieved its targets on higher education attainment 
level and on reducing early school leaving. Some 
progress was made on increasing the employment 
rate, but targets on reducing poverty and social 
exclusion remain distant.  
Cyprus faces challenges with regard to a 
number of indicators of the Social Scoreboard 
supporting the European Pillar of Social Rights . 
Strong economic growth has translated into 
improved employment outcomes and a declining 
proportion of people at risk of poverty, except 
among children. However, a growing gender 
employment gap, the high share of young people 
not in education, emplo yment or training and an 
increasing number of early school leavers may 
weigh on current and future equality of 
opportunities.  EXECUTIVE SUMMARY  
Executive summary  
 
 
2 The main findings of the in -depth review 
contained in this report, and the related policy 
challenges, are as follows:  
 Private debt  continues to be among the 
highest in the EU.  The debt of non -financial 
corporations and households has decreased to 
around 250  % of GDP (excluding non -financial 
SPEs) in 2017Q3, primarily driven by 
households’ debt reduction. Despite the robust 
recovery, repayment of debt has only 
marginally improved as contract enforcement 
remains weak and the use of the insolvency and 
foreclosure frameworks is limited.  
 Although still high, public debt is falling 
markedly.  Cyprus has significantly accelerated 
debt reduct ion, notably thanks to a prudent 
fiscal stance and active debt management 
operations. While risks related to high private 
debt levels in the economy remain significant, 
they are mitigated by the country’s favourable 
fiscal position. Cyprus remains vulnerab le to 
external shocks and changes in fiscal stance 
and economic outlook. Significant reliance on 
corporate income tax revenues and the 
presence of tax planning businesses exposes 
the country to changes in international tax 
systems.  
 The net international in vestment position 
(NIIP) remains very negative, but nearly two 
thirds are linked to SPEs.  The NIIP has 
decreased in recent years, but remains largely 
negative at 120.6  % of GDP in 2017Q3. 
Excluding the external debt of SPEs, the 
negative NIIP is smaller bu t still substantial at 
around 44  % of GDP. This highlights Cyprus’ 
dependency on foreign financing sources and 
its vulnerability to shifts in international 
financial market sentiment. The widening 
current account deficit warrants monitoring.  
 The high leve l of non -performing loans 
(NPLs) remains the key vulnerability of the 
banking sector and affects credit supply.  
NPLs decreased, albeit unevenly across banks, 
as a result of debt restructuring through write -
offs and debt -to-asset swaps. Uncertainties 
remain  over the sustainability of banks 
reduction strategies, as loan re -defaults and re -
restructuring remain high and banks' direct exposure to the property market increases. The 
limited use of the insolvency and foreclosure 
framework remains an obstacle to the  reduction 
of NPLs. Banks still face impediments in 
enforcing their claims on defaulted borrowers 
and weak repayment discipline remains 
problematic. The lack of a secondary market 
for loans and a loan securitisation framework 
also hinders progress. Supervi sory pressure has 
led banks to increase their risk provisioning in 
line with the euro area average. This has 
weighed on profitability and the ability to 
increase credit supply.  
 Banks are improving their fundamentals but 
still face challenges as regards per formance . 
In 2017, the emergency liquidity assistance was 
repaid and banks continued to accumulate large 
liquidity buffers. This behaviour is explained 
by banks’ reliance on potentially volatile short -
term deposits, notably from non -residents. The 
poor ass et quality and the lack of inter -bank 
markets are hindering wholesale long -term 
funding and the build -up of loss absorption 
capacity. Banks’ operational costs remain high. 
Improvements to the governance and 
administrative capacity of insurance and 
pension funds’ supervision remain pending.  
 Inefficiencies in the justice system continue 
to affect contract enforcement and swift 
resolution of civil and commercial cases.  
Cumbersome civil procedures and weak 
enforcement of court decisions weigh on 
banks’ incenti ves to use the insolvency and 
foreclosure frameworks to reduce their stock of 
NPLs. A series of reforms have started to 
address the most critical problems in the justice 
system, in particular low digitalisation of courts 
and the lack of life -long training of judges.  
 The housing market is recovering.  Housing 
transactions have picked up and prices are 
recovering, particularly in the luxury segment. 
This may incentivise mortgage holders in 
difficulty to liquidate the underlying real estate 
collateral, which mi ght in turn help to reduce 
private debt. The increased construction 
activity is supported mainly by self -financing 
and foreign investment. However, major 
obstacles to transferring and issuing property 
title deeds have not yet been resolved.  
Executive summary  
 
 
3  Potential growth is recovering but remains 
subdued.  Higher investment and employment 
are lifting potential growth, but it remains 
below the EU average. The main constraining 
factors are low productivity, modest growth -
boosting investment, notably in innovation, 
difficulties to access finance, in particular for 
small businesses, and shortcomings in the 
business environment.  
Other key structural issues analysed in this report 
and pointing to particular challenges for Cyprus' 
economy are the following:  
 The labour market  is improving.  
Employment is on the rise and unemployment 
is rapidly decreasing, even though it remains 
high among young people and the long -term 
unemployed. The capacity of the public 
employment services and activation measures 
are improving but are still  sub-optimal. 
Outreach to young people not in employment, 
education or training is limited. Conditions of 
employment differ significantly between 
temporary and permanent contracts and 
between public and private sectors, pointing to 
segmentation of the labo ur market. The share 
of employees covered by collective bargaining 
is lower than the EU average.  
 The modernisation of the education sector 
has advanced albeit important challenges 
remain. Poor educational achievements and 
skills mismatches continue to weig h on 
potential growth. Participation in vocational 
education and training is low and the reform of 
the teachers’ evaluation system is still pending. 
Recent reforms on the appointment of teachers, 
curricula and plans to increase vocational 
education and tra ining capacity are expected to 
improve the current situation.  
 Key steps to reform the healthcare sector 
have been taken and the focus is now on 
implementation. Legislation establishing the 
new National Health System, providing for 
universal health coverag e, was adopted. The 
new system aims at improving access to care, 
reduce high levels of out -of-pocket payments 
and increase efficiency of care delivery in the 
public sector. Until the system becomes fully functional in 2020, important implementation 
challen ges and investment needs are expected.  
 Enforcement of environmental and climate 
regulations remains weak.  Recent investment 
has proved insufficient to achieve full 
compliance with environmental regulations, in 
particular in waste and water management. 
Cypr us still lacks effective tools to sustainably 
increase energy and resource efficiency. The 
energy sector reform has made some progress 
and could encourage growth in renewable 
energy. However, Cyprus remains heavily 
dependent on fossil fuels.  
 Some indicato rs suggest that Cypriot tax 
rules are used by companies engaged in 
aggressive tax planning. Cyprus has taken 
steps to amend aspects of its tax system that 
may facilitate aggressive tax planning. 
However, the existence of specific tax rules 
(e.g. the corpor ate tax residency rules, the 
absence of withholding taxes on dividend, 
interest and royalty payments by Cyprus 
companies and potential risks associated with 
the design of notional interest regimes), 
combined with the lack of some anti -abuse 
rules, suggest that Cyprus’ corporate income 
tax rules may still be used in tax avoidance 
structures.  
 Inefficiencies in the public sector impact on 
the business environment.  Planned reforms to 
modernise the public administration and 
improve its efficiency are pending. S ome 
efforts are being made to expand e -government 
services and improve regulatory quality. 
Measures to simplify permits and licensing 
procedures, notably for strategic investments, 
have also been taken. According to relevant 
indicators, competition and qua litative 
assessment in public tenders could be further 
enhanced to strengthen efficiency and 
transparency in public procurement. The 
governance framework for state -owned entities 
remains unconducive to adequate assessment of 
risks and performance improveme nts. This 
might facilitate the build -up of public 
contingent liabilities and hinder investment 
capacity in key utilities such as telecoms and 
energy. Perceived levels of corruption in the 
public sector are high, which could deter 
Executive summary  
 
 
4 investment. The authoritie s have announced 
measures to strengthen the anti -corruption 
framework.  
 
 
5 GDP growth  
Cyprus’ economy is in a vigorous upswing 
phase of the economic cycle, with real GDP 
expected to have grown by 3.8  % in 2017.  It is 
the third consecutive year of firm economic 
growth, confirming a sturdy recovery. For 2017 as 
a whole, the growth rate  in Cyprus is estimated to 
have been among the highest in the euro area. It 
was driven by private consumption and exports of 
services, the latter mainly linked to the booming 
tourism (see Graph  1.1). For the first time in 
several years, public consumption posted a 
positive contribution.  
Graph  1.1: Real GDP and contribution to growth  
 
Source:  European Commission  
Real private consumption is the main growth 
driver.  It is estimated to have increased by more 
than 3 % in 2017, driven by steadily rising 
household disposable income, solid employment 
and the first aggregate wage increases after a four -
year drop. Consumer confidence is high, well 
above pre -crisis levels, signalling a continuation of 
the current strong consumption in the near term. 
Apart from these positive cyclical factors, Cypriot 
households continue to use accumulated wealth to 
finance consumption, as reflected by a negative 
savings rate.  
Investment is recovering, particularly in 
construction and equipment.  After contracting 
sharply during the crisis, investment started to 
recover in 2015, before increasing significantly in 
2016 and levelling -off in 2017 (see Graph  1.2). In 2017(2), gross fixed capital formation reached 
16.4 % of GDP, coming closer to the EU average 
(20.0  %), from a low of 11.7  % in 2014. 
Investmen t was driven by construction, boosted by 
the tourism industry as well as the recovery of the 
residential real estate market, and shipping (which 
heavily influenced the equipment investment). Key 
indicators in the construction sector and plans for 
large tou rism-related projects, amongst others, 
point to strong construction investment in the near 
future.  
Graph  1.2: Investment (in current prices)  
 
Source:  Cystat  
Net exports in 2017 are expected to have 
positively contributed to growth.  Exports of 
services were strong, on the back of record 
numbers of tourists visiting Cyprus and a big 
increase in tourism revenues; exports of goods, 
after a sharp contraction in 2016, rebounded 
somewhat in 2017. Imports remained more 
moderate; if one excl udes one -offs relating to ship 
registrations in 2016, they have risen in line with 
consumption and investment.  
The economic recovery is broad -based, fuelled 
by tourism.  Substantial gains were recorded in 
most sectors, except the financial sector, which 
remains heavily burdened with non -performing 
loans (NPLs). Tourism, booming for the second 
year in a row, had a positive impact on other 
sectors, particularly transport, trade, construction, 
food and accommodation. Business services, 
public administration, d efence and education are 
                                                           
(2) Based on three quarters data.  
-12-8-404812
10 11 12 13 14 15 16 17 18 19
Net exports Investment
Priv. consumption Gov. consumption
Inventories Real GDP (y-o-y%)forecastpps. 
051015202530
01 03 05 07 09 11 13 15 17Q3% of GDP
Transport eqipment Equipment
Construction Total1. ECONOMIC SITUATION A ND OUTLOOK  
1. Economic situation and outlook  
 
6 also growing strongly. Meanwhile potential growth 
is improving on the back of recovering investment 
and increasing employment, but remains weak.  
Inflation  
Inflation based on the harmonised index of 
consumer prices (HICP) turned po sitive but 
remains modest.  After a few years of aggregate 
price declines, inflation in 2017 was positive at 
0.7 %, driven mainly by rising energy prices in the 
first half of the year. Core inflation also turned 
marginally positive, as a result of rising pr ices for 
services. HICP inflation is expected to increase 
moderately in 2018 -2019, driven by the economic 
recovery and anticipated wage rises.  
Housing market  
The residential real estate market has 
completed its downward adjustment and is in a 
modest recov ery. Housing sale contracts were up 
by double -digit percentage in 2017.   A number of 
government incentives, such as lower property 
transfer fees, capital gains tax exemption, 
abolishing the immovable property tax, and a 
citizenship scheme based on property  acquisition, 
have contributed to the recovery. Eurostat and 
Central Bank of Cyprus indicators show that house 
prices have started to rise since the end of 2016.  
Real estate acquisitions are funded mainly by 
savings and foreign investment  (see Graph  1.3). 
Domestic buyers funded property transactions 
mostly from their own savings. Foreign buyers, in 
particular from Russia, Asia and the Middle East, 
were responsible for fewer, but much more 
sizeable transactions, predominantly in cash. 
Mortgage interest rate s have substantially come 
down initially as a result of directives issued by the 
Central Bank of Cyprus.  Other historical factors 
included the European Central Bank (ECB) policy 
rates, and strong competition among banks for 
viable borrowers in the mortgag e refinancing 
segment. However, banks in Cyprus remain very 
cautious when it comes to granting new mortgages 
(given the very high proportion of NPLs in their 
household credit portfolios, see Section  4.2). Graph  1.3: Housing sales by residency and housing 
credit to residents  
 
Source:  Department of Lands and Surveys, European 
Central Bank, European Commission  
The real estate supply side is responding to 
positive demand developments.  Construction 
activity has been on the rise since mid -2016 and 
this trend is expected to continue, as the number of 
building permits are increasing. Construction 
companies also face tough constraints when 
seeking to obtain bank credit for new projects, due  
to heavy corporate indebtedness in the sector and 
the prevalence of NPLs. Therefore, they fund most 
residential real  estate projects by pre -sales.  
Labour market  
The labour market improves rapidly on the 
back of economic recovery.  The number of 
people emp loyed is expected to increase at around 
3 % in 2017, mainly in the services sectors and 
construction. Unemployment rate dropped to 
10.5 % in 2017Q3, falling faster than expected on 
the basis of its pre -crisis relationship with 
economic growth (European Com mission, 2017a, 
p. 25). However, unemployment remains 
particularly high among young people (25.1  % in 
2017Q3, above the EU on average) and for long -
term unemployed (4.3  % in 2017Q3 as against the 
EU average of 3.5  %). The employment rate 
increased and in 2 017Q3 was only slightly below 
the EU average (71.5  %, as compared to 72.3  %, 
respectively), but still significantly below the pre -
crisis level (76.8  % in 2007; see Graph 1.4). While 
headcount employment increased, the number of 
hours worked still lags behind. This is associated 
-10-505101520253035
 01 0002 0003 0004 0005 0006 000
04Q1
04Q4
05Q3
06Q2
07Q1
07Q4
08Q3
09Q2
10Q1
10Q4
11Q3
12Q2
13Q1
13Q4
14Q3
15Q2
16Q1
16Q4
17Q3% Units
Housing sales to non-residents
Housing sales to residents
Housing credit to residents, y-o-y % change (rhs)
1. Economic situation and outlook  
 
7 with the rise in part -time work and employment on 
temporary contracts, both still above pre -crisis 
levels. Underemp loyment, which increased 
substantially as a consequence of the crisis, has 
subsided only marginally: in 2017Q3, 6.3  % of the 
labour force reported that they would like to work 
more hours (as against 7.4  % in 2016Q3).   
Graph  1.4: Labour market situation  
 
Source:  Eurostat – Labour force survey  
Wage growth remained modest, even as the 
recovery gained strength.  Nominal wages had 
previously declined over a 4 -year period, partly 
compensating for competitiveness losses 
accumulated since the early 2000s. In 2017, they 
are expected to have returned moderately positive, 
held back by labour market slack.  (3) Collective 
agreements reached in all unionised sectors, 
covering about 30 % of private sector employees, 
provide for gradual wage increases and partial 
adjustment to the price index in the coming years.  
Social developments  
Social conditions are still challenging but have 
begun to improve as a result of the labour 
market recovery.  Gross household disposable 
income fell more steeply than GDP in 2010 -2015, 
leading to a sharp rise in income inequality. Many 
young people are not in employment, education, or 
training (NEET). Income inequality receded to 4.9 
                                                           
(3) The labour market slack is a sum of the persons available 
to work but not seeking work, those seeking work but not 
immediately available, and involuntarily 
part-time-employed (European Commission, 2017a).  % in 2016, slightly below the EU average (see 
Section  4.3.2). However, wealth inequality 
remains among the hi ghest in the euro area. The 
Gini coefficient of net wealth (assets minus 
liabilities) was 0.72 in 2014  (4), reflecting a high 
proportion of indebted households.  
Competitiveness  
Real effective exchange rate (REER) 
developments may erode cost competitivene ss 
gained during the crisis.  The REER has 
depreciated significantly in the crisis years, in line 
with the euro area trend (see Graph  1.5). With the 
euro appreciation against major currencies in 2017, 
the drop in REER is expected to have come to a 
halt. The Cypriot REER is expected to be 
reversing, particularly as wages start to rise and 
inflation is no longer negative, and the euro is 
project ed to appreciate in 2018.  
Graph  1.5: Real effective exchange rates  
 
Source:  AMECO  
Cyprus has continued to lose export market 
shares since 2010 , despite depreciating REER and 
downwards adjustment of the unit labour costs 
over several years . This sugges ts that structural 
factors, such as low business dynamism, are at 
play (see Section  4.4.2).  The foreseen wage 
                                                           
(4) The Gini coefficient is a summary statistic of inequality. 
The closer the Gini is to 1, the more unequal is the 
distribution of income or wealth. If there is no inequality in 
a society, the indicator is equal to 0. If all national income 
or wealth is earned by one person alone, the Gini 
coefficient is equal to 1.  
626466687072747678
051015202530354045
01020304050607080910111213141516% %
Employment rate 20-64
Unemployment rate 15-74 (lhs)
Long-term unemployment rate 15-74 (lhs)
Youth unemployment rate 15-24 (lhs)
NEET rate 15-24 (lhs)
708090100110120130140150
000102030405060708091011121314151617
IE EL ES CY PT
1. Economic situation and outlook  
 
8 increases are expected to drive unit labour costs 
higher as of 2018.  
Total factor productivity remains weak.  After a 
long decline, total factor productivity has started to 
improve slightly in the past 3 years (see 
Graph  1.6). A substantial proportion of investment 
(around 30  % in 2017) is linked to the construction 
of dwellings, while the equipment category, 
accounting for around half of all investments, is 
partially driven by ship registrations (see 
Graph  1.2). This data points to potentially limi ted 
impacts on productivity.  
External position  
The current -account deficit, based on 
four-quarter rolling sum, is widening.  After 
increasing to 4.9  % in 2016, it widened further to 
6.9 % in the third quarter of 2017 (on a fours 
quarter rolling sum basis). This was driven partly 
by recovering investment, which has high import 
content, and more generally by the consumption 
resuming after the crisis. As such, the widening 
may be temporary, but developments should be 
monitored carefully.  
The current -account deficit is largely influenced 
by special purpose entities (SPEs).  (5) The size 
and the current trend of the current account are 
driven to a very large extent by the activities of 
SPEs (see Box  1.1). When one excludes these, the 
current -account determined by the real sector was 
balanced in 2016, but turned negative in 2017 for 
                                                           
(5) Although no internationally agreed definition of SPEs 
exists, BPM6, ESA2010 and the fourth edition of the 
OECD’s Benchmark Definition of Foreign Direct 
Investment (BD4) identify four distinctive features of 
SPEs, namely (a) legal entitie s incorporated by non -
residents, (b) small footprint on the real economy and (c) 
balance sheets largely consisting of claims on and 
liabilities to non -residents. In the case of Cyprus, the major 
types of SPEs identified so far, can be classified in the 
following two broad categories:  
− Financial companies  
− Financing and holding companies, which channel 
funds within a global group on behalf of a non -
resident parent company.  
− Factoring/invoicing companies, which invoice the 
sales of a group with global operations  on behalf of 
the parent.  
− Non-financial companies (mainly ship -owning), 
which own non -financial assets that are usually 
financed through a loan from a non -resident bank or 
from their parent companies.  
 both the SPE sector and the real sector (on four 
quarter rolling basi s) (see Graph  1.7).   
Graph  1.6: Total factor productivity  
 
Source:  AMECO  
 
Graph  1.7: Current account developments, SPEs and  
non-SPEs (based on 4 quarters rolling sum)  
 
Source:  Central Bank of Cyprus  
The net international investment position 
(NIIP) remains very negative, but nearly two 
thirds of it is attributable to the presence of 
SPEs.  As of 2017Q3, they determined a proportion 
of the negative NIIP equivalent to 76.4  % of GDP, 
while the total NIIP was equivalent to -120.6  % of 
GDP. This mitigates to a marked extent the risks 
stemming from the very large NIIP, as SPEs’ links 
to the real economy are rather limited.  
80859095100105110
0001020304050607080910111213141516172000 = 100
CY EA-19 EU-28
-10-8-6-4-202
14Q4
15Q1
15Q2
15Q3
15Q4
16Q1
16Q2
16Q3
16Q4
17Q1
17Q2
17Q3% GDP
CA, excluding SPEs CA, SPEs
1. Economic situation and outlook  
 
9 The NIIP continued narrowing.  The NIIP 
contracted quite markedly, by 7pps, from the end 
of 2016 till the third quarter 2017. The correction 
of the NIIP since 2014 was driven by adjustments 
in the real sector, a positive sign, p roving that the 
real Cypriot economy is becoming less reliant on 
foreign funds. Meanwhile the part of NIIP linked 
to the SPE sector has remained broadly stable and 
is expected to somewhat increase in the future. 
This indicates that the substantial negative  overall 
NIIP is likely to persist in the medium term.  
Debt of non -financial private sector  
While non -financial private sector debt is 
falling, it is still very high.  Private sector debt 
stood at 329  % of GDP in 2017Q3 — down from 
345 % in 2016 (see Graph  1.8), but well above the 
macroeconomic imbalance procedure (MIP) 
threshold of 133%. Non -financial SPEs accounted 
for a substantial proport ion of the accumulated 
private debt, at 79  % of GDP in 2017Q3. They 
have limited links to the real economy and their 
debt is funded mostly by foreign banks, which 
markedly diminishes the risks to the domestic 
economy. In nominal terms, household and 
non-financial corporate debt (including SPEs) has 
remained broadly stable since 2014 at 
EUR  62 billion. However, even when excluding 
SPEs, non -financial private sector debt remained 
very high, at 250  % of GDP, at 2017Q3 (see 
Section  4.2.2).   
Financial sector  
The high level of non -performing loans (NPLs) 
remains the key vulnerability of the banking 
sector.  NPLs in the banking sector started to fall, 
but are still very high, accounting for around half 
of the non -financial private sector loan 
portfolio.   The propor tion of NPLs in corporate 
and household loan portfolios have slightly 
declined to 52.7% in June 2017 (compared with 
54.8% at end 2016), by EUR 1.4 billion. The most 
important NPL reduction has been in the sectors 
related to real estate and tourism activiti es, such as 
construction as well as accommodation and food 
services. NPLs fell on the back of loan 
restructuring in the form of cash repayments, debt -
to-asset swaps and, to a lesser extent, loan write -
offs. The recourse to debt -to-asset swaps led to an 
accumulation of real estate assets by banks, increasing their exposure to the property market 
(see Section  4.2.1).  
Graph  1.8: Private sector indebtedness  
 
Source:  Eurostat, Central Bank of Cyprus  
Risk provisioning improved substantially in 
2017 and is now in line with the euro area 
average.  Supervisory pressure, notably through 
the single supervisory mechanism (SSM) 
supervisory review and evaluation processes 
(SREP), led to gradual improvements in the 
provisioning coverage of NPLs since 2014, i.e. 
from 31.7 % to 46.2  % as of June 2017 (see Graph 
1.9 and Table 4.2.1). Provisioning is now 
comparable with the EU average and should reflect 
more accurately the real value of the real estate 
collateral. However, the improved average 
coverage masks differences across banks. As 
banks accelerate the cleaning -up of their balance 
sheets, further provisioning is likely to be 
necessary in order to maint ain and, in some cases, 
improve coverage, where the valuation of 
collateral might not fully reflect market prices.  
Banks were loss making in the first nine months 
of 2017.  The results for the first nine months of 
2017 show a hefty deterioration in the ban ks’ 
profitability relative to the same period in 2016, as 
the net interest income declined by about EUR 158 
million. In addition, the big increase in loan loss 
provisions announced by banks, notably by the 
Bank of Cyprus, led to a system -wide increase in 
provisions by more than EUR 850 million. It 
tipped financial results into deeply negative 
territory of about EUR 535 million in the first nine 
0100200300400
01020304050607080910111213141516% of GDP
Households, debt-to-GDP ratio
non-financial special purpose entities, debt-to-GDP ratio
Non-financial corporations, debt-to-GDP ratio excluding
debt of non-financial special purpose entities
Private sector, debt-to-GDP ratio
1. Economic situation and outlook  
 
10 months of 2017, relative to a profit of EUR 317 
million in the same period of 2016. Overall, the 
banks’ capacity t o generate profits remains under 
pressure in a context of tighter interest margins and 
the need to work out the extremely high volume of 
NPLs.  
Banks are taking measures to reduce operating 
expenses.  Cypriot banks made progress in 
reducing numbers of branc hes and employees, but 
the number of customers and assets per branch or 
employee remains significantly lower than the euro 
area average.  
The common equity tier 1 (CET  1) capital ratio 
of all banks declined to 15  % in September 
2017, from 16  % a year before, and remains 
vulnerable to further loss recognition.  The 
overall solvency ratio fell by 0.6 pps to 16.3  % in 
September year on year. The CET  1 ratio is still 
higher than the EU average (around 13%), but this 
reflects the great uncertainty associated with the 
high ratio of impaired loans. While capital ratios 
did not decline in 2015 and 2016 despite negative  
financial results, the acceleration of the NPL 
workout has started to take a toll on banks’ capital 
buffers. Banks that are more advanced in terms of 
balance -sheet clean -up have seen their CET  1 ratio 
fall well below average. If banks continue to 
increase  their provisioning and recognise losses, 
maintaining current capitalisation is likely to prove 
challenging. Therefore, some of the largest banks are planning to issue additional tier  1 or tier  2 
capital in order to strengthen their capital buffers 
as a pr e-requisite for achieving NPL reduction 
targets.  
Deleveraging appears to have come to a halt, 
but the clean -up of the balance sheets continues.  
As of November 2017, the stock of loans to 
domestic non -financial corporates (NFCs) and 
households remained rela tively flat year on year. 
This masks underlying movements and efforts by 
banks to clean up their balance sheets. New 
lending picked up slightly, while unpaid interests 
on NPLs are capitalised, which increases the credit 
stock. On the other hand, banks’ gro wing use of 
debt-to-asset swaps and debt write -offs in order to 
restructure their non -performing exposures, 
together with debt repayments, tends to reduce the 
stock of credit. Amid strong growth, the private 
sector debt to GDP continued declining (see 
Grap h 1.10).  
Graph  1.10:  Private sector debt  
 
Source:  Eurostat  
New lending is gradually recovering.  The gross 
volume of new loans to domestic residents 
increased in the first half of 2017 to EUR  1.4 
billion, from a very low base of EUR  890 million 
in the first half of 2016. The latest bank lending 
survey shows that credit standards for loans to 
business es and households remained unchanged 
since end of 2014. Banks are increasingly 
venturing into new lending opportunities, given the 
large amount of liquidity on their balance sheets 
010203040506070
050100150200250300350400 bn EUR % GDP
Stock of loans bn EUR  (rhs)
Stock of loans % GDPGraph  1.9: Private sector NPLs and coverage ratios, June 
2017  
 
(1) Data for Portugal is not available.  
Source:  ECB consolidated banking data.  
0102030405060
CY
EL
BG
HR
IT
IE
HU
SI
RO
LV
PL
ES
MT
AT
CZ
LT
SK
FR
DE
BE
DK
NL
EE
UK
FI
LU
SE
NPLs Coverage ratio
1. Economic situation and outlook  
 
11 and the pressing need to improve their financial 
results.  
Deposits increas ed in 2017 on the back of 
strengthened confidence.  Total deposits had 
increased by about EUR  240 million year -on-year 
(2.4 %) as of end November 2017. The highest 
annual growth rates were recorded for domestic 
and other euro area residents.  
Public finances  
Cyprus is expected to post sizeable budgetary 
surpluses in 2017 -2019.  The Commission projects 
general government surpluses of above 1  % of 
GDP in 2017 and 2018 and close to 2  % in 2019. 
The primary surplus for 2017 -2019 is expected to 
be among the highest  in the EU, at 3.5  % of GDP 
in 2017 and just below 4  % of GDP in 2018 and 
2019. Strong fiscal performance in 2017 is 
expected to have been driven by high revenue 
collection on the back of a favourable 
macroeconomic situation, positive developments 
in the l abour market and the fact that the 
government concluded gas exploration contracts 
for 2017 -2019. Revenue collection is expected to 
more than offset the impact of expansionary fiscal measures of 2017, such as the abolition of the 
immovable property tax, ter mination of the 
temporary wage levy and the additional hiring of 
soldiers. The structural balance is forecast to be in 
surplus (0.4% of GDP) in 2017 and close to a 
balanced position in 2018 and 2019.  
There are risks associated with financing 
permanent expe nditure increases from 
temporary revenue windfalls.  Public expenditure 
is projected to increase, albeit more slowly than 
revenue. However, the still -uncertain fiscal impact 
of health system reform, the absence of a 
mechanism to contain public payroll growt h 
beyond 2018 and pressures for fiscal relaxation 
may pose further risks in the medium term.  
The debt ratio is expected to decline steadily 
and fall below 94  % of GDP in 2019 . The 
downward debt trajectory reflects expected high 
primary surpluses and favou rable debt dynamics 
due to strong nominal growth. In the medium term, 
the high public debt remains subject to downside 
risks stemming from macroeconomic shocks, 
vulnerabilities in the financial system and gradual 
deterioration of the structural fiscal posi tion (see 
Section 4.1.1).  
1. Economic situation and outlook  
 
12                                                            
6 Source: http://www.investcyprus.org.cy/en/establishi ng-business -cyprus/tax --legal -framework/competitive -corporate -tax-system  Box 1.1: The impact of special -purpose entities on statistics and the real economy  
Special Purpose Entities (SPEs) are used to legally register and hold assets in Cyprus, including for 
risk insulation and tax planning purposes.  SPEs are legal entities registered and tax resident in Cyprus 
with few employees and/or no production, which are controlled by non -resident entities. They are mainly 
used by non -residents to channel funds to other non -residents, notably in the case of holding companies or 
intra-group financing operations. Companies can use SPEs to legally separate risk -bearing activities from 
other operations and valuable assets, for example at the request of their creditors. SPEs are also legal tools 
used to protect assets from bankruptcy proceedings, notably for economic agents originating from 
jurisdictions where contract  enforcement is poor or characterised by high levels of corruption. Setting up an 
investment vehicle, a subsidiary or a shipping company in Cyprus currently allows benefitting from 
relatively low taxation and a local pool of specialised expertise.  
SPEs ar e also widely used to register ships in Cyprus.  Shipping activities usually take place offshore. 
Therefore, shipping companies have an interest in structuring these activities through SPEs in favourable tax 
regimes such as Cyprus (see Section 4.1.3).6 Avai lable data on non -financial SPEs (mostly linked to 
shipping activities) show that they had total liabilities of about EUR 18 billion at end -2016, or about 100% 
of Cyprus' GDP. Non -financial SPEs are significantly leveraged (debt to equity ratio of 3.7) and  mostly 
funded from abroad (97% of outstanding loans).  
SPEs introduce a bias in Cyprus' economic statistics.  The economic transfer of transport equipment by 
non-financial entities owned by a resident of Cyprus has a large impact on external accounts, whil e its 
impact on the real domestic economy is limited to the leasing fee charged by these entities, which increases 
GDP. Under ESA2010, a vessel/aircraft is a Cypriot economic resident independently from the location of 
its activities if its economic owner is a resident of Cyprus. The gross financial assets and liabilities of 
financial SPEs offset each other, but considerably inflate the size of the financial accounts.  
Shipping -related transactions increase the volatility of investment, imports and exports s tatistics and 
have an impact on the GDP through the leasing services provided by ship -owning entities whose 
economic owners are residents of Cyprus.  The registration of a ship in Cyprus increases investment. This 
is however offset by a corresponding increa se in imports of goods. Likewise, when a vessel is de -registered 
from Cyprus, this reduces investment, but increases exports. Neither registration nor de -registration affect 
GDP, but the size of some important transactions (some ships can be worth several hundred million euros) 
can distort the analysis of investment and external trade.  
The debt of ship -owning SPEs weighs on the net international investment position.  The capital -
intensive nature of the shipping industry weighs significantly on the NIIP, as ship-owning SPEs have large 
financial liabilities towards foreign creditors, while they mostly hold tangible assets. Since the NIIP shows 
the financial position, and does not include real assets, the inclusion of ship -owning SPEs worsens 
significantly the NIIP. However, the impact risks for the real domestic economy are limited, as non -financial 
SPEs are currently overwhelmingly funded by foreign financial institutions or other related non -resident 
entities and own assets located outside Cyprus.  
The signifi cance of the large and negative NIIP is reduced when excluding SPEs.  The NIIP stood at 
minus EUR 22.5 billion (127.8 % of GDP) in 2016. As of end -2016, the net external debt of non -financial 
SPEs reached EUR 11.3 billion, or 62.5 % of the NIIP. According t o the Central Bank of Cyprus, the NIIP 
corrected from the impact of non -financial SPEs' own movable equipment was -71 % of GDP in 2015 and -
50.6 % of GDP in 2016. Furthermore, a large part of the external debt is composed of general government 
debt to the ESM and the IMF, which has a very long term maturity structure and therefore is not exposed to 
short term refinancing risk. Taking these factors into account, the "underlying" NIIP could be considered 
closer to the MIP threshold of -35% of GDP. However, it  still highlights Cyprus' high reliance on external 
credit to finance its economy.  
2. Progress with country -specific recommendations  
 
13  
Table  1.1: Key economic and financial indicators - Cyprus  
 
(1) NIIP excluding direct investment and portfolio equity shares.        
(2) Domestic banking groups and stand -alone banks, EU and non -EU foreign -controlled subsidiaries and EU and non -EU 
foreign -controlled branches. The aggregate NPL ratio, which covers all loan and advances, may be misleading for Cyprus 
due to the large exposures of domestic and foreign banks to central banks (representing 14% of gross loans) and other 
financial institutions (10% of gross l oans). For Cyprus the NPL ratio for the private sector, comprising only exposures to non -
financial corporations and households is more appropriate indicator (see Section 4.2).  
Source:   Eurostat and ECB as of 30 Jan 2018, where available; European Commissio n for forecast figures (Winter forecast 2018 
for real GDP and HICP, Autumn forecast 2017 otherwise)  
2004-07 2008-12 2013-14 2015 2016 2017 2018 2019
Real GDP (y-o-y) 4,4 0,1 -3,7 2,0 3,0 3,8 3,2 2,8
Potential growth (y-o-y) 3,4 1,7 -2,1 -1,4 0,4 1,1 1,4 1,7
Private consumption (y-o-y) 6,3 0,5 -2,7 2,6 3,3 . . .
Public consumption (y-o-y) 3,6 2,7 -7,6 -2,8 -0,4 . . .
Gross fixed capital formation (y-o-y) 9,9 -8,6 -15,2 13,6 35,0 . . .
Exports of goods and services (y-o-y) 2,7 0,5 3,2 6,3 3,9 . . .
Imports of goods and services (y-o-y) 6,1 -0,9 -0,2 8,1 6,6 . . .
Contribution to GDP growth:
Domestic demand (y-o-y) 6,7 -1,1 -5,4 2,9 6,8 . . .
Inventories (y-o-y) -0,3 0,4 -0,1 -0,1 -2,1 . . .
Net exports (y-o-y) -2,0 0,5 1,8 -0,9 -1,7 . . .
Contribution to potential GDP growth:
Total Labour (hours) (y-o-y) 1,3 0,6 -1,8 -1,1 0,0 0,5 0,5 0,6
Capital accumulation (y-o-y) 2,0 1,5 0,0 -0,1 0,5 0,7 0,8 0,9
Total factor productivity (y-o-y) 0,0 -0,3 -0,3 -0,3 -0,2 0,0 0,2 0,2
Output gap 3,6 0,3 -7,3 -3,6 -1,1 1,3 2,7 3,7
Unemployment rate 4,6 7,0 16,0 15,0 13,0 11,0 10,0 9,3
GDP deflator (y-o-y) 3,5 2,1 -1,3 -1,2 -0,9 1,2 1,1 1,6
Harmonised index of consumer prices (HICP, y-o-y) 2,1 2,7 0,1 -1,5 -1,2 0,7 1,2 1,3
Nominal compensation per employee (y-o-y) 3,7 2,7 -4,5 -1,2 -0,8 1,7 1,5 1,8
Labour productivity (real, person employed, y-o-y) 0,9 -0,1 0,2 0,5 -0,1 . . .
Unit labour costs (ULC, whole economy, y-o-y) 2,8 2,7 -4,7 -1,7 -0,7 1,0 0,5 0,5
Real unit labour costs (y-o-y) -0,7 0,7 -3,4 -0,5 0,2 -0,2 -0,5 -1,1
Real effective exchange rate (ULC, y-o-y) 1,1 0,6 -3,2 -6,1 -0,1 1,9 1,1 -1,2
Real effective exchange rate (HICP, y-o-y) -0,1 -0,4 0,2 -6,5 0,7 0,3 1,4 .
Savings rate of households (net saving as percentage of net 
disposable income) 3,8 0,3 -13,5 -13,7 . . . .
Private credit flow, consolidated (% of GDP) 23,7 17,5 -6,8 4,1 10,2 . . .
Private sector debt, consolidated (% of GDP) 259,7 311,3 346,3 353,5 344,6 . . .
of which household debt, consolidated (% of GDP) 87,2 116,3 128,9 127,7 121,2 . . .
of which non-financial corporate debt, consolidated (% of GDP) 172,5 195,0 217,4 225,8 223,4 . . .
Gross non-performing debt (% of total debt instruments and total 
loans and advances) (2) . 8,9 36,4 34,7 33,8 . . .
Corporations, net lending (+) or net borrowing (-) (% of GDP) -11,7 0,5 11,0 7,0 1,6 1,5 0,9 0,4
Corporations, gross operating surplus (% of GDP) 23,8 20,3 22,2 21,6 20,8 20,7 20,9 21,5
Households, net lending (+) or net borrowing (-) (% of GDP) -5,7 -4,9 -8,1 -8,7 -7,8 -8,5 -9,2 -9,8
Deflated house price index (y-o-y) 6,9 -4,7 -2,7 0,3 1,6 . . .
Residential investment (% of GDP) 10,9 8,2 4,1 4,2 4,6 . . .
Current account balance (% of GDP), balance of payments . -8,9 -4,6 -1,5 -4,9 -5,4 -6,2 -6,8
Trade balance (% of GDP), balance of payments . -6,0 1,9 0,8 -0,8 . . .
Terms of trade of goods and services (y-o-y) 0,5 -0,2 -0,3 -0,5 0,1 0,0 -0,2 0,0
Capital account balance (% of GDP) . 0,3 1,1 0,3 0,2 . . .
Net international investment position (% of GDP) .-109,9 -142,9 -145,0 -127,8 . . .
Net marketable external debt (% of GDP) (1) . -84,2 -109,3 -136,1 -118,4 . . .
Gross marketable external debt (% of GDP) (1) .578,3 512,5 500,3 492,3 . . .
Export performance vs. advanced countries (% change over 5 years) -13,5 -8,7 -13,7 -10,6 -5,7 . . .
Export market share, goods and services (y-o-y) . . 1,6 -1,5 4,7 . . .
Net FDI flows (% of GDP) . 1,7 -4,8 47,4 -7,8 . . .
General government balance (% of GDP) -0,9 -4,1 -6,9 -1,2 0,5 1,1 1,4 1,9
Structural budget balance (% of GDP) . -4,6 1,2 1,6 1,1 0,4 0,0 -0,1
General government gross debt (% of GDP) 59,8 60,1 105,0 107,5 107,1 103,0 98,3 93,9
Tax-to-GDP ratio (%) 32,2 32,4 32,5 33,1 33,3 34,0 33,9 34,2
Tax rate for a single person earning the average wage (%) 7,9 . . . . . . .
Tax rate for a single person earning 50% of the average wage (%) 6,3 . . . . . . .forecast
2. Progress with country -specific recommendations  
 
14 Progress with implementing the 
recommendations addressed to Cyprus  in 
2017  (7) has to be seen in a longer perspective 
since the introduction of the European Semester 
in 2011.  Looking at the multi -annual assessment of 
the implementation of the CSRs since these were 
first adopted, 69  % of all CSRs addressed to 
Cyprus have recorded at least ʻsome progressʼ. 
31 % of these CSRs recorded ʻlimitedʼ or ʻno 
progressʼ (see Graph 2.1). Full implementation and 
substantial progress have been achieved in a wide 
range of reforms, in particular fiscal and financial 
ones supported by the 2013 -2016 EU -IMF 
economic adjustment programme. These reforms 
address most of the CSRs made in 2011 and 2012. 
As regards CSRs made in 2016, these mostly cover 
persisting challenges, which are also reflected in 
the 2017 CSRs.  
Graph  2.1: Overall multiannual implementation of 2011 -
2017 CSRs to date  
 
* The overall assessment of the country -specific 
recommendations related to fiscal policy excludes 
compliance with the Stability and Growth Pact.  
** 2011 -2012: Different CSR assessment categories  
***The multiannual CSR assessment looks at the 
implementation since CSRs were first adopted until February 
2018 Country Report.  
****The multi -annual CSR assessment excludes the years 
when Cyprus was under an economic adjustment 
programme.  
Source:  European  Commission  
The public financial management and 
budgetary framework was significantly 
strengthened  to ensure transparency and 
sustainability of public finances. The pension 
system was reformed  to ensure its long -term 
sustainability. CSR on social benefits  and the high 
‘at risk of poverty’ rate among the elderly were 
addressed by the guaranteed minimum income 
                                                           
(7) For the assessment of other reforms implemented in the 
past, see Section 4.  allowing for more efficient and targeted social 
benefits.  
The financial sector also underwent significant 
reforms , including the modernisation of the 
supervisory framework. Insolvency and 
foreclosure frameworks were also modernised. 
Sector -specific obstacles to the establishment and 
free provision of services  have been mostly 
removed. Measures were introduced to  promote 
renewable energy production  and d iversify the 
energy mix. However, energy production is still 
heavily dependent on fossil fuels. 
Recommendations on the labour market  have 
been implemented through a reform of wage 
indexation, measures addressing unemployment 
(notably youth and long -term) a nd policies to 
upgrade skills in the labour force.  
Cyprus has made so far limited  (8) progress in 
addressing the 2017 CSRs.  Reforms of the public 
administration, local government and state -owned 
entities remain pending, even though new rules on 
staff mobi lity were adopted. Some measures were 
taken or announced to improve the efficiency of 
the judicial system, but a comprehensive reform is 
still at an early stage. Administrative measures 
were taken to reduce the backlog in the issuing of 
title deeds, but no  extensive solution has yet been 
proposed. Measures were announced to help 
accelerate the reduction of NPLs, in line with the 
euro area recommendation (EAR) 4, and to ensure 
the effective implementation of the insolvency and 
foreclosure frameworks, yet pro gress is still 
limited. Implementation of the action plan for 
growth advances, focussing on improving the 
business environment, in line with the EAR 1. The 
privatisation plan is largely on hold, while plans to 
open up the electricity market somewhat advanc e. 
Steps were made on increasing the capacity of the 
public employment services, in line with EAR 3, 
while on education reform only limited progress 
was achieved. Finally key legislation establishing a 
National Health System was adopted in June 2017 
and im plementation is underway.  
                                                           
(8) Information on progress and action taken to address the 
policy advice in each subpart of a CSR is p resented in the 
overview table (see Annex A). This overall assessment of 
CSR 1 does not include an assessment of compliance with 
the Stability and Growth Pact. Source: European 
Commission.  
14%
17%
46%20%3%
No Progress
Limited Progress
Some Progress
Substantial Progress
Full Implementation2. PROGRESS WITH COUNTR Y-SPECIFIC RECOMMENDAT IONS  
 
 
15  
Table  2.1: Summary assessment of CSR implementation  
 
Source:  European Commission  
 
2017 CSRs to Cyprus  Overall assessment of progress with the 2017 
CSRs: Limited Progress  
CSR1:  By the end of 2017, adopt key legislative reforms 
aiming to improve efficiency in the public sector, notably 
to the functioning of public administration, governance of 
State -owned entities and local governments.  (MIP 
Relevant)  Limited  progress* :  
 Some progress regarding the legislative 
reforms for the functioning of public 
administration.  
 No progress  regarding the law on the 
governance of state -owned enti ties. 
 No progress regarding the reform of local 
governments.  
CSR2:  Increase the efficiency of the judicial system by 
modernising civil procedures, implementing appropriate 
information systems and increasing the specialisation of 
courts. Take additional measures to eliminate 
impediments to the full implementation of the insolvency 
and foreclosure frameworks, and to ensure reliable and 
swift systems for the issuance of title deeds and the 
transfer of immovable property rights. (MIP Relevant)  Limited progre ss: 
 Limited progress  on increasing the eff iciency 
of the judicial system, modernisation of civil 
procedures and on increasing the specialisation 
of courts.   
 Limited progress  in eliminating impediments 
to the full implementation of the insolvency 
and forecl osure frameworks.  
 Limited  progress  on ensuring reliable and 
swift systems for the issuance of title deeds and 
the transfer of immovable property rights . 
CSR3:  Accelerate the reduction of non -performing loans 
by setting related quantitative and time -bound  targets for 
banks and ensuring accurate valuation of collateral for 
provisioning purposes. Create the conditions for a 
functional secondary market for non -performing loans. 
Integrate and strengthen the supervision of insurance 
companies and pension funds.  (MIP Relevant)  Limited  progress : 
 Limited  progress on accelerating the 
reduction of non -performing loans by setting 
up a task force to develop national strategy and 
to evaluate comprehensive solutions including 
a new targeting framework.  
 Limited progress  regarding the creation of the 
conditions for a functional secondary market 
for non -performing loans.  
 Limited progress  on strengthening the 
supervision of insurance companies and 
pension funds.  
CSR4:  Accelerate the implementation of the action plan 
for g rowth, focusing in particular on fast -tracking 
strategic investments and improving access to finance, 
and, by the end of 2017, resume the implementation of the 
privatisation plan. Take decisive steps towards the 
ownership unbundling of the Electricity Auth ority of 
Cyprus and, in particular, proceed with the functional and 
accounting unbundling by the end of 2017.   
(MIP Relevant)  Limited progress : 
 Some progress  in accelerating the 
implementation of the action plan for growth  
focusing in particular on busines s environment, 
facilitating strategic investments and  improving 
access to finance .  
 Limited progress  regarding the 
implementation of the privatisation plan.  
 Limited progress regarding the ownership 
unbundling of the Electricity Authority of 
Cyprus.  
CSR5:  Speed up reforms aimed at increasing the capacity 
of public employment services and improving the quality 
of active labour market policies delivery. Complete the 
reform of the education system to improve its labour 
market relevance and performance, i ncluding teachers’ 
evaluation. By the end of 2017, adopt legislation for a 
hospital reform and universal healthcare coverage. (MIP 
Relevant)  Some progress : 
 Some progress  in increasing the capacity of 
the public employment services and improving 
the quality  of active labour market policies.    
 Limited progress  regarding the reform of the 
education system to improve its labour market 
relevance and performance.  
 Substantial progress  regarding the adoption 
of the legislation for a hospital reform and 
universal healthcare coverage.   
* This overall assessment of CSR1 does not include an assessment of com pliance with the Stability and G rowth Pac t 
 
2. Progress with country -specific recommendations  
 
16 ESI Funds are pivotal in addressing key 
challenges to inclusive growth and convergence 
in Cyprus,  notably by the promotion and 
expansion of e -services and e -government, the 
support for women's and youth entrepreneurship, 
the enhancement of the energy efficiency, the strengthening of links between vocational training 
and adult learning and the labour market needs. 
ESI Funds are also instrumental in promoting 
R&D in the private sector, for improving the links 
between research, development and innovation on 
one hand and industry on the other.   
2. Progress with country -specific recommendations  
 
17 Box 2.1: Tangible results delivered through EU support to structural change in Cyprus  
Cyprus is a beneficiary of European Structural and Investment Funds (ESI Funds) support and can 
receiv e up to EUR 917 million until 2020 . This represents around 1 % of GDP annually over the period 2014 -
2018 and 20% of public investment (1). By 31 December 2017, an estimated EUR 330 million (36 % of the total) 
was allocated to projects on the ground. EU fun ding has paved the way for over 100 enterprises to be supported 
in introducing over 80 new products and over 250 enterprises are supported in the manufacturing sector. 
Approximately EUR 17 million has been contracted to investments to modernise and restruc ture the agro -food 
sector and promote young farmers entrepreneurship. Additional funds have been also allocated to boosting youth 
employment under the Youth Employment Initiative. Out of the EU financing, EUR 40 million is to be delivered 
via financial ins truments i.e. twice the amount delivered in the 2007 -2013 period.  
ESI Funds help address structural policy challenges and implement country -specific recommendations.  
Actions financed cover, among others, boosting competitiveness and economic growth; promo ting R&D in the 
private sector; strengthening links between R&D, innovation and industry; supporting women and youth 
entrepreneurship; promoting e -services and e -government; helping develop more sustainable economy; assisting 
Cyprus to meet EU standards, i n particular as regards waste treatment and recycling; strengthening links between 
vocational training and the labour market and adult learning development.  
Various reforms were undertaken already as precondition for ESI Funds support.  Smart Specialisation  
Strategies for research and innovation were developed to focus efforts on product specialisation with strong 
market potential. A strategic policy framework was set up for digital strategy which will stimulate the ICT 
products and services and increase the  development of ICT applications for e -government. The adoption of 
adequate water pricing policy, a river basin management plan and solid waste management plans will ensure 
efficient use of resources, promotion of sustainable investments as well as respect  of the EU environmental 
acquis. Efforts are made to complete the outstanding ex -ante conditionality related in particular to re -use and 
recycling as soon as possible in order to avoid a possible suspension of interim payments.  
Cyprus is advancing the take  up of the European Fund for Strategic Investments (EFSI).  As of December 
2017, overall financing volume of operations approved under the EFSI for Cyprus amounted to EUR 45 million, 
which is expected to trigger total private and public investment of EUR 81  million. More specifically, 1 project 
under the Infrastructure and Innovation Window has been approved so far in the energy sector, amounting to 
EUR 35 million in EIB financing under the EFSI. This is expected to trigger nearly EUR 53 million in 
investmen ts. Under the SME Window, 2 agreements with financial intermediaries have been approved so far. 
European Investment Fund financing enabled by the EFSI amounts to EUR 10 million, which is expected to 
mobilise more than EUR 28 million in total investment. Ab out 125 smaller companies or start -ups will benefit 
from this support.  
Funding under Horizon 2020, the Connecting Europe Facility and other directly managed EU funds is additional 
to the ESI Funds. By the end of 2017, Cyprus has signed agreements for EUR 51 million for projects under the 
Connecting Europe Facility.  
https://cohesiondata.ec.europa.eu/countries/CY    
(1) Public investment is defined as gross fixed capital formation + investment grants + national expenditure on agriculture a nd 
fisheries. (2) Before programmes are adopted, Member States are required to comply with a number of so -called ex -ante 
conditiona lities, which aim at improving conditions for the majority of public investments areas.  
2. Progress with country -specific recommendations  
 
18 Box 2.2: Technical support for the implementation of structural reforms in Cyprus  
Cyprus is benefiting from technical support provided by the Commission's SRSS1 to help implement 
structural reforms in various areas including public administration and justice, growth and the business 
environment, healthcare, education, public financial management and taxation.  
With SRSS support, the Cypriot authorities intend to i mprove the efficiency of the judicial system. In 
this context, an in -depth functional review of the operations, processes and management of courts is 
ongoing. In addition, the reforms underway to improve the operations of the Law Office are being supported  
through a review of the latter's functions, processes, structures and management.  
The Cypriot authorities have drawn on SRSS support for the implementation of the Action Plan for 
Growth. Assistance was provided for monitoring entrepreneurial activity, dev eloping social 
entrepreneurship, and assessing and developing the non -credit cooperative sector.  In addition, the SRSS has 
mobilised support for strengthening the administrative capacity for public investment management. In an 
effort to streamline the iss uance of building permits and title deeds, the Cypriot authorities have, with 
technical support, reviewed the legislative framework for planning and construction. The authorities have 
also benefited from technical support to prepared reforms in the area of  energy. This includes assistance for: 
revising the National Action Plan for Renewable Energy Sources; developing the forthcoming Integrated 
National Energy and Climate Plan; developing a national energy efficiency strategy, revising electricity 
tariffs; a nd assessing the potential of high -efficiency cogeneration of heat and power. In the area of 
environment, technical support has enabled the authorities to develop, economic tools for the 
implementation of its Municipal Waste Management Plan.  
In the area o f health, Cyprus has benefited from technical support on the design, financing and 
management of the National Health Insurance System , reimbursement methods of outpatient laboratory 
tests, on capacity planning and health technology assessment and options f or designing and negotiating 
agreements on outpatient pharmaceuticals.  
In the area of education, the SRSS assisted the authorities towards the development of an IT School 
Management System  and the improvement of the teachers' professional learning initiat ive.  Also, the SRSS 
has been providing support for the introduction of performance based funding in higher education and the 
reorganisation of the school boards.  
In the area of public finance, the Cypriot authorities have made progress, using technical su pport, in 
bringing accounting practices in line with best international practices and international public -sector 
accounting standards.  In the area of revenue administration, technical support has focused on the 
integration of the Inland Revenue Department  and VAT Services into a function -based, compliance strategy 
driven tax department. Support was also provided for the implementation of an information security risk 
assessment of the main IT tax systems, the preparation of the procurement procedure for a n ew tax IT 
system, and the development and implementation of a strategy for promoting TaxisNet, the online system 
for electronic submission of income tax returns. Additional support included training on VAT laws and 
regulations, revision of the audit manual s, and improvements of data collection and analysis through a 
survey on taxpayer compliance behaviour and satisfaction.  
 
1  The Structural Reform Support Service (SRSS) provides, in cooperation with the relevant Commission services, tailor -
made technical support, which does not require co -financing and is provided at a Member State's request. The support 
addresses priorities identified in the context of the EU economic governance process (i.e., implementation of country -
specific recommendations), but the scope of the SRSS support is wider as it can also cov er reforms linked to other 
Commission priorities, or reforms undertaken at the initiative of Member States.  
 
 
19 The in -depth review for the Cyprus' economy is 
presented in this report.  In spring 2017, Cyprus 
was identified as having excessive macroeconomic 
imbalances, in particular relating to the very high 
share of non -performing  loans, which burdens the 
financial sector and the high stock of private, 
public, and external debt weighing on the economy 
in the context of high unemployment and weak 
potential growth. The 2018 Alert Mechanism 
Report (European Commission, 2017d) conclude d 
that a new in -depth review should be undertaken 
for Cyprus to assess developments relating to 
identified imbalances. Excessive government debt 
is discussed in Section  4.1.1, financial sector 
imbalances in Section  4.2.1, private indebtedness 
in Section  4.2.2 and external imbalances in 
Section  1. Investment is analysed in Section  4.4.1, 
given its links to private indebtedness and growth. 
(9). 
3.1 Imbalances and their gravity  
Non-financial private sector debt is high (albeit 
decreasing slowly) and remains fa r above the 
levels estimated by fundamental and prudential 
benchmarks  (see Section  4.2.1). It contracted 
from 353.5  % of GDP in 2015 to 344.6  % of GDP 
in 2016, as a result of deleveraging by households. 
The drop was driven by an absolute reduction in 
the s tock of loans and ‘passive deleveraging’ 
(i.e. when nominal economic growth is faster than 
the accumulation of debt). Households’ debt fell 
from 127.7  % of GDP to 121.2  %, mainly as a 
result of asset disposals and swaps as well as debt 
forgiveness and rest ructuring rather than actual 
repayment. NFCs indebtedness remained broadly 
unchanged at 223.3  % of GDP in 2016, among the 
highest in the EU, even when taking into 
consideration that non -financial SPEs account for 
over a third of the NFCs’ debt stock. The h igh debt 
level contains growth and the scope for more 
investment from the non -financial private sector.  
Public debt has decreased significantly, but 
remains high, at around 99 % of GDP in 2017.  
High public debt makes Cyprus vulnerable to 
                                                           
(9) An asterisk indicates that the analysis in the section 
contribu tes to the in -depth review under the MIP.  financial or econ omic shocks. However, the large 
proportion of long -term low -interest debt provided 
by external creditors during the economic 
adjustment programme, the current low sovereign 
bond yields and relatively low medium -term 
financing needs mitigate refinancing ris ks. Cyprus 
has significantly reduced debt thanks to robust 
fiscal performance and active debt management 
operations.  
Cyprus still has a large negative net 
international investment position (NIIP), 
combined with a current -account deficit.  The 
NIIP stood at  -120.6% of GDP in 2017Q3. 
Excluding non -financial SPEs registered in Cyprus 
(see Section  1 and box  1.1), which distort the 
liability position, the NIIP was about -44 % of 
GDP, and has been on a declining trend, 
suggesting that the non -SPE sector of the Cy priot 
economy is adjusting. The persistent current -
account deficit, however, weights on NIIP and 
reflects low domestic savings compounded by 
increased investment.  
Around half of the financial sector’s loan book 
is currently non -performing.(10) The deep 
recession triggered a surge in NPLs, which are still 
very high, fuelled by the high level of indebtedness 
and weak contract enforcement. The high stock of 
NPLs continues to raise concerns for financial 
stability, as it weighs on banks’ profitability and 
limit s their ability to generate capital and increase 
credit supply.  
The recovery of the housing market may help to 
reduce NPLs and household debt.  A large 
proportion of loans have real estate collateral. The 
long downward price adjustment discouraged 
mortgage holders and banks from selling their 
assets and may have incentivised strategic defaults. 
Guiso et al.   (2013) show that willingness to 
default depends on and increases with both the 
absolute value and the value of mortgage in excess 
of current house price . (11) The recent increase in 
                                                           
(10) The text refers to the NPL ratio for the private sector, 
comprising only of exposures to non -financial corporations 
and households. See section 4.2.1.  
(11) Alongside other factors, such as others having defaulte d 
previously and the probability of becoming unemployed.  3. SUMMARY OF THE MAIN FINDINGS FROM THE 
MACROECONOMIC IMBALANCE PROCEDURE IN-DEPTH 
REVIEW  
3.1. Summary of the main findings from the MIP in -depth review  
 
20 house prices and transactions is expected to help 
both creditors and debtors to dispose debt and 
liquidate the collateral underlying NPLs. However, 
difficulties in the issuing and transfer of title deeds 
remain and deter some p rospective buyers.  
Potential growth is expected to increase 
somewhat over the medium term, helping to 
slowly unwind the accumulated stock 
imbalances.  Recovering investment, the return of 
discouraged workers to the labour force and 
declining unemployment a re expected to raise 
growth potential and support total factor 
productivity. The latter is expected to start 
contributing positively in 2018 after a decade of 
negative contribution. At the same time, very high 
debt still weighs on growth, limiting the 
availability of credit and impeding the expansion 
of existing businesses and the start -up of new ones. 
Potential growth is estimated at 1 -1.6 % in the 
medium term; closer to, though still below, the 
euro area average, and far below the historical 
levels for Cy prus. Furthermore, the composition of 
investment may not be very conducive to long -
term growth and productivity (see Sections  1 and 
4.4.2).  
3.2 Evolution, prospects and policy responses  
Private sector deleveraging is progressing 
slowly, despite limited us e of the new insolvency 
tools.  Private debt reduction has been supported by 
the better economic situation and more so by 
valuation effects (debt write -offs and debt -to-asset 
swaps). The insolvency framework has still been 
used only scarcely to date, due to  obstacles to its 
effective application (i.e. inadequate court rules, 
capacity limitations, legal impediments) and 
inefficiencies in the judicial system.  
Supposing Cyprus maintains a prudent fiscal 
policy stance, government debt is projected to 
fall below  68% of GDP by 2028.  Medium -term 
fiscal sustainability risks are moderate, mainly due 
to the favourable fiscal position. To that end, a 
sound fiscal policy, in particular limiting public 
expenditure increases to medium -term potential 
growth, remains key. H owever, there are risks  
such as the lack of a mechanism to contain 
increases in the public wage bill beyond 2018 and 
the slow pace of reforms of the public 
administration and local governments. Cyprus 
could also better support potential growth by shifting  public expenditure towards more growth -
enhancing projects in a fiscally neutral manner.  
The NIIP is on a downwards trend but is still 
largely negative . It improved from -145 % of 
GDP in 2015 to -127.8  % of GDP in 2016 and 
further to -120.6% in the third quarter of 2017. The 
NIIP of non -financial SPEs, which have limited 
links to the real economy, accounted for a very 
large share of NIIP, at -76.4 % of GDP, while the 
contraction of overall NIIP was achieved by 
adjustment in the real sector. The general 
government long -term debt to international 
creditors accounts for a large part of the remaining 
position, which further mitigates risk. However, 
banks’ external liabilities remain high, exposing 
the financial sector and the economy to shifts in 
investor and d epositor confidence.  
The current -account deficit has widened.  
Activities of SPEs heavily influence Cyprus' 
current account and influence its volatility, which 
complicates its timely monitoring. The current 
account deficit increased in 2016 to 4.9  % of GDP 
from 1.5  % in 2015, notably due to negative 
household savings ( -3.1 % of GDP in 2016). In 
2017, it has continued further widening (data up to 
third quarter, on a four quarter rolling basis) and is 
expected to remain in deficit in the medium term 
amid stron g economic recovery. Cyprus would 
need a current -account balance close to zero to 
reduce its NIIP, excluding SPEs, to the MIP 
threshold of -35 % of GDP by 2026.  
The household savings rate remained negative . 
It is estimated to have been negative for the fi fth 
year in a row, suggesting that households have 
been running down their accumulated savings 
(assets) in order to repay debt and smooth 
consumption. The persistence of negative 
household savings in good times is worrisome. 
Other factors, such as a change  of attitude towards 
savings after the 2013 bail -in, low interest rates 
and currently high out -of-pocket payments in 
health, might have caused Cypriot households to 
save less.  
Continued loan restructurings have reduced 
NPLs.  Banks have continued to restruc ture loans, 
prioritising measures such as debt -to-assets swaps 
and debt write -offs. Recently, the ratio of NPLs to 
gross loans started to fall, albeit slowly (see 
Section 4.2.1).  
3.1. Summary of the main findings from the MIP in -depth review  
 
21 Meanwhile policy measures have had a limited  
impact on debt reduction and NPLs.  Weak 
contract enforcement fosters debt repayment 
indiscipline, which continues to hamper private 
sector deleveraging. It stems from inefficiencies in 
the judicial system, limited use of the foreclosure 
and insolvency fra meworks, and persistent 
information gaps regarding borrowers. Some 
progress was made in addressing the shortcomings 
in the system for issuing and transferring property 
title deeds, but significant policy gaps remain.  
A key challenge is to avoid the build -up of new 
financial sector imbalances in the short term.  
Banks’ profitability is expected to remain 
challenged by risk provisioning and impairments, 
while credit growth is likely to be constrained by a 
limited pool of eligible borrowers. Low investment 
returns in the banking sector combined with 
abundant liquidity might incentivise risk -taking. At 
the same time, the increasing recourse to 
debt-to-asset swaps leads banks to accumulate real 
estate assets on their balance sheet. This may pose 
challenges in the  future as they will need to devote 
resources to managing the assets (see 
Section  4.2.1).  
The housing market is recovering, but 
regulatory inefficiencies remain . House prices 
have bottomed out and property sales have picked 
up, but significant backlogs and  delays continue to 
affect the issuing of title deeds. Major obstacles to 
the transfer of title deeds from sellers to final 
buyers have not been resolved. Housing supply is 
responding to the increased demand, but is 
obstructed by long delays in issuing bui lding 
permits and restricted credit availability. The lack 
of a reliable and transparent property transactions 
system does not allow banks to monitor the 
proceeds of sales from indebted and 
non-performing developers.  
Still-low labour productivity might co nstrain 
long-term growth.  Productivity has broadly 
stagnated since 2008 and investments that improve 
it (i.e. those not linked to ship registrations or 
residential construction) remain relatively limited 
(see Section  4.4.1). In the medium term, emerging 
upward cost pressures could erode competitiveness 
if productivity does not improve. Moreover, the 
labour -market relevance and quality of young 
jobseekers’ education remain a concern.  Structural reforms to improve the business 
environment are gradually being  implemented.  
The action plan for growth aims to improve the 
business environment, promote alternative 
financing sources and boost investment and 
employment in priority sectors, including tourism 
and shipping. In addition, the government intends 
to cut the  regulatory burden by making procedures 
more efficient, developing digital public services 
and improving the quality of regulation. However, 
the privatisation plan, which was adopted to attract 
investment and foster efficiency in public utilities, 
has larg ely been put on hold.  
3.3 Overall assessment  
Cyprus still faces significant challenges in the 
form of very high levels of NPLs burdening the 
financial sector, combined with large stocks of 
private, government and external debt.  The 
current -account deficit is not conducive to a 
sustainable correction of the NIIP. Government 
debt is on a downward path, but the prudent fiscal 
policy needs to be maintained if the projected pace 
of debt reduction is to materialise. In the private 
sector, debt and the NPL ratio r emain high. The 
surge in NPLs has dried up credit supply and is 
weighing on investment and harming the growth 
potential of the economy. Private sector savings 
fell in 2016 and are expected to have remained 
weak in 2017, leading to a worsening of the 
saving s-investment balance.  
The implementation of policy measures to 
address macroeconomic imbalances remains a 
challenge.  Only limited progress has been 
recorded regarding the implementation of 
measures addressing the macroeconomic 
imbalances (see Section 2 an d Annex A). 
Measures taken to reduce NPLs, such as the 
revised insolvency framework and a strengthened 
supervisory and regulatory framework, still face 
obstacles to effective application. Other reforms 
regarding public administration, the justice system, 
title deeds and improvements to the business 
environment are on -going but at a slow pace, while 
privatisation plan has lost momentum.  
3.1. Summary of the main findings from the MIP in -depth review  
 
22   
Table  3.1 Macroeconomic Imbalance Procedure assessment matrix for Cyprus  
 
 
(Continued on the next page)  
This MIP Assessment Matrix summarises the main findings of the in -depth review in the country report. It focuses on imbalances and 
adjustment issues relevant for the MIP.  
 Gravity of the challenge  Evolution and prospects  Policy response  
Imbalances (unsustainable trends, vulnerabilities and associated  risks)  
External Balance  The NIIP stood at -127.8% 
of GDP in 2016 . The 
current account balance, 
based on 3 -year average , 
stood at -3.6%. This falls 
short of what is required 
for a swift external 
rebalancing.  
The NIIP and the current 
account are biased  by non-
financial  SPEs  (see Box 
1.1). 
The REER depreciated by 
6.5% over three years, 
beyond the MIP threshold 
of -5%.  
Over the last 5 years 
Cyprus lost 3% of world 
export shares . The NIIP kept contracting in 2017. 
The current account deficit, 
however, is not conductive to 
durable NIIP reduction . The current 
account deficit widened to 4.9% in 
2016 and remained in deficit in 
2017.   
The real effective exchange rate 
started appreciat ing in 2016  and 
continued in 2017 , eroding cost 
competitive ness. Unit labour costs 
fell in 2016 but the downwards 
adjustment seems to have paused  in 
2017.   
Domestic savings are low due to 
negative savings of households. 
This increases the gap  between 
savings and investment.  Tourism exports have been stimulated by 
structural reforms aimed at extending the 
tourism season and improving connectivity, 
but less has been done in other areas.  
Authorities try to control wage growth. A 
new wage indexation mechanism (CoLA) 
for the private sector has been agreed by 
social partners for 2018 -2020 based on 
50% of inflation  once a year . In the public 
sector the same mechanism applies  
permanently,  in addition to  the existing 
collective agreemen t until 2018 .  
Private debt  Private debt in Cyprus 
stood  at 34 4.6% of GDP in 
2016, among the highest 
level in the EU.  
A large proportion of debt 
stock  is non-performing , 
despite the economic 
recovery, due to poor 
contract enforcement  and 
inefficient implementation 
of the foreclosure and 
insolvency frameworks . Deleveraging continues at a slow 
pace, with trend continuing in 2017 
as a result of declining debt stock, 
strong real growth and inflation .  
The capitalisation of unpaid interest 
on the large stock of NPLs inflates 
the debt stock .  
The use of insolvency procedures 
remains limited . Recovery of 
property prices  and more active real 
estate market may help to reduce  
debt.  Debt -to-asset swaps have be en used as a 
deleveraging tool, as inefficiencies in the 
insolvency service and the judicial system 
deter  the use of the new insolvency tools. 
Banks have increase d debt write offs.  
Reforms aiming to improve the protection 
of property rights (notably regard ing title 
deeds) are being adopted at a slow pace.  
Rules of Court for insolvency have been 
partly updated, while amendments to civil 
procedure have been proposed to better  
enforce contracts and court decisions.  
Public debt  The Government debt -to-
GDP ratio  was high , at 
around 99 % in 2017, 
exposing the country to 
changes in financial or 
economic conditions that 
may increase financing 
costs.  
However, l arge share of 
long-term low -interest debt 
provided by external 
creditors during the 
economic adjustment 
programme mitigates  risks 
to some extent . The debt -to-GDP ratio peaked in 
2015 and is projected to gradually 
decline  below 94% and 68%  of 
GDP in 2019  and 2028, 
respectively . 
Cyprus' sovereign  credit rating has 
improved significantly since mid -
2013, but remains at least one notch 
below investment grade.   
Yields on the longest term 
marketable debt (8 -year) have 
declined substantially: f rom 3.5% at 
the end of 2016 to 1.5% in January 
2018.  
The tax base is concentrated on a 
few components , in particular on 
corporate income tax  and VAT , and 
the immovable property  tax was 
abolished. This might pose risks to 
the long -term sustainability of tax 
revenue.  Active debt -management policy has 
allowed containing refinancing risk , 
smoothing -out the debt repayment schedule  
in the medium -term and quicker reduction 
of debt. 
 
 
3.1. Summary of the main findings from the MIP in -depth review  
 
23 Table (continued)  
 
 
Source:  European Commission  
Financial Sector  At around 45% of the total 
loan stock, non -performing 
loans (NPLs) in the 
Cypriot banking sector 
remain among the highest 
in the euro area.  
Banks have a strong 
exposure to the property 
market. A  large proportion 
of loans are collateralised, 
while banks increasingly 
take over real estate 
collateral as part of NPL 
resolution efforts .  
Banks' weak underlying 
profitability and sustained 
provisioning needs are 
negatively affecting  
capitalisation.  The ratio of non -performing  loans  
kept declining slowly in 2017 , to 
52.7% for  households and non -
financial corporations loans  at end -
June 2017  from  54.8% at end 2016 . 
The high level of collateralised 
lending and r elatively benign  
estimates of expected losses on 
collateralised loans have kept 
provisions  at levels below the EU 
average, although there has been 
some catching up.   
Capacity to build up further capital 
buffers is still hampered by low 
profitability and high NPL risks. 
The flow of credit to the economy is 
still limited.  More information has been made available 
to creditors through the credit and company 
registry but the quality and breadth of 
available information can be enhanced.  
Targets for loan restructuring and early 
arrears management have been set but  it 
had been difficult for banks to meet them .   
There are still impediments to the 
implementation of the reformed fo reclosure 
framework.  
Legislation allowing the sale of non -
performing loans was enacted but some 
provisions are considered overly restrictive . 
Provisioning requirements have been 
enhanced . Provisions improved and are 
now in line with the euro area averages.  
Adjustment issues  
Potential growth  Potential growth is 
estimated at around 1 -1.6% 
in the medium term , while 
higher rates would be 
needed to permit the 
economy to rapidly grow 
out of debt .  Potential growth was revised up in 
line with increasing  investment and 
improving labour market .  The 
investment to GDP ratio markedly 
increased , although a fair share of 
investment is linked to construction 
and ship registrations . Productivity 
growth remains weak . An action plan for growth is in place to 
impro ve the business environment and help 
develop key sectors of the economy, but 
has only been partially implemented.  
A privatisation plan was adopted to attract 
investment, increase competition and 
reduce prices in network industries, but its 
implementation has st alled . 
Unemployment  Unemployment was high at 
11.3 % in 201 7. The 3 -year 
average was 13.1%, still 
above the MIP threshold.  
Youth and  long term 
unemployment are also 
high but already within the 
threshold . 
The activity rate  has 
reached 73.4% in 2016,  0.2 
p.p. lower than in 2013 but 
within the MIP threshold  Unemployment has markedly 
shrunk in 2017 on the back of 
economic recovery, to 1 0.5% in 
2017 Q3. Youth and long -term 
unemployment also contract ed, 
albeit still high at  respectively 
25.1% and 4. 3% in 2017 Q3.  
The capacity of the public 
employment services to provide 
quality services to the unemployed, 
reach out to NEETs, and help 
reduce welfare dependence remains 
sub-optimal. Participation in 
Vocational and Education Training 
remains low and the  relevance and 
quality of young entrants in the 
labour market remains a concern . 
Activity rate is increasing alongside 
economic recovery.  The reform of the public employment 
services has been delayed and the impact of 
ALMPs implemented is still to be 
evaluated.  
Measures are being taken to enhance 
vocational training and the quality of 
higher education, but the implementation is 
slow.  
Conclusions from IDR analysis  
 Cyprus faces important imbalances in the form of a weak financial sector, combined with large stocks of private, public, and external 
debt. The high ratio of non -performing loans in the domestic banking system constrains deleveraging and banks' profitabili ty, 
reducing the amount of credit that can be channelled to the economy.  
 
 Private sector deleveraging and the reduction of the non -performing loans continue to be hampered by poor contract enforcement, 
inefficiencies in the judicial system, obstacles to t he use of foreclosure and insolvency legislation and insufficient information on 
borrowers. Delays in reforming the system of issuance and transfer of title deeds continue, posing problems in the context of  a large 
proportion of collaterised loan stocks. T he Cypriot current account deficit is larger than what is required to bring down the NIIP to 
more manageable levels, reflecting very low domestic savings amid recovering investment.  
 
 Measures have been taken to review the insolvency legislation, improve t he credit and companies' registries, enhance the efficiency 
of the judiciary, and allow for the sale of non -performing loans . However, efforts are still needed to improve available information on 
borrowers, to identify and remove obstacles to the use of th e foreclosure and insolvency framework, to improve contract enforcement, 
to ensure well defined property rights, and to help banks resume a healthy flow of credit to the economy. Ensuring fiscal dis cipline is 
also crucial for debt -reduction. Measures are s till needed to foster efficiency and competition in network industries and to reduce 
labour market frictions.         
(*) The first column summarises 'gravity ' issues which aim at providing an order of magnitude of the level of imbalances. The second column reports 
findings concerning the 'evolution and prospects ' of imbalances. The third column reports recent and planned relevant measures. Findings are reported  
for each source of imbalance and adjustment issue. The final three paragraphs of the matrix summarise the overall challenges,  in terms of their gravity, 
developments and prospects, policy response.  
 
 
 
24 4.1.1.  PUBLIC DEBT AND RISK S TO FISCAL 
SUSTAINABILITY*  (12)  
General government debt came down 
significantly in 2017 but remains high.  After 
rising sharply in the years following the financial 
crisis, it peaked at 107.5  % of GDP in 2015, about 
62 percentage points (pps) above its 2008 trough. 
Owing to strong economic growth, fiscal 
performance and an early debt repayment in 
November 2017, it fell below 100% of GDP in 
2017. The Commission’s autumn 2017 forecast 
projects that it will fall to below 94  % of GDP in 
2019 (about 14 pps above the EU average)  (13), on 
the back of sizeable fiscal primary surpluses 
combined with strong nominal growth.  
Cyprus does not appear to face immediate risks 
of fiscal stress, owing to its favourab le fiscal 
position.  (14) This is mainly thanks to the 
improvement of the general government fiscal 
balance and primary balance, low gross financing 
needs and relatively low short -term general 
government debt. These more than offset the 
still-sizeable public  debt. However, short -term 
risks on the macro -financial side remain 
significant. According to the S0 indicator 
breakdown, several factors remain sources of 
vulnerability. These include households’ negative 
net saving rate, the large negative NIIP, the 
current-account deficit and the high private sector 
debt, a significant proportion of which is 
short -term.  (15) This is partly mitigated by, in 
particular, the slope of the sovereign bond yield 
curve and improved cost competitiveness. The 
                                                           
(12) An asterisk indicates that the analysis in the section 
contributes to the in -depth review under the MIP (see 
Section 3 for a summary of main findings).  
(13) This does not take into account the out turn data for 2017.  
(14) Short -term fiscal stress is measured by the S0 indicator, an 
early -detection indicator designed on the basis of past 
crises to highlight short -term (1 -year horizon) fiscal risks 
stemming from the macro -financial or the fiscal side o f the 
economy. According to the Commission’s autumn 2017 
forecast, the S0 indicator for Cyprus stood slightly below 
the critical threshold, but its macro -financial and 
competitiveness sub -index exceeded the critical value 
(European Commission, 2018a).  
(15) The NIIP, the private sector debt and the current -account 
deficit are affected by SPEs (see Section 1).  vulnerabilities relati ng to NPLs are addressed 
separately below.  
Given its initial high public debt stock, Cyprus 
faces medium fiscal sustainability risks in the 
medium term. (16) Debt sustainability analysis 
shows that, under normal economic conditions 
with no fiscal policy cha nge (baseline scenario), 
the general government debt -to-GDP ratio would 
fall to around 68  % by 2028, still above the critical 
60 % threshold (see Graph  4.1.1 ). The projected 
significant decrease of around 26  pps in 2020 -2028 
would be driven by persistent primary surpluses 
and (to a lesser extent) by a negative 
interest -rate/growth differential. In public debt 
projections taking into account potential shocks to 
nominal growth, fiscal stance and interest rates in 
alternative scenarios and sensitivity tests, debt -to-
GDP does not exceed the critical 90  % threshold 
and does not rise over the projection period. The 
S1 medium -term sustainabi lity indicator is 
assessed as pointing to medium (almost low) risk 
(European Commission, 2018a).  
Risks relating to the debt structure are low and 
investor confidence has improved.  In mid -2017, 
the average maturities of total public debt and 
marketable debt  were 7.6 and 4.8 years, 
respectively.  (17) The latter, relatively short period, 
was partly driven by the fact that the last foreign 
bond issuances targeted 7 -year, rather than longer, 
maturity bonds. A large proportion of debt (79  % 
in 2016) is held by non -resident creditors.  (18) This 
is largely because much of the borrowing is from 
official sources, in particular in the context of the 
macro -financial assistance programme. Although 
Cyprusʼ sovereign credit rating remains one notch 
below investment grade,  (19) excluding its bonds 
                                                           
(16) The assessment of medium -term sustainability challenges 
relies on the joint use of debt sustainability analysis (for a 
10-year period) and the S1 me dium -term sustainability 
indicator.  
(17) Source: 
http://www.mof.gov.cy/mof/pdmo/pdmo.nsf/All/B473D27
6A2304DD2C2257C6E003439D5?OpenDocument  
(18) Source:  Eurostat.  
(19) Although four rating agencies upgraded Cyprus’ sovereign 
rating in 2017, its most favourable rating, by S&P, remains 
one notch below investment grade (see European 
Commission, 2017b, Section 6). In December 2017, DBRS 
changed the outlook to  positive from stable.  4. REFORM PRIORITIES  
4.1. PUBLIC FINANCES  AND TAXATION  
4.1. Public Finances and Taxation  
 
25 from ECB refinancing and asset purchase 
programmes, investor confidence has improved 
significantly. In particular, sovereign yield spread 
(versus German bond) on the longest -term (8 -year) 
marketable debt has declined substantially: fr om 
3.5 % at the end of 2016 to 1.5  % in January 2018.  
Graph  4.1.1:  Public debt projections  
 
Source:  European Commission  
Government guarantees have declined, but 
there are risks associated with state -owned 
enterprises (SOEs).  Guarantees dropped 
significantly, to around 9  % of GDP, at the end of 
2016, down from 15.1  % the previous year  (20), but 
still remain somewhat above the EU average. 
Although the risk of guarantees being called is 
limited due to the low proportion of 
state-guaranteed loans being made up of NPLs 
(representing less than 0.6  % of GDP), the lack of 
comprehensive and public information on the 
state’s exposure to SOEs, in particular through 
their long -term liabilities relating to pensions, 
makes it difficult to as sess Cyprus’ fiscal risks.  
Contingent risks remain in the banking sector, 
notably in the short term,  mainly due to a high 
ratio of NPLs. They are more significant in the 
short term, since safety nets in the form of 
increasing capital requirements, bail -in and 
national and supranational resolution funds  are still 
being put in place.  (21) According to the 
                                                           
(20) This excludes guarantees on general government debt.  
(21) As set out in the new Capital Requirement Regulation and 
Directive IV, the Bank Recovery and Resolution Directive 
and Single Resolution Mechanism Regulation.  Commission’s systemic model of banking 
originated losses (Symbol), Cyprus is the Member 
State most exposed to short -term fiscal risks in a 
severe stress sce nario of a repeat of the recent 
financial crisis.  (22) On the basis of the current 
level of NPLs and conservative loss assumptions, a 
recapitalisation of Cyprusʼ systemic banks by 
public funds to 8  % and 10.5  % of their 
risk-weighted assets could increase s overeign debt 
by 4.1  % and 7.6  % of GDP, respectively, in the 
short term.  However, the country’s exposure to the 
banking sector is seen as decreasing to below 1  % 
of GDP by 2028, given that the safety nets will 
have been fully phased in and assuming that t he 
effect of NPLs will become negligible in the long 
term.  
The setting -up of a sovereign wealth fund 
(SWF) could improve public debt sustainability 
in the long term.  The House of Representatives is 
still discussing the bill laying out the governance 
struct ure of the SWF and the draft legislation 
governing SWF inflows and outflows. Adoption of 
the legislation would contribute to ensure 
sustainable use of revenue from the exploitation of 
hydrocarbon reserves and to improve public debt 
sustainability outlook.  
4.1.2.  FISCAL FRAMEWORK AND  POLICY*  
The reformed budgetary framework, currently 
being implemented, plays a key role in ensuring 
sustainable public finances.  The 2014 Fiscal 
Responsibility and Budget System Law (FRBSL) 
establishes a comprehensive and trans parent legal 
framework for the entire general government, in 
line with EU requirements. Importantly, the 
FRBSL links ministries’ strategic objectives and 
government policy priorities with the annual 
budget and medium -term budgetary planning, 
including expe nditure ceilings and key 
performance indicators for each policy. It also 
governs the management and evaluation of public 
investment and the monitoring of fiscal risks 
                                                           
(22) Symbol simulates the short - and medium -term fiscal 
impact of a financial crisis similar to the 2008 crisis. The 
short -term simulation is run on the basis of December 2016 
data for the first quarter of 2018. Symbol estimates the 
public bailout required to keep the  systemic banks open 
and sufficiently capitalised after applying the safety net 
tools. The improvement in Symbol results for Cyprus as 
compared to the previous year is due to, amongst others, 
enlarging the sample of covered banks.  
65758595105115
1213141516171819202122232425262728% of GDP
Commission 2017 autumn forecast
Combined macro and fiscal shock
Standardised (permanent) negative shock (-0.5 pps) on
GDP growth
Standardised (permanent) negative shock on the PB equal
to 50 % of the forecast cumulative change over the forecast
years
4.1. Public Finances and Taxation  
 
26 stemming from guarantees, payment arrears and 
SOEs. The budgetary framework is expected t o be 
fully implemented in 2018.  
The reform of public financial management will 
take several years.  Current efforts are focused on 
the selection and evaluation of investment projects. 
Administrative capacity is being improved in the 
key institutions involve d in investment projects, 
including public -private partnerships, in particular 
through specific guidance, training programmes 
and the acquisition of suitable IT management 
systems. Budget -data reporting from local 
authorities and SOEs is also improving, al though 
the data are not sufficiently homogenised to ensure 
comparability and full assessment of fiscal 
positions.  
Solutions to ensure long -term fiscal 
sustainability of the public sector wage bill are 
lacking.  The containment of the public sector 
wage bil l has been a significant factor in fiscal 
consolidation in Cyprus.  (23) To instil more 
flexibility in workforce management, a bill 
adopted in May 2017 facilitates staff mobility 
between the public service and SOEs. However, 
the current collective agreement (covering also 
SOEs) limiting the growth of public sector 
compensation to nominal economic growth expires 
in 2018.  
Budgetary regulations were slightly amended to 
comply with the Budgetary Frameworks 
Directive  by improving the transparency of public 
financ es. In particular, the amendment to the 
Budget Law requires comprehensive publication of 
tax expenditures as part of the annual budgetary 
documentation. Also, the publication on contingent 
liabilities was considerably improved recently, in 
particular as re gards information on NPLs in the 
general government sector and state participation 
in the capital of corporations.  
The medium -term budgetary framework  (24) 
effectively strengthens the transparency and 
predictability of the budgetary process.  
Published and rolled over for a year each spring, it 
                                                           
(23) This results mainly f rom a reduction in the number of 
public sector employees through natural attrition and the 
freezing of wages in the broader public sector in 2012 -
2016.  
(24) In Cyprus, referred to as the medium -term strategic 
framework for fiscal policy.  includes medium -term macroeconomic and 
budgetary forecasts, and expenditure ceilings for 
the following 3 years. The first framework was 
issued in 2014, covering the period of 2015 -2017. 
The appropriations in the annua l budgets in 2015 -
2018 should therefore be in line with the 
expenditure ceilings in the frameworks. As there 
are only small differences for certain years (below 
0.3 % of GDP)  (25), the frameworks can be 
assessed to have improved the budgetary process 
in ter ms of transparency and predictability.  
4.1.3.  TAXATION AND TAX ADM INISTRATION*  
Value added tax (VAT) and corporate income 
tax (CIT) are major sources of revenue in 
Cyprus, with CIT revenue subject to potential 
decreases.  As percentages of GDP (9.2  % and 
5.8 % respectively in 2016), VAT and CIT 
revenues are above the EU average (7  % and 
2.6 %), although the effective CIT rate (13.1  %, 
2016) is below the EU average (20.9  %). (26) The 
discrepancy between the higher revenue and the 
lower rate can be explained by  a larger aggregate 
tax base at a lower statutory tax rate and the 
presence of businesses engaging in tax planning. 
(27). As a result, Cyprus appears exposed to CIT 
revenue decreases due to potential changes in the 
international corporate tax framework elim inating 
incentives for tax planning. The VAT gap (7.4  % 
of theoretical VAT liability in 2015) is below the 
EU average (12.8  %), indicating lower revenue 
losses due to non -compliance (Center for Social 
and Economic Research, 2017).   Graph 4.1.2 
shows the ta x structure in Cyprus as compared to 
that of the EU and selected Member States for 
2015.  
The tax burden on labour is low and 
consumption and environmental tax revenues 
are high, making Cyprus’ tax structure 
relatively growth - and environment -friendly.  As 
                                                           
(25) The expenditur e ceilings in the framework do not include 
expenditure on loans and interest payments, while the 
appropriations in the budget law do. These differences have 
been taken into account in this analysis.  
(26) Source: 
https://ec.europa.eu/taxation_customs/busines s/economic -
analysis -taxation/data -taxation_en.  
(27)  Aggressive tax planning allows businesses to reduce tax 
liabilities through debt shifting, strategic location of 
intellectual property rights and intangible assets, and/or 
(mis)use of transfer pricing.  
4.1. Public Finances and Taxation  
 
27 a percentage of GDP, revenues from labour taxes 
are low compared with the EU average (11.3  %, as 
against 19.3  % in 2015). Taxes on labour are set to 
increase in the future due to legislated rises in 
social contributions in relation to the pension 
system in the period to 2039 (European 
Commission 2017c) and the introduction of 
compulsory health insurance contributions to 
finance the recently adopted national health service 
(see Section  4.3.2). However, labour tax revenue is 
not expected to catch up fully with  the EU average. 
This is mainly due to the significantly lower 
revenue from personal income tax as a result of a 
threshold for untaxable income that is one of the 
highest in the EU. On the other hand, revenues 
from consumption and environmental taxes 
(12.9  % and 3  % of GDP respectively in 2015) are 
above the EU averages (11.1  % and 2.4  %). 
Vehicle taxation in Cyprus is also linked to carbon 
dioxide emissions.  
Tax revenues are currently supported by 
temporary tax buoyancy effects, which could 
generate risks if used to finance long -term 
expenditure.  Commission analysis of CIT and 
VAT in Cyprus points to significant tax buoyancy 
effects, leading to revenue windfalls in the current 
economic cycle.  (28) This is because real revenues 
from CIT and VAT increase faste r than their tax 
bases (i.e. final consumption expenditure and gross 
operating surpluses) along the business cycle. 
There is also evidence, but to a lesser extent, of tax 
buoyancy effects in the case of the personal 
income tax revenues. The use of the addi tional 
revenue stemming from tax buoyancy effects 
should be monitored carefully, to avoid risks 
associated with using temporary revenue to finance 
increases in long -term expenditure. Given the high 
public debt stock and low potential growth in 
Cyprus, the additional revenue could be used to 
reduce public debt further or support growth - 
enhancing investment.  
Cyprus’ tax base has narrowed and become 
more dependent on specific components.  The 
                                                           
(28) Tax buoyancy effects represent the deviation of short -term 
elasticities from long -term elasticities (usually close to one) 
as a result of changes in tax rates, tax collection or tax 
efficiency ratios. In the long term, tax revenues are 
expected to move closely in line with tax bases. Based on 
the Commission’s assessment of tax buoyancy in Cyprus, 
the additional annual revenues from the VAT and CIT 
stemming from buoyancy effects are estimated at above 
0.5 % of GDP in 2017.  Commission’s analysis of the tax structure shows 
that the tax base i s concentrated on a few drivers, 
in particular CIT and VAT. It was narrowed in 
2017, when the immovable property tax was 
abolished, despite being widely considered one of 
the most growth -friendly sources of tax revenue.  
Graph  4.1.2:  Tax structure in 2015  
 
(1) The countries were selected on the basis of legal and 
economic indicators of aggressive tax planning.  
(2) ‘Other taxes on capital’ include immovable property tax 
revenues.  
Source:  European Commission  
The tax and benefits system has become more 
effective in addressing income inequality, but 
wealth inequality remains high.  The 
redistributive effects of the tax and benefits system 
in respect of revenue have grown almost twofold 
since the crisis (in 2009 -2016), but remain slightly 
below the EU average. The system performs 
relatively well (better than the EU on average) in 
reducing the number of people at risk of poverty. 
However, the abolition of the immovable property 
tax undermined efforts to reduce wealth inequality, 
which was among the highest in the  euro area in 
2014 (see Section 1).  (29) 
Some indicators continue to suggest that 
Cyprus’ CIT rules are used by companies 
engaged in aggressive tax planning.  A study 
shows that Cyprus’ high inward and outward 
foreign direct investment stocks can be only par tly 
                                                           
(29) Given the absence of recurre nt property tax, inheritance 
and gift tax and net wealth tax in Cyprus, the redistributive 
effect of the tax and benefit system concerning wealth is 
assessed to be very low.  
05101520253035404550 % GDP
Other taxes on capital Corporate income tax
Taxes on labour Other taxes on consumption
VAT
4.1. Public Finances and Taxation  
 
28 explained by real economic activity in the country 
(Institute for Advanced Studies, 2018). 
Furthermore, the high levels of dividend and 
interest payments as percentage of GDP continue 
to suggest that its tax rules are used by companies 
that engage in a ggressive tax planning.  (30) As 
explained above, CIT revenue as a percentage of 
GDP in Cyprus (5.8  %) was much higher than the 
EU average (2.6  %) in 2016. The absence of 
withholding taxes on dividend, interest and royalty 
payments by Cyprus -based companies may lead to 
those payments escaping tax altogether, if they are 
also not subject to tax in the recipient jurisdiction. 
(31) This absence, together with the corporate tax 
residency rules, may continue to facilitate 
aggressive tax planning.  (32) Notional inter est 
deduction regimes, while helping to reduce the 
debt equity bias, can also be used for tax avoidance 
purposes if not properly safeguarded. Therefore, 
there is a need to closely monitor the effectiveness 
of anti -avoidance rules in this regime.  
Cyprus has  taken measures to amend aspects of 
its tax system that were facilitating aggressive 
tax planning.  The Code of Conduct on Business 
Taxation Group has approved amendments to align 
the patent box scheme  (33) with international 
developments and the modified ne xus 
approach,  (34) and the closure of the old patent 
box. The latter is subject to a grandfathering clause 
until June 2021. The new amendments will make a 
stronger link between the intellectual property 
                                                           
(30) The inward and outward foreign direct investment stocks 
were 1  048% and 1  029%  of GDP respectively in 2016, 
among the highest in the EU. In 2016, the flows of 
dividends paid and received amounted to 19.8  % and 
11.4 % of GDP respectively, and the flows of interests paid 
and received to 3.3% and 2.3% of GDP respectively, all of 
those among the highest in the EU.  
(31) There is a withholding tax on royalties if the intellectual 
property rights are used locally. For more information on 
the interaction between withholding tax and aggressive tax 
planning structures, see  ZEW 2016.  
(32)  A com pany is resident if its management and control is 
exercised in Cyprus. A company may be incorporated in 
Cyprus but not regarded as resident there if its management 
and control is exercised abroad.  
As regards corporate tax residency, following 
recommendati ons from the Global Forum on Tax 
Transparency, Cyprus introduced in 2012 local tax 
reporting of companies that are incorporated in Cyprus but 
non-resident.  
(33) A tax scheme that offers a substantially reduced rate of CIT 
on the income derived from patents.  In Cyprus, the rate 
was 2.5%.  
(34) The nexus approach allows a taxpayer to benefit from 
patent box arrangements only to the extent that it can show 
that the taxpayer incurred related expenditure.  rights that can benefit and the R&D that created 
them.  While economic evidence of the 
effectiveness of patent boxes as a means of 
encouraging R&D remains limited (CPB, 2014), 
they may be used as a tax competition tool 
(Alstadsæter et. al., 2017, pp. 131 -177). A circular 
amending the rules on the tax treatment  of 
financing companies from 1 July 2017 provides 
additional guidance on substance and transfer 
pricing requirements in line with OECD 
guidelines. Finally, in November 2017, the tax 
authorities launched a public consultation on the 
transposition into natio nal law of the two EU 
Directives on Anti -Tax Avoidance (ATADs). The 
transposition should take place by the end of 2018 
and 2019.  (35) The extent to which the new 
measures and the transposition of ATADs will 
limit the scope for aggressive tax planning and th e 
impact on the CIT revenue in the medium term is 
still to be assessed.  
After progress in previous years, revenue 
administration reforms have slowed down . The 
single tax registration process has been completed 
for both direct and indirect taxes, which now  share 
common procedures. Measures to step up the fight 
against tax evasion are under way, notably on 
social contributions for previously undeclared 
work (see Box  4.3.2). The tax procedure code has 
been drafted and some chapters are expected to be 
adopted in 2018. However, progress on 
implementing the integrated tax administration 
system (ITAS) is slow. The merger of the VAT 
service and the Inland Revenue department into a 
single department has not been completed yet, 
although the Large Taxpayer Office now carries 
out joint audits. ITAS implementation requires the 
full deployment of the new tax IT system, which 
will take several years. In the meantime, the 
current online system is being upgraded to 
improve tax administration (e.g.  allowing for 
online VAT, ta x income and debt payments).  
                                                           
(35) These entail rules for interest limitation, controlled f oreign 
companies, and general anti -avoidance (to take effect as 
from 2019); exit taxation (from 2020); and hybrid 
mismatch (from 2020 -2022).    
See https://ec.europa.eu/taxation_customs/business/compan
y-tax/anti -tax-avoidance -package/anti -tax-avoidance -
directive en  and http://europa.eu/rapid/press -releas e_IP-17-
1433_en.htm . 
 
 
29 4.2.1.  ASSET QUALITY IN THE  BANKING SECTOR *  
Financial developments  
The Cypriot economy is predominantly 
financed by the banking sector.  Loans from 
monetary and financial institutions (MFIs) to 
NFCs represented about 115  % of GDP in 2016, 
about three times higher than the EU average. 
Funding via equi ty markets, debt issuance and 
venture capital remains very marginal due to the 
small size and unsophisticated nature of Cyprus’ 
capital markets. In 2017, credit conditions 
improved gradually for all types of client, 
including SMEs, in terms of both availab ility and 
cost. New bank lending picked up, albeit from a 
very low base (see Section  1), but remains 
insufficient to meet demand. Additional initiatives 
have been taken to develop access to finance (see 
Section  4.2.4).   
Poor asset quality and low interest margins 
continue to exert downward pressure on banks' 
profits . Banks had to set aside additional 
provisioning in 2017, resulting in banks recording 
losses in the first nine months of 2017 (See 
Section  1). Net interest margins continue to decline 
as a resul t of lower interest income and still 
relatively high interest rates offered on deposits. At 
the same time, the three largest banks made good 
progress on restructuring their operations to reduce 
operating costs, but benchmark indicators point to 
them still being oversized. Banks may seek higher -
yielding investments to use their ample liquidity 
and this is an important risk for the future.  
Banks face challenges in issuing funding 
instruments with longer maturities.  They are 
almost entirely reliant on short -term deposits to 
fund their lending operations. There is no inter -
bank market in Cyprus, as banks currently hold 
excess liquidity at the ECB.  Owing to their 
precarious asset quality, banks have not yet 
succeeded in raising medium - or long -term 
funding on w holesale capital markets. However, 
longer -term funding sources may be needed in 
future to diversify their funding structure and meet 
future regulatory requirements. Indeed, long -term 
subordinated debt issuance will be necessary in 
order to meet requirement s on loss -absorption 
capacity, such as the minimum requirement for 
own funds and eligible liabilities, which is meant 
to complement the bail -in mechanism under the Bank Recovery and Resolution Directive and the 
total loss absorption capacity set by the Fin ancial 
Stability Board. As a consequence, the conditions 
under which funding will be raised hinge 
significantly on banks’ ability to improve their 
asset quality.  
Improving asset quality  
The stock and ratio of private sector NPLs have 
declined.  Excluding lo ans to financial institutions 
and the government sector, (36) the ratio of private 
sector NPLs has declined to 52.7  % in June 2017, 
which is still very high. The reduction was mostly 
a result of contraction in the stock of NPLs on the 
part of NFCs, which ha d fallen by approximately 
16 % in June 2017 on a year -on-year basis. These 
developments came at a time when provisioning 
coverage ratios increased substantially as a result 
of supervisory action, from 41.3  % of gross NPLs 
at end -2016 to 46.2  % in June 2017 , above the 
euro area average of 44.7  %. Despite these 
improvements, which also address the EAR 4, the 
stock of NPLs in absolute terms remains higher 
than its June 2013 level of EUR  21 billion.  
 
Table  4.2.1:  Financial soundness indicators for domestic 
and foreign banks"  
 
(1) Due to the sizeable exposures of banks to central banks 
and other financial institutions, the aggregate non -
performing loan (NPL) ratio differs substantially from the NPL 
ratio for the private sector alone, comprising only of loans  to 
NFCs and households.  
(2) ECB aggregated balance sheet: loans excluding to 
government and MFIs / deposits excluding from government 
and MFIs.  
(3) For comparability, only annual values are presented.  
Source:  ECB consolidated banking data  
 
 
                                                           
36  The aggregate NPL ratio, which covers all loan and 
advances, may be misleading for Cyprus due to the large 
exposures of domestic and foreign banks to central banks 
(representing 14% of gross loans) and other financial 
institutions ( 10% of gross loans). For this reason, the text 
refers to the NPL ratio for the private sector, comprising 
only of exposures to non -financial corporations and 
households.  
(%) 2012 2013 2014 2015 2016 2017Q2
Non-performing debt 18,7 36,2 35,6 34,7 33,8 31,4
Non-performing loans (1) - - 38,6 36,3 35,4 33,4
   from foreign banks - - 17,1 26,6 26,5 24,8
   to NFCs and households (1) - - 54,6 55,1 54,8 52,7
   to NFCs - - 57,2 55,3 55,0 50,9
   to households - - 52,1 55,0 54,7 54,5
Coverage ratio 46,7 31,0 31,7 37,2 41,3 46,2
Loan to deposit ratio (2) 119,3 152,3 152,1 152,0 120,5 120,0
Tier 1 ratio 6,3 12,3 14,6 16,0 16,4 15,5
Capital adequacy ratio 7,3 13,5 15,3 16,6 16,8 16,4
Return on equity (3) -100,8 -37,9 -7,1 -7,7 1,7 -
Return on assets (3) -3,6 -2,9 -0,6 -0,6 -0,3 -4.2. FINANCIAL SECTOR  
4.2. Financial sector  
 
30 The most notable improvements in asset quality 
have been in the sectors directly related to real 
estate and tourism.  In the construction sector, the 
largest sector in Cyprus in terms of outstanding 
loans, the NPL ratio dropped from 72  % in 
September 2016 to 64  % in  September 2017 (see 
Table  4.2.2 ). The NPL ratio for the 
accommodation and food services sector was 35  % 
in September 2017, down from 53  % a year earlier 
(see Section  4.5.4). A similar improvement was 
seen in the real estate activities sector, where the 
ratio dropped from 54  % to 40  %, reflecting 
improving sales and prices. The NPL reduction in 
these three sectors alone contributed to almos t 
three quarters of the aggregate reduction in NPLs 
over the year.  
 
Table  4.2.2:  NPL and coverage ratios across main sectors 
of economic activity  
 
Source:  Central Bank of Cyprus  
 
Debt restructuring and debt -to-asset swaps 
remain the principal drivers of the reduction in 
NPLs.  Loan restructuring has slowed down, even 
when debt -to-asset swaps  (37) are counted as 
restructuring solutions (see Graph  4.2.1 ). Banks’ 
performance in meeting the loan restructuring 
targets set by the Central Bank of Cyprus remains 
uneven and deteriorated in the first quarter of 
2017. Nearly ha lf the reduction in the stock of 
NPLs from September 2016 to September 2017 
was due to successful loan restructuring, cash 
repayments or debt -to-asset swaps. Another third 
was due to loan write -offs, in particular as part of 
restructuring efforts.  
The sustainability of loan restructuring 
solutions continues to be a concern.  New NPLs 
amounted to EUR  195 million a month on average 
between September 2016 and September 2017, and 
52% were loans that had previously been 
restructured. Given the heavy reliance on loan 
restructuring as an NPL resolution strategy, the 
sustainability of these solutions is a key concern. 
                                                           
(37) In a debt -to-asset swap, part or all of the outstanding value 
of a loan is written  off in exchange for an asset, usually the 
property underpinning the loan.  Over 11  % of all restructured loans had defaulted 
again as of September 2017. The  ratio for the first 
‘vintages’ of loan restructuring 2013 -2014 i s more 
than double this, indicating that these loans may 
require further restructuring. Nearly a quarter of all 
restructured NPLs have been restructured at least 
twice, which may conceal the true extent of re -
defaults. Granular data show that re -restructur ing 
is more common with solutions that convert 
present or past -due liabilities into future liabilities, 
this account for nearly half the volume of all 
restructured loans. In a bid to improve results, 
major banks have decided to outsource NPL 
resolution act ivities to third -party debt servicers, 
with experience in loan restructuring in other 
European markets. Hellenic Bank took first steps 
in this direction by selling EUR 145 million 
portfolio on NPLs to the Norwegian pan -European 
debt specialist in early 201 8.   
Graph  4.2.1:  Development of restructured loans  
 
Source:  Central Bank of Cyprus  
Recourse to debt -to-asset swaps is leading 
banks to assume increasing direct real estate 
exposures.  Although this is expected to be 
contained by exposure limits, the large volume of 
real estate assets on banks’ balance sheets might 
eventually increase the risk of fire sales or 
oversupply in the housing market, which could in 
turn affect collateral value s. More importantly, in 
the absence of an effective, cost -efficient 
framework for selling properties, banks’ ability to 
manage these assets effectively in the long run is 
questionable. This may exert more downward 
2016Q3 2017Q3 2016Q3 2017Q3
Construction 72% 64% 39% 50%
Wholesale & retail trade 46% 49% 45% 60%
Real estate activities 54% 40% 41% 48%
Accommodation & food 
services 53% 35% 31% 42%
Manufacturing 50% 51% 42% 52%NPL (% of loans) Coverage (% of NPL)
0%10%20%30%40%50%
02000400060008000100001200014000160001800020000
13Q2
13Q3
13Q4
14Q1
14Q2
14Q3
14Q4
15Q1
15Q2
15Q3
15Q4
16Q1
16Q2
16Q3
16Q4
17Q1
17Q2
17Q3% of NPLs EUR 
million
Debt-to-asset swaps (D2A, lhs)
Restructured NPLs (lhs)
Total restructured NPLs and D2A (% of NPLs, rhs)
4.2. Financial sector  
 
31 pressure on their already weak profitabili ty 
prospects.  
4.2.2.  PRIVATE INDEBTEDNESS  AND SAVINGS *  
Private sector indebtedness is far above the 
levels estimated by fundamental and prudential 
benchmarks  (see Section  1 on actual debt levels). 
Household debt in 2016 was 16  % of GDP above 
what fundame ntals suggest. For NFCs the gap 
reached 56  % the same year, even after subtracting 
the debt of non -financial SPEs (Graph  4.2.2 ). 
Moreover , the risks attached to the current level of 
debt can be highlighted by comparing non -
financial private sector debt with a ‘prudential 
benchmark’ estimating the value of debt above 
which a banking crisis is more likely.  (38) The debt 
stock exceeded the prud ential threshold by 80  % of 
GDP in 2016 in the case of households and by 
75 % in the case of NFCs, when subtracting the 
debt of non -financial SPEs.   
Economic growth and loan valuation effects 
were major factors contributing to the recent 
reduction in the p rivate indebtedness ratio  (see 
Graph  4.2.3 ). The stock of loans from MFIs to 
resident NFCs and households declined by 28  pps 
of GDP in 20 16 and by another 10  pps in the first 
two quarters of 2017.  (39) This reduction is largely 
attributable to GDP growth, which explains 
roughly a third of the decline in the ‘corporate 
loans to GDP’ ratio and roughly half in the case of 
household loans. The r emainder is mostly due to 
debt write -offs and debt -to-asset swaps, i.e. 
valuation effects. Banks prefer to use debt -to-asset 
swaps and to hold real estate assets on their 
balance sheets, rather than realising potential 
losses from selling the collateral at  prices that are 
still low (see Section  1). The difficulty of 
foreclosing properties is another obstacle to 
resolving NPLs more directly. Private sector 
                                                           
(38) Fundamental -based benchmarks are derived from 
regressions capturing the main determinants of credit 
growth and taking into account a given initial stock of debt. 
Prudential thre sholds represent the debt threshold beyond 
which the probability of a banking crisis is high, 
minimising the probability of missed crisis and that of false 
alerts. See also European Commission (2017), 
"Benchmarks for the assessment of private debt", Note f or 
the Economic Policy Committee  
(39) Given the high reliance on banking loans from the 
domestic banking system, developments in the stock of 
loans from the domestic banking system provide an early 
indication of developments in the scoreboard indicator.  deleveraging via actual debt repayment has been 
modest since 2014.  
 
Graph  4.2.2:  Private sector debt g ap compared with 
prudential and fundamentals -based 
benchmarks  
 
For NFCs, the gaps to benchmarks are adjusted for the 
impact of non -financial SPEs  
Source:  European Commission  
 
Graph  4.2.3:  MFI loans to domestic residents, annual 
changes  
 
Source:  Central Bank of Cyprus, Eurostat and European 
Commission  
Leverage is still high across most business 
sectors.  Most sectors deleveraged in 2016 and the 
-20020406080100120
96 98 01 03 05 07 09 11 13 15 17% of GDP
Gap to prudential threshold - HH
Gap to fundamental benchmark - HH
Gap to prudential threshold, adjusted for SPEs - NFC
Gap to fundamental benchmark, adjusted for SPEs - NFC
-25-20-15-10-505101520
11 12 13 14 15 16 17pps
Transactions Other
Real growth Inflation
MFI loans to GDPratio
4.2. Financial sector  
 
32 first half of 2017, but many — in particular 
construction, real estate activities, trade, transport 
and accommodation, and industry — remain 
highly indebted (see Graph  4.2.4 ). The rapid 
recovery of the construction sector improved the 
situa tion substantially in 2017 and this is expected 
to continue, as construction of residential and 
tourism -oriented projects supports the short - to 
medium -term growth outlook (see Section  1).  
Graph  4.2.4:  Ratio of loans to gross value added across 
sectors of  economic activity  
 
(1) A: Agriculture, forestry and fishing;  
B_E:  Industry (except construction);  
F: Construction;  
G_I: Wholesale and retail trade, transport, accommodation 
and food service activities;  
J: Information and communication;  
L: Real estate activities;   
M_N: Professional, scientific and technical activities; 
administrative and support service activities.  
Source:  Eurostat  
Debt sustainability indicators highlight a 
considerable gap in households’ savings.  
Households’ negative s avings rate prevents them 
from reducing their debt to sustainable levels. To 
illustrate this, two long -term sustainability 
indicators were estimated. Debt sustainability 
indicators correspond to the permanent adjustment 
in the savings rate to (i) reach the  fundamental 
benchmark for debt within 15 years (S1) and (ii) 
ensure that net financial liabilities are eventually 
reimbursed (S2).  (40) As of 2016, the extra annual 
savings required to comply with both indicators 
are considerable, amounting respectively to  15.5 % 
                                                           
(40) See also European Commission (2017), "Benchmarks for 
the assessment of private debt", Note for the Economic 
Policy Committee.  and 8.3  % of gross disposable income (see 
Graph  4.2.5 ).  
Use of the new corporate and personal 
insolvency processes remains limi ted. Rules of 
court for corporate insolvency have not been 
updated, which hampers the effectiveness of the 
insolvency framework. Banks do not make full use 
of the new tools, which offer sustainable 
restructuring solutions to clients with in sufficient 
repayment capacity. Insolvent borrowers and other 
stakeholders appear not to be fully aware of the 
possibilities offered by the insolvency and 
pre-insolvency mechanisms. Banks’ participation 
in insolvency proceedings in the framework of 
loan restructuring rema ins limited.  
Graph  4.2.5:  Cypriot households savings gap  
 
Source:  European Commission  
Some impediments to the effective application 
of the insolvency framework have been 
identified.  A working group of relevant 
stakeholders (Central Bank, ministries) was set up 
to review the implementation and performance of 
the Insolvency and Foreclosure frameworks to 
ensure that it supports its objectives and principles. 
However, the group meets onl y occasionally and 
does not plan to release recommendations before 
the end of 2018.  
Use of the foreclosure framework remains 
marginal.  Foreclosure auctions under the new 
legislation started in June 2016, but have proved 
rather unsuccessful as the majority did not attract 
0200400600800100012001400
A B_E F G_I J L M_N% of GVA
14Q3 15Q3 16Q3 17Q3
051015202530
2008 2009 2010 2011 2012 2013 2014 2015 2016% of household GDI
S1: savings gap to reach debt fundamental benchmark in 15
years
S2: savings gap required to stabilise households debt to GDP
ratio
4.2. Financial sector  
 
33 satisfactory bids. Most foreclosure notices and 
auctions concern plots of lands, as these are 
considered less socially  sensitive than primary 
residences. Banks have so far used foreclosure 
mainly to improve repayment discipline via a 
signalling effect, rather than as a means of 
collecting outstanding debts. Some key 
deficiencies of the foreclosure legislation have 
been id entified, such as a high reserve price for the 
first auction (currently 80  % of the book value), 
the difficulty of serving foreclosure notices and a 
lack of clarity as regards guarantors’ obligations. 
The foreclosure law does not ensure that the 
framework applies to cases affected by a court 
ruling based on the previous legislation.  
The reform of the system for transferring title 
deeds is still pending.  A substantial number of 
property buyers have yet to receive their title deed, 
despite having paid the fu ll purchase price. The 
adoption of a law on legacy cases (for property 
sales up to the end of 2014) created some 
momentum. As of end September 2017, a total of 
14 628 applications had been received in relation 
to such cases; in response, 6  683 title deeds were 
issued, which led to almost 3  000 transfers of 
titles. This progress is due, in particular, to 
sustained efforts by the Department of Land and 
Surveys, including website information, training 
and an instruction manual sent to all relevant staff. 
Pendi ng a final ruling as to the constitutionality of 
the law, the authorities will continue to apply it, 
although amendments are under consideration.  
A reliable new system for the transfer of future 
title deeds has yet to be designed.  There is 
general agreemen t that the system should ensure 
that buyers who pay the full purchase price get 
their titles quickly and are prevented from refusing 
them (e.g.  to avoid paying overdue taxes). Progress 
is slow on this issue due to its political sensitivity, 
but the authori ties remain committed to designing 
a reliable legal framework in the coming months.  
There is a considerable backlog of new title 
deeds awaiting issue.  At the current rate, it would 
take about 7 years to address it (about 28  000 
deeds were pending as of Sep tember 2017) (see 
Section  4.4.2). However, the Ministry of Interior 
has announced measures to streamline procedures, 
in particular through technical assistance from the 
Commission. Measures have been taken to 
facilitate the issuing and transfer of title de eds in the event of relatively minor breaches of planning 
conditions. The main bottleneck as regards issuing 
deeds appears to be municipalities’ uneven ability 
to fulfil their obligations, in particular as regards 
issuing the requisite certificates of appr oval.  
4.2.3.  OTHER FINANCIAL ISSU ES * 
Financial regulation  
In recent years, the authorities have ensured a 
good degree of compliance with the 
implementation of the EU supervisory 
framework and regulatory reform.  Most 
recently, a regulation on loan impairme nt and 
provisioning paved the way for the upcoming 
international financial reporting standard (IFRS)  9 
rules, under which forward -looking losses can also 
be addressed.  (41) Banks with sizeable legacy 
issues and those that rely heavily on loan 
restructuring are likely to face higher additional 
provisioning charges. However, the relatively 
strong underlying economic conditions are likely 
to serve as an offsetting factor. In 2017, the SSM 
and the local supervisor required additional 
provisioning buffers to be b uilt, partly to offset the 
additional provisioning needs under IFRS 9.  
A secondary market for NPLs has yet to 
emerge.  No significant sale of NPLs has taken 
place since the sale of loans law was adopted in 
2015. The lack of a secondary market for NPLs is 
due in particular to potential loan buyers’ 
requirements, including data protection and 
establishment conditions. In addition, there are 
doubts as to the efficiency of the tools available to 
NPL purchasers to ensure loan repayments. To 
date, very limited us e has been made of the 
foreclosure framework created in 2015, due to 
provisions making it easy for borrowers to stall or 
stop the process, and the burden of creditors’ 
procedural requirements, in particular as regards 
notifying the debtor. The securitisati on law would 
allow banks to manage their balance sheet more 
actively, but it is still awaiting adoption. Much like 
the foreclosure and loan sales frameworks, the 
draft law requires the originator to engage with the 
                                                           
(41) IFRS 9 will be the new accounting standard for financial 
instruments, replacing IAS 39 from 1 January 2018. It will 
have a significant impact on banks, especially in 
impairment methodology, as the focus on expected credit 
losses will require banks to recog nise their losses earlier.  
4.2. Financial sector  
 
34 borrower before his or her loan is put in to the 
securitisation pool.  
Pensions and insurance  
The merger of the pension fund and insurance 
supervisors is still pending.  The legal framework 
for a common independent supervisory body is 
awaiting parliamentary approval. In particular, it 
aims to ensur e that transferred staff retains their 
rights and career prospects. A working group was 
set up to explore reform of the very fragmented 
provident pension fund system. Currently, each 
economic sector has its own rules concerning 
contributions and investment  policy. The Ministry 
of Finance aims to create a universal pillar  2 
system for both the public and private sectors, with 
harmonised contribution rates and private 
management of the accumulated funds.  
4.2.4.  ACCESS TO FINANCE  
Access to finance has improved  but remains a 
key issue, notably for small businesses.  
According to the SAFE survey, access to finance is 
the most important concern for 16% of Cypriot 
SMEs (EU average: 7%) (European 
Commission/European Central Bank, 2017). 
Although modest improvements h ave been made, 
banks’ collateral requirements remain major 
obstacles to SMEs’ access to finance. Other 
obstacles include the lack of dedicated instruments 
to help small businesses with their costs. Although 
small and micro companies benefit from more 
diver se sources of external finance than larger 
firms, businesses’ access to, and the availability of, 
alternative sources of finance such as venture 
capital, equity funding and crowdfunding are quite 
poor. A recent European Investment Bank (EIB) 
study has iden tified substantial financing gaps for 
SMEs and in the field of energy (European 
Investment Bank, 2017). In order to help 
implement the findings of the study, technical 
support will be provided by the Commission, via 
its Structural Reform Support Service.  
Financial support measures are based mainly 
on grants and access to alternative financing 
remains marginal.  A general lack of experience 
and awareness of equity financing continues to be 
a major obstacle to this alternative to bank 
financing. Supply of equi ty financing covers only a fraction of identified demand (European 
Investment Bank, 2017). Also, there is no clear 
regulatory framework on microfinance. The small 
size of the market does not facilitate participation 
in equity mechanisms under H2020/Innofin  and 
COSME. The EIB continues to direct funds 
through its multi -beneficiary intermediated lending 
facility. The Cyprus Entrepreneurship Fund 
(CYPEF) has supported both working capital and 
investment loans to SMEs. Results in 2016 were 
promising, thanks to greater participation by 
financing intermediaries.  
Some new financial support measures for SMEs 
were introduced in 2017, but their impact is yet 
to be seen.  In May 2017, the government signed a 
cooperation agreement with the European Bank for 
Reconstructi on and Development (EBRD) on the 
implementation of the ‘advice for small 
businesses’ facility, financed through the European 
Structural and Investment Funds (ESIFs). The 
EBRD will provide SMEs with assistance, advice 
and training so as to increase the succ ess rate of 
credit applications. Cyprus is contemplating the 
creation of an inter -ministerial coordination 
committee to improve SMEs’ access to EU funds.  
 
 
35 4.3.1.  LABOUR MARKET  
Labour market is improving, but the situation 
of young people remains precarious. The robust 
recovery resulted in growing number of jobs, a 
steady increase of the employment rate (from 69  % 
in 2016Q3 to 71.5  % in 2017Q3) and a rapid drop 
in the unemployment rate (from 13.2  % in 2016Q3 
to 10.5  % in 2017Q3). However, the youth 
unemployment rate is high (25.1  % in 2017Q3) 
and many young people are no t in employment, 
education, or training (NEET rate 16  % in 2016 for 
15-24 years old see Box 4.3.1 ). While decreasing, 
long-term and very l ong-term unemployment rates 
are also above the EU averages.    
Wage developments have turned moderately 
positive after several years of decline.  This 
provides grounds for an improvement of the real 
gross disposable household income. In the short 
term, despite a recent pick -up, the labour market 
slack (estimated at 10  % in 2017Q3) and the 
slowdown in productivity growth may still put 
downward press ure on wages.  
Although union density rate is higher in Cyprus 
than in other member states, the share of 
employees covered by collective bargaining is 
lower than the EU average. Most of bargaining 
takes place at sector or company level. Social 
partners agr eed on a new way of indexing the cost 
of living allowance (COLA) in the private sector 
for the period 2018 -2020. The agreement foresees 
that wages will be indexed annually corresponding 
to half the level of inflation. In addition, wages 
will not be indexed  when negative economic 
growth is recorded at the end of second and third 
quarters of the previous year. In the broader public 
sector, the same wage indexation mechanism 
applies on a permanent basis. This mechanism 
comes in addition to the existing collect ive 
agreement with the broader public sector until 
2018, which caps the payroll growth to the 
nominal GDP growth.  
Conditions of employment differ between 
private and public sectors.  Public sector workers 
enjoy more stable employment and higher wages, 
on average 36% more than in the private sector.  (42) This wage gap, clearly correlated with age, 
was the highest in the EU (see Graph 4.3.1 ).  
Graph  4.3.1:  Adjusted wage gap between public and 
private employees by age group  
 
Calculations based on the microdata from the Structure of 
Earnings Survey, 2010 and 2014  
Source:  European Commission  
Temporary employment started to decrease but 
it rema ins fairly high.  On the back of the 
improving labour market more workers moved 
from temporary to permanent employment and 
more new employees received a permanent 
contract. As a result, the proportion of temporary 
employees fell to 14.2  % in 2016 from 15.8  % in 
2015 (see Graph 4.3.2 ), which was still 3.1 pps 
above the pre -crisis level and the EU average. 
Almost all temporary employees (93  %) work on 
such contracts because they could not find a 
permanent one (the EU average is 59%). The 
prevalence of temporary employment is linked to 
the importance of tourism in the economy. 
Temporary employment is associated with lower 
wages than permanent em ployment. In 2014, 
permanent employees earned on average 14  % 
more than temporary employees (see Graph 
4.3.2 ). (43) The gap was slightly w ider in 2010.  
                                                           
(42) The Commission's estimations are based on the microdata 
of the Structure of Earnings Survey. The adjusted wage gap 
is calculated based on an Ordinary Least Squares (OLS) 
regression analysis using a human capital earnings equa tion 
(so called "Mincer" equation). The regression estimates the 
average impact on wages of being employed in the public 
sector, while adjusting for age, gender, educational 
attainment, sector of employment, occupation, type of 
contract and working hour re gime.  
(43) Ibid. 
0%10%20%30%40%50%60%70%
15-19 20-29 30-39 40-49 50-59 60+% of the 
hourly 
earnings 
of private 
employees
Estimate Min CI Max CI4.3. LABOUR MARKET, EDUCA TION AND SOCIAL POLI CIES 
 
 
36  
 
 
 
  
 
 
 Box 4.3.1:  Monitoring performance in light of the European Pillar of Social Rights  
The European Pillar of Social Rights, proclaimed on 17 N ovember 2017 by the European Parliament, the 
Council and the European Commission, sets out 20 principles and rights to benefit citizens in the EU. In light 
of the legacy of the crisis and changes in our societies driven by population ageing, digitalisation  and new 
ways of working, the Pillar serves as a compass for a renewed process of convergence towards better working 
and living conditions.  
Cyprus faces challenges with regard to a 
number of indicators of the Social Scoreboard 
(1) supporting the European Pillar of Social 
Rights.  Those include the level of gross 
disposable household income, the gender 
employment gap and the coverage of formal 
childcare for children aged less than 3 years. The 
risk of poverty or social exclusion is s till relatively 
high, but has been declining. While the unmet 
demand for medical care is low, there are high out -
of-pocket payments for medical costs..  
Despite a decline in unemployment, the labour 
market situation of young people remains 
problematic.  The share of young people who are 
not in employment, education nor training 
(NEETs) continues to increase. This, together with 
increasing incidence of early school leaving may 
weigh on current and future equality of 
opportunities.  
In 2014, Cyprus introduced a  Guaranteed 
Minimum Income (GMI) scheme.  The GMI 
provides targeted benefits to cover the basic needs 
and is defined in reference to a minimum 
consumption basket of different household types. 
The scheme is designed to incentivise work, as 
beneficiaries who are able to work must register 
with the public employment services and be 
willing to participate in active labour market 
programmes. The introduction of the GMI scheme 
has been important in fighting poverty. It is a significant step forward towards ensurin g "minimum income 
protection".  
 
(1) The Social Scoreboard is composed of 14 headline indicators, of which 12 are currently used to compare Member 
States' performance. The indicators "participants in active labour market policies per 100 persons wanting to work" and 
"compensation of employees per hour worked (in EUR)" are not used due to reservations by Member States. Possible 
alternatives will be discussed in the relevant Committees.  GDHI: gross disposable household income.  

4.3. Labour market, education and social policies  
 
37 Participation in activ e labour market policies 
(ALMPs) is increasing but remains lower than 
in most other EU Member States.  In 2015, there 
were 9.2 participants for every 100 people willing 
to work, which represents an increase from 2013 
(5.6 participants) but it is significant ly less than the 
EU average (23.7).  
Graph  4.3.2:  Adjusted wage gap between permanent and 
temporary employees (% of the average hourly 
earnings of temporary employees)  
 
Calculations based on the microdata from the Structure of 
Earnings Survey, 2010 and 2014   
Source:  European Commission  
Cyprus has invested in the administrative 
capacity of the public employment service but, 
its effectiveness still remains a challenge.  In 
October 2017, a call for 30 additional PES 
counsellors was published, with a view of being 
recruited the first half of 2018, albeit, on a short -
term contract (24 months). The long -term 
sustainability and quality of services, in particular 
in areas that  are lagging behind (e.g. customer 
segmentation, personalised guidance and 
activation) and the provision of services to 
employers, remain a challenge. Additional initiatives include peer support projects from other 
PES in the EU and an IT platform for use by both 
employers and job -seekers to better match labour 
market demand and supply. Cooperation with the 
private employment services has also been 
developed. However, the provision of services to 
both employers and job -seekers is still sub -
optimal.  
New ALMP s schemes were launched.  They 
target young people, long -term unemployed and 
other vulnerable groups, including recipients of the 
guaranteed minimum income (GMI), in line with 
the euro area recommendation (EAR) 3. Around 
5000 unemployed people benefited in 2017. 
However, activation results were mixed: ALMPs 
targeting young people were more successful than 
those targeting vulnerable groups. Meanwhile, 
measures were taken to improve the ALMPs. A 
monitoring and evaluation tool for reporting the 
output and resul ts of the ALMPs became 
operational in December 2017.   
The proportion of young people (15-24 years) 
not in employment, education, or training 
(NEET) remains one of the highest in the EU.  In 
2016, it grew to 16 % (from 15.3 % in 2015), still 
significantly above the EU average of 11.6  %. The 
NEET rate for young people with tertiary 
education was 4.8  %, compared to EU average of 
0.9% (see Graph 4.3.3 ). Contributing factors 
include lack of jobs for university graduates (two 
in f ive graduates work in jobs below their 
qualifications), low enrolment in VET and 
possibly undeclared work. The authorities try to 
address the situation through targeted counselling 
in schools and youth entrepreneurship schemes. 
Youth Guarantee monitoring l ed to estimates that 
only (23  %) of the NEET population was enrolled 
in relevant schemes in 2016. This is mainly due to 
the limited capacity of the Public Employment 
Services.
-5%0%5%10%15%20%25%
PL
LU
CY
PT
SI
CZ
NL
DE
ES
SK
FI
HU
IT
FR
MT
BE
LT
UK
BG
EE
RO
LV
Adjusted gap 2014 Adjusted gap 2010% of the average hourly 
earnings of temporary 
employees
4.3. Labour market, education and social policies  
 
38 Education and skills  
Spending on education is relatively high, but it 
is not reflected into high educational outcomes.  
Public expenditure on education was 5.7  % of 
GDP in 2015, as compared with the EU average of 
4.9 %. In primary and secondary education, 
Cyprus’ spending per student is among the highest 
in the EU. However, Cypriot 15 -year-olds ranked 
second from last acro ss the EU in the most recent 
(2015) PISA survey measuring skills in science, mathematics and reading. Low performance affects 
all socioeconomic groups. In science, Cyprus has 
one of the EU’s highest proportion of low 
achievers among students from the botto m 
socioeconomic quartile and the highest proportion 
in the top quartile (OECD, 2016). Low 
performance in reading skills is a concern overall 
(35.6%), but male students perform considerably 
worse than female students, resulting in the widest 
gender gap in t he EU (22 pps).  
A new system for teacher appointments based 
on competitive exams was launched in 2017.  A 
shorter time -lapse between graduation and 
appointment is intended to increase the 
attractiveness and quality of the teaching 
profession and thus lead to better educational 
outcomes in line with EAR 3. Significant efforts 
have been made to upscale teachers ongoing 
training through a new ‘professional learning’ 
framework. Although participation levels varied 
significantly between primary and secondary 
schools during the pilot phase, these are expected 
to go up with the implementation of the framework 
at all school levels. The reform of the teacher 
evaluation system, which has not changed over 40 
years, has not advanced. An action plan to improve 
student pe rformance in particular on science, 
technology, engineering and maths (STEM), will 
be implemented in the next school year (2018/19). 
The entry age for primary education will be raised 
to 6 years (from current 5 years and 8 months 
currently) to improve scho ol success rates.  Box 4.3.2: Policy highlights: Undeclared Work  
The informal sector has been estim ated to be over 25% of the Cypriot economy (OECD, 2015), one among 
the largest in the EU. Since the financial crisis, the Republic of Cyprus has intensified attempts to combat 
undeclared work by increasing deterrents (e.g. more regular inspections, more an d heftier fines).  
The new legislation on Undeclared Work was enacted on 2 June 2017, introducing heavy fines and giving 
more legislative power to inspectors. It also improves processes by requiring pro -rata registration of 
employees before recruitment. In accordance with the transitional provisions of the Law, for three months 
from its entry into force employers could register any undeclared employees without having to pay any 
overdue contributions or risking a fine. This resulted in some 3 000 new registra tions during the grace 
period.  
Furthermore, the reform unifies all inspectorates into one unit within the Ministry of Labour. It also provides 
enhanced powers for the inspectorate, including inspection of safeguards contained in 28 laws. Closer 
cooperatio n and use of expertise of the Tax and Police departments is provided in the context of the reform 
and can be requested, when deemed necessary.   
Overall, the new approach forms multi -disciplinary cooperation at local, regional and national level in order 
to tackle undeclared work in Cyprus. According to the latest national figures, based on targeted inspections, 
the size of the informal sector is down to 16.16%. Some challenges remain however on the quality the new 
unified operations and the use of the new IT system functionality.  
Graph  4.3.3:  NEET rate (15 -24 years old) by educational 
attainment, 2008 -2016  
 
Labour Force Survey  
Source:  Eurostat  
024681012141618
2008 2016 2008 2016 2008 2016 2008 2016
Low Medium High Overall
EU CY
4.3. Labour market, education and social policies  
 
39 Graph  4.3.4:  Expenditure on Education (% of GDP) 
compared to PISA results, 2015  
 
PISA average scores are based on the average score in 
science, mathematics and reading.  
Source:  OECD, Eurostat  
The rate of early school leaving (ESL) remains 
below the EU average, but it rose significantly 
in 2016 ( by 2.4 pps in 2016 to 7.6  %). The 
problem affects boys: 11.4  % of boys left school 
early in 2016, compared to 4.3  % of girls. Also, the 
early school leaving rate of 18.2  % for students 
with a  migrant background contrasts sharply with 
that of 4.6  % for native -born students. To prevent 
school failure, the ‘actions for social and school 
inclusion’ programme, which supports 
disadvantaged students at all levels of education, 
has been extended to 96  schools and now covers 
15 % of the student population (Pandeia news, 
2017).  
Participation in vocational education and 
training (VET) remains far below the EU 
average, despite favourable employment 
prospects for VET graduates . The proportion of 
upper secon dary students (ISCED 3) in VET in 
Cyprus increased slightly in 2015 to 15.6  %, but 
remains far below the EU average of 47.3  %. 
Participation levels are expected to increase in the 
coming years with the creation of new technical 
schools. The employment rate  for VET graduates 
has risen by 17.1 pps since 2014 and stands at 
72 %, which is still below the EU average (75  %) 
but slightly above the total employment rate for 
Cyprus (71  %). Measures to ensure skills relevance 
in the VET sector include tracking gradua tes on placement schemes, and cooperation with industry 
on curriculum development.  
Tertiary educational attainment remains high 
but its labour market relevance is low.  At 
53.4 %, the overall rate of tertiary attainment is 
one of the highest in the EU and h as far surpassed 
the national target of 46  %, but for the foreign -
born students the figure is only 37.3  % (all data for 
2016). While the employment level for recent 
tertiary graduates has risen since 2015 at 76.4 %, it 
remains below the EU average of 82.8 %. The 
skills mismatch in tertiary education (ISCED 5 or 
6) remains one of the highest in the EU (41.2  %) 
(European Commission, 2017a). To establish 
closer links to the labour market new legislation 
has been tabled to facilitate the commercialisation 
of pu blic universities' research results. The first 
graduates of the University of Cyprus Medical 
School (established in 2013) and of the Maritime 
Academy (2015) will enter the labour market in 
2019.  
Adult participation in learning remains low, 
impacting on th e skills level.  In 2016, the 
respective figure was 6.9  %, below the EU average 
of 10.8  % and down from 7.5  % in 2015. The 
participation of the low -skilled workers in adult 
learning is among the lowest in the EU (1.5  %). 
Remedial actions to implement the Co uncil 
Recommendation on upskilling pathways 
(European Commission, 2016) includes the 
setting -up of a validation system for informal and 
non-formal education, the development of 
additional professional standards and strengthening 
the capacity of post -second ary VET schools and 
second chance schools for upskilling and 
retraining. The national qualification framework 
was cross -referenced to the European 
Qualifications Framework in 2017. Challenges 
remain in relation to the integration and efficiency 
of adult le arning governance structures, and the 
systematic training of adult education trainers.  
The level of digital skills is below the EU 
average.  50 % of Cypriots have basic digital skills, 
as compared with the EU average of 57 %. Cyprus 
also has one of the high est proportions of people 
who have never used the internet (26  %), while 
the rate of people with advanced ICT skills and 
BE
BGCZDESI
ESFR
IT
CYLV
LTLUNL
ATPL
PT
ROIE
SKFI
SEUK
430440450460470480490500510520530
2 3 4 5 6 7 8Average PISA score 2015
Expenditure on education in 2014 
(excluding ECEC) (% of GDP)
4.3. Labour market, education and social policies  
 
40 development is one of the lowest in the EU(44) 
(European Commission, 2017b). This poses a 
challenge for labour -market needs in an area of 
growing demand. In response to those challenges, 
since 2017 training and certification in the 
European Computer Driving Licence (ECDL) 
training and certification is being offered free of 
charge to all secondary students and some 
vulnerable groups from 2 017 (Government of 
Cyprus, 2017).  
4.3.2.  SOCIAL POLICIES  
Poverty and social exclusion are improving.  
This could be attributed to the roll out of social and 
activation measures (GMI and labour market 
activation schemes for vulnerable groups), in line 
with EAR 3, and to the improved economic and 
labour market conditions. More than one in four 
Cypriots (27.7  %) was at risk of poverty or social 
exclusion (AROPE) in 2016. This represents a 
decrease of 1.2 pps from the year before but the 
rate remains 4.2 pps ab ove the EU average. 
Absolute poverty decreased, with the incidence of 
severe material deprivation falling from 15.4  % in 
2015 to 13.6  % in 2016. However, relative 
(monetary) poverty remained close to its highest 
point (16.1  % compared to the EU average: 17 .3 
%). The relative poverty of older people (aged 65+ 
and 75+) is much lower than in 2008. According to 
analysis carried out for the upcoming Pension 
adequacy report, this can be attributed to the 
maturation of the pension system, the statistical 
effect of  the economic crisis pushing down the 
incomes of non -pensioners and the anti -poverty 
effect of non -contributory policies supporting low -
income pensioners. However, the wide gender gap 
as regards pensions (49%) is also a matter of 
concern. This may be linke d to a significant gender 
gap of 5.7 years in the duration of working life 
(EU average of 4.9 years) and to the past 
significant gender pay gap, which narrowed over 
the years and now stands around the EU average.      
The social safety net has been strengt hened by 
the new guaranteed minimum income (GMI) 
scheme.  The reform aimed to prevent abuses, 
improve targeting and strengthen incentives for 
                                                           
(44) Measured by the aggregated score of IT specialists and 
science, technology, engineering, and math (STEM) 
graduates.  reintegration in the labour market, while ending 
administrative fragmentation and keeping the 
social budget envelop e unchanged. Most of those 
aims have been reached and over two -thirds of 
public social assistance spending is now 
channelled through GMI. By September 2017, the 
scheme had reached about 28  000 households 
(approx. 48  000 people, up from approx. 14  000 
cover ed by the previous public assistance system). 
Calculations show that GMI has a greater impact 
on extremely poor people than public assistance 
alone. GMI recipients who are able to work are 
obliged to register with the PES. Targeted ALMPs 
launched in Octobe r 2017 are aimed at activating 
around 2500 GMI recipients. A comprehensive 
assessment of GMI remains pending.  
The risk of poverty or social exclusion for 
people with disabilities has come down but 
remains high.  In 2016, it fell from 38.1  % to 
35.5 %, partly thanks to additional funding from 
the European Social Fund for in -house services 
and schemes for labour market activation. A 
unified system for the certification of disabilities 
has been put in place. Changes  in the legislation on 
disability benefits  aimed at boosting the benefits 
in kind and improving the services  have been 
delayed. In December 2017, the government 
approved the new National Disability Action Plan 
2018 – 2020.  
The unemployment protection i s suboptimal.  
Between 2008 and 2016, the coverage of 
unemployment benefits for the short -term 
unemployed dropped by 9  pps., down to 21  %. (45) 
This is well below the EU average. In addition, the 
unemployment protection is not available to the 
self-employed.  There is also no compulsory 
insurance for self -employed against accidents at 
work and occupational injuries.  
Increases in income inequality since the crisis 
are starting to reverse, but wealth inequality 
remains high.  The impact of the crisis on 
househol d income led to a sharp increase in 
income inequality. The increase between 2008 and 
2015 can be explained by an increase in inequality 
in market income (household income before taxes 
                                                           
(45) According to the benchmarking exercise in the area of 
unemployment benefits and ALMP, conducted within the 
EMCO Com mittee. See the draft European Commission 
(2017i) for details.  
4.3. Labour market, education and social policies  
 
41 and social transfers), which resulted from the 
precarious labour market situation during the crisis 
(see Graph 4.3.5 ). Changes to enhance the 
redistributive effect of the benefits system have 
mitigated this ef fect only partially. Wealth 
inequality increased to 0.72 Gini points in 2014, 
one of the highest levels in the euro area. It is 
largely driven by a high share of indebted 
households, as a result of negative equity in 
housing assets.   
Cyprus has seen a strong increase in child 
poverty since the crisis.  The AROPE rate among 
children rose steadily from 20.2  % in 2009 to 
29.6 % in 2016. The increase has been greatest for 
the childr en of parents with low skills (from 
14.9 % in 2010 to 46.0  % in 2015); for the children 
of high -skilled parents the risk rose from 5.3  % to 
6.1 % over the same period). The GMI includes 
measures to combat child poverty such as extra 
allowance for children and single parents. In 
addition, the Child Benefit Law was modified in 
2017 to increase the eligible income threshold by 
EUR 5  000 for every additional child after the first 
two.  Enrolling children in formal childcare remains 
a challenge. The proportion of children under 3 
years of age in formal childcare (20.8  %) is low 
compared with the EU average (30.3  %). Parental 
leave is currently unpaid. However, paid paternity 
leave of 15 days was introduced in July 2017.  
Health Care  
Health spendin g in Cyprus is among the lowest 
in the EU and comes mainly from out -of-pocket 
payments.  In 2015, Cyprus spent EUR 1,592 per 
person on health care, well below the EU average 
of EUR 2,797. Total health spending was 6.8  % of 
GDP in 2015, of which only 42.6  % came from 
public expenditure (7.1  % of the government 
budget); both proportions were among the lowest 
in the EU (see Graph 4.3.7). Meanwhile, out -of-
pocket healthcare expenditure amounted to EUR 
606 per inhabitant – the highest level for the 
surveyed EU Me mber States, once adjusted for 
purchasing power standard. This reflects the lack 
of universal coverage and the fragmentation of 
healthcare provision between the public and the 
largely unregulated private sector, resulting in 
unequal access and inefficient use of resources.  Graph  4.3.5:  Change in  income inequality and its 
components, 2008 -2015  
 
(1) Countries are ranked by increasing order of the change 
in overall income inequality between 2008 and 2015, as 
measured by the Gini coefficient of the equivalised 
(corrected for household composition)  disposable 
household income. (2) The contribution of the tax and 
benefit system is calculated as the difference of the change 
in inequality of the disposable household income between 
2008 and 2015 and the change in inequality of market 
income (including p rivate pensions) between 2008 and 
2015.  
Source:  Eurostat  Graph  4.3.6:  At risk -of-poverty  or social exclusion rate, age 
groups  
 
(1) The European Union Statistics on Income and Living 
Conditions (EU -SILC)  
(2) AROPE: At -risk-of-poverty or social exclusion rate (% of 
total population). People who are at -risk-of poverty (AROP) 
and/or suffering from severe material deprivation (SMD) 
and/or living in household with zero or very low work intensity 
(LWI).  
Source:  Eurostat  
-0.08-0.06-0.04-0.020.000.020.040.060.080.10
LV
PT
PL
BE
UK
FI
NL
FR
AT
IE
SK
MT
CZ
BG
EL
LU
SI
SE
RO
IT
DK
ES
HU
EE
LT
CY
Contribution of the T&B system
Change in inequality of market income
Changes in inequality of equivalised disposable income
0102030405060
05 06 07 08 09 10 11 12 13 14 15 16% of 
populationCY
Children (<18y) Working age (18-64)
Elderly (65+)
4.3. Labour market, education and social policies  
 
42 The legislation for establishing a universal national 
health insurance system (NHIS) was adopted and 
is being implemented. In June 2017, the House of 
Representatives adopted two bills establishing a 
universal health insurance system by 20 20 and 
providing for gradual financial and administrative 
autonomy for the public hospitals. The NHIS aims 
to reduce out -of-pocket costs significantly and 
ensure universal healthcare coverage and 
sustainable public health care expenditure. A study 
is being  conducted to assess the NHIS' economic 
impact. Implementation of the reform entails 
investment in public health providers (human 
capital, health technologies, hardware, and new IT 
system). Further financing opportunities, in 
particular involving EU funds might be explored.  
Graph  4.3.7:  Share of healthcare in public expenditure  
 
Source:  OECD Health Statistics; Eurostat Database; WHO 
Global Health Expenditure Database.  
Primary health care (PHC) will be the 
backbone of the system.  Under the NHIS a 
formal referral is foreseen from primary to 
specialised and hospital care, for both private and 
government hospitals and outpatient departments. 
This entails restructuring of public PHC by 
clustering small healthcare facilities, extending  
opening hours, standardising procedures and 
improving coordination of care.  
Meanwhile, around a quarter of the population 
- among the highest proportion in the EU – is 
not covered by the public system.  The incidence 
of reporting unmet medical need, thoug h lower 
than the EU average, was attributed almost entirely to financial reasons (4.6  % of surveyed Cypriots 
reported that needs were unmet due to costs).  
The authorities have made efforts to improve 
the planning in the health sector and to ensure 
that cu rrent resources are adequately used.  In 
2015, the number of nurses per 1000 inhabitants 
(5.2) was well below the EU average and the ratio 
of 1.5 nurses for every doctor was among the 
lowest in the EU. The relative availability of 
advanced medical equipment  is very high 
compared with other EU countries but those 
resources are mainly concentrated in the private 
sector. In both sectors, allocative inefficiencies 
result from underuse of these high -cost medical 
technologies.  
The levels of long -term care (LTC) (46) provided 
is low.  Public spending on LTC is among the 
lowest in the EU (0.3  % of GDP, as compared with 
the EU average of 1.6  %). The acceleration of the 
population ageing poses a further challenge. At 
present, there are regular medical visits to remote 
areas offered to the elderly and other vulnerable 
groups. The new NHIS system will involve actions 
for long -term care, including outpatient services, 
which are currently been provided mostly by 
private enterprises. The ALMP schemes to train 
unemployed peopl e to provide LTC have been 
successful. There are also plans to establish 
community centres, co -financed by the European 
Social Fund, to offer in house LTC.  
 
                                                           
(46) Long -term care includes health, personal, and support 
services, aiming at helping people to remain at home and 
live as independently as possible.  
0510152025
Germany
Netherlands
Ireland
Sweden
United Kingdom
EU
Denmark
France
Austria
Belgium
Spain
Czech Republic
Malta
Italy
Slovenia
Lithuania
Finland
Portugal
Estonia
Slovak Republic
Luxembourg
Croatia
Romania
Poland
Bulgaria
Hungary
Greece
Latvia
Cyprus% of government expenditure 
 
 
43 4.4.1.  INVESTMENT SITUATION * 
Investment in Cyprus is driven by the 
expansion of construction and ship registrations  
(see Graph  4.4.1). The recovery of the residential 
real estate market (see Section  1), capacity 
constraints in hotels and the development of new 
tourism products, such as yachting and 
entertainment (see Section  4.5.4) have led to a 
substantial expansion of construction activities. 
Investment in equipment ha s also been strong, but 
partly driven by ship registration, since Cyprus has 
one of the largest ship registers in the world. The 
shipping sector’s overall contribution to GDP and 
employment is small.  
Graph  4.4.1:  Investment by category (2000 -2016)  
 
Source:  Cystat  
The composition of investment is not expected 
to boost productivity in a durable way . The 
investment trend does not appear to markedly 
contribute to the diversification of the economy 
and may fall short of Cyprus’ smart specialisation 
strategy. (47) While the construction industry 
currently exhibits the highest productivity in 
Cyprus, this may not hold in the long run. The very 
limited level of investment in R&I (see 
Section  4.5.1) suggests that productivity may 
                                                           
(47) The Commission’s smart specialisation s trategies set out 
ex-ante conditions for each Member State’s use, in the 
2014 -2020 programming period, of ESIF resources to 
enhance R&I in areas where it has a competitive 
advantage. For Cyprus, these are energy, tourism, the 
structured environment/constru ction industry, 
transport/marine, agriculture/food industry and health.  remain structurally low, which  might hamper 
competitiveness in the future.  
Limited access to finance and the need to 
reduce debt still restrain private sector 
investment.  Bank credit supply remains very 
limited, while alternative modes of financing are 
underdeveloped. In addition, NFCs  remain heavily 
indebted and are struggling to repay outstanding 
loans (see Section  4.2). Therefore, private sector 
investment has been financed mainly through FDI 
and self -financing. Survey indicators suggest that 
credit demand, though weak, exceeds suppl y (see 
Section  4.2). On the other hand, while banks 
remain very selective as regards project financing, 
funding conditions are gradually improving (see 
Graph  4.4.2).  
Graph  4.4.2:  Interest rates on loans to NFCs  
 
Source:  Central Bank of Cyprus  
4.4.2.  BUSINESS ENVIRONMENT*  
The quality of the business environment is 
improving slowly , in line with the EAR 1. Cyprus 
moved up 13 places in the 2017 ranking of the 
Doing Business  report (World Bank, 2017a) and 
improved its ranking in the World Economic 
Forum’s g lobal competitiveness index (World 
Economic Forum, 2017), moving up 19 places to 
64th. However, it still lags behind most EU 
countries in both survey -based rankings. 
Implementation of the action plan for growth led to 
some progress in the areas of strategi c investments, 
tourism, entrepreneurship and better regulation. 
0123456
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
17Q3EUR 
billion
Other equipment Transport equipment
Housing Other construction
Other
345678
08 09 10 11 12 13 14 15 16 17%
New loans over 1 mn EUR
New loans up to 1 mn EUR4.4. INVESTMENT  
4.4. Investment  
 
44 However, other important reforms have stalled, in 
particular the granting of licenses authorising 
investment projects.  
On entrepreneurship, Cyprus is performing in 
line with the EU average.  Early -stage 
entrepreneurial activity in Cyprus was the third 
highest in the EU in 2016 (European Commission, 
2017f), but the proportion of ‘high -growth’ 
companies  (48) is relatively low. Implementation of 
the national policy statement on entrepreneurship 
identified a series of actions in five broad areas 
(entrepreneurial culture, business environment, 
innovation, access to finance and access to 
markets), of which 50  % were completed by 
September 2017. This includes streamlining 
company registration procedu res, creating an 
online administrative platform for businesses, 
simplifying social security contributions and 
establishing a regulatory framework for university 
spin-offs. Efforts were made to improve digital 
entrepreneurship by setting up a working group to 
promote digital skills, innovation and creativity in 
elementary and secondary education.  
Heavy regulation in some professional services 
is restricting competition.  This applies in 
particular to lawyers, patent agents and real estate 
agents. There are pe rsistent high barriers to entry 
to those activities, such as reserve of activities and 
residency requirements, as well as requirements 
for establishing a practice, such as legal form and, 
in some cases, shareholding requirements. In 
addition to serving con sumers’ interests, more 
competition in services would support growth and 
jobs.  
The issuing of building permits and planning 
licences remains cumbersome  (see 
Section  4.2.2). The issuing of building permits is 
characterised by time -consuming formalities 
(Wor ld Bank, 2017a). Despite authorisation and 
notification schemes to check for technical and 
professional capacity in the construction sector, 
there are no simplified procedures for permit 
issuance.  
Implementation of the privatisation plan is 
basically at a  standstill.  In 2017, the privatisation 
                                                           
(48) High -growth companies have average annualised growth in 
employee numbers of over 10  % a year over a three -year 
period, from a base of at least 10 employees.  unit was dismantled and decrees on the 
privatisation of the Cyprus Telecom Authority 
(CyTA) and the Cyprus Stock Exchange were 
cancelled. Only minor privatisation projects 
remain active, although a draft bill was pro posed 
to re -launch CyTA privatisation. An agreement to 
sell CYTA Hellas, the Greek subsidiary of CYTA, 
was recently reached. The lack of major progress 
on privatisation exposes the state to the build -up of 
contingent liabilities in the medium term, due to 
the weakening competitiveness of public 
companies (see Section  4.1.1).  
Action is being taken to support growth -
friendly policies, stimulate investment and 
promote the social economy.  To mobilise public 
resources to ensure consistent implementation of 
strategic policy priorities, Cyprus intends to create 
deputy ministries for growth and competitiveness 
and tourism, in addition to the one for shipping 
already established in 2017. Legislation on the new 
procedural and legal framework on strategic 
investments,  including the setting -up of a fast -
track mechanism, is due to be put in place in 2018. 
A ‘start -up visa’ programme allows talented 
entrepreneurs from non -EU countries to come to 
Cyprus to set up, operate and develop start -ups 
with high growth potential. T ax incentives were 
adopted to boost and promote entrepreneurship, in 
particular exempting investments from investors’ 
taxable income (up to 50  % of taxable income). 
Furthermore, the government has approved a bill 
in January 2018 in order to boost the socio -
economic benefits from social enterprises.  
E-Commerce remains relatively under -
developed in Cyprus . The rates of individuals and 
NFCs making use of e -commerce are among the 
lowest in the EU, with 29  % and 12  % of survey 
respondents respectively having pur chased online 
in 2016.  (49) According to a recent study (Baker 
Tilly, 2016), the main obstacles to the growth of e -
commerce are: (i) concerns over the security of 
transactions; (ii) legal issues; (iii) shipping costs; 
(iv) taxation, and (v) language and rel iability 
issues. Cypriot businesses and consumers appear 
to face significant problems due to shipping 
conditions (high costs and difficult product 
returns).  
                                                           
(49) Source: Eurostat.  
4.4. Investment  
 
45 4.4.3.  PUBLIC ADMINISTRATIO N* 
Efficiency in the public administration remains 
a challenge.  Accordin g to European Commission 
and World Economic Forum surveys (European 
Commission, 2015 and World Economic Forum, 
2017),  Cyprus ranks relatively low in comparison 
with other Member States for the efficiency of its 
public administration. Also, it is among the lowest 
rated Member States as regards executive capacity 
and accountability (Bertelsmann Institute, 2017).  
The reform of the public administration has not 
been completed yet.  To date, Cyprus has only 
taken measures to incentivise staff mobility and 
improve  redeployment rules.  
Local government reform has stalled.  The local 
government reform bill is awaiting adoption by the 
House of Representatives. The reform is intended 
to streamline local public services, notably waste 
and water management and the issuing  of building 
permits and certificates, which might lead to 
improvements in the issuing of title deeds. It also 
addresses gaps in local government financial 
reporting by establishing a common accounting 
and reporting framework.  
Efforts are being made to imp rove and broaden 
Cyprus’ digital public services (e -government).  
Cyprus ranks in the bottom half of Member States 
as regards e -government services (European 
Commission, 2017j). To improve the situation, it 
has enhanced its e -government governance and 
updat ed its national e -government interoperability 
framework (eGIF), which is a mandatory tender 
requirement for the design and implementation of 
e-government information systems/services. An 
awareness campaign was launched to inform 
citizens and businesses of the benefits of using ICT 
and the internet. 68 e -services have been 
developed in line with the ‘once -only’ principle 
and 30 more are expected to be made available in 
the course of 2018. As of 2017, there were around 
38 000 users in the government gateway p ortal 
‘Ariadni’, and over 300  000 in TAXISnet, the 
electronic income tax returns system.  
The justice system continues to face serious 
challenges as regards its efficiency.  In particular, 
this concerns very long proceedings in 
administrative, civil and comm ercial cases (European Commission, 2018c),  (50) leading to a 
persistently big backlog of pending cases. The 
problems stem mainly from complex and outdated 
procedural rules. They are compounded by a low 
level of digitalisation in courts, in particular for 
case management, the under -use of alternative 
dispute resolution mechanisms and a lack of 
formal life -long training for judges. Operational 
inefficiencies in the justice system hamper the 
implementation of the insolvency and foreclosure 
frameworks, and more generally deter investments, 
as they undermine the enforcement of contracts.  
Some reform initiatives are aimed at making 
the courts more efficient.  An amendment to the 
Courts of Justice Law places new limits on the 
right to appeal against interlocutory de cisions 
during civil proceedings. This is expected to 
accelerate judicial procedures and reduce backlogs. 
A public tender was launched in 2017 to procure a 
court management information system. The 
authorities aim to have a fully operational e -justice 
syste m by the end of 2018. The Supreme Court 
intends to create a special section in charge of the 
life-long training for judges, to become fully 
operational in 2018.  
The planned creation of specialised courts could 
help to accelerate the resolution of pending 
cases.  The establishment of a commercial court is 
envisaged in 2018 and it will be responsible for 
cases involving amounts of over EUR  2 million. 
New rules of procedure should be drafted in 2018. 
It is also expected that a court of appeals will be 
created i n 2018 to rule on civil, criminal and 
administrative cases at second instance. A bill has 
been submitted to the House of Representatives for 
the establishment of an administrative court of 
international protection, to deal mainly with 
asylum cases. This wo uld leave the Administrative 
Court to deal with all other administrative cases. 
Also, a study is expected to contribute for the 
preparation of legal amendments in 2018 to 
facilitate the use of mediation.  
Steps have been taken to improve the quality of 
regu lation.  A new impact assessment mechanism 
was put in place in 2017, ensuring more focused 
and thorough impact assessments of new 
                                                           
(50) Disposition time for first instance administrative law cases 
was 1  582 days in 2016, exceeding the already very long 
disposition time in 2015.  
4.4. Investment  
 
46 legislation. This includes an SME test, to assess 
the possible negative impact of new laws on SMEs 
and examine mitigating measu res. Efforts have 
also been made to improve legal drafting and 
vetting. Civil servants undergo specialised training 
and guidelines have been issued for legal drafting 
and harmonising national legislation. The 
authorities also aim to lower administrative hu rdles 
in strategic areas such as the tourism sector. These 
measures are aimed to improve the institutional 
environment, which is in line with the EAR 1.  
Anti -corruption measures have been put 
forward as high levels of perceived corruption 
risk undermining the business environment.  In 
a 2017 Eurobarometer survey (European 
Commission, 2017g), all companies surveyed 
considered that corruption is widespread in Cyprus 
(EU average: 67  %), 91  % agreed that corruption 
hampers business competition (EU average: 74  %) 
and 72  % pointed to patronage and nepotism as 
problems for their company when doing business 
in Cyprus (EU average: 38  %). Recurrent surveys 
also point to similar problems in dealing with the 
public administration (World Bank, 2017b and 
Transparency Inter national, 2017). A draft law to 
protect whistle -blowers was submitted to the 
House of Representatives in May 2017 and a 
national anti -corruption strategy and action plan 
were published in December. The government is 
considering establishing a new independe nt 
anti-corruption agency. In the meantime, the 
Coordinating Body against Corruption remains 
without permanent staff or budget, and the House 
of Representatives is revising the asset declaration 
law after deeming it inadequate. A new website 
with informati on on public procedures and services 
has also been developed.  
Competition and qualitative assessment in 
public tenders could be further enhanced to 
strengthen the efficiency and transparency of 
public procurement.  In 2017, 42% of public 
procurement procedu res involved only a single 
bidder, up from 38% in 2016. The proportion of 
procedures that did not feature a call for tender 
decreased from 38% in 2016 to 30% in 2017, but it 
remains one of the highest in the EU (European 
Commission, 2018b).  Many business respondents 
(European Commission, 2017g) point to the abuse 
of negotiated and fast -track procedures, tailor -
made specifications and conflicts of interest in the 
evaluation of bids. A recruitment freeze blocked plans for a central pool of public procurement  
experts. Instead, the Treasury continues to provide 
guidance, standard templates and a helpdesk for 
local contracting authorities, in addition to 
participating, together with the Audit Office, in 
selected tender boards and evaluation committees. 
Cyprus is  ranked among the EU countries with the 
highest number of contracts awarded exclusively 
on the basis of lowest price (93% of public 
contracts awarded in 2017) (European 
Commission, 2018b), contrary to best practice 
foreseeing the use of more comprehensive criteria.  
The framework for managing SOEs still poses 
certain risks.  There are no established common 
reporting standards, financial data are not 
centralised and benchmarked, and direct 
supervision is scattered among line ministries. 
There are no common st andards for corporate 
governance. The lack of visibility and long -term 
strategy regarding SOEs may pose risks of 
contingent liabilities, as the state is their ultimate 
guarantor. A draft law on SOEs was submitted for 
discussion in the House of Representati ves, but has 
not been adopted. It aims to improve SOEs’ 
corporate governance and monitoring of their 
functioning. The adoption delays are holding up 
these improvements and the mitigation of 
SOE -related fiscal risks.  
4.4.4.  GREEN INVESTMENT  
In the recent pa st, Cyprus’ spending on 
environmental protection  (51) has increased 
significantly.  Between 2004 and 2012, total 
environmental expenditure by the most important 
contributing sector, i.e. specialised providers of 
environmental protection services, grew by 139  %, 
reaching 1.7  % of GDP in 2012,  (52) well above the 
EU average of 1.14  % (see Graph  4.4.3). 
Investments by this sector accounted for 0.5  % of 
GDP, three times the EU average (0.18  %). This 
high level of investment stems from the need to 
bring environment al protection standards into line 
with EU requirements, in particular as regards 
sewerage and waste management.  
                                                           
(51) Total spending by specialised providers of environmental 
protection services.  
(52) Data not available af ter 2012.  
4.4. Investment  
 
47 Graph  4.4.3:  Environmental investment  
 
(1) Data on government spending in 2005 -2009 are not 
available in the dataset.  
(2) For statistical reasons the sectoral data cannot be 
aggregated.  
Source:  Eurostat  
At the same time, Cyprus’ environmental 
performance is considerably below the EU 
average.  This indicates the need for additional 
investment. For instance, investment needs in 
water -collectin g systems and treatment plants are forecast to reach about EUR  750 million by 
2026.  (European Commission, 2017d)  
Framework conditions for investment in the 
renewable energy sector have improved but 
remain relatively constrained.  This has 
prevented Cyprus from exploiting its considerable 
potential in renewable energy generation, notably 
as regards solar power. Some progress was made 
in 2017, as Cyprus opened its electricity market to 
bilateral long -term contracts between producers 
and suppliers, allowing en ergy producers to 
negotiate the sale price of electricity directly with 
suppliers. However, the Electricity Authority of 
Cyprus (EAC) remains the only supplier to date. 
Following a court order, Cyprus abandoned its 
embargo on licensing new independent powe r 
producers, which might allow investment projects 
to develop. The reform of the electricity market, in 
particular the adoption of new trade and settlement 
rules, the gradual unbundling of EAC as well as 
recent decisions on the independence of the 
Transmis sion System Operator, might incentivise 
further investment in the coming years. Cyprus’ 
plans to import natural liquefied gas by 2020 might 
create opportunities for new power generation 
facilities.  
0.00.10.20.30.40.50.60.7
04 05 06 07 08 09 10 11 12% GDP
Specialised producers of environmental protection service
Industry
Government
4.4. Investment  
 
48 Box 4.4.1: Investment challenges and reforms in Cyprus  
Macroeconomic perspective  
Investment in Cyprus has been recovering for the third year in a row since 2014, increasing to 16 % of GDP 
in 2017Q3, though still well below Cyprus' historical average. Private investment has been mostly funded by 
foreign sources and self -financing, as domestic credit remains tight. Public investment is constrained by the 
need to reduce public debt . The composition of investment reflects the recovery of the construction sector, 
and also stems from rising ship registrations and airplane imports. Public investment increased slightly, 
albeit remaining among the lowest in the EU in 2016. Low public inve stment might weaken the quality of 
basic public services, while low investment in R&D and infrastructure weighs on potential growth.  
Assessment of barriers to investment and reform priorities:  
 
In addition to macroeconomic constraints, the overall busine ss environment in Cyprus does not appear to 
facilitate investment, notably due to difficult access to finance and weak contract enforcement. An action 
plan for growth is being implemented gradually, which and mainly aims to improve the business 
environment , lighten the administrative burden for companies as well as and support growth and boost 
investment. Furthermore, a wide range of reforms have been adopted or are envisaged, in particular in the 
areas of the judicial system and labour legislation, albeit.  Nevertheless, some barriers remain to be addressed 
in areas such as contract enforcement and judicial procedures.  
 
Main barriers to investment and priority actions underway  
1. Firms’ access to finance remains wholly dependent on bank lending, which has r ecovered only slightly in 
2017 (see Section  4.2.4). Banking sector vulnerabilities persist and capital markets remain underdeveloped, 
while Cypriot banks are not equipped to assess early -stage business risks and innovative projects. This 
results in signifi cant constraints, particularly for small and medium -sized businesses SMEs. Access to 
alternative financing sources, such as venture capital and equity funding remains limited. More intensive use 
of the new insolvency and foreclosure frameworks, material pr ogress with reforming the system of issuing 
and transferring title deeds, and modernising the legal procedures would support the resolution of NPLs and 
the deleveraging process.  
2. The regulatory and administrative burden remains high and hampers business activities and investment 
decisions (see Section  4.4.3). Inefficiencies in the public administration and broad public sector, 
underdeveloped digital public services and a high level of perceived corruption all constitute barriers to 
investment. Additionall y, low quality of regulations negatively weighs on competitiveness, although steps 
have been taken to address this (e.g. with the introduction of an ‘"SME test"). Inadequate enforcement due 
to lengthy administrative and court proceedings weakens the effect iveness of Cyprus' legislation and overall 
legal certainty.  
Regulatory/ administrative burden Taxation
Public administrationCSRAccess to financeCSR
Public procurement /PPPs Cooperation btw academia, research and business
Judicial systemCSRFinancing of R&D&I
Insolvency frameworkCSRBusiness services / Regulated professions
Competition and regulatory frameworkCSRRetail
EPL & framework for labour contracts CSRConstruction
Wages & wage setting Digital Economy / Telecom
Education EnergyCSR
Legend :Transport
No barrier to investment identified
CSR Investment barriers that are also subject to a CSR Some progress
No progress Substantial progress
Limited progress Fully addressedPublic 
administration/ 
Business 
environmentFinancial 
Sector / 
Taxation
R&D&I
Sector 
specific 
regulationLabour 
market/ 
Education
 
 
49 4.5.1.  RESEARCH AND INNOVAT ION 
Cyprus remains a moderate innovator with a 
focus on higher added value activities.  In 2016, 
innovation performance declined by 12.7  % 
compared with that of the EU in 2010. (European 
Commission, 2017e) The relative strengths of the 
innovation system are the number of international 
scientific co -publications, the percentage of the 
populat ion with tertiary education and increasing 
trademark applications. Relative weaknesses are 
limited public -private collaboration, difficulties in 
the private co -funding of public R&D expenditure, 
low R&D expenditure in the public sector and 
business investm ents. Cyprus’ services -oriented 
economy, its small market size and geographical 
remoteness hinder the realisation of economies of 
scale. For this reason, the government focuses on 
higher -value niche production. (Eurostat, 2017)  
Public and private R&D expen diture levels are 
among the lowest in the EU.  In 2016, Cyprus 
reached its national target of 0.50  % of GDP for 
R&D expenditures, however both public and 
private expenditure remain well below the EU 
average. Public expenditure was 0.27  % of GDP in 
2016, as compared with the EU average of 0.70  % 
(2015) and the R&D expenditure in the business 
sector was 0.17  % of GDP in 2016 (EU average: 
1.31 % in 2015). The fact that multinational 
companies in Cyprus are mostly present in Cyprus 
for sales representation purpo ses and carry out 
their R&I activities elsewhere (headquarters and 
other countries) is a contributory factor (European 
Commission, 2017h). The government aims to 
improve the quality of R&I expenditure (rather 
than raising the R&D intensity target) in its 
implementation of the Smart Specialisation 
Strategy (S3) with grants targeting specific S3 
identified areas.  
Increasing private R&I investment and the 
innovation capacity of the business sector 
remains a major challenge.  Firms’ access to 
finance for innova tive investment depends on bank 
lending, which has been significantly reduced in 
recent years. To remedy the situation, Cyprus 
provides public grants to innovative companies to 
support the development and marketing of 
innovative products and services, and to promote 
cooperation between stakeholders. Implementation 
of the schemes has been successful so far and it is 
expected to increase enterprises’ R&I spending of enterprises due to the ‘own contribution’ rule 
(usually around 30  % of a project’s budget).  
Cyprus’ R&I governance structure is being 
improved.  The Council of Ministers acts as the 
political decision -making body for R&I, while the 
National Council for Research and Innovation 
(NCRI)) has been inactive since 2014. The 
government has announced its in tention to create a 
Deputy Ministry for Growth, which will be 
responsible for R&I policy -making, including 
coordination of national stakeholders. (European 
Commission, 2017e) The establishment has been 
approved of a National Academy of Sciences, 
Letters an d Arts (European Commission, 2017e) 
and a relevant Law was voted by the House of 
Representatives in November 2017 aiming, inter 
alia at providing policy -makers with scientific 
guidance.  
Cyprus participates actively in EU R&I 
programmes.  To date, it has be en quite successful 
in targeting teaming actions in Horizon 2020, 
aiming to establish centres of excellence. The 
latest Horizon 2020 figures show that it 
participates in 328 projects with EU funding of 
over EUR 88 million. (European Commission, 
2017e) The national 2016 -2020 European 
Research Area (ERA) roadmap for Cyprus 
recommends even greater participation in Horizon 
2020 and a stronger evaluation framework. This 
might provide scientific employment opportunities 
and enhance Cyprus’ potential to become a n ode of 
scientific cooperation in the Mediterranean and 
Middle East. Cyprus intends to build on 
constructive partnerships between research 
institutions in these regions.  
4.5.2.  ENVIRONMENTAL POLICI ES 
Poor waste management performance remains 
a major enviro nmental concern.  Taking policy 
measures to achieve the 2020 targets under the 
Waste Framework Directive and meeting EU 
funding conditions remain a challenge. In the 
meantime, waste generation is increasing.  
Recycling rates are low and there is still a 
strong dependence on landfilling.  Cyprus 
landfills most of its municipal waste (75  %, as 
compared with the EU -average of 26  %). It missed 
the 2010 target for diverting biodegradable 4.5. SECTORAL POLICI ES 
4.5. Sectoral policies  
 
50 municipal waste from landfills. The minimum 
permissible quantity for disposal  was exceeded by 
64 %. Recycling accounts for 17  %, including 4  % 
of composting, which is significantly below the 
EU average (45  %).  
Eliminating illegal landfilling and putting in 
place the necessary infrastructure for waste 
management remain a challenge . There are no 
landfill taxes and limited incentives for producers 
to take responsibility for their waste. Extended 
Producer Responsibility or equivalent schemes 
cover only a few waste streams and do not cover 
the full costs of separate collection and recyc ling 
of the main waste streams. Incentive systems to 
favour prevention and participation in separate 
collection also appear to be limited. Cyprus’ 
transition to circular economy is hampered by the 
lack of policies and investments encouraging a 
shift from l andfilling and implementing separate 
collection. An additional challenge is to avoid 
creating overcapacity for the treatment of residual 
waste.  
Cyprus’ main water management problem is 
the over -abstraction of groundwater, coupled 
with water scarcity.  The use of recycled water is 
promoted for irrigation and the recharging of 
aquifers  a good practice that can mitigate water 
scarcity under the right conditions. Cyprus has also 
put in place a new water pricing policy. The new 
regulations apply to all sectors . They transpose 
certain requirements under the Water Framework 
Directive, but it is still early to assess whether the 
new framework provides adequate incentives for 
the efficient use of water. Regarding waste waters, 
Cyprus forecasts in its National Imple mentation 
Programme that it will have the necessary capacity 
to reach full compliance with the Urban Waste 
Water Treatment Directive by 2026, i.e. 
significantly later than provided for in the 
Accession Treaty.  
Incompatible development activities endanger 
Cyprus’ rich natural environment and 
biodiversity.  Cyprus is one of the countries with 
the largest Natura 2000 network coverage. 
However, in many cases infrastructure has 
developed in protected areas without the 
assessments required under European and nati onal 
legislation. This hinders Natura 2000 projects and 
can lead to significant environmental damage, such 
as fragmentation or degradation of these areas and significant threats to protected species. 
Safeguarding natural capital, especially under 
Natura 20 00, and promoting green tourism remain 
a challenge.  
4.5.3.  ENERGY AND CLIMATE P OLICIES  
Cyprus appears on track to meet its greenhouse 
gas emissions target in 2020.  It adopted a low 
carbon development strategy in 2016 and aims to 
fulfil its commitments on greenhouse gas 
emissions by reducing its dependence on fossil 
fuels. This involves the promotion of renewable 
energy sources, energy efficiency and 
climate -friendly technologies. While Cyprus is still 
on its planned trajectory for increasing the share of 
renewables in final energy consumption, an 
acceleration of renewable energy supply is likely 
to be needed to meet the 2020 target. The 
economic recovery is leading to a sustained 
increase in sales of petroleum products, which 
might translate into rising ene rgy consumption 
and, consequently, greenhouse gas emissions, and 
make it harder to reach the mitigation targets.  
The electricity market remains heavily 
dependent on imported oil products.  Electricity 
is mostly produced by the state -owned EAC, 
which relies on a set of plants using heavy fuel oil 
and gas oil. The production of electricity from 
renewable energy sources remains below EU 2020 
targets, as capacity build -up was prevented by the 
freeze on new licences for independent power 
producers until early 201 7. The opening -up of the 
electricity market is scheduled for mid -2019, while 
from September 2017, suppliers and generators 
may trade electricity using bilateral contracts. In 
December, ministerial decisions were taken to 
ensure that in the future the Trans mission System 
Operator will have the capacity and the 
independency to operate the electricity market.   
The authorities have identified the desired 
structure for introduction of natural gas into the 
domestic electricity market by 2020. They intend 
to laun ch tenders for establishing the necessary 
infrastructure and the long -term importing of 
natural gas.  
Gas exploration in Cyprus’ exclusive economic 
zone (EEZ) has resumed and will intensify.  
Following the renewal of exploration licences for 
blocks 2, 3, 9 a nd 11 of the EEZ (ENI/KOGAS 
4.5. Sectoral policies  
 
51 and Total) until 2018, in April 2017 new licences 
for blocks 6, 8 and 10 were granted to well -known 
companies (ExxonMobil, Qatar Petroleum, Eni 
and Total). Exploration drilling resumed in June, 
indicating that the geological fea tures of Cyprus’ 
EEZ are similar to that of the large gas field in the 
neighbouring, Egyptian EEZ. This can be 
considered an encouraging sign for oil companies 
currently present in Cyprus, as it might indicate 
that more gas reserves are likely to be found.  As 
negotiations on the commercialisation of the 
Aphrodite gas field continue, exploratory drillings 
took place in 2017 and more are expected in 2018, 
which should bring more clarity as to the extent of 
Cyprus’ hydrocarbon reserves.  
Measures have not yet b een taken to ensure 
continued compliance with the Industrial 
Emissions Directive once current derogations 
have expired.  The plants using heavy fuel oil to 
generate electricity must comply with the 
Directive, but are covered by derogations until the 
end of 2019, and in one case, until 2023. Plans to 
start importing liquefied natural gas by 2020, 
might facilitate compliance with the Directive.  
4.5.4.  TOURISM POLICY  
Cyprus is experiencing a tourism boom.  In 
2016, the number of visiting tourists rose by 20  %, 
while tourism revenues increased by 13  % of GDP. 
In 2017, visits increased by another 15 % to an all -
time record of 3.7 million tourists. Tourism 
revenues grew by 12  % y-o-y(53). It is estimated 
that tourism accounted directly for 7  % of Cyprus' 
GDP and 7 % of jobs in 2016, while including 
indirect and induced effects, it accounted for over 
a fifth of GDP and 22 % of jobs (World Travel & 
Tourism Council, 2017).  
External factors are playing a major positive 
role in the current tourism boom.  While globally 
the tourism industry has been on the rise, Cyprus 
performance from 2000 up to 2015 was rather 
weak. The country lost its competitive advantage, 
as rising industry costs were not matched by 
improvements in quality, while most of its 
competitors, particularly Tu rkey, engaged in 
substantial upgrades of tourism facilities. As of 
2010, terrorist attacks, as well as political and civil 
                                                           
(53) Data up to October 2017.  unrest have severely harmed Cyprus’ competitors 
in North Africa and the Middle East. This trend 
has intensified since 2015, diverting  tourist flows, 
particularly from Europe, to safer destinations, and 
giving Cyprus a temporary competitive advantage.  
Graph  4.5.1:  Changes in number of tourist arrivals  
 
Source:  World Tourism Organisation  
Cyprus has also made efforts to attract tourists 
by improving air connectivity, advertising, and 
diversifying tourism products.  The 2015 
bankruptcy of Cyprus Airways, the national 
carrier, incentivised competition in the air 
transport market. Traditional airlines increased 
their participation an d low -cost operators entered 
the market. As part of the economic adjustment 
programme, Cyprus removed several restrictions 
on foreign operators, in particular as regards the 
number of airlines that can fly to Cyprus. 
Improved air access was combined with 
intensified, more targeted advertising. In parallel, 
tourism products diversified from the traditional 
‘sun and beach’ to  include nautical, rustic and 
sport tourism, ‘experiences’ such as cycling, 
diving, golf, wellness, wine tours, and conference 
hosting.  This ongoing strategy has been successful, 
in particular by extending tourist arrivals during to 
the ‘shoulder months’ (March -May and October). 
Compared with European peers with a similar 
climate, Cyprus scores well in seasonality terms.  
The heavy relian ce on two inbound markets is 
one of the main challenges, although efforts are 
being made to broaden the tourist base.  The UK 
remains the largest inbound market, accounting for 
-20020406080100
1995-2000 2001-2005 2006-2010 2011-2015 2015-2016%
Egypt Turkey Cyprus Tunisia Portugal Malta
4.5. Sectoral policies  
 
52 about a third of all tourists, followed by Russia, 
currently accounting for abou t a quarter of all 
tourists. The few other long -established, but much 
smaller markets include Greece, Germany and 
Sweden (about 5% each). Efforts have been made 
to exploit other markets, resulting in more short -
distance visitors, notably from Israel and Le banon, 
with number of Israeli visitors growing particularly 
fast (76% in 2017) and becoming the third biggest 
inbound market. Thanks to new connections to 
European regional airports, substantial increase in 
2017 was recorded in visits by German (52%), 
Swed es (19%), Polish (33%), Austrian (33%) and 
other tourists. Efforts to diversify the tourist base 
are expected to continue, with some progress made 
in providing visas, e.g. for Chinese and Iranian 
nationals.  
The challenges to further expansion of tourism 
stem from accommodation capacity and 
growing environmental impact.  The official 
accommodation sector reached full capacity in the 
peak months of 2016. The further increase in 
arrivals in 2017 suggests the active use of informal 
accommodation. Supply is respo nding to demand, 
and various hotel units were either under 
construction or renovation in 2017, which is 
expected to increase official bed capacity by 3%. Further sizable projects are planned to start in 
2018. However, the rapid hotel expansion and 
buoyant  residential construction in prime tourist 
areas pose questions of environmental 
sustainability. This is particularly true with respect 
to air pollution, and water and waste management, 
which pose critical challenges (see Section 4.5.2). 
The overall sustai nability of the tourism sector 
depends on the implementation of adequate 
environmental impact assessment in new 
investments.  
A new national tourism strategy is under 
consideration.  Following the public consultation 
on a study conducted by the external con sultants, a 
proposal on National Tourism Strategy was 
submitted to the Council of Ministers, with the 
summary and the main elements of the new 
strategy. The strategy aims at making Cyprus a 
premium tourism destination, while emphasizing 
the sustainability aspects of tourism growth. The 
proposal was approved on 17th January 2018.  
 
 
53 Commitments  Summary assessment (54) 
Country – specific recommendations (CSRs)   
CSR 1:  Pursue its fiscal policy in line with the 
requirements of the preventive arm of the Stability 
and Growth Pact, which entails remaining at its 
medium -term budgetary objective in 2018. Use 
windfall gains to accelerate the reduction of the 
general government debt ratio. By the end of 2017, 
adopt key legislative reforms aiming to improve 
efficiency in the public sector, in particular on the 
functioning of public administration govern ance of 
state-owned entities local governments. (MIP - 
relevant)  Cyprus has made limited progress  in 
addressing CSR 1, in particular 
concerning the public administration 
reform, with the adoption of legislation 
facilitating staff mobility between the 
publi c administration and state -owned 
entities. No progress was made 
regarding the reforms of state -owned 
entities and local governments.  
The compliance assessment with the 
Stability and Growth Pact will be 
included in Spring when final data for 
2017 will be a vailable.  
Pursue its fiscal policy in line with the requirements 
of the preventive arm of the Stability and Growth 
Pact, which entails remaining at its medium -term 
budgetary objective in 2018.  The compliance assessment with the 
Stability and Growth Pact will be 
included in Spring when final data for 
2017 will be available.  
Use windfall gains to accelerate the reduction of the 
general government debt ratio.  The compliance assessment with the 
Stability and Growth Pact will be 
included in Spring when fina l data for 
                                                           
(54) The following categories are used to assess progress in implementing the 2017 country -specific recommendations (CSRs):  
 
No progress:  The Member State has not credibly announced nor adopted any measures to address the CSR. This category 
covers a number of typical situations, to be interpreted on a case -by-case basis taking into account country -specific conditions. 
They include the following:  
 no legal, administrative, or budgetary measures have been announced in the national reform programme, in any 
other official communication to the national Parliament/relevant parliamentary committees or the European 
Commission, publicly (e.g. in a press statement or on the government's website);  
 no non -legislative acts have been presented by the governing or legislative body;   
 the Member State has taken initial steps in addressing the CSR, such as commissioning a study or setting up a study 
group to analyse possible measures to be taken (unless the CSR explicitly asks for orienta tions or exploratory 
actions). However, it has not proposed any clearly -specified measure(s) to address the CSR.  
 
Limited progress:  The Member State has:  
 announced certain measures but these address the CSR only to a limited extent; and/or  
 presented legislative acts in the governing or legislative body but these have not been adopted yet and substantial further, 
non-legislative work is needed before the CSR is implemented;  
 presented non -legislative acts, but has not followed these up with t he implementation needed to address the CSR.  
 
Some progress:  The Member State has adopted measures:  
 that partly address the CSR; and/or  
 that address the CSR, but a fair amount of work is still needed to address the CSR fully as only a few of the 
measures have been implemented. For instance, a measure or measures have been adopted by the national 
Parliament or by ministerial decision, but no implementing decisions are in place.  
 
Substantial progress:  The Member State has adopted measures that go a long way towards addressing the CSR and most of 
them have been implemented.  
 
Full implementation:  The Member State has implemented all measures needed to address the CSR appropriately.  ANNEX A  
OVERVIEW TABLE  
A. Overview Table  
 
54 2017 will be available.  
By the end of 2017, adopt key legislative reforms 
aiming to improve efficiency in the public sector, in 
particular on the functioning of public administration,  There has been some progress  
regarding the improvement of the 
efficiency of the public sector with the 
adoption of legislation facilitating staff 
mobility between the public service and 
state-owned entities. Some measures 
were also undertaken promoting e -
governance. However, key legislation 
remains to be adopted.   
(…) governance of state -owned entities  There has been no progress  with regard 
to the governance of state -owned 
entities. The draft law is still pending 
adoption by the House of 
Representatives.  
(…) and local governments  There has been no progress  related to 
the reform of local governments. 
Relevant legislation is awaiting 
adoption by the House of 
Representatives.  
CSR 2: Increase the efficiency of the judicial system 
by modernising civil procedures, implementing 
appropriate information systems and increasing the 
specialisation of courts. Take additional measures to 
eliminate impediments to the full implementation of 
the insolvency and foreclosure frameworks, and to 
ensure reliable and swift systems for the issuance of 
title deeds and the transfe r of immovable property 
rights.  Cyprus has made Limited Progress  in 
addressing CSR 2. Regarding the 
efficiency of the judicial system, some 
measures have been announced, but key 
reforms are at preliminary stage. Efforts 
are on -going on eliminating obstacl es to 
fully implement the insolvency and 
foreclosure frameworks, but no 
significant progress was recorded. 
Administrative steps were taken to 
address the issuance of title deeds and 
transfer of immovable property rights, 
but more comprehensive measures 
remain to be adopted.   
Increase the efficiency of the judicial system by 
modernising civil procedures, implementing 
appropriate information systems and increasing the 
specialisation of courts.  Limited Progress  in modernising the 
civil procedures. A legisla tion filtering 
appeals on interlocutory decisions is in 
place. However, a series of announced 
measures still remain to be 
implemented, such as setting up a 
management information system for the 
courts (e -justice system), establishing a 
specialised commerci al court, amending 
the civil procedure law to strengthen the 
legal framework for the enforcement of 
A. Overview Table  
 
55 judgements, incentivising judicial 
mediation and creating a training 
department in the Supreme Court.  
Take additional measures to eliminate impediments 
to the full implementation of the insolvency and 
foreclosure frameworks,  Limited progress  in eliminating 
barriers to fully implement the 
insolvency and foreclosure frameworks. 
Rules of Court have been adop ted for 
personal insolvency procedures, but the 
amendment of the bankruptcy rules on 
legal entities is still under preparation. 
An independent review of the 
insolvency and foreclosure frameworks, 
covering also staffing and IT 
requirements, is completed and  the 
results are reviewed by the authorities.  
(…) and to ensure reliable and swift systems for the 
issuance of title deeds and the transfer of immovable 
property rights.  Limited Progress  on ensuring reliable 
and swift systems for issuing title deeds 
and transferring of immovable property 
rights. Administrative simplification 
measures to facilitate the issuance of 
title deeds are on -going and a policy 
response related to the licencing and 
permitting procedures is under 
preparation based on findings of 
external experts. A draft law on the 
creation of a new system for the transfer 
of property rights is under preparation.  
CSR 3:  Accelerate the reduction of non -performing 
loans by setting related quantitative and time -bound 
targets for banks and ensuring acc urate valuation of 
collateral for provisioning purposes. Create the 
conditions for a functional secondary market for non -
performing loans. Integrate and strengthen the 
supervision of insurance companies and pension 
funds.  Cyprus has made Limited Progress  in 
addressing CSR 3. Some measures were 
undertaken such as setting up a task 
force on non -performing loan in the 
Central Bank. Despite the small decline 
in non -performing loans, the level of 
stock is still very high.    
Accelerate the reduction of non -performing loans by 
setting related quantitative and time -bound targets for 
banks and ensuring accurate valuation of collateral 
for provisioning purposes.  Limited Progress  was made. The 
Central Bank of Cyprus in July 2017 
set-up an NPL task force to develop a 
national strategy to reduce NPLs and 
the authorities are evaluating various 
options for a comprehensive solution to 
the NPL problem, including a new 
targeting framework creation.  
Create the conditions for a functional secondary Limited Progress  was made by banks 
announcing the creation of joint 
A. Overview Table  
 
56 market for non -performin g loans.  ventures with specialised foreign debt 
servicers to manage their NPL 
portfolios, which could facilitate NPL 
sales in the future. Recently Hellenic 
bank has sold a loan package of 145 
mln euros. However, t he legal 
framework for the securitisation of 
loans is still pending.  
Integrate and strengthen the supervision of insurance 
companies and pension funds.  Limited Progress  was made as relevant 
legislation is still under preparation.  
CSR 4: Accelerate the  implementation of the action 
plan for growth, focusing in particular on fast -
tracking strategic investments and improving access 
to finance, and, by the end of 2017, resume the 
implementation of the privatisation plan. Take 
decisive steps towards the owne rship unbundling of 
the Electricity Authority of Cyprus and, in particular, 
proceed with the functional and accounting 
unbundling by the end of 2017.  Cyprus has made Limited Progress  in 
addressing CSR 4. Limited progress 
was recorded in the implementation  of 
the action plan for growth and no 
progress was made with regard to the 
privatisation plan.  
Accelerate the implementation of the action plan for 
growth, focusing in particular on fast -tracking 
strategic investments and improving access to 
finance,  Some Progress  was made in 
implementing the action plan for 
growth. A series of measures stemming 
from the action plan are gradually being 
implemented. The legal framework to 
attract and facilitate large scale 
investments was submitted to the House 
of Repre sentatives for adoption. Some 
initiatives were undertaken by the 
authorities to improve access to finance, 
but still remain at a preliminary stage.  
(…) and, by the end of 2017, resume the 
implementation of the privatisation plan.  Limited Progress  has be en achieved in 
pursuing the privatisation plan. Only the 
operations of the port of Limassol were 
transferred to a private consortium, 
while the privatisation of the port of 
Larnaca is under way. An agreement to 
sell the Greek subsidiary of CYTA was 
reached . A series of measures were 
announced but still are at preliminary 
stage.  
Take decisive steps towards the ownership 
unbundling of the Electricity Authority of Cyprus 
and, in particular, proceed with the functional and 
accounting unbundling by the end of 2017.  Limited Progress.  Some new decisions 
were taken at ministerial level to ensure 
greater independence of the 
Transmission System Operator Cyprus, 
but many important steps still need to be 
A. Overview Table  
 
57 taken.  
CSR 5:  Speed up reforms aimed at increasing the 
capaci ty of public employment services and 
improving the quality of active labour market 
policies delivery. Complete the reform of the 
education system to improve its labour market 
relevance and performance, including teachers’ 
evaluation. By the end of 2017, ad opt legislation for 
a hospital reform and universal healthcare coverage.  There has been some progress  overall 
in addressing CSR 5, in particular with 
the adoption of legislation establishing a 
universal National Health System.  
Speed up reforms aimed at increasing the capacity of 
public employment services and improving the 
quality of active labour market policies delivery.  There has been some progress  
regarding the capacity of the public 
employment services with the initiation 
of the recruitment of additional 
counsellors, which will also facilitate 
the active labour market policies. A web 
platform to facilitate recruitment of 
personnel by employers was  launched 
and a project for the use of private 
employment services by unemployed is 
being implemented.  
Complete the reform of the education system to 
improve its labour market relevance and 
performance, including teachers’ evaluation.  Limited Progress.  Some measures are 
being implemented in relation to the 
vocational education training system. 
The new teacher appointing system is in 
place; however, no progress has been 
made regarding the evaluation system of 
teachers.  
By the end of 2017, adopt legislat ion for a hospital 
reform and universal healthcare coverage.  Substantial Progress.  The legislation 
for the creation of a national health 
system with universal coverage and the 
autonomisation of public hospitals was 
adopted. Secondary legislation and 
imple menting steps are under way.  
Europe 2020 (national targets and progress)  
Target  Summary assessment  
Employment rate: 75 % - 77 % of the population aged 
20-64 should be employed by 2020.  In 2016 the employment rate (20 -64 
years) increased to 68.7 % below the 
lower bound set in the national target. 
The employment rate is increasing, but 
remains below the pre -crisis period 
level, when Cyprus was already 
fulfilling its national target.  
A. Overview Table  
 
58 Research and development target: Increase research 
and development expenditure to 0.5 % of GDP by 
2020.  Cyprus has reached its national target 
with regard to R&D intensity 0.5 % of 
GDP in 2016. Cyprus does not plan to 
further increase the annual expenditure 
on research, development and 
innovation until 2020, but rather to  
focus on the quality of spending.  
Emissions in the sectors not covered by the EU ETS 
must decrease by 5 % in 2020 compared to 2005.  According to the latest national 
projections submitted to the 
Commission and taking into account 
existing measures, the ta rget might be 
achieved by 2020.  
Renewable energy target: 13 % of gross final energy 
consumption from renewable sources.  With a renewable energy share of 9.4 
% in 2015 (55), Cyprus is on track to 
reach the target for 2020. However, 
since the trajectory is n ot linear, the 
final target will need to be achieved by 
means of a stronger annual growth of 
the renewable energy share, in line 
with Cyprus's high potential in this 
area.  
Energy efficiency target: absolute level of primary 
consumption of 2.2 Mtoe  Gross inland primary energy 
consumption was reduced during the 
recent economic recession, from 2.5 
Mtoe in 2012 to 2.2 Mtoe in 2015. 
National data show that the energy 
consumption has recently started to 
pick-up in line with the sustained 
economic growth, which poses 
challenges in reaching the target 
without additional measures. 
Furthermore, over 90 % of Cyprus's 
energy consumption continues to be 
covered by imported oil and oil 
products.  
Early school leaving target: Reduce the rate of early 
school leavers to 1 0 % by 2020.  Cyprus has already reached the 
Europe 2020 national target as regards 
early school leaving 7.6 % in 2016. 
However, in 2016 early school leaving 
rate grew by 2.4 pps compared to 
2015. Among students with migrant 
background early school leaving is 
                                                           
(55) Renewable energy shares for 2015 are approximations and not official data, r eflecting the available data (04.10.2016). See Öko -
Institut (2016).  
A. Overview Table  
 
59 markedly higher at 18.2 %.   
Tertiary education target: Increase participation in 
higher education to 46 %.  Cyprus surpassed its national target 
and it has one of the highest tertiary 
education attainment rates in the EU, 
53.4 %, in 2016 as compared to  39.1 
% EU average. However, 
unemployment of tertiary education 
graduates and skills mismatches 
continue to be a challenge.  
Target for reducing the population at risk of poverty or 
social exclusion in number of persons: Reduce the 
number of people at risk  of poverty or social inclusion 
by 27 000 persons or decrease to 19.3 % of the 
population. (base year 2008)  The number of people at risk of 
poverty or social exclusion had been 
increasing since 2008, reaching 27.8 
% of the total population in 2013. In 
2016  it increased to 27.7 % 
(corresponding to 10 000 less people 
at-risk-of-poverty or social exclusion 
than in 2015). Based on these figures, 
the national target for 2020 appears 
distant.  
 
 
60  ANNEX B  
MACROECONOMIC IMBALA NCE PROCEDURE SCOREB OARD  
 
Table  B.1: The MIP scoreboard for Cyprus (AMR 2018)  
 
Flags:b:Break in series. e:Estimated. p:Provisional.           
1) This table provides data as published under the Alert Mechanism Report 2018, which reports data as of 24 Oct 2017. Please 
note that figures reported in this table may therefore differ from more recent data elsewhere in this document. 2) Figures 
highlighted are those falling outside the threshold established in the European Commission's Alert Mechanism Report.  
Source:  European Commission 2017, Statistical Annex to the Alert Mechanism Report 2018, SWD(2017) 661.  
 
Thresholds 2011 2012 2013 2014 2015 2016
Current account balance, % of GDP 3 year average -4%/6% -7.7 -7.1 -5.0 -5.1 -3.6 -3.6 
Net international investment position % of GDP -35% -129.9 -129.1 -138.7 -147.0 -145.0 -127.8 
Real effective exchange rate - 42 trading 
partners, HICP deflator3 year % change±5% (EA) 
±11% (Non-EA)-3.0 -5.9 -0.8 -1.7 -6.1 -6.5 
Export market share - % of world exports 5 year % change -6% -11.4e -21.7e -14.9 -23.8 -11.9 -3.0 
Nominal unit labour cost index 
(2010=100)3 year % change9% (EA) 
12% (Non-EA)9.4 3.2 -2.1 -7.6 -10.6 -6.2p
House price index (2015=100), deflated 1 year % change 6% -4.5p -5.3p -4.1p -1.3p 0.3bp 1.6 
Private sector credit flow, consolidated % of GDP 14% 13.0 16.5 -13.3 -0.3 4.1 10.2p
Private sector debt, consolidated % of GDP 133% 321.6 328.1 340.1 352.5 353.5 344.6p
General government gross debt % of GDP 60% 65.7 79.7 102.6 107.5 107.5 107.1 
Unemployment rate 3 year average 10% 6.5 8.7 11.9 14.6 15.7 14.7 
Total financial sector liabilities, non-
consolidated1 year % change 16.5% -6.1 6.3 -15.3 -3.7 11.1 0.7 
Activity rate - % of total population aged 
15-643 year change in pp -0.2 pp -0.1 0.5b 0.0 0.8 0.4 -0.2 
Long-term unemployment rate - % of 
active population aged 15-743 year change in pp 0.5 pp 1.1 3.0 4.8 6.1 3.2 -0.3 
Youth unemployment rate - % of active 
population aged 15-243 year change in pp 2 pp 13.4 13.9 22.3 13.6 5.1 -9.8 External imbalances and competitiveness Internal imbalances Employment indicators
 
 
61  ANNEX C  
STANDARD TABLES  
 
Table  C.1: Financial market indicators  
 
(1) Latest data Q3 2017. Includes not only banks but all monetary financial institutions excluding central banks.  
(2) Latest data Q2 2017.  
(3) As per ECB definition of gross non -performing debt instruments. The aggregate NPL ratio, which covers all loan and 
advances, may be misleading for Cyprus due to the large exposures of domestic and foreign banks t o central banks 
(representing 14% of gross loans) and other financial institutions (10% of gross loans). For Cyprus the NPL ratio for the pri vate 
sector, comprising only exposures to non -financial corporations and households is more appropriate indicator s ee Section 4.2.  
(4) Quarterly values are not annualised.  
* Measured in basis points.  
Source:  European Commission (long -term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators)  
 
2012 2013 2014 2015 2016 2017
Total assets of the banking sector (% of GDP)(1)657.4 497.7 517.7 513.0 477.6 425.1
Share of assets of the five largest banks (% of total assets) 62.6 64.1 63.4 67.5 65.7 -
Foreign ownership of banking system (% of total assets)(2)30.1 33.9 35.2 19.2 21.6 19.7
Financial soundness indicators:2)
              - non-performing loans (% of total loans)(3)18.7 36.2 35.6 34.7 33.8 31.4
              - capital adequacy ratio (%) 7.3 13.5 15.3 16.6 16.8 16.4
              - return on equity (%)(4)-100.8 -37.9 -7.1 -7.7 1.7 -8.5
Bank loans to the private sector (year-on-year % change)(1)4.2 -9.4 -4.2 3.6 -8.3 3.8
Lending for house purchase (year-on-year % change)(1)0.3 -6.8 -2.8 -3.0 -1.0 -0.6
Loan to deposit ratio(1)119.3 152.3 152.1 152.0 120.5 114.1
Central Bank liquidity as % of liabilities - - 12.4 6.9 1.3 1.4
Private debt (% of GDP) 328.1 340.1 352.5 353.5 344.6 -
Gross external debt (% of GDP)(2) - public - - - - - -
    - private - - - - - -
Long-term interest rate spread versus Bund (basis points)* 550.5 493.0 483.7 404.1 368.3 239.9
Credit default swap spreads for sovereign securities (5-year)* 1196.2 943.9 423.1 330.6 262.5 180.0
C. Standard Tables  
 
62   
Table  C.2: Headline Soc ial Scoreboard indicators  
 
† The Social Scoreboard includes 14 headline indicators, of which 12 are currently used to compare Member States 
performance. The indicators "participants in active labour market policies per 100 persons wanting to work" and 
"compensation of employees per hour worked (in EUR)" are not used due to technical concerns by Member States. Possible 
alternatives will be discussed in the relevant Committees.  
(1) People at risk of poverty or social exclusion (AROPE): individuals who are  at risk of poverty (AROP) and/or suffering from 
severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI).       
(2) Unemployed persons are all those who were not employed but had actively sought work and wer e ready to begin 
working immediately or within two weeks.       
(3) Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2018.       
(4) Reduction in percentage of the risk of poverty rate, due to  social transfers (calculated comparing at -risk-of poverty rates 
before social transfers with those after transfers; pensions are not considered as social transfers in the calculation).       
(5) Average of first three quarters of 2017 for the employment r ate and gender employment gap.  
Source:  Eurostat  
 
2012 2013 2014 2015 2016 2017 5
Equal opportunities and access to the labour market
Early leavers from education and training 
(% of population aged 18-24)11.4 9.1 6.8 5.2 7.6 :
Gender employment gap (pps) 11.3 10.4 7.7 8.3 9.7 9.9
Income inequality, measured as quintile share ratio (S80/S20) 4.7 4.9 5.4 5.2 4.9 :
At-risk-of-poverty or social exclusion rate1 (AROPE) 27.1 27.8 27.4 28.9 27.7 :
Young people neither in employment nor in education and 
training (% of population aged 15-24)16.0 18.7 17.0 15.3 16.0 :
Dynamic labour markets and fair working conditions†
Employment rate (20-64 years) 70.2 67.2 67.6 67.9 68.7 70.4
Unemployment rate2 (15-74 years) 11.9 15.9 16.1 15.0 13.0 11.3
Gross disposable income of households in real terms per capita3 
(Index 2008=100) : : 77.0 76.9 : :
Public support / Social protection and inclusion
Impact of social transfers (excluding pensions) on poverty 
reduction4 37.4 37.0 41.5 36.2 35.6 :
Children aged less than 3 years in formal childcare 26.0 25.0 25.5 20.8 24.8 :
Self-reported unmet need for medical care 3.5 4.4 4.7 1.5 0.6 :
Individuals who have basic or above basic overall digital skills 
(% of population aged 16-74): : : 43.0 43.0 50.0
C. Standard Tables  
 
63   
Table  C.3: Labour market and education indicators  
 
* Non -scoreboard indicator       
(1) Long -term unemployed are people who have been unemployed for at least 12 months.       
(2) Difference between the average gross hourly earnings of male paid employees and of female paid employees as a 
percentage of average gross hourly earnings of male paid employees. It is defined as "unadjusted", as it does not correct for  
the distribution of individual characte ristics (and thus gives an overall picture of gender inequalities in terms of pay). All 
employees working in firms with ten or more employees, without restrictions for age and hours worked, are included.       
(3) PISA (OECD) results for low achievement in  mathematics for 15 year -olds.       
(4) Impact of socio -economic and cultural status on PISA (OECD) scores. Values for 2012 and 2015 refer respectively to 
mathematics and science.       
(5) Average of first three quarters of 2017, unless for the youth une mployment rate (annual figure).  
Source:  Eurostat, OECD  
 
Labour market indicators 2012 2013 2014 2015 2016 2017 5
Activity rate (15-64) 73.5 73.6 74.3 73.9 73.4 :
Employment in current job by duration
From 0 to 11 months 15.7 15.7 18.5 18.1 19.7 :
From 12 to 23 months 10.1 8.5 7.6 9.5 9.7 :
From 24 to 59 months 19.1 17.9 15.7 14.9 13.7 :
60 months or over 55.1 57.9 58.2 57.5 56.9 :
Employment growth* 
(% change from previous year) -3.2 -5.9 -1.8 1.5 3.1 3.3
Employment rate of women
(% of female population aged 20-64) 64.8 62.2 63.9 64.0 64.1 65.7
Employment rate of men 
(% of male population aged 20-64)76.1 72.6 71.6 72.3 73.8 75.6
Employment rate of older workers* 
(% of population aged 55-64)50.7 49.6 46.9 48.5 52.2 54.5
Part-time employment* 
(% of total employment, aged 15-64)9.7 11.9 13.5 13.0 13.4 12.4
Fixed-term employment* 
(% of employees with a fixed term contract, aged 15-64)15.1 17.5 19.0 18.4 16.5 15.5
Transition rate from temporary to permanent employment
(3-year average)23.0 22.0 20.4 21.6 : :
Long-term unemployment rate1 (% of labour force) 3.6 6.1 7.7 6.8 5.8 4.8
Youth unemployment rate 
(% active population aged 15-24)27.7 38.9 36.0 32.8 29.1 26.1
Gender gap in part-time employment 6.7 7.2 6.5 5.5 4.3 6.4
Gender pay gap2 (in undadjusted form) 15.6 14.9 14.2 14.0 : :
Education and training indicators 2012 2013 2014 2015 2016 2017
Adult participation in learning
(% of people aged 25-64 participating in education and  training)7.7 7.2 7.1 7.5 6.9 :
Underachievement in education342.0 : : 42.6 : :
Tertiary educational attainment (% of population aged 30-34 having 
successfully completed tertiary education)49.9 47.8 52.5 54.5 53.4 :
Variation in performance explained by students' socio-economic 
status4: : : 9.5 : :
C. Standard Tables  
 
64  
  
Table  C.4: Social inclusion and health indicators  
 
(1) At -risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60  % of the national 
equivalised median income.  
(2) Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) p ay 
their rent or utility bills, ii) keep their home adequately warm, iii) face unexpe cted expenses, iv) eat meat, fish or a protein 
equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing 
machine, viii) have a colour TV, or ix) have a telephone.  
(3) Percentage of total populat ion living in overcrowded dwellings and exhibiting housing deprivation.   
(4) People living in households with very low work intensity: proportion of people aged 0 -59 living in households where the 
adults (excluding dependent children) worked less than 20  % of their total work -time potential in the previous 12 months.  
(5) Ratio of the median individual gross pensions of people aged 65 -74 relative to the median individual gross earnings of 
people aged 50 -59. 
(6) Fixed broadband take up (33%), mobile broadband  take up (22%), speed (33%) and affordability (11%), from the Digital 
Scoreboard.  
Source:  Eurostat, OECD  
 
2012 2013 2014 2015 2016 2017
Expenditure on social protection benefits* (% of GDP)
Sickness/healthcare 4.5 4.5 4.4 4.7 : :
Disability 0.7 0.7 0.7 0.7 : :
Old age and survivors 11.1 12.0 11.8 11.7 : :
Family/children 1.5 1.4 1.4 1.3 : :
Unemployment 1.6 2.0 1.5 1.2 : :
Housing 0.6 0.4 0.3 0.4 : :
Social exclusion n.e.c. 1.2 1.1 1.1 1.3 : :
Total 21.2 22.1 21.3 21.4 : :
of which: means-tested benefits 2.9 2.7 2.6 2.8 : :
General government expenditure by function (% of GDP, COFOG)
Social protection 12.9 13.4 13.7 13.6 13.8 :
Health 3.0 3.1 2.6 2.6 2.6 :
Education 6.3 6.8 6.0 6.0 6.0 :
Out-of-pocket expenditure on healthcare (% of total health expenditure) 44.0 43.1 44.8 43.9 : :
Children at risk of poverty or social exclusion (% of people 
aged 0-17)*27.5 27.7 24.7 28.9 29.6 :
At-risk-of-poverty  rate1 (% of total population) 14.7 15.3 14.4 16.2 16.1 :
In-work at-risk-of-poverty rate (% of persons employed) 7.9 8.9 7.8 9.1 8.2 :
Severe material deprivation rate2  (% of total population) 15.0 16.1 15.3 15.4 13.6 :
Severe housing deprivation rate3, by tenure status
Owner, with mortgage or loan 0.0 1.1 1.5 0.0 2.0 :
Tenant, rent at market price 1.9 2.6 3.0 1.3 1.6 :
Proportion of people living in low work intensity households4 
(% of people aged 0-59)6.5 7.9 9.7 10.9 10.6 :
Poverty thresholds, expressed in national currency at constant prices* 8958 8148 7363 7072 7301 :
Healthy life years (at the age of 65)
Females 7.7 8.7 8.8 7.3 : :
Males 8.8 9.5 10.4 8.4 : :
Aggregate replacement ratio for pensions5 (at the age of 65) 0.4 0.4 0.4 0.4 0.4 :
Connectivity dimension of the Digital Economy and Society Inedex 
(DESI)6: : 37.7 40.4 48.2 54.6
GINI coefficient before taxes and transfers* 42.9 43.8 44.8 47.4 47.1 :
GINI coefficient after taxes and transfers* 31.0 32.4 34.8 33.6 32.1 :
C. Standard Tables  
 
65  
 
  
Table  C.5: Product market performance and policy indicators  
 
(1) The methodologies, including the assumptions, for this indicator are shown in detail here: 
http://www.doingbusiness.org/methodology.        
(2) Average of the answer to question Q7B_a. "[Bank loan]: If you applied and tried to negotiate for this type o f financing 
over the past six months, what was the outcome?". Answers were codified as follows: zero if received everything, one if 
received most of it, two if only received a limited part of it, three if refused or rejected and treated as missing values i f the 
application is still pending or don't know.       
(3) Percentage population aged 15 -64 having completed tertiary education.       
(4) Percentage population aged 20 -24 having attained at least upper secondary education.       
(5) Index: 0 = not regula ted; 6 = most regulated. The methodologies of the OECD product market regulation indicators are 
shown in detail here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm       
(6) Aggregate OECD indicators of regulation i n energy, transport and communications (ETCR).  
Source:  European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for 
the product market regulation indicators); SAFE (for outcome of SMEs' applications for  bank loans).  
 
Performance Indicators 2010 2011 2012 2013 2014 2015 2016
Labour productivity (real, per person employed, year-on-year % 
change)
Labour productivity in Industry 4.24 -10.75 -5.09 2.79 4.39 4.51 3.01
Labour productivity in Construction -2.97 -1.47 -6.43 6.58 -0.54 -1.99 4.21
Labour productivity in Market Services 2.93 2.12 0.98 -0.49 -2.26 0.75 -0.95
Unit labour costs (ULC) (whole economy, year-on-year % change)
ULC in Industry 3.42 12.59 11.61 -19.22 -1.19 -3.57 -3.84
ULC in Construction 4.65 2.89 3.10 -3.91 -3.25 0.97 -4.28
ULC in Market Services 1.53 1.47 0.80 -2.85 -0.83 -1.38 0.42
Business Environment 2010 2011 2012 2013 2014 2015 2016
Time needed to enforce contracts(1) (days) 735.0 735.0 735.0 735.0 1100.0 1100.0 1100.0
Time needed to start a business(1) (days) 8.0 8.0 8.0 8.0 8.0 8.0 6.0
Outcome of applications by SMEs for bank loans(2)na 0.70 na 1.41 1.34 1.76 0.76
Research and innovation 2010 2011 2012 2013 2014 2015 2016
R&D intensity 0.45 0.46 0.44 0.48 0.51 0.48 0.50
General government expenditure on education as % of GDP 6.70 6.50 6.10 6.50 5.70 5.70 na
Persons with tertiary education and/or employed in science and 
technology as % of total employment42 45 47 48 50 49 49
Population having completed tertiary education(3)32 34 35 35 36 36 38
Young people with upper secondary level education(4)86 88 88 90 92 94 91
Trade balance of high technology products as % of GDP -3.03 -1.40 -1.00 -0.23 -1.24 -0.25 na
Product and service markets and competition 2003 2008 2013
OECD product market regulation (PMR)(5), overall na na 1.65
OECD PMR(5), retail na na 1.67
OECD PMR(5), professional services na na 3.11
OECD PMR(5), network industries(6)na na 2.64
C. Standard Tables  
 
66  
Table  C.6: Green growth  
 
All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2010 prices)  
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)  
          Carbon intensity: greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR)  
          Resource intensity: domestic material consumption (in kg) divided by GDP (in EUR)  
          Waste intensity: waste (in kg) divided by GDP (in EUR ) 
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP   
Weighting of energy in HICP: the proportion of 'energy' items in the consumption basket used for the construction of the HICP  
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % 
change)  
Real unit energy cost: real energy costs as % of total value added for the economy  
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2010 EUR)  
Real unit energy costs for manufacturing industry excluding refining : real costs as % of value added for  manufacturing 
sectors  
Share of energy -intensive industries in the economy: share of gross value added  of the energy -intensive industries in GDP  
Electricity and gas prices for medium -sized industrial users: consumption band 500 –20 00MWh and 10 000 –100 000 GJ; figures 
excl. VAT.  
Recycling rate of municipal waste: ratio of recycled and composted municipal wa ste to total municipal waste  
Public R&D for energy or for the environment: government spending on R&D for these categories as % of GDP  
Proportion of GHG emissions covered by EU emissions trading system (ETS) (excluding aviation): based on GHG emissions  
(excl land use, land use change and forestry) as reported by Member States to the European Environment Agency.  
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value 
added (in 2010 EUR)  
Transport carbon intensity: GHG emissions in transport activity divided by gross value added of the transport sector  
Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of 
international bunker fuels  
Aggrega ted supplier concentration index:  covers oil, gas and coal. Smaller values indicate larger diversification and hence 
lower risk.  
Diversification of the energy mix: Herfindahl index covering natural gas, total petrol products, nuclear heat, renewable 
energ ies and solid fuels  
* European Commission and European Environment Agency  
Source:  European Commission and European Environment Agency (Share of GHG emissions covered by ETS); European 
Commission (Environmental taxes over labour taxes and GDP); Eurostat (al l other indicators)  
 
Green growth performance 2011 2012 2013 2014 2015 2016
Macroeconomic
Energy intensity kgoe / € 0.14 0.13 0.12 0.13 0.13 0.13
Carbon intensity kg / € 0.48 0.47 0.46 0.48 0.47 -
Resource intensity (reciprocal of resource productivity) kg / € 1.17 0.89 0.68 0.69 0.65 0.70
Waste intensity kg / € - 0.11 - 0.12 - -
Energy balance of trade % GDP -6.8 -7.5 -6.3 -5.9 -4.1 -3.5
Weighting of energy in HICP % 8.73 9.42 9.53 9.33 8.35 7.46
Difference between energy price change and inflation % 14.0 17.9 -7.0 -8.8 -17.5 -13.5
Real unit of energy cost% of value 
added10.7 12.6 11.8 11.6 - -
Ratio of environmental taxes to labour taxes ratio 0.24 0.23 0.26 0.28 0.26 -
Environmental taxes % GDP 2.8 2.6 2.7 3.1 3.0 3.0
Sectoral 
Industry energy intensity kgoe / € 0.17 0.16 0.18 0.22 0.19 0.19
Real unit energy cost for manufacturing industry excl. 
refining% of value 
added26.7 28.8 26.7 26.4 - -
Share of energy-intensive industries in the economy % GDP 4.15 3.73 3.67 3.56 3.75 -
Electricity prices for medium-sized industrial users € / kWh 0.19 0.23 0.20 0.18 0.14 0.12
Gas prices for medium-sized industrial users € / kWh - - - - - 0.00
Public R&D for energy % GDP 0.00 0.00 0.00 0.00 0.00 0.00
Public R&D for environmental protection % GDP 0.00 0.00 0.00 0.00 0.00 0.00
Municipal waste recycling rate % 12.6 13.6 14.6 16.8 17.9 17.2
Share of GHG emissions covered by ETS* % 49.8 50.3 50.6 53.2 50.1 52.6
Transport energy intensity kgoe / € 0.81 0.78 0.68 0.73 0.77 0.81
Transport carbon intensity kg / € 1.73 1.67 1.47 1.58 1.68 -
Security of energy supply
Energy import dependency % 92.4 97.0 96.3 93.2 97.7 96.2
Aggregated supplier concentration index HHI 0.0 0.0 0.0 0.0 0.0 -
Diversification of energy mix HHI 0.91 0.90 0.88 0.88 0.87 0.87
 
 
67 Alstadsæter et. al. (2017), Patent Boxes Design, Patents Location and Local R&D. Economic Policy 
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