COMMISSION STAFF WORKING DOCUMENT Assessment of the 2012 national reform programme and stability programme for CYPRUS Accompanying the document Recommendation for a__COUNCIL RECOMMENDATION on Cyprus' 2012 national reform programme and delivering a Council opinion on Cyprus' updated stability programme, 2012-2015
Date: 2012-05-30
Institutions: European Commission
Subjects: Cyprus, budget deficit, budgetary equilibrium, competitiveness, credit union, free competition, health expenditure, job mobility, retirement conditions, youth unemployment

EUROPEAN COMMISSION 

Brussels, 30.5.2012  
SWD(2012) 308 final 

COMMISSION STAFF WORKING DOCUMENT 

Assessment of the 2012 national reform programme and stability programme for 
CYPRUS 

Accompanying the document 

Recommendation for a 

COUNCIL RECOMMENDATION 

on Cyprus' 2012 national reform programme and delivering a Council opinion on 
Cyprus' updated stability programme, 2012-2015 

{COM(2012) 308 final} 

EN 

   EN 

 
 
 
  
 
 
CONTENTS 

EXECUTIVE SUMMARY ................................................................................................. 3 

1. 

INTRODUCTION....................................................................................................... 4 

2.  ECONOMIC DEVELOPMENTS AND CHALLENGES .......................................... 5 

2.1.  Recent economic developments and outlook .................................................... 5 

2.2.  Challenges ......................................................................................................... 6 

3.  ASSESSMENT OF THE POLICY AGENDA ........................................................... 9 

3.1.  Fiscal policy and taxation.................................................................................. 9 

3.2.  Financial sector................................................................................................ 13 

3.3.  Labour market, education and social policies ................................................. 15 

3.4.  Growth and competitiveness structural measures ........................................... 18 

3.5.  Modernisation of public administration .......................................................... 21 

4.  OVERVIEW TABLE................................................................................................ 23 

5.  ANNEX ..................................................................................................................... 26 

2

 
 
 
 
EXECUTIVE SUMMARY 

In  2012,  Cyprus's  economic  activity  is  expected  to  contract  by  0.8%  in  2012,  before 
regaining some momentum in 2013 to reach 0.3% of GDP. Unemployment is foreseen to 
increase further to 9.8% in 2012. 

To ensure sound public finances, Cyprus has adopted a series of consolidation measures, 
committing to the reduction of its fiscal deficit. Legislation has also been put in place to 
accommodate,  via  public  intervention,  risks  to  the  viability  of  banks  or  needs  for 
recapitalisation that cannot be met by market operations. As response to the economy's 
contraction, the government also adopted a wide-ranging package of measure to enhance 
the country's growth potential, employment, productivity, and competitiveness. Measures 
were  taken  to  reform  the  pension  system  and  a  social  dialogue  is  currently  under  way 
regarding the reform of the wage indexation system. 

Despite  these  efforts,  Cyprus  is  affected  by  sizeable  and  persistent  current  account 
deficits,  large  amount  of  accumulated  private  sector  debt,  widening  annual  deficits  of 
public finances and the large exposure to Greece of the banking sector.  Tax collection is 
marked by inefficiencies that give rise to tax evasion.  A comprehensive pension reform 
is  needed  to  address  the  inherent  sustainability  as  well  as  adequacy  problems  of  the 
system,  given  the  high  poverty  risk  among  the  elderly.  The  healthcare  system  is 
characterised  by  inequity  and  inefficiencies.  Unemployment  is  on  the  rise,  reaching 
historically  high  figures,  especially  for  young  people  and  the  labour  market  is 
characterised  by  an  inadequate  supply  of  skills  to  match  current  and  future  labour 
demand.  Obstacles  in  the  services  market  and  to  the  provision  of  professional  services 
remain. 

3

 
 
 
 
1. 

INTRODUCTION 

In  July  2011,  the  Council  of  the  European  Union  adopted  seven  country-specific 
recommendations1 (CSRs) for economic and structural reform policies for Cyprus. These 
recommendations2  concerned  public  finances,  banking  supervision,  the  pension  and 
healthcare system, the labour market, energy and deregulation. 

In November 2011, the Annual Growth Survey for 2012 (AGS 2012) provided the basis 
for building the necessary common understanding of the priorities for action at national 
and  EU  level  in  20123.  It  focused  on  five  priorities  —  growth-friendly  fiscal 
consolidation,  restoring  normal  lending  to  the  economy,  promoting  growth  and 
competitiveness,  tackling  unemployment  and  social  consequences  of  the  crisis,  and 
modernising public administration — and encouraged Member States to implement them 
in the 2012 European Semester. 

Against this background, Cyprus presented updates of its national reform programme and 
stability  programme  in  May  2012.  These  programmes  give  details  on  progress  made 
since July 2011 and plans for moving forward.  

This Staff Working Document assesses the state of implementation of the 2011 CSRs as 
well  as  the  AGS  2012  in  Cyprus,  identifies  current  policy  challenges  and,  in  this  light, 
examines the country’s latest policy plans. 

Overall assessment  

Cyprus  has  implemented  the  Council  recommendations  only  partially.  Cyprus  has 
adopted  a  series  of  consolidation  measures,  committing  to  the  reduction  of  its  fiscal 
deficit as required under the Excessive Deficit Procedure (and repeated in the CSRs). It 
has  also  adopted  legislation  to  allow  governmental  support  to  the  banking  sector,  if 
needed.  Notwithstanding  these  achievements,  reform  efforts  were  limited,  in  particular 
regarding pensions, wage indexation, energy and regulation. As for healthcare reform, no 
progress is reported. 

Cyprus faces its most pressing challenges in public finances and in the supervision of the 
banking sector's efforts to meet new capitalisation requirements, while in parallel, it has 
to  address  concerns  regarding  the  labour  market  and  education  policy,  pension  and 
healthcare systems, the energy sector, and remaining regulatory obstacles in the services 
sector. The government budget deficit has to be reduced to the medium-term objective so 
as  to  help  boost  the  confidence  of  financial  markets.  The  banking  sector  has  made 
significant  effort  to  meet  the  strengthened  capital  requirements;  however,  close 
monitoring of developments is required. In the labour market and education policy, the 
supply  of  skills  needs  to  be  matched  with  the  needs  of  business  modernisation  and 
potential  growth  areas  of  the  economy.  In  parallel,  the  sharp  increase  in  youth 
unemployment  needs  to  be  addressed.  Furthermore,  the  existing  system  of  wage 
indexation  limits  the  degree  to  which  wages  reflect  productivity  differences  across 
sectors,  resulting  in  undermined  flexibility  and  competitiveness  losses.  On  the  pension 
and healthcare front, ensuring control of relative expenditure and the projected increase 
in age-related expenditure constitute additional challenges. Regarding the single market, 
the  full  implementation  of  the  sectoral  legislation  in  line  with  the  Services  Directive  is 
still awaited. In the energy sector, further progress in improving resource efficiency, in 
particular water efficiency and waste management, is needed.  

1   SEC(2011) 803 final 
2   OJ C 210, 16.7.2011, p.12 
3   COM(2011) 815 final 

4

 
 
                                                 
The  national  reform  programme  and  the  stability  programme  submitted  by  Cyprus 
respond to last year's recommendations and also have forward-looking elements. While 
some measures have been adopted to address the challenges at least in the medium-term 
horizon, in some other areas they do not address the challenges in a comprehensive and 
permanent way. 

2.  ECONOMIC DEVELOPMENTS AND CHALLENGES 

2.1.  Recent economic developments and outlook 

Recent economic developments 

The Cypriot economy grew by a modest 0.5 % in 2011. After a good first half-year when 
GDP  rose  by  1.5 %  y-o-y  thanks  to  an  exceptionally  good  tourist  season,  economic 
activity  was  badly  affected  by  the  accident  in  July  that  destroyed  the  Vassiliko 
electricity-producing plant, which accounted for half of the total generating capacity of 
Cyprus. Moreover, a worsening external environment and tightening financial and fiscal 
conditions compounded the adverse effect on economic activity. 
Domestic demand, traditionally the main driver of growth, shrank in 2011. Tighter bank 
lending conditions along with a worsening labour market outlook and weaker confidence 
weighed  on  private  consumption.  In  addition,  weak  foreign  demand  for  housing  and  a 
restructuring  of  corporate  balance  sheets  kept  investment  on  a  correction  path  for  the 
third year in a row. On the other hand, the external sector made a positive contribution to 
growth. Tourist arrivals and revenues posted an increase of 10 % and 13 % respectively. 
This  was  due  to  political  instability  in  competing  Mediterranean  destinations  and  an 
increased flow of arrivals from developing markets such as Russia. Also, import growth 
decreased, in line with the contraction in domestic demand. 

Economic outlook  

GDP is projected to contract by 0.8% in 2012 due to a fall in domestic demand and the 
weaker  external  environment,  notably  including  persistent  financial  market  uncertainty. 
Private  consumption  will  be  restrained  by  the  squeeze  in  disposable  income,  mainly 
among  public  sector  employees,  exerted  by  the  fiscal  restriction  incorporated  in  the 
Budget Law 2012 adopted on 16 December 2011, as well as by the rise in unemployment 
to  unprecedented  levels.  The  large  exposure  of  the  financial  sector  to  Greece  and  the 
banks' need of recapitalisation will probably raise the cost of financing and limit private-
sector access to it. Demand for housing is also expected to remain sluggish, while other 
construction  investment  is  likely  to  benefit  from  reconstruction  work  in  the  destroyed 
Vassilikos power station and from other infrastructure projects. Leading indicators point 
to  weak,  albeit  improving,  consumer  and  business  confidence.  This  suggests  that  a 
recovery  should  set  in  during  the  second  half  of  2012,  with  the  improvement  of  the 
external  environment  and  the  resumption  of  private  investment  as  uncertainty  slowly 
dissipates.  The  contribution  of  the  external  sector  to  growth  is  set  to  remain  positive. 
While slowing global trade and worsening economic  prospects  in  Cyprus'  main  trading 
partners are likely to weigh on exports of goods, this should be partly offset by healthy 
performance  of  business  services  and  tourism.  Imports  are  set  to  decline  against  the 
backdrop  of  weak  domestic  demand,  allowing  the  current-account  deficit  to  narrow 
further. Economic activity is projected to recover only gradually in 2013, mainly driven 
by private investment, while domestic consumption will remain constrained by the need 
for further correction of economic imbalances. 

5

 
 
 
 
 
On 7 May 2012, Cyprus submitted its stability programme and, on 10 May 2012 its 2012 
national reform programme. They outline in an integrated manner the fiscal consolidation 
efforts,  the  key  structural  reforms  and  the  reforms  that  underpin  macroeconomic 
stabilisation.  The  national  reform  programme evaluates  progress  towards meeting 
national  targets  for  employment,  R&D,  education,  energy  and  climate  change  and 
poverty reduction for 2020. These targets set out the longer-term development trajectory 
to  modernise  the  Cypriot  economy  and  put  immediate  reform  priorities  in  a  broader 
context.  The  national  reform  programme  also  describes  the  measures  Cyprus  plans  to 
take to fulfil its obligations under the Euro Plus Pact.  

Prior  to  adopting  the  national  reform  programme,  the  Cypriot  government  has  held 
consultations  with  social  partners  and  political  parties  on  Europe  2020  matters.  On  the 
5th of April 2012 a  public consultation was held with all  stakeholders (political actors, 
social partners and civil society), where an outline of the national reform programme was 
presented.  

Both programmes share the same economic outlook, but they do not quantify the impact 
of the proposed structural reforms on growth. For 2012 the outlook is broadly in line with 
the  most  recent  Commission  forecast.  However,  for  2013  the  Cypriot  authorities  are 
more  optimistic  and  anticipate  real  GDP  growth  of  0.5%,  as  well  as  an  additional 
consolidation effort of 1.8% of GDP. 

2.2.  Challenges 

Cyprus is currently facing multidimensional challenges, with some progress made by the 
government in a number of areas. The deteriorating outlook for growth, with increasing 
unemployment,  the  prevailing  high  deficit,  and  the  new  challenges  resulting  from  the 
exposure  of  the  financial  sector  (with  its  disproportionate  size  relative  to  the  domestic 
economy)  to  the  developments  in  Greece  raise  the  negative  risks  associated  with  the 
short-term  prospects,  posing  more  difficulty  for  Cyprus’s  economy.  The  Cypriot 
sovereign debt is thus being increasingly perceived as risky. As a result, the government 
and the commercial banks are unable to borrow from international financial markets, to 
which they have lost access since June 2011. Safeguarding the long-term sustainability of 
public  finances  and  improving  the  efficiency  of  public  spending  by  adhering  to  a 
medium-term  budgetary  framework  with  a  binding  statutory  basis  and  corrective 
mechanism form two additional urgent policy challenges. Progress with the phasing-in of 
an  enforceable  multiannual  budgetary  framework  is  still  slow.  Implementation  of  the 
growth-enhancing  measures  put  to  Parliament  for  adoption  in  March  2012  will  be 
welcome.  Equally  important  is  the  allocation  of  public  expenditure  directed  towards 
growth-enhancing  items  including  for  the  promotion  of  innovation,  R&D,  and  in  the 
energy sector. As regards the revenue-raising capacity of the government, improving tax 
administration  and  compliance,  including  fighting  tax  evasion,  constitute  additional 
challenges  for  the  authorities,  as  Cyprus’s  administrative  costs  in  relation  to  revenue 
collection rank highest in the EU. 

Cyprus  also  faces  the  challenge  of  strengthening  its  external  competitiveness  and 
fostering  growth.  The  in-depth-review  undertaken  for  Cyprus  identified  imbalances  in 
persistent  current  account  deficit,  loss  of  external  competitiveness,  annual  deficits  in 
public  finances,  and  the  financial  sector  which  require  close  monitoring  and  urgent 
economic policy attention in order to avert any adverse effects. 

Appropriate  wage  and  price  adjustments  are  necessary  in  order  to  regain  and  sustain 
competitiveness.  In  this  context,  the  uniform  application  of  the  wage  indexation 
mechanism (i.e. the cost of living allowance — COLA) introduces an element of wage 
rigidity,  thereby  limiting  the  degree  to  which  wages  reflect  productivity  differences 

6

 
 
across sectors. The resulting inflationary second-round effects undermine flexibility and 
erode competitiveness. Currently, unemployment is on the rise (while being still below 
the EU average), reaching historically high figures, especially for young people. On the 
other hand, whereas the Cypriot workforce is overall well educated, the labour market is 
characterised  by  an  inadequate  supply  of  skills  to  match  current  and  future  labour 
demand.  As  regards  the  active  inclusion  of  socially  vulnerable  population  groups, 
measures to help single parents and public assistance recipients to enter and remain in the 
labour market are currently not sufficiently developed. 

Growing public pension and healthcare expenditure (at the varying respective levels) due 
to  the  ageing  of  the  population  are  further  issues  that  need  to  be  addressed.  A 
comprehensive  pension  reform  to  address  the  inherent  sustainability  problems  of  the 
system  is  necessary,  and  this  in  parallel  should  be  an  opportunity  to  make  the  system 
more  equitable.  In  the  short  to  medium-term,  adequacy  issues  are  also  important  given 
the high poverty risk among the elderly. The expected increases in healthcare expenditure 
related to population ageing, adoption of new technologies, and the inefficiencies of the 
healthcare  system  are  not  yet  properly  addressed.  The  implementation  of  enacted 
legislation  to  move  to  the  National  Health  Insurance  Scheme  of  universal  coverage  is 
being constantly postponed. 

In  order  to  boost  growth  in  the  services  market  and  to  open  up  the  provision  of 
professional services, the implementation of the Service Directive is a key requirement. 
However, it is not yet achieved in all sectors.  

Regarding  energy,  the  recent  gas  discovery  in  Cyprus  Exclusive  Economic  Zone  is 
promising  for  Cyprus’s  diversification  of  energy  sources  and  for  reduction  of  its 
excessive reliance on  oil  imports.  Further progress in improving resource efficiency, in 
particular water efficiency and waste management, can bring benefits in terms of growth 
and jobs.  

  Box  1:  Summary  of  the  results  of  the  in-depth  review  under  the  macroeconomic 

imbalances procedure 

1.  Sizeable and persistent current account deficits have resulted mainly from a deficit 
in the volume of trade, which is in turn linked to a gradual erosion of price/cost 
competitiveness.  Indeed,  the  latter  was  driven,  under  the  impact  of  the  boom  of  the 
early  2000s  and  domestic  labour  shortages,  by  wage  growth  outpacing  productivity 
gains. The needed correction of the rise in relative unit labour cost should be facilitated 
by  the  current  slack  in  overall  demand  and  employment  and  by  wage  restraint  in  the 
public sector, which serves as a benchmark also for private sector settlements. At the 
same time, a shift of the supply structure towards goods and services of higher value 
added  would  help  generate  higher  export  revenues,  notably  in  the  tourism  industry, 
which  is  an  important  source  of  revenue  for  the  Cypriot  economy.  Insofar  as  the 
financing  of  the  current  account  deficit  is  concerned,  Cyprus  was  able  to  rely  in  the 
past  on  high  external  capital  inflows  from  foreign  deposits  and  foreign  direct 
investment  (FDI),  also  including  re-invested  profits  of  foreign  companies  in  Cyprus. 
Such  reliance  represents  a  particular  vulnerability  should  confidence  in  the  sovereign 
and the private economy diminish. 

2.  The banking sector suffers from a large exposure to Greece, in terms of both the 
private  sector  and  the  sovereign,  and  needs  to  raise  fresh  capital.    The  non-
performing  loans  (as  a  percentage  of  total  loans)  of  the  non-financial  corporations 
increased  substantially,  and  are  significantly  higher  than  the  percentage  of  non-

7

 
 
 
 
performing  loans  of  the  whole  private  sector.  Legislation  has  been  put  in  place  to 
accommodate,  via  public  intervention,  any  risks  to  the  viability  of  banks  or  need  for 
recapitalisation that cannot be met by market operations. The situation in the Cypriot 
banking  sector  also  threatens  the  sustainability  of  the  country's  position.  The 
composition  of  the  international  investment  position  is  a  cause  for  concern,  as  it  is 
characterized by risky foreign assets and liabilities dominated by foreign-held deposits. 
Any  shock  to  the  banking  sector  could  thus  have  catastrophic  consequences  to  the 
economy by compounding the challenges arising from Cyprus' internal imbalances.   

3.  The large amount of accumulated private sector debt is a source of concern. Total 
private sector indebtedness (as a share of GDP) in Cyprus is the second highest in the 
EU,  with  the  debt  of  non-financial  corporations  being  particularly  outstanding.  In 
addition  the  net  financial  position  of  the  non-financial  corporate  sector  is  negative. 
Most non-financial corporations in Cyprus are small enterprises and their main source 
of funding is loans from banks, in contrast to larger euro-area enterprises, which have 
access to other sources of funding, such as shares and other equity. Given that external 
financing is constrained by prohibitively high interest rates, corporate investment relies 
crucially  on  the  generation  of  higher  private  savings.  The  degree  of  household 
indebtedness  is  also  among  the  highest  in  the  EU.  While  household  loans,  most  of 
which were granted for housing purposes, are well collateralised and households are on 
aggregate net lenders, the servicing costs of the debt absorb a relatively high share of 
household disposable income, implying an important vulnerability in terms of potential 
interest rate rises.   

4.  Domestically,  government  finances  have  swung  to  annual  deficits  that  have 
widened  even  as  the  economy  recovered  from  recession.  The  general  government 
deficit,  at  over  6%  of  GDP  in  2011,  exceeds  the  reference  value  of  the  Stability  and 
Growth  Pact  by  a  wide  margin  and  recent  efforts  to  correct  the  excessive  deficit, 
although substantial, may not prove sufficient. Likewise, public debt has risen above 
the  ceiling  of  60%  of  GDP.  A  credible  consolidation  strategy  needs  to  address  the 
issue  of  overstaffing,  the  generosity  of  social  benefits  granted  independent  of  private 
needs,  and  the  system  of  automatic  and  frequent  salary  adjustments.  Control  over 
government spending should be effectively reinforced by subjecting annual budgetary 
planning to a medium-term fiscal framework, which is about to be adopted. 

In  this  context,  the  national  authorities  adopted  an  ambitious  expenditure-driven 
consolidation strategy to correct the excessive fiscal deficit, to stabilise the banking sector, 
and to strengthen economic growth over the medium term. However, the size and scope of 
the  identified  imbalances,  as  well  as  their  potential  negative  spill-over  effects  to  other 
economies  in  the  euro-area  call  for  a  comprehensive  adjustment  and  determined  policy 
action on a sustained basis. Beyond the correction of the excessive fiscal deficit, restoring 
balance  in  public  finances  should  be  supported  by  tight  control  over  expenditure  going 
forward, the  adoption of a medium-term budgetary framework and the establishment of a 
fiscal Council for the surveillance of budgetary execution, as well as by strengthening tax 
compliance and the fight against tax evasion. In order to restore external competitiveness, 
wage  dynamics  need  to  be  better  controlled  by  means  of  a  thorough  reform  of  the  wage 
indexation system; over the medium term, upgrading the supply structure by a shift towards 
higher-  value-added  activities  will  increase  the  scope  for  higher  earnings.  Policies  for  the 
financial sector will need to strengthen regulatory provisions for bank recapitalisation and 
supervision of the cooperative societies. In order to reduce the indebtedness of the private 
sector,  corporate  legislation  establishing  liability  for  loan  repayments  and  covering 
supervision of the granting of corporate loans will both need to be reinforced. 

8

 
 
3.  ASSESSMENT OF THE POLICY AGENDA 

3.1.  Fiscal policy and taxation 

Budgetary developments and debt dynamics 

The  main  goal  of  the  medium-term  budgetary  strategy  presented  in  the  stability 
programme  for  the  years  2012  to  2015  consists  of  reducing  the  general  government 
deficit  to  zero  in  structural  in  2013  and  nominal  terms  in  2014.  The  strategy  first 
envisages a reduction of the general govermnent deficit to below 3% of GDP in 2012, in 
line  with  the  Council  recommendation  issued  in  the  context  of  the  Excessive  Deficit 
Proedure (EDP) in July 2010, and then a further reduction in the subsequent years. The 
programme  confirms  the  previous  medium-term  objective  (MTO)  of  a  balanced  budget 
in  structural  terms,  which  adequately  reflects  the  requirements  of  the  Stability  and 
Growth Pact. 

In 2011, the general government deficit increased from 5.3% of GDP in 2010 to 6.3% of 
GDP.  This  was  due  to  both  revenue  shortfall  and  expenditure  overruns,  especially  in 
wage  bill  and  social  transfers.  In  the  previous  stability  programme  the  general 
government  deficit  was  planned  to  be  4%.  The  consolidation  effort  planned  in  the 
programme  is  front-loaded  in  terms  of  the  headline  deficit,  primary  balance  and 
(recalculated)  structural  balance,  mainly  coming  from  the  expenditure  side.  The 
consolidation effort planned for 2012 and 2013 is underpinned by measures but not fully. 
Specifically,  under  the  current  programme,  the  government  intends  to  implement 
additional consolidation measures of 1.8% of GDP for 2013. This explains the difference 
between the previous and the current stability programme to deficit targets in the years 
2013 to  2015. Box 1 presents the measures already adopted. 

In 2012, progress is targeted for the fiscal deficit of an annual effect of 3.5% GDP of the 
structural  balance4  till  the  deadline  for  the  correction  of  the  Council  by  2012.  The 
Commission,  forecasts  that  the  correction  will  be  of  2.9%  GDP,  under  a  no-policy-
change,  which  is  larger  than  the  1.5%  of  GDP  annual  fiscal  effort  required  by  the 
Council5. In 2013, the targeted progress of 2 pps. of GDP fiscal deficit reduction would 
lead  to  the  achievement  of  the  MTO.  Nevertheless,  there  are  uncertainties  surrounding 
the achievement of the stablitiy programme's targets, which stem from potentially more 
negative  macroeconomic  outlook  (with  more  negative  growth  rate  and  higher 
unemployment), measures for 2013 not being fully defined, expenditure projections due 
to  the  electoral  year  and  possible  financial  rescue  operations  for  troubled  financial 
corporations. 

In  the  period  2012-2014,  the  net  government  expenditure  decreases  faster  than  this 
benchmark  of  "Reference  rate"  for  Cyprus6.  Following  an  overall  assessment  of  the 
Cyprus'  State’s  budgetary  developments  with  the  structural  balance  as  a  reference, 

4  “Cyclically  adjusted  balance  net  of  one-off  and  temporary  measures,  recalculated  by  the  Commission 
services  on  the  basis  of  the  information  provided  in  the  programme,  using  the  commonly  agreed 
methodology.” 
http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/30_edps/104-07_council/2010-07-
13_cy_126-7_council_en.pdf 

5 

6   For Cyprus the "Reference value" is 1.51 for each of the years 2012 -2015  

9

 
 
 
 
 
 
                                                 
including  an  analysis  of  expenditure  net  of  discretionary  revenue  measures,  the 
adjustment path towards the MTO seems to be appropriate. 
In 2013 and 2014, according to the stability programme and the Commission's forecast, 
plans  would  ensure  sufficient  progress  towards  compliance  with  the  debt  criterion7.  In 
2015, according to stability programme, the debt benchmark will be met at the end of the 
transition period.  

Long-term sustainability 

The  long-term  change  in  age-related  expenditure  is  clearly  above  the  EU  average.  The 
initial  budgetary  position  offsets  the  long-term  costs.  Under  a  no-policy-change 
assumption,  debt  would  increase  to  77%  of  GDP  by  20208.  Additional  fiscal 
consolidation beyond the forecast horizon would be needed to make progress towards the 
reference  value  for  government  debt  beyond  the  short-term.  However,  the  full 
implementation of the programme would be enough to put debt on a downward path by 
2020. Given the very high projected increase in age-related expenditure, focus should be 
put  on  containing  long-term  public  spending  trends.  Ensuring  sufficient  primary 
surpluses  over  the  medium-term,  as  planned  in  the  programme  update  and  further 
reforming the Cypriot social security system, in particular reforming the pension system 
so as to curb the projected substantial increase in age-related expenditure, would improve 
the sustainability of public finances.  

  Box 2. Main measures 

The  consolidation  measures  are  mainly  from  the  expenditure  side.  The  main  revenue-supporting 
measure is the VAT rate rise from 15 % to 17 %. On the expenditure side, the main measure is the 
targeting of social transfers, which accounts for about 1 % GDP consolidation. 

Revenue 
       2011 

Expenditure 

•  Full-year  impact  from  the  application  of  the  minimum  excise  duties  prescribed  by  the  EU  acquis  on 

petroleum products (0.1 %) 
Increased tobacco products excise duty (0.1 %) 

• 
•  Application of the reduced VAT rate on foodstuffs and pharmaceuticals (0.3 %) 
•  Application of a levy on bank deposits (0.4 %) 
•  Harmonisation of water pricing policy (0.1 %) 
• 
•  Dividend income from semi-governmental organisations (-0.7 %)  
• 
• 

Interest rate swap (-0.2 %) 

Increased tax on interest accrued on deposits of local banks from 10 % to 15 % (0.1 %) 

Temporary  compensating  expenditure  measures  to  vulnerable  groups  adversely  affected  by  the 
application of the reduced VAT rate on foodstuffs and pharmaceuticals (0.2 %)Targeting social transfers 
towards low-income households (0.1 %) 
Income support provided to Cyprus Airways (0.1 %) 
Containment in the rate of growth of current expenditure (0.1 %) 

• 

       2012 

Increase of the standard VAT rate from 15 % to 17 %, from 1 March 2012 (0.7 %). 
Increase of the tax rate on deemed dividend distribution from 15 % to 20 % (0.1 %). 

• 
• 
•  Revision of scales used for applying the tax coefficients on immovable property, until the re-evaluation of 

7      Structural adjustment is larger than the required adjustment (DG ECFIN calculations) 
8     These projections do not take into account possible state intervention to financial institutions, therefore   
these projections are underestimating debt developments (by more than 10 pps. in 2020, given the increase 
in debt and  interest expenditure) 

10

 
 
 
 
 
 
 
 
 
 
 
                                                 
• 
• 

• 

• 

land prices from 1980s prices to current prices. (0.1 %). 
Increase of tax on interest accrued on deposits of local banks from 10 % to 15 % (0.2 %) 
Introduction  of  a  temporary  contribution  on  gross  earnings  of  broader  public  sector  employees  and 
pensioners for a period of two years from 0 % to 3.5 % (0.1 %). 
Introduction of a temporary contribution on gross earnings of private sector employees and pensioners for 
a period of two years from 0 % to 3.5 % (0.1 %). 
Increased  contribution  of  3 %  on  gross  earnings  of  broader  public  sector  employees  for  public  pensions 
(0.2 %).  

•  Contribution  on  gross  earnings  of  broader  public  sector  employees  and  pensioners  for  a  period  of  two 

• 

• 

years from 0 % to 3.5 % (0.1 %). 
Increase of the rate of contribution in the Widows and Orphans Fund by 1.25 pp to 2 % on gross earnings 
(0.1 %).  

Targeting of all social schemes based mainly on income and economic criteria  
(-1.0 %). 

• 

•  Freezing  of  emoluments,  including  pensions,  in  the  broader  public  sector  for  a  period  of  two  years.  (-

0.7 %) 

•  Containment in the rate of growth of current expenditure (-0.3%) 
•  Temporary compensating expenditure measures to vulnerable groups adversely affected by the application 

of the reduced VAT rate on foodstuffs and pharmaceuticals (-0.2 %)  

•  Abolition of all vacant posts (-0.1 %) 
•  Reduction of call allowances in the broader public sector (-0.1 %). 
•  Reduction of the number of personnel in the broader public sector by 5 000 over the next five years (one 

recruitment for every four retirees). (-0.1 %). 

• 
        2013 

• 

• 

Increase of the standard VAT rate from 15 % to 17 %, from 1 March 2012 (0.1 %) 
of 
emoluments, including pensions, in the broader public sector for a period of two years. (-0.8 %) Abolition 
of all vacant posts (-0.1 %). 
Reduction of the number of personnel in the broader public sector by 5 000 over the next five years (one 

Freezing 

recruitment for every four retirees). (-0.1 %) 
• 

 2014 

•  Contribution  on  gross  earnings  of  broader  public  sector  employees  and  pensioners  for  a  period  of  two 

years from 0 % to 3.5 %. 

•  Contribution on gross earnings of private sector employees and pensioners for a period of two years from 

0 % to 3.5 %.  
Increase of the tax rate on deemed dividend distribution from 15 % to 17 %.   Abolition of all vacant posts.  
Reduction of the number of personnel in the broader public sector by 5 000 over the next five years (one 

• 

. 

recruitment for every four retirees).    

Note:  The  budgetary  impact  in  the  table  (as  a  percentage  of  GDP)  is  the  impact  reported  in  the 
programme  (SP),  i.e.  by  the  national  authorities.  A  positive  sign  means  that  revenue/expenditure 
increases  as  a  consequence  of  the  measure.  The  degree  of  detail  reflects  the  type  of  information 
made available in the stability programme and the multi-annual budget. 

Fiscal frameworks 

In Cyprus, the institutionalization of the medium term budgetary framework into primary 
law is still pending. The government has recently prepared a draft Bill entitled 'Law on 
the  Medium-Term  Budgetary  Framework  and  Fiscal  Rules'  which  secured  the  legal 
vetting by the Law Office of the Republic on 4 May 2012, but still requires Ministerial 
Council  approval  before  being  submitted  to  the  Parliament  for  adoption  at  the  end  of 
May  2012.  Enforceable  as  of  the  date  of  adoption,  it  will  be  applicable  for  the 
compilation of the 2013 Budget Law. The new medium-term budgetary framework will 
become  the  only  budgetary  method  for  the  budget  planning  as  of  2013.  The  draft 
medium-term  budgetary  framework  provides  for  the  achievement  of  the  medium-term 
budgetary objective  through the introduction  of an  expenditure and debt  brake  rule.  To 
that end, it provides for the introduction of a medium-term budgetary framework which 
puts in place monitoring and control of expenditure by line ministries, while promoting 

11

 
 
 
 
 
 
the reallocation of expenditure in favour of growth-enhancing activities as set out in the 
national reform programme. In case of departure from the medium-term objective (or as 
long  as  the  medium-term  objective  has  not  been  reached),  the  annual  growth  rate  of 
expenditure may not exceed a rate below the medium-term potential growth rate of GDP, 
unless such excess is covered by the generation of new revenues. The 2012 Budget Law 
adopted  on  16  December  2011  reflects  the  principles  of  the  medium-term  budgetary 
framework.  While  the  2012  Budget  Law  warrants  systematic  monitoring  of  2012 
budgetary plans, especially on expenditure, it does not envisage a corrective mechanism 
in case of non-compliance.  

Tax system 

The  Cypriot  tax-to-GDP  ratio  is  in  line  with  the  EU-27  average.  The  structure  of 
Cyprus’s tax system stands out in several respects. In terms of tax structure, Cyprus relies 
heavily on consumption taxes, while the tax burden on labour is low. The revenue share 
from capital taxes is relatively high (fourth highest in the EU-27), while tax rates remain 
rather low. The share of environmental taxes in relation to total taxes in Cyprus is above 
the  EU-27  average  due  to  its  high  transport  taxes,  while  there  are  no  pollution  and 
resource taxes. 

Cyprus  has  implemented  several  tax  measures  to  reduce  its  budget  deficit.  These 
measures are allocated across all tax areas, labour, capital and consumption. As such, the 
measures  correspond  only  partly  to  the  AGS  priority  of  shifting  taxation  away  from 
labour.  However,  Cyprus  is  among  those  countries  that  have  a  fairly  low  share  of 
distortionary  taxation,  i.e.  labour  and  capital  taxation.  Particularly,  increases  in  social 
security  contributions,  the  introduction  of  an  additional  tax  bracket  with  a  top  rate  of 
35 %  for  incomes  over  EUR 60 000  in  the  personal  income  tax  field  and  the  temporary 
solidarity  contribution  increase  the  labour  tax  burden.  Most  measures  are  targeted  at 
high-income individuals and  public sector employees. The increased taxation of capital 
—  increasing  the  defence  contribution  on  interest  from  10 %  to  15 %  and  on  dividends 
from  15 %  to  temporarily  20 %,  after  which  it  will  be  reduced  to  17 %  in  2014,  also 
aggravates the burden of taxes which are considered as more detrimental to growth. At 
the same time that taxes considered more detrimental to growth have been increased, i.e. 
capital  and  labour  taxation,  the  reliance  on  consumption  taxation,  i.e.  less  distortionary 
taxation, has  risen with the relatively  low standard  VAT  rate (15 %) being increased  to 
17 %. 

The  VAT  base  was  broadened  in  2011,  by  making  previously  exempt  food  and 
pharmaceutical products subject to a 5 % VAT rate. However, given the large number of 
remaining VAT-exempt services and the wide application of reduced VAT rates, there is 
scope for further measures to fully address the AGS priority of tax base broadening. 
Immovable property taxation, and in particular recurrent taxes, is acknowledged to be the 
least harmful to growth among broad categories of taxes. There is scope to improve and 
extend the taxation of immovable property in Cyprus, which is low in relation to other 
EU countries. Taxes on property transactions account for the main part of this revenue. 
The autumn 2011 consolidation package raised the rates and lowered the tax thresholds 
of the recurrent property tax. However, there were no changes to the assessment of the 
tax  base,  which  remains  the  market  value  in  1980.  A  proposal  concerning  an  updated 
assessment of property values aiming to reflect recent market values was put forward for 
2010,  but  has  so  far  not  been  implemented.  The  tax  structure  of  immovable  property 
suggests  that  a  shift  from  taxing  property  transactions  towards  the  recurrent  tax  on 
immovable  property  would  improve  economic  efficiency,  and  also  offer  scope  to 

12

 
 
 
 
 
increase  property  taxes.  Revenue  from  a  recurrent  property  tax  would  be  less  cyclical 
than revenue from a tax on property transfers and lower taxes on property transfers could 
support the housing market. 

tackled  with 

Future  challenges,  which  have  not  been 
fiscal 
consolidation packages  or  in  detail  within  the  recent  stability  programme  and  national 
reform programme,  are the AGS  priorities of improving tax collection and tackling tax 
evasion. While increased inspection of companies – as envisaged in the national reform 
programme – is a step in the right direction, its effectiveness and efficiency to encourage 
a move away from informal/undeclared work and tackle tax evasion has to be assessed. 
 Furthermore, improving revenue collection systems – by making them more efficient - 
would also boost the effectiveness of the recently introduced tax measures.  

recent 

the 

3.2.  Financial sector 

Financial stability 

Cyprus’s  large  banking  sector,  with  assets  of  more  than  seven  times  the  economy’s 
annual output, is a pillar of the economy, generating a high share of jobs and income, and 
indirectly  supporting  other  business  services.  Following  the  outbreak  of  the  financial 
crisis,  the  Cypriot  banking  system  at  first  remained  resilient,  as  banks  and  supervisors 
took  action,  with  some  consolidation of bank balance sheets taking place. Yet, in 2011 
banks  faced  deterioration  in  the  quality  of  their  assets  and  an  increase  in  credit 
provisioning, which impacted on their profitability. 

Given that Cyprus’s banking institutions are widely exposed to the Greek economy (both 
as  holders  of  Greek  government  bonds  and  as  lenders  for  Greek  domestic  loans),  the 
banks’  asset  performance,  profitability,  capital,  and  liquidity  buffers  have  been 
negatively  affected  by  the  restructuring  of  the  Greek  government  debt,  and  by  the 
increasing non-performing loans (NPLs) extended to Greek borrowers. Domestic banks, 
which have the strongest links to the domestic economy, are also the principal holders of 
Greek government bonds and providers of loans to Greek and Cypriot borrowers, while 
other financial institutions (mainly subsidiaries of Greek banks) operating in Cyprus are 
comparatively  less  exposed  to  the  Greek  sovereign  debt  and,  with  limited  loans,  to  the 
domestic market. The prudential requirement to invest 70 % of the non-resident deposits 
into liquid assets resulted in the banks’ high demand for Greek government bonds, which 
were considered liquid assets. Total exposure of the consolidated Cypriot banking sector 
to Greece amounts to around 175 % of GDP (in November 2011). 

No Cypriot institution was below the required 5 % core Tier 1 (a key measure of a bank’s 
financial  strength)  following  the  July  2011  European  Banking  Authority  (EBA)  stress 
test. However, concerns over the sovereign debt markets and difficulties on the interbank 
market resulted in a call by the European Council on 27 October 2011 for a temporary 
increase  of  banks’  capital  to  a  9 %  core  Tier  1  capital  ratio  by  mid-2012  (above  the 
threshold laid down as part of the Basel III package); this increase is coordinated by the 
EBA.  In  December  2011,  the  EBA  established  the  need  for  two  institutions9  to  further 
increase their respective compliance with the capital base requirements, which currently 
is being pursued. The total capital increase necessary was EUR 3.5 billion. 

9 Laiki Popular Bank and Bank of Cyprus. 

13

 
 
 
 
 
 
 
 
                                                 
To that end, the banks concerned submitted capital strengthening plans on 29 February 
2012. Their plans include new equity issuance, conversion of existing hybrid capital to 
eligible convertible capital, restrictions on profit distributions and bonuses, and the sale 
of  assets  such  as  foreign  subsidiaries.  Successful  implementation  of  the  announced 
capital strengthening plans is crucial. Anticipating that the Cyprus Popular Bank may fail 
to  achieve  its  own  plan  to  raise  the  fresh  capital  required  by  mid-June  2012,  the 
government  decided  to  recapitalise  the  bank  and  underwrote  a  rights  issue  of  EUR  1.8 
billion  on  17  May  2012.  In  that  case,  the  bank  will  have  to  undergo  appropriate 
restructuring and downsizing in line with EU competition law. 

In their recent downgrades of Cyprus’s sovereign debt, two of the credit rating agencies 
also downgraded the three main Cypriot banks’ ratings to ‘non-investment grade’, owing 
to contagion from Greece and the Cypriot sovereign downgrades and under the rationale 
that  finding  private  capital  to  cover  their  new  capital  needs  until  June  2012  would  be 
difficult. These downward ratings primarily affected banks’ ability to access international 
markets and caused liquidity constraints in the Cypriot financial system, while the stock 
prices of the major banks declined. 

Furthermore,  non-performing  loans  (NPLs)  during  2011  increased,  reaching  14.4 %  for 
domestic institutions and 13.2 % for all banks operating in Cyprus. NPLs to non-financial 
corporations have also been increasing, putting an additional burden on the profitability 
of  Cyprus’s  banks.  Regarding  domestic  operations,  the  expected  contraction  of  the 
economy by 0.5 % in 2012, based on the latest Commission forecast, could exert further 
pressure  on  NPLs.  On  the  positive  side,  the  vulnerabilities  related  to  size  and 
concentrations are mitigated by the overall moderate degree of leverage of the banks. The 
loan to deposit ratio is low, particularly for the domestic Cypriot banks where it is less 
than 100 % thanks to their strong deposit rates. 

As a response to the challenging environment and in line with the CSR of June 2011 on 
the need for strengthening of the prudential framework for supervision of banks to ensure 
early detection of risks, the Cyprus Parliament adopted on 14 December 2011 two bills to 
strengthen  the  system’s  resilience  against  banking  crises.  The  first  bill  allows  the 
Ministerial  Council  —  in  cooperation  with  the  Central  Bank  of  Cyprus  —  to  take,  in 
times  of  financial  crisis,  measures  to  address  liquidity/solvency  problems  and/or  to 
enhance  the  capital  base.  Such  government  support,  if  given,  would  first  require 
clearance against EU state aid rules. The second bill provides for the establishment of an 
independent  financial  stability  fund.  These  regulatory  and  legal  changes  are  relevant, 
addressing the strengthening of the prudential banking framework in an effective manner. 
However,  the  supervision  of  the  cooperative  credit  societies,  which  hold  about  40 %  of 
all domestic deposits, needs strengthening. 

Access to finance for SMEs 

The government has prepared a financing mechanism to facilitate SME access to finance 
by  providing  guarantees  to  stimulate  growth  and  job  creation  in  Cyprus.  This  action 
comes  as a  response to concerns by Cyprus’s entrepreneurs  that  credit conditions  are a 
major challenge as interest rates are now at nearly 8 % (indicating a sharp tightening of 
credit  standards)  and  140 %  of  collateral  is  requested  by  banks.  The  mechanism  will 
involve  the  creation  of  a  Holding  Fund,  managed  by  the  European  Investment  Fund 
(EIF),  bearing  similarities  with  the  JEREMIE  initiative  (joint  European  resources  for 
micro  and  medium  enterprises).  Regarding  the  implementation  of  the  JEREMIE 
instruments, it is expected that the whole amount of EUR 20 million under the ‘Funded 
Risk  Sharing  Product’  will  be  disbursed  to  SMEs  by  mid-2012.  Meanwhile,  the 
implementation  of  the  ‘First  Loss  Portfolio  Guarantee  Product’  is  proving  more 

14

 
 
 
 
problematic,  with  limited  demand  due  to  current  economic  conditions  that  are  not 
conducive to business expansion or start-ups. 

3.3.  Labour market, education and social policies 

    Labour market policies 

the  Cypriot 

labour  market,  raising 

The  crisis  adversely  affected 
the  rate  of 
unemployment.  The  subdued  economic  activity  dampened  job  creation,  causing  a  large 
increase in youth unemployment, whereas efforts to further adapt educational outcomes 
to  the  labour  market  needs  were  not  ambitious  enough  and  lacked  urgency.  Three 
particular challenges have to be confronted in the Cyprus labour market: (i) ensuring that 
the system of wage adjustment is conducive to regaining and sustaining competitiveness, 
(ii)  easing  the  transition  from  school  to  work  particularly  by  reinforcing  the  supply  of 
vocationally  oriented  skills  at  secondary,  post-secondary  and  higher  education  levels, 
through a combination of classroom education and on-the-job training, (iii) exploiting the 
growth  and  job  creation  potential  of  high  value-added  activities  through  appropriate 
policy  measures  including  those  aimed  at  boosting  the  re-skilling  and  up-skilling 
opportunities  for  the  workforce  (in  particular  for  the  low-skilled,  older  workers  and 
disadvantaged  groups).  These  challenges  are  referred  to  in  the  June  2011  CSRs  for 
Cyprus. Additionally, in a new challenging development, Cyprus experienced one of the 
highest year-on-year increases in youth unemployment in the EU in 2011.  

Wage  growth  is  expected  to  moderate  given  unfavourable  labour  market  conditions  in 
tandem  with  public  sector  wage  restraint  linked  to  the  fiscal  consolidation  effort, 
expected  to  spill  over  to  the  private  sector.  In  particular,  in  December  2011,  Cyprus 
adopted a series of measures to contain public sector wages which included a two-year 
pay freeze in the broader public sector affecting, among other things, the inflation-linked 
pay  rise  (cost  of  living  allowance  —  COLA)  and  the  seniority-based  rises.  Empirical 
evidence suggests that a temporary de-activation of the COLA system is occurring also 
in the private sector, though this is a discretionary decision by each employer. In parallel, 
the  government  and  social  partners  agreed  to  initiate  a  dialogue  with  the  aim  of 
reviewing the COLA system by the end of June 2012. While the above developments are 
first  steps  in  the  right  direction  for  Cyprus  to  regain  and  sustain  competitiveness,  their 
relevance and credibility depends crucially on the degree of ambition and enforcement of 
the final outcome of the social dialogue currently under way regarding the reform of the 
wage indexation system. 

With  a  view  to  addressing  the  policy  challenge  of  further  adapting  the  education  and 
training system to the labour market and skills requirements, a number of positive steps 
have  been  taken.  Particularly,  in  September  2011  the  gradual  introduction  of  new 
curricula from primary up to the first year of upper secondary education was launched, 
focusing on the development of key skills. Moreover, the development phase for the new 
apprenticeship system is proceeding and the latest commitment of the national authorities 
is  to  have  the  new  system  operating  in  October  2012,  instead  of  February  2012  as 
initially  planned.  On  the  other  hand,  the  Council  of  Ministers  approved  the  planned 
setting-up  of  four  post-Secondary  Institutes  for  Vocational  Education  and  Training  in 
September  2012.  The  establishment  and  operation  of  the  Vocational  Qualifications 
System is proceeding with 67 standards developed so far in priority occupations. 

Also,  Cyprus  continued  to  implement  measures  for  improving  the  employability  of 
unemployed and inactive persons, as well as of secondary and tertiary graduates. These 

15

 
 
 
 
measures  focus  on  the  provision  of  training  and  work  experience,  offering  work 
placement  and  training  opportunities  to  secondary  and  tertiary  education  graduates,  as 
well  as  providing  incentives  to  companies  for  recruiting  unemployed  and  other 
vulnerable  people.  Company  traineeships  are  vital  to  help  bridge  the  gap  between  the 
world of education and the world of work. Furthermore, an action plan for the promotion 
of green skills for both employed and unemployed persons is being carried out. Cyprus is 
also  implementing  some  schemes  to  encourage  the  entrepreneurship  of  women  and 
young  people,  and  it  plans  to  introduce  a  new  one  for  combating  youth  unemployment 
and  long-term  unemployment.  The  above  measures  are  relevant  but  not  ambitious 
enough,  especially  when  taking  into  account  the  growing  youth  unemployment  and 
structural  unemployment  associated  with  the  shedding  of  semi-skilled  or  low-skilled 
labour  in  the  sectors  of  construction  and  trade.  There  is  a  need  to  expand  support 
measures for young people making full use of the EU structural funds, putting emphasis 
on  the  provision  of  more  workplace  learning  opportunities,  teaching  of  entrepreneurial 
skills, and promotion of self-employment. Further efforts are also required for enhancing 
the  skills  profile  of  the  workforce  to  facilitate  the  necessary  transitions  in  the  labour 
market,  focusing  in  particular  on  those  groups  with  a  low  participation  rate  in  lifelong 
learning activities such as the low-skilled, unemployed and older workers. Ensuring the 
appropriate capacity readiness of public employment services is of paramount relevance 
to the effective implementation of the above active labour market measures. 

In addition to these efforts to improve the supply of skills, it will be necessary to improve 
the demand side through new business initiatives, innovation and growth.  In particular, 
policy measures aimed at exploiting the growth and job creation potential of high value-
added activities (business services, health and social sectors, digital economy, green jobs) 
should  be  promoted.  This  would  in  turn  make  vocational  education  and  training  more 
attractive in the sectors where there could potentially be an increasing demand for new 
skills.  Adequate  priority  should  also  be  given  to  the  anticipation  of  skills  that  may  be 
needed for exploitation of recently discovered natural gas resources.   

Cyprus has a well above the EU average proportion of older people in employment and 
this proportion has been steadily growing over the last decade. Women tend to make a 
much earlier exit from the labour market than men. No active ageing strategy providing 
incentives  or  removing  disincentives  for  staying  longer  in  work  is  in  place.  The  public 
sector  pension  scheme  allows  for  early  retirement  from  the  age  of  55  without  any 
actuarial reduction of benefits. 

Social policies 

Cyprus  faces  challenges  in  ensuring  the  long-term  sustainability  of  public  finances, 
notably  in  the  pension  field,  which  have  been  only  partially  addressed.  Even  though  a 
series of measures have been adopted to improve the sustainability of the pension system, 
a comprehensive pension reform has not yet been designed. Cyprus has implemented two 
important  structural  measures:  the  enactment  of  contributions  from  public  sector 
employees  to  their  public  pensions,  and  the  inclusion  in  the  social  security  fund  of 
newcomers  to  the  public  sector,  with  the  abolition  of  occupational  pensions.  While  the 
measures  adopted  are  relevant  and  credible,  the  response  of  Cyprus  is  not  sufficiently 
ambitious;  it  is  important  to  explore  the  scope  for  more  ambitious  measures  that  will 
secure  sustainability  and  adequacy,  and  further  improve  the  system’s  fairness,  in  the 
longer term. Cyprus has not increased the retirement age but adopted the aforementioned 
measures which, according to the Cypriot authorities, have a significant budgetary effect 
for  public  finances.  Increasing  the  retirement  age  and  linking  it  with  life  expectancy 
would  provide  an  opportunity  to  increase  fairness  notably  in  terms  of  aligning  the 

16

 
 
pensionable ages of the public and private sector. Such a change could also be utilised to 
help address issues of adequacy in the medium to long term. 

In terms of poverty among the elderly, Cyprus has partly addressed their high at-risk-of-
poverty rate. In 2010, 41.2% of the Cypriot population aged 65 or more was still exposed 
to the risk of poverty, the highest rate in the EU. In order to address the high at-risk-of-
poverty  rate  of  the  elderly,  the  provision  of  the  means-tested  grant  to  low-income 
pensioner households continues. There are plans to gradually phase out the grant scheme 
along  with  the  maturation  of  the  pension  system.  A  special  grant  for  low-income 
pensioner  households  was  also  introduced  as  compensation  for  the  VAT  increase  on 
foodstuffs and medicines. The adopted measures are relevant, credible, and in the right 
direction. However, considering that old-age poverty rates remain high, the challenge of 
improving  the  short-term  adequacy  of  income  for  a  large  proportion  of  the  elderly 
population are still to be met. Close monitoring is important for tracking the effectiveness 
of the adopted measures in reducing old-age poverty. 

With regard to the healthcare system, no progress has been observed in the direction of 
implementing the national health insurance system (apart from some advancement in the 
operational design in the financing aspect of the new National Health Insurance System), 
which could help to address major problems of inefficiency and inequity. The provision 
and  funding  of  healthcare  is  fragmented  between  public  and  —  largely  unregulated  — 
private  providers  of  healthcare  services.  The  current  system  has  led  to  the  unequal 
distribution  of  services  and  inequities  in  access  to  care.  Moreover,  capacity  and  care 
quality are to a large extent unregulated. There is no universal health coverage. Currently 
around  85 %  of  the  population  is  eligible  for  public  healthcare  that  is  either  free  or 
provided at a reduced cost. However, only 40 % of the population use public healthcare 
services, mainly due to the inefficiencies and long waiting times. Thus, the majority of 
the  beneficiaries  use  private  healthcare  services  and  bear  the  total  expense.  Therefore, 
around two thirds of the total healthcare cost in Cyprus is covered by the private sector. 
This is equivalent to 3.4 % of GDP, the second highest share across the EU, after Greece. 

In  addition,  healthcare  expenditure  is  growing  rapidly.  This  is  probably  because  the 
government exerts little control over the tariffs of healthcare services. The absence of an 
integrated and homogeneous national healthcare system is wasteful of resources, causes 
overlaps and irrational distribution of services and healthcare facilities, and leads to low 
quality of services for citizens. Furthermore, the Directive on the application of patients’ 
rights  in  cross-border  healthcare,  which  should  be  transposed  into  national  law  by 
October  2013,  requires  Member  States  to  improve  transparency  and  to  either  charge 
existing  public  tariffs  to  patients  from  other  Member  States  (in  a  non-discriminatory 
way)  or,  in  the  absence  of  such  official  tariffs,  put  in  place  an  objective,  non-
discriminatory  pricing  mechanism  for  health  services.  The  National  Health  Insurance 
System  should  foster  universal  coverage,  equal  treatment,  and  sustainability.  The  new 
system  should  provide  a  rational  supply  of  services,  which  will  avoid  duplication  and 
waste of resources. No clear timeline for proceeding with the National Health Insurance 
System has been presented so far, casting doubt on the political will to implement it. In 
parallel this poses risks to the long-term control and sustainability of public finances. 

In  the  coming  years  the  public  healthcare  expenditure  cost  is  expected  to  continue 
increasing at a higher rate than nominal GDP, making the healthcare reform more urgent, 
especially  when  considering  that  the  elderly  are  at  great  risk  of  poverty  or  exclusion. 
Meanwhile, policy challenges also exist in respect of the provision and quality standards 
of long-term care. Consultation on reforming long-term care is on-going. 

17

 
 
In  a  context  of  increasing  unemployment  and  greater  strain  on  the  social  protection 
budget,  the  population  at  risk  of  poverty  or  exclusion  has  increased.  The  government 
announced  its  plans  to  rationalise  social  benefits  by  introducing  income  and  wealth 
criteria. This is expected to improve the targeting of benefits. The laws on child benefit 
and  the  student  allowance  were  consequently  modified.  This  is  a  step  in  the  right 
direction. Close monitoring is needed to ensure that these measures produce the intended 
impact. The government is also planning to reform the public assistance law in order to 
correct  the  distortions  of  the  current  system.  At  present,  there  is  a  lack  of  proper 
activation  measures  for  public  assistance  recipients,  who  risk  getting  trapped  in  the 
benefit system instead. 

In seeking to address the high incidence of poverty among single person households with 
dependent  children,  Cyprus  has  introduced  a  cash  benefit  for  single  parent  households, 
calculated  on  the  basis  of  income  and  wealth  criteria.  However,  the  cash  benefit  is  not 
linked  with  activation  measures  specifically  targeted  at  unemployed/inactive  single 
parents. Moreover, the proportion of single persons who withdraw from a paid job when 
children  enter  the  household  is  far  from  negligible.  This  can  be  linked  to  the  limited 
availability of flexible forms of employment in Cyprus and to the relatively high cost of 
childcare.  

There is thus scope for introducing or reinforcing activation measures targeted at single 
parents  and  public  assistance  recipients.  These  need 
include  personalised 
psychological support and understanding of labour market conditions. Flexible forms of 
employment  need  to  be  made  sufficiently  available  and  more  efforts  must  be  made  to 
satisfy the needs in terms of care services for dependents.  

to 

3.4.  Growth and competitiveness structural measures 

Cyprus  is  a  small,  open,  service-oriented  island  economy,  with  micro-services  and 
family-owned  enterprises.  The  small  size  of  the  economy  limits  the  range  of 
diversification  of  production  activities  and  leads  to  a  higher  degree  of  trade 
specialisation,  which  in  turn  increases  its  exposure  to  external  shocks.  Evidently,  the 
adverse  external  environment  coupled  with  the  international  financial  crisis  hit  the 
Cypriot economy (albeit with delayed effect), weighing strongly on growth which during 
the  last  two  years  had  contracted,  while  imbalances  built  up  during  the  previous  years 
came to the fore. 

In  an  effort  to  enhance  the  country’s  growth  potential,  employment,  productivity  and 
competitiveness, the government prepared a wide-ranging package of measures, adopted 
by the Council of Ministers, consisting of measures to support employment, institutional 
arrangements for attracting public and private investments, and measures to enhance the 
role  of  Cyprus  as  an  international  business  and  financial  centre  providing  high  value 
added  services.  The  measures  are  intended  to  form  an  immediate  response  to  the 
economy’s contraction at a time when fiscal consolidation measures would be taking full 
effect. 

In  terms  of  its  business  environment,  Cyprus  ranked  37th  out  of  183  economies  in 
2011.10  Yet,  it  performs  poorly  in  a  number  of  sub-areas  such  as  dealing  with 
construction permits (75th position), and registering property (66th position). There are 

10 Doing Business in a More Transparent World: Cyprus, The World Bank, 2012. 

18

 
 
 
 
 
                                                 
also  severe  restrictions  in  key  transport  sectors  in  terms  of  working  hours  (e.g.  ports, 
warehouses).  The  cost  of  starting  a  business  is  relatively  high  and  the  process  of 
enforcing contracts should be accelerated. 

In  regard  to  the  service  sector,  Cyprus  transposed  the  Services  Directive  by  way  of  a 
horizontal  law  accompanied  by  a  number  of  sector-specific  amending  laws  and 
regulations.  However,  in  sectors  such  as  retailing,  tourism,  and  construction  services, 
sector-specific legislation and a firm timetable for adoption are still awaited. Other issues 
concern  regulated  professional  services  where  fixed  tariffs  exist  (such  as  lawyers  and 
architects),  which  play  an  important  role  in  a  variety  of  contractual  and  legal  acts  for 
business  (and  citizens),  and  improving  their  quality  and  reducing  their  cost  can  have  a 
multiplier  effect  on  the  economy  in  the  medium  term.  Regarding  the  requirement 
whereby the Services Directive leaves it to the Member State to streamline the regulatory 
environment,  quantitative  or  territorial  restrictions  exist  in  the  tourism  and  food  and 
beverages  sectors.  Also  in  the  education  sector,  legal  form  and  shareholding 
requirements  have  been  maintained.  Cyprus  ranks  favourably  in  relation  to  the  EU 
average  (152  regulated  professions)  with  regard  to  regulation  of  professional  services. 
The country has notified to the Commission 90 regulated professions (60 % in the health 
sector,  15 %  in  the  transport  sector,  15 %  in  construction  and  industry).  Of  the  90 
regulated professions in Cyprus, only four are in business services. 

To enhance the business environment, and in line with the Services Directive, the Point 
of Single Contact (PSC) was set up through the upgrading and expansion of the One-Stop 
Shop. The PSC provides a good level of information on procedures and formalities and 
the  portal  is  well  structured.  However,  it  does  not  score  well  on  online  completion  of 
procedures.  While  it  accepts  e-IDs  from  some  Member  States,  the  option  of  using  this 
system  is  not  available  for  Cypriot  nationals  as  e-IDs  are  not  yet  issued  in  Cyprus. 
Through the personal space accessible in the PSC Portal, registered service providers for 
several  sectors  are  able  to  submit  online  application  forms  (direct  data  entry),  attach 
supporting documents, and e-sign the application package. 

In  Cyprus,  R&D  expenditure  is  0.5%  of  GDP,  which  is  in  line  with  its  national 
commitments  under  the  EU  2020  strategy,  but  is  far  from  the  EU  average  (2.0%). 
Regarding R&D and innovation policies, the announced new national plan for research 
and  innovation  has  not  materialised  yet.  The  role  of  the  business  community  in 
innovation  remains  marginal,  partly  because  of  the  structure  of  the  productive  sector 
(small  companies  in  traditional  sectors)  and  partly  because  of  weak  consultation 
processes that hamper the full involvement of businesses in RTDI activities. The Cyprus 
Ministry  of  Commerce,  Industry  and  Tourism  focuses  on  defining  and  promoting  a 
broader research and innovation concept that reaches beyond manufacturing enterprises 
and  includes  services,  a  sector  where  Cyprus  is  strong.  Emphasis  is  also  placed  on 
fostering  cooperation  between  universities  and  research  centres  targeted  by  innovation 
policy  measures.  To  date,  policy  priorities  rely  on  traditional  direct  funding-type 
schemes.  One  such  financial  tool  is  under  preparation  and  aims  to  encourage  SMEs 
(which  under-invest  in  research  and  innovation)  to  develop  and  introduce  innovative 
products and services, either in-house, or by cooperating with research organisations or 
other companies. The public sector with pre-commercial procurement  would be invited 
to play an active part and lead the development of  technologically innovative solutions 
addressing its specific needs.  

The transport infrastructure in Cyprus (road, sea and air) is generally considered to be of 
relatively  good  quality.  However,  the  lack  of  alternatives  to  private  cars  for  inland 

19

 
 
 
 
 
 
transport, together with relatively low fuel taxes, increases the dependency on imported 
oil  products  and  the  sensitivity  of  the  economy  to  changes  in  oil  prices.  It  also  has a 
strong  impact  on  congestion and  on greenhouse  gas  emissions.  Given  that  transport 
accounts for more than half of the total CO2 emissions from non-ETS activities, reversing 
the  trend  in  CO2  emissions  from  transport  is  key  to  enabling  Cyprus  to  meet  its  2020 
target  (i.e.  to  reduce  CO2  emissions  by  -5 %  by  2020). According  to  latest  data,  the 
environmental performance of transport has not improved in recent years. 

Cyprus adopted its Digital Strategy on 8 February 2012, aiming to drive Cyprus into the 
digital era mainly by achieving full broadband coverage, reducing passive infrastructure 
network  costs,  and allocating  spectrum  for  wireless  networks  that  would  potentially 
support  high-speed  broadband  access.  While  Cyprus  has  almost  reached  100 % 
broadband coverage and despite a significant increase in broadband speeds, it is still at 
infant stage regarding the deployment of Next Generation Access networks (only 7.3 % 
of lines provide 10 Mbps or more). Implementation of its Digital Strategy is still pending, 
in particular the allocation of sufficient spectrum to wireless electronic communications 
services and the inducement for electronic communications providers to invest in ultra-
high-speed  networks.  Although  the  analogue  switch-off  was  completed  in  July  and 
September  2011,  there  is  no  concrete  timetable  for  the  release  of  the  digital  dividend 
(800 MHz band) for wireless broadband. 

Cyprus  is  currently  not  expected  to  achieve  the  climate  target  based  on  existing 
measures.  According  to  the  2011  bi-annual  projections  based  on  existing  measures 
submitted by the country, Cyprus is expected to increase emissions by 8.4 % (compared 
to 2005) by 2020, falling short by 13.4 % (base-year emissions) relative to the target. In 
order to achieve the target without making use of costly flexibility mechanisms, Cyprus 
would thus need to adopt and effectively implement these additional policies. 
In the CSRs issued in June 2011, emphasis was placed on the need for Cyprus to increase 
the  diversity  of  its  energy  mix  and  to  expand  its  supply  and  use  of  renewable  energy 
sources.  The  recent  gas  discovery  (December  2011)  in  Cyprus’s  Exclusive  Economic 
Zone  is  very  promising  for  the  diversification  of  energy  sources,  allowing  Cyprus  to 
move  away  from  its  excessive  reliance  on  oil  imports.  However,  energy  efficiency  and 
the use of renewable energy should be important components of the effort to strengthen 
energy security in Cyprus and progress towards the climate target. 

Under  the  second  National  Energy  Efficiency  Action  Plan  (NEEAP),  grants  and 
subsidies are planned for the residential, service, and industrial sectors so as to increase 
energy efficiency as well as the use of renewable energy sources from 2011 to 2020, but 
more may be required. It is of concern that, to date, there is no energy service company 
(ESCO)  operating  in  Cyprus.  The  second  NEEAP  emphasises  the  potential  of  further 
energy savings in buildings and it also provides for investments in public transport (on-
going) as well as for financial incentives to have more fuel-efficient vehicles (yet to be 
formally adopted). 

Cyprus  is  late  in  implementing  the  Third  Energy  Package  and  has  yet  to  notify  its 
national  measures  to  the  Commission  (two  infringement  procedures  in  progress). 
Although the electricity market is legally open to all non-domestic customers, there are 
no  alternative  suppliers  beside  the  incumbent  Electricity  Authority  Cyprus  (EAC),  a 
public-law body which enjoys a de facto monopoly, although the cost-oriented prices are 
set by the national energy regulatory authority (CERA). The gas market law currently in 
force grants DEFA, the new Public Gas Corporation, a legal monopoly for 20 years and 
allows EAC to own part of its share capital. Such provisions represent a huge obstacle to 

20

 
 
 
 
 
 
the  development  of  a  competitive  energy  market,  which  is  particularly  important  given 
the prospects of new gas resources for the island. 

In  compliance  with  the  Water  Framework  Directive  2000/60/EC,  Cyprus  adopted  its 
River  Management  Plan  on  9  June  2011.  The  Plan  is  currently  being  assessed  by  the 
Commission and may require further follow-up as regards its implementation. It includes 
water  pricing  policies  as  indicated  by  the  Directive,  and  in  line  with  the  Council 
recommendation. It  also  comprises  measures 
increase  water  efficiency  and 
improve the ecological conditions of aquatic ecosystems that will contribute to achieving 
resource efficiency goals. 

to 

However,  Cyprus  is  not creating opportunities  to  recycle more  and reduce its  current 
80 % landfilling rate, accounting for the highest amount of landfilled waste per capita in 
the  EU11.  Increasing  waste  generation  and  landfilling  drive  increasing  GHG  emission 
from the  waste  sector  which  was  responsible  for  17.3%  of  Cyprus  GHG  emissions12 in 
2011. This is not a resource-efficient approach and it may prevent Cyprus from reaching 
the  EU  recycling  targets.  Current  very  limited  economic  instruments,  including 
landfilling fees, pay-as-you-throw and producer responsibility schemes13 have not proven 
to  be  effective  as  Cyprus  still  ranks  very  low  in  recycling  rates.  Modelling  shows  that 
without any action, the amount of waste generated and landfilled will double14 by 2025, 
hindering  growth  by  hampering  energy  recovery,  neglecting  potential  to  reduce  GHG 
emissions and foregoing opportunities for job creation. 

3.5.  Modernisation of public administration 

Cyprus  has  so  far  taken  significant  steps  to  better  serve  citizens  and  to  enhance  the 
productivity  and  effectiveness  of  public  services.  Citizens’  Service  Centres  (CSC)  are 
now operating, providing citizens with over 50 services of six government departments. 
Also,  the  Companies  Registration  System  (e-filing),  allowing  for  complete  online 
registration of companies, is expected to partly address the cost of setting up a business 
in  Cyprus,  which  is  higher  than  the  EU  average.  Additionally,  the  system  of  ‘e-
procurement’ enables public procurement competitions to be carried out electronically. 
Furthermore,  Cyprus  is  committed  to  reducing  by  20%  the  administrative  burden  in 
national  legislation  by  2012.  On  ways  to  achieve this target, a sectoral baseline project 
was  promoted  for  reducing  the  administrative  burden  in  all  legislation  relating  to 
enterprises,  based  on  eight  priority  areas.  A  number  of  relevant  proposals  have  been 
submitted  in  each  national  priority  area,  on  the  basis  of  recommendations  made  by  a 
consultancy firm and after extensive consultation with government departments and the 
private  sector.  It  is  expected  that  implementation  of  all  recommendations  will  bring  a 
total reduction of 22 % in the administrative burden (i.e. EUR 155 407 051). 
Regarding e-governance, not all of the most important public services for enterprises are 
online  yet  (still  75 %),  leading  to  some  inefficiencies,  whereas  the  take-up  rate  by 
enterprises has increased to 74 %. On the other hand, both provision (at 42 %) and take-
up  (at  25 %)  for  and  by  citizens  are  among  the  lowest.  In  this  respect,  a  horizontal 
proposal  has  also  been  submitted  aimed  at  promoting  the  use  of  existing  electronic 
systems in the Public Service. 

11http://europa.eu/rapid/pressReleasesAction.do?reference=STAT/12/48&format=HTML&aged=0&langua

ge=EN&guiLanguage=en 

12 Cyprus National Reform Programme, 2012. 
13 Use of economic instrument, Annex I, BioIntelligence Service, 2012. 
14 Use of economic instruments, Annex V, BioIntelligence Service, 2012. 

21

 
 
 
 
 
                                                 
Some  other  challenges  need  to  be  addressed.  The  transposition  of  the  Late  Payment 
Directive  is  still  pending.  Also,  enforcement  of  contracts  in  Cyprus  requires  twice  as 
much  time  as  the  regional  average.  In  response  to  that,  Cyprus  is  evaluating  the 
establishment of commercial courts to resolve trade disputes. 

22

 
 
4.  OVERVIEW TABLE  

2011 commitments 
Country-specific recommendations (CSRs) 
CSR  1:  Adopt 
the  necessary  measures  of  a 
permanent  nature  to  achieve  the  budgetary  target  in 
2011  and  the  correction  of  the  excessive  deficit  by 
2012,  in  line  with  the  Council  recommendations 
under  the  EDP.  Take  measures  to  keep  tight  control 
over  expenditure  and  make  use  of  any  better-than-
expected  budgetary  developments  for  faster  deficit 
and  debt  reduction.  Ensure  progress  towards  the 
medium-term  objective  by  at  least  0.5 %  of  GDP 
annually  and  bring  the  public  debt  ratio  on  a 
downward  path.  Accelerate  the  phasing-in  of  an 
enforceable multiannual budgetary framework with a 
binding statutory basis and corrective mechanisms, as 
from  the  preparation  of  the  2012  budget.  The 
programme  and  performance  budgeting  should  be 
implemented as soon as possible. 
CSR 2: Strengthen further the prudential framework 
for  supervision  of  banks  and  cooperative  credit 
societies to ensure early detection of risks. 

increase 

the  projected 

CSR  3:  Improve  the  long-term  sustainability  of 
public finances by implementing reform measures to 
control  pension  and  healthcare  expenditure  in  order 
in  age-related 
to  curb 
expenditure.  For  pensions, 
extend  years  of 
contribution, link retirement age with life expectancy 
or adopt other measures with an equivalent budgetary 
effect,  while  taking  care  to  address  the  high  at-risk-
of-poverty  rate  for  the  elderly.  For  healthcare,  take 
further  steps  to  accelerate  implementation  of  the 
national health insurance system. 

CSR  4:  Take  steps  to  reform,  in  consultation  with 
social  partners  and  in  accordance  with  national 
practices,  the  system  of  wage  bargaining  and  wage 
indexation to ensure that wage growth better reflects 
and 
labour 
developments 
competitiveness. 

productivity 

in 

23

Summary assessment 

Cyprus has implemented CSR 1 only partially: 
Effective  action  has  been  taken  to  correct  the 
excessive  budget  deficit  in  a  timely  and 
sustainable  manner,  by  2012.  However,  an 
enforceable multiannual budgetary framework 
law has not yet adopted, although the Cypriot 
authorities  committed  to  adopt  it  by  May 
2012. 

crises 

(a  bill 

allowing 

Cyprus has implemented CSR 2 only partially: 
Effective  action  was  taken  with  the  adoption 
of  two  legal  instruments  to  strengthen  the 
resilience  of 
the  banking  system  against 
the 
financial 
government  to  take  measures  in  a  period  of 
financial  crisis  to  address  liquidity/solvency 
problems and/or to enhance the capital base; a 
second bill that provides for the establishment 
of an independent stability fund). 
Cyprus has implemented CSR 3 only partially: 
On  pension  system  sustainability  and  poverty 
risk  for  the  elderly,  Cyprus  has  implemented 
the recommendation only partially: a series of 
measures have been taken in the framework of 
fiscal  consolidation 
to  control  pension 
expenditure.  However,  there  is  a  lack  of 
long-term  vision.  Measures 
ambition  and 
addressing  the  risk  of  poverty  for  the  elderly 
need to be monitored. 
On  the  health  insurance  system,  Cyprus  has 
not  implemented  the  recommendation:  no 
progress  was  observed  in  the  direction  of 
implementation  of 
the  national  health 
insurance system. 

the  wage 

indexation  system:  In 

Cyprus has implemented CSR 4 only partially: 
On 
the 
framework of fiscal consolidation, a two-year 
freeze of the cost of living allowance (COLA) 
was decided, also bringing about a downward 
shift in the public wage bill. A social dialogue 
is currently under way regarding reform of the 
wage 
system.  The  Cypriot 
authorities  undertook  to  reach  an  agreement 
and  reform  the  COLA  by  the  end  of  June 
2012. 

indexation 

 
 
 
 
 
  
 
 
 
 
 
CSR 5: Take further steps, within the reform planned 
for  the  vocational  education  and  training  system,  to 
match  education  outcomes  to  labour  market  needs 
better, including setting up post-secondary vocational 
education  and  training  institutes.  Take  measures  to 
increase  the  effectiveness  of  the  vocational  training 
for  and 
system  by 
incentives 
improving  access 
to  vocational  education  and 
training,  especially  for  low-skilled  workers,  women 
and older workers. 

increasing 

the 

remaining  obstacles 

CSR  6:  Abolish 
the 
establishment and free provision of services in sector-
specific  legislation  by  December  2011  in  order  to 
create more opportunities for growth and jobs in the 
services sector. 

to 

CSR 7: Introduce measures to increase the diversity 
of  the  energy  mix  and  the  expansion  of  renewable 
energy  sources.  Establish,  by  2012,  a  water 
management  plan  and  a  price-setting  scheme 
reflecting cost efficiency and equity concerns in order 
to  ensure  more  sustainable  management  of  water 
resources. 

by 

to  strengthen 

is  still  a  need 

Cyprus has implemented CSR 5 only partially: 
A  draft  policy  proposal  for  setting  up  Post-
Secondary Institutes for Vocational Education 
and  Training  has  been  prepared,  pending 
approval 
the  Ministerial  Council. 
Following  its  approval, four  Institutes  will  be 
running  as  of  September  2012.  The  gradual 
introduction of new curricula from primary to 
the  first  year  of  upper  secondary  education is 
proceeding, having started in September 2011. 
the 
There 
appropriate re-skilling and up-skilling training 
schemes targeted at the indicated groups (low-
skilled, unemployed, and older workers). 
Cyprus has implemented CSR 6 only partially: 
Cyprus  transposed  the  Services  Directive  by 
way  of  horizontal  law.  However,  in  some 
tourism,  and 
sectors  such  as 
construction 
sector-specific 
services, 
legislation  and  a  firm  timetable  for  adoption 
are still awaited.  
Cyprus has implemented CSR 7 only partially: 
To date, Cyprus has not submitted its Progress 
Report due in December 2011 (as required by 
the Renewable Energy Directive) to allow the 
Commission to assess and monitor progress in 
meeting 
(13 %)  of 
diversifying its energy mix and expanding the 
use of renewable sources. 
Cyprus adopted its River Management Plan on 
9 June 2011, and it is currently being assessed 
by  the  Commission.  The  Plan  also  includes 
water  pricing  policies  as  indicated  by  the 
Directive,  and  seems  to  be  in  line  with  the 
CSR.  

the  national 

retailing, 

target 

Euro Plus Pact (national commitments and progress) 
Fostering employment: 

• 
• 

lifelong learning 
undeclared work 

Competitiveness: 

24

The commitments for fostering unemployment 
have only partially been implemented:  

In  February  2012,  the  government  adopted  a 
decision  on 
the  establishment  of  post-
secondary  vocational  education  and  training 
institutes (four in total, one in each district in 
Cyprus).  Enrolment  of  the  first  students  and 
full operation of these institutes is planned for 
September 2012. The estimated budget for this 
action  is  EUR 4 411 696  (co-financed  at  85 % 
from the ESF). 

In  response  to  the  large  inflow  of  foreign 
workers and as a result of the economic crisis, 
over  the  last  two  years  the  government  has 
stepped  up  the  labour  inspection  process,  in 
order  to  inspect,  at  employers’  premises, 
illegal  work  and  unregistered  employees,  and 
has 
illegal 
employment  while  putting  more  stringent 
conditions  on  employers  to  limit  undeclared 
work.  A  nationwide  complaints  line  has  been 
established  to  allow  citizens  to  report  illegal 
work. 
The  commitments  related  to  competitiveness 

the  penalties 

reinforced 

for 

 
 
 
 
 
 
public sector wage development 

• 
•  wage-setting mechanisms 
• 
business environment 
• 
education, R&D, and innovation 
• 
enhancing the digital economy 
• 
improving the competitiveness of enterprises 
• 
promoting energy efficiency and use of RES 

have been partially implemented. 

to 

to 

address 

The government has adopted a series of fiscal 
consolidation  measures 
the 
excessive  government  deficit,  some  of  which 
affect  public  sector  wages.  A  key  measure 
involves  the  enactment  of  contributions  from 
public  sector  employees 
their  public 
pensions,  and  the  freezing  of  emoluments, 
including  pensions,  in  the  broader  public 
two  years,  bringing  about  a 
sector  for 
downward  shift  in  the  public  wage  bill.  In 
addition,  the  government  adopted  measures 
regarding  the  abolition  of  all  vacant  posts  in 
the public sector (exemptions up to 10 %), the 
reduction  of  salary  scales  for  new  employees 
in  the  broader  public  sector  by  10 %,  and 
reduction  of  the  number  of  personnel  in  the 
broader  public  sector  by  5 000  over  the  next 
five  years  (one  recruitment  for  every  four 
retirements). 

Importantly,  there  will  be  no  cost-of-living 
adjustments (COLA) for 2011-2012. A public 
dialogue  for  redesigning  COLA  is  currently 
ongoing  with  a  view  to  being  concluded  by 
end of June 2012. 

intends 

the  current 
Cyprus 
corporate taxation system, which features low 
rates and a broad tax base.   

to  maintain 

A state grant scheme being promoted is to be 
co-financed  by  Structural  Funds  (85 %)  and 
the  Republic  of  Cyprus  (15 %).  It  aims  to 
provide  financial  support  to  companies  in 
services sectors for upgrading their technology 
and to promote innovation. 

Cyprus  adopted  its  National  Digital  Strategy 
for  2012-2020  on  8  February  2012.  To  date, 
Cyprus  has  achieved  100 %  broadband 
coverage with at least 2Mbps. Additionally, in 
all  the  communities  (151  communities)  that 
were  not  covered  by  the  DSL  network  in 
2009,  terrestrial  infrastructure  (Wi-Fi)  and 
satellite connections have been installed. 

A  scheme  has  been  set  up  for  grants  to 
strengthen the competitiveness of SMEs in the 
services  sector  in  order  to  upgrade  their 
technology  and  to  promote  innovation.  The 
total budget of the scheme amounts to EUR 23 
million  for  the  programming  period  2007-
(co-financed  by  Structural  Funds). 
2013 
Between 40 and 50 enterprises are expected to 
be subsidised. 
The commitments related to the sustainability 
finances  have  been  partially 
of  public 
implemented:  

In the context of reforming the public pension 

25

Sustainability of public finances: 

• 

align pensions to demography 

 
 
 
 
 
 
 
 
 
 
 
system,  a  number  of  measures  have  been 
adopted.  These  entail 
the  enactment  of 
contributions  of  3 %  on  gross  earnings  of 
broader  public  employees  against  pension 
entitlements,  a  temporary  contribution  on 
gross  earnings  of  broader  public  sector 
employees and pensioners for a period of two 
years,  and  an 
rate  of 
increase 
contribution to the Widows and Orphans Fund 
by  1.25  pps  to  2 %  on  gross  earnings  of 
broader  public  sector  employees.  In  addition, 
the government has opted for the abolition of 
occupational  pensions  for  new  employees  of 
the  broader  public  sector,  with  considerable 
savings over the long term. 

the 

in 

Financial stability: 

• 

national legislation for banking resolution or 
other measures 

A  draft  new  budgetary  framework  is  being 
established.  The  draft  bill  is  expected  to  be 
approved by the Council of Ministers and will 
then be submitted to the Parliament by the end 
of May 2012.  
The financial stability commitments have only 
been partially implemented: 

crises 

On  14  December  2011, 
the  government 
adopted  two  legal  instruments  to  strengthen 
the  resilience  of  the  banking  system  against 
financial 
the 
government  to  take  measures  in  a  period  of 
financial  crisis  to  address  liquidity/solvency 
problems and/or to enhance the capital base; a 
second bill that provides for the establishment 
of an independent stability fund).  

allowing 

(a  bill 

Europe 2020 (national targets and progress) 
Employment rate: 75 % - 77 % of the population aged 
20–64 should be employed by 2020. 

R&D  target:  Increase  R&D  expenditure  to  0.5 %  of 
GDP by 2020. 

Greenhouse  gas  emissions 
target:  Reduction  of 
greenhouse gas emissions in non-ETS sectors by 5 % 
(compared to 2005). 

The  unemployment  rate  doubled  between 
2008  and  2011,  from  3.7 %  to  7.4 %  (annual 
average). 
The  overall  employment  rate  continued  its 
declining  trend  for  2011  and  is  now  standing 
at  73.8 %  compared  to  75.7%  in  2009.  This 
suggests  that  the  attainment  of  the  lower 
boundary target will require a more ambitious 
and consistent policy effort 
 R&D intensity for 2010 increased to 0.5 % of 
GDP  (Eurostat  provisional  data)  from  0.43% 
in 2008 and 0.49% in 2009. Cyprus is on track 
to meet its national target. 
The  public  source  of  funding  for  R&D 
intensity  was  69%,  the  highest  percentage  in 
the  EU27.  Business  R&D  expenditures 
(BERD)  as  a  share  of  GDP  were  0.09%  in 
2010, at the lowest level in EU27. 

Greenhouse gas emissions in non-ETS sectors 
were  reduced  by  7  %  (compared  to  2005)  by 
2010  in  Cyprus.  According  to  Cyprus'  latest  
projections  based  on  existing  measures, 
emissions  are  expected  to  increase  by  8.4 % 
(compared  to  2005)  by  2020,  thereby  leading 
to a shortfall of the target by 13.4 percentage 
points.  This  means  there  is  not  sufficient 
progress towards achievement of the target. 

26

 
 
 
 
 
Starting  from  2.9 %  in  2005,  the  share  of 
renewable  energy 
in  gross  final  energy 
consumption  decreased  to  2.5 %  in  2006,  but 
has  been  increased  to  4.6 %  (in  2009)  since 
then. 
The  Eurostat  estimation  for  2010  is  5.4% 
which  would  show  that  CY  is  on  track  to 
reach its 2020 target (4.92% interim target for 
2011/2012).  The  Commission  is  waiting  for 
the Progress report (as per requirements of the 
Renewable  Energy  Directive)  to  make  a  full 
assessment of the measures in place to follow 
the indicative trajectory. 
Greenhouse gas emissions in non-ETS sectors 
were  reduced  by  7  %  (compared  to  2005)  by 
to  Cyprus' 
2010 
latest projections  based  on  existing  measures, 
emissions  are  expected  to  increase  by  8.4 % 
(compared  to  2005)  by  2020,  thereby  leading 
to a shortfall of the target by 13.4 percentage 
points.  This  means  there  is  not  sufficient 
progress towards achievement of the target. 

in  Cyprus.  According 

The  current  level  of  renewable  energy  (based 
on  presentation  of 
the  Cyprus  Planning 
Bureau, 12/10/2011) is 5.4 %. 

The  current 
level  of  energy  efficiency: 
reduction  of  energy  consumption  in  Mtoe 
(based on presentation of the Cyprus Planning 
Bureau, 12/10/2011) is 6.6 %. 
The  method  of  assessment  of  national 
progress  in  energy  efficiency  is  currently 
under  discussion  between  the  institutions  in 
the context of the proposed Energy Efficiency 
Directive. 
According to the Cyprus Planning Bureau, the 
current  early  school  leavers’  rate  at  national 
level is 11.2%. Cyprus seems on track to meet 
its 2020 target on early school leaving. 
Cyprus  is  currently  at  level  of  45.8 %  and 
seems  on  track  to  meet  its  2020  target  on 
tertiary education. 

The  number  of  people  at  risk  of  poverty  and 
social  exclusion  has  increased  from  22.9% 
(182 000 persons) in 2009 to 23.6% (188 000 
people) in 2010. It is expected that the current 
context  of  crisis  will  intensify  the  negative 
groups 
effects 
(unemployed  persons,  single  parents,  public 
benefit recipients, migrants). Sustained policy 
initiatives  will  thus  have  to  focus  on  these 
groups for the attainment of the target, as well 
as on the elderly at risk. 

population 

certain 

on 

Renewable energy target: 13 % of gross final energy 
consumption from renewable sources.  

Greenhouse  gas  emissions  target:  Reduce  CO2 
emissions by 5 % by 2020. 

Increase the proportion of renewable energy by 13 % 
by 2020. 

efficiency  — 

Energy 
energy 
consumption in Mtoe from 6.6 % to 14.3 % by 2020. 
(0.46Mtoe) 

reduction 

of 

Early school leaving target: Reduce the rate of early 
school leavers to 10 % by 2020. 

Tertiary  education  target:  Increase  participation  in 
higher education to 46 %. 

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. 

27

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5.  ANNEX 

Table I. Macroeconomic indicators 

Core indicators
GDP growth rate
Output gap 1
HICP (annual % change)
Domestic demand (annual % change) 2
Unemployment rate (% of labour force) 3
Gross fixed capital formation (% of GDP)
Gross national saving (% of GDP)
General Government (%  of GDP)
Net lending (+) or net borrowing (-)
Gross debt
Net financial assets 
Total revenue 
Total expenditure
  of which: Interest
Corporations (%  of GDP)
Net lending (+) or net borrowing (-)

1995-
1999

2000-
2004

2005-
2008

2009

2010

2011

2012

2013

4.8
-1.3
2.3
4.4
3.2
18.8
18.3

-3.5
56.2
-35.9
32.2
35.7
2.6

3.5
0.9
3.1
4.5
4.2
17.8
14.2

-3.9
65.3
-37.3
36.5
40.4
3.4

4.2
1.1
2.7
6.5
4.4
21.3
12.0

0.2
60.4
-34.5
42.5
42.3
3.2

-1.9
-0.6
0.2
-7.0
5.3
20.5
8.4

-6.1
58.5
-33.9
40.1
46.2
2.6

1.1
-0.9
2.6
1.9
6.2
19.5
10.9

-5.3
61.5
-38.3
41.1
46.4
2.3

0.5
-0.6
3.5
-3.3
7.8
16.6
9.4

-6.3
71.6
n.a
41.0
47.3
2.5

-0.8
-1.9
3.4
-2.4
9.8
16.5
8.9

-3.4
76.5
n.a
42.6
46.0
3.2

0.3
-2.0
2.5
0.3
9.9
16.3
9.2

-2.5
78.1
n.a
42.8
45.3
3.2

2.9

-0.3

-5.0

-5.5

-4.7

-1.0

-3.2

-2.6

n.a
n.a
8.5
25.1

n.a
n.a
7.7
25.9

-78.9
-59.1
8.6
26.9

-0.5
n.a
39.7
-0.5
28.4
4.3

-145.7
55.3
7.3
21.2

-116.2
12.0
8.2
21.1

-114.5
10.4
7.3
24.6

-121.9
83.7
7.8
21.6

-0.6
107.8
39.6
6.1
17.2
7.0

-4.2
160.4
38.3
5.5
22.2
5.7

2.2
134.4
39.5
5.3
28.1
8.8

0.6
142.9
39.4
5.6
24.0
8.5

0.8
122.0
39.1
5.4
20.0
7.8

Net financial assets, non-financial corporations
Net financial assets, financial corporations
Gross capital formation
Gross operating surplus
Households and NPISH (%  of GDP)
Net lending (+) or net borrowing (-)
Net financial assets
Gross wages and salaries
Net property income
Current transfers received
Gross saving
Rest of the world (%  of GDP)
Net lending (+) or net borrowing (-)
Net financial assets
Net exports of goods and services
Net primary income from the rest of the world
Net capital transactions 
Tradable sector
Non-tradable sector
  of which: Building and construction sector
Real effective exchange rate (index, 2000=100)
Terms of trade goods and services (index, 2000=100)
Market performance of exports (index, 2000=100)
Notes:
1 The output gap constitutes the gap between the actual and potential gross domestic product at 2000 market prices.
2 The indicator for domestic demand includes stocks.
3  Unemployed persons are all persons who were not employed, had actively sought work and were ready to begin working immediately or within two 
weeks. The labour force is the total number of people employed and unemployed. The unemployment rate covers the age group 15-74.

-1.2
67.7
-0.8
-0.9
0.0
44.7
47.8
9.0
106.7
99.4
110.1

-9.1
-20.2
-5.9
-4.0
0.2
36.6
52.5
10.9
118.8
102.1
86.6

-10.9
-15.8
-5.7
-4.5
0.1
35.2
54.7
9.3
121.9
102.0
88.7

-3.4
20.7
-0.4
-4.4
0.3
41.9
49.4
8.7
108.3
100.6
96.3

-8.6
-54.3
-6.3
-2.7
0.2
35.3
54.8
8.2
118.0
102.4
88.5

-7.1
n.a
-3.1
-3.4
0.2
35.2
55.3
7.3
120.2
100.6
91.9

-7.8
n.a
-1.9
-7.3
-0.1
n.a
n.a
n.a
116.7
99.7
93.7

-1.2
n.a
38.2
1.1
27.6
3.1

n.a
n.a
8.4
25.7

-2.1
n.a
37.4
1.6
27.7
2.2

-7.2
n.a
-1.9
-6.9
0.0
n.a
n.a
n.a
115.6
99.8
93.6

Source :
Commission spring 2012 forecast

28

 
 
 
 
 
 
 
Table II. Comparison of macroeconomic developments and forecasts 

Real GDP (% change)
Private consumption (% change)
Gross fixed capital formation (% change)
Exports of goods and services (% change)
Imports of goods and services (% change)
Contributions to real GDP growth:
- Final domestic demand
- Change in inventories
- Net exports
1

Output gap
Employment (% change)
Unemployment rate (%)
Labour productivity (% change)
HICP inflation (%)
GDP deflator (% change)
Comp. of employees (per head, % change)
Net lending/borrowing vis-à-vis the rest of 
the world (% of GDP)

2011
COM SP
0.5
0.2
-13.8
3.6
-5.0

0.5
0.2
-13.8
3.6
-5.0

2012
COM SP
-0.5
-0.8
-1.3
-2.5
5.5
-1.1
2.0
1.4
1.5
-2.2

2013
COM SP
0.5
1.0
-1.0
3.0
1.5

0.3
0.3
0.8
2.3
2.3

-3.5
0.0
3.9
-0.6

0.5
7.8
-0.1
3.5
2.0
2.0
-7.1

-3.6
0.0
4.1
-0.6

0.6
7.7
-0.1
3.5
2.0
2.0
-10.4

-2.4
0.0
1.6
-1.9

-1.5
9.8
0.7
3.4
2.3
-0.8
-7.8

-0.7
0.0
0.2
-1.8

-0.2
9.5
-0.3
3.0
3.0
1.2
-7.5

0.4
0.0
0.0
-2.0

0.6
9.9
-0.2
2.5
2.0
-0.3
-7.2

-0.2
0.0
0.7
-2.1

0.2
9.5
0.3
2.2
2.2
1.3
-6.5

2014
SP
1.0
1.5
-0.2
3.6
2.8

0.7
0.0
0.3
-2.1

0.3
9.0
0.7
2.0
2.0
1.2
-5.5

2015
SP
1.5
1.7
1.2
4.0
3.3

1.2
0.0
0.3
-1.7

0.3
8.5
1.2
2.0
2.0
1.7
-5.0

Note:
1In percent of potential GDP, with potential GDP growth according to the programme as recalculated by the Commission.

Source :
Commission spring 2012 forecasts (COM); Stability programme (SP).

29

 
 
 
 
 
Table III. Composition of the budgetary adjustment 

(% of GDP)

2011

2012

2013

2014

2015

Change: 
2011-2015

Revenue
of which:
- Taxes on production and imports
- Current taxes on income, wealth, etc.
- Social contributions
- Other (residual)
Expenditure
of which:
- Primary expenditure

of which:

Compensation of employees
Intermediate consumpiton
Social payments
Subsidies
Gross fixed capital formation
Other (residual)
- Interest expenditure
General government balance (GGB)
Primary balance
One-off and other temporary measures
GGB excl. one-offs
Output gap2
Cyclically-adjusted balance2
Structural balance
Change in structural balance
Structural primary balance3
Change in structural primary balance
Expenditure benchmark
Public expenditure growth4 (real)
5,6
Reference rate

3

5,7

Lower reference rate
Deviation in % GDP 
   from applicable reference rate
Two-year average deviation in % GDP 
   from applicable reference rate

COM COM SP
42.5
42.6
41.0

COM SP
42.4
42.8

14.8
11.9
9.5
4.9
47.3

15.1
12.9
9.7
4.9
46.0

15.3
13.0
9.5
4.7
45.1

15.4
13.3
9.9
4.3
45.3

15.4
13.0
9.4
4.6
43.0

SP
42.1

15.4
12.3
10.1
4.3
42.1

SP
42.6

15.3
12.7
10.0
4.6
42.6

44.8

42.8

42.1

42.0

39.8

39.0

39.6

15.8
4.9
15.3
0.5
3.4
4.8
2.5
-6.3
-3.8
-0.5
-5.8

-0.6

-6.0

-5.5

-3.1

15.4
4.8
14.6
0.9
3.1
4.0
3.2
-3.4
-0.2
0.0
-3.4

-1.9

-2.7

-2.7
2.9

0.5
3.6

15.3
5.0
15.2
0.4
3.1
3.1
3.0
-2.6
0.4
0.1
-2.7

-1.8

-1.9

-2.0
3.5

1.0
4.0

15.4
4.3
14.7
0.8
3.1
3.8
3.2
-2.5
0.7
0.0
-2.5

-2.0

-1.7

-1.7
1.0

1.6
1.0

14.6
4.9
15.5
0.3
2.7
1.8
3.2
-0.6
2.6
0.0
-0.6

-2.1

0.2

0.2
2.2

3.4
2.4

14.3
4.9
15.7
0.3
2.7
1.1
3.1
0.0
3.1
0.0
0.0

-2.1

0.8

0.8
0.6

3.9
0.5

-7.92

1.51

0.33
-3.74

-9.14

1.51

0.33
-4.76

-2.18

1.51

0.33
-1.08

-5.18

1.51

0.33
-2.30

-3.28

1.51

0.33
-1.88

13.9
4.8
15.8
0.3
2.7
2.1
3.0
0.0
3.0
0.0
0.0

-1.7

0.6

0.6
-0.2

3.6
-0.3

2.58

1.51

0.33
0.41

n.a.

n.a.

-2.41

-3.53

-2.09

-0.74

SP
1.6

0.5
0.8
0.5
-0.3
-4.7

-5.2

-1.9
-0.1
0.5
-0.2
-0.7
-2.7
0.5
6.3
6.8
0.5
5.8

-1.0

6.7

6.2

6.7

-

-

-
-

-

Notes:
1On a no-policy-change basis.
2Output gap (in % of potential GDP) and cyclically-adjusted balance according to the programme as recalculated by the Commission 
on the basis of the information in the programme.
3Structural (primary) balance = cyclically-adjusted (primary) balance excluding one-off and other temporary measures.

4M odified expenditure aggregate used for the expenditure benchmark, growth rates net of non-discretionary changes in 
unemployment benefit and of discretionary measures.

5The reference rates applicable to 2014 onwards will be available from mid-2012. For illustrative purposes, the current reference 
rates have also been applied to the years 2014 onwards.
6The (standard) reference rate applies starting in the year following which the country has reached its M TO.
7The lower reference rate applies as long as the country is adjusting towards its M TO, including the year in which it reaches the 

Source :
Stability programme (SP); Commission spring 2012 forecasts (COM); Commission calculations.

30

 
 
 
 
 
Table IV. Debt dynamics 

(% of GDP)

average 
2006-10

Gross debt ratio1
Change in the ratio
Contributions 2 :

1. Primary balance
2. “S now-ball” effect

Of which:
Interest expenditure
Growth effect
Inflation effect

3. S tock-flow adjustment

Of which:
Cash/accruals diff.
Acc. financial assets
Privatisation

Val. effect & residual

(% of GDP)

Gap to the debt benchmark5,6
S tructural adjustment7
To be compared to:
Required adjustment8

58.5
-1.6

-1.2
-0.3

2.8
-1.5
-1.7
0.0

-

-

-

2011

71.6
10.2

3.8
1.0

2.5
-0.3
-1.2
5.3

2011

-

-

-

2012

2013

COM

76.5
4.9

0.2
2.2

3.2
0.6
-1.6
2.5

2012

COM/SP3
-

-

-

CP

72.1
0.5

-0.4
1.2

3.0
0.3
-2.1
-0.4

0.0
0.5
0.0
0.0

SP4
-

-

-

COM

78.1
1.5

-0.7
1.5

3.2
-0.3
-1.5
0.8

2013

COM/SP3
-

2.2

0.0

CP

70.2
-1.9

-2.6
1.3

3.2
-0.4
-1.5
-0.6

0.0
0.5
0.0
0.0

SP4
-

2.2

0.1

2014
CP

67.8
-2.4

-3.1
1.1

3.1
-0.7
-1.3
-0.4

0.0
0.5
0.0
0.0

2014
SP4
-

0.6

0.0

2015
CP

65.4
-2.4

-3.0
0.7

3.0
-1.0
-1.3
-0.1

0.0
0.5
0.0
0.0

2015
SP4
-

-0.2

0.0

Notes:
1End of period.
2The snow-ball effect captures the impact of interest expenditure on accumulated debt, as well as the impact of real GDP growth and inflation on the 
3Assessment of the consolidation path set in the SP assuming growth follows the COM  forecasts.
4Assessment of the consolidation path set in the SP assuming growth follows the SP projections.
5 Not relevant during EDP that were ongoing in November 2011 and in the three years following the correction of the excessive deficit.
6Shows the difference between the debt-to-GDP ratio and the debt benchmark. If positive, projected gross debt-to-GDP ratio does not comply with the 
debt reduction benchmark.
7Applicable only during the transition period of three years from the correction of the excessive deficit for EDP that were ongoing in November 2011.
8Defines the remaining annual structural adjustment over the transition period which ensures that - if followed – M ember State will comply with the 
debt reduction benchmark at the end of the transition period, assuming that COM  (SP) budgetary projections are achieved.
Source :
Stability programme (SP); Commission services’ spring 2012 forecasts (COM); Commission services’ calculations.

31

 
 
 
 
 
Table V. Long term sustainability indicators 

CY

EU27

No-policy 
change 
scenario 

Stability 
programme 
scenario

No-policy 
change 
scenario 

SCP's 
scenario

S2
of which:

Initial budgetary position (IBP)
Long-term change in the primary balance (LTC)
 of which:

pensions
health care and long-term care
other

S1 (required adjustment)*

5.5

-0.2
5.7

5.8
0.3
-0.5
2.3

3.3

-2.2
5.5

5.5
0.3
-0.3
-1.6

2.9

0.7
2.3

1.1
1.5
-0.3
2.2

Debt,  % of GDP (2011)
Age-related expenditure, % of GDP (2011)

71.6
17.8

82.8
25.8

0.7

-1.6
2.4

1.2
1.5
-0.3
-0.1

Source:  Commission, 2012 Stability programme. 
Note:  The ‘no policy change’ scenario depicts the sustainability gap under the assumption that the budgetary 
position evolves according to the spring 2012 forecast until 2013. The ‘stability programme’ scenario depicts the 
sustainability gap under the assumption that the budgetary plans in the programme are fully implemented.     

*  The required adjustment of the primary balance until 2020 to reach a public debt of 60% of GDP by 2030.
Graph – Medium-term debt projections 

Source: Commission, 2012 stability and convergence programmes. 

32

 
 
 
 
 
Table VI - Taxation indicators — Cyprus 

Total tax revenues (incl. actual compulsory social contributions, % of GDP)

2001

30.7

2005

35.0

2007

40.1

2008

38.6

2009

35.3

2010

35.7

1
Breakdown by economic function (% of GDP)
     Consumption

              of which:

              - VAT

             - excise duties on tobacco and alcohol

             - energy

             - other (residual)

     Labour employed

     Labour non-employed

     Capital and business income

     Stocks of capital/wealth

     p.m.  Environmental taxes

2

3
VAT efficiency
     Actual VAT revenues as % of theoretical revenues at standard rate

11.4

14.6

15.2

15.2

13.5

13.5

5.7

0.8

1.0

3.9

9.8

0.2

7.4

1.8

3.0

9.1

1.4

1.9

2.2

11.3

0.1

6.4

2.7

3.5

10.2

1.3

1.8

1.9

10.8

0.1

10.6

3.4

3.4

10.6

1.3

1.6

1.8

11.0

0.1

9.7

2.6

3.2

9.2

1.3

1.6

1.4

9.2

1.3

1.9

1.1

12.2

12.6

0.1

7.8

1.7

2.9

0.1

7.6

1.9

2.9

75.8

82.7

92.1

91.9

79.9

79.2

Note: 
1 T ax revenues are broken down by economic function, i.e. according to whether taxes are raised on consumption, labour or capital. See European Commission (2012), 

T axation trends in the European Union, for a more detailed explanation.

2 T his category comprises taxes on energy, transport and pollution and resources included in taxes on consumption and capital.

3 T he VAT  efficiency is measured via the VAT  revenue ratio. T he VAT  revenue ratio is defined as the ratio between the actual VAT  revenue collected and the revenue 

that would theoretically be raised if VAT  was applied at the standard rate to all final consumption. A low ratio can indicate a reduction of the tax base due to large 

exemptions or the application of reduced rates to a wide range of goods and services ('policy gap') or a failure to collect all tax due to e.g. fraud ('collection gap'). See 

European Commission (2011), T ax reforms in EU Member States, European Economy 5/2011, for a more detailed explanation.

Source: Commission
Table VII Selected macro-financial stability indicators 

Total assets of the banking sector (% of GDP)
Share of assets of the five largest banks (% of total assets)
Foreign ownership of banking system (% of total assets)
Financial soundness indicators:
              - non-performing loans (% of total loans) 1)
              - capital adequacy ratio (%)  1) 2)
              - return on equity (%) 1), 3)
Bank loans to the private sector (year-on-year % change)
Lending for house purchase (year-on-year % change)
Loan to deposit ratio
CB liquidity as % of liabilities
Banks' exposure to countries receiving official financial assistance  (% of GDP)4)
Private debt (% of GDP)
Gross external debt (% of GDP)
            - Public
            - Private
Long term interest rates spread versus Bund (basis points)*
Credit default swap spreads for sovereign securities (5-year)*
Notes: 
1) Latest available June 2011. 
2) The capital adequacy ratio is defined as total capital divided by risk weighted assets.   
3) Net income to equity ratio.

2007

2008

2009

2010

2011

584.2
64.9
0.0

...
...
...
22.5
27.4
100.6
0.0
…
213.3

…
…
25.8
…

688.3
63.8
38.1

3.6
11.0
14.5
28.4
22.5
109.4
4.3
…
261.6

…
…
61.6
…

827.1
64.9
37.0

4.5
12.1
14.0
9.9
11.2
114.0
5.9
…
287.8

…
…
137.8
…

778.8
65.8
…

5.6
12.5
11.0
7.9
14.3
103.9
4.5
…
296.7

…
…
185.7
…

747.4
…
…

6.7
13.3
-2.5
8.1
5.1
112.7
4.6
…
308.7

…
…
317.9
…

* M easured in basis points.
Source :
Bank for International Settlements and Eurostat (exposure to macro-financially vulnerable countries), IMF (financial soundness indicators), 
Commission (long-term interest rates), World Bank (gross external debt) and ECB (all other indicators).

33

 
 
 
Table VIII Labour market and social indicators 

Labour market indicators
Employment rate 
(% of population aged 20-64)
Employment growth 
(% change from previous year)
Employment rate of women 
(% of female population aged 20-64)
Employment rate of men 
(% of male population aged 20-64)
Employment rate of older workers 
(% of population aged 55-64)
Part-time employment 
(% of total employment)
Part-time employment of women  
(% of women employment)
Part-time employment of men  
(% of men employment)
Fixed term employment 
(% of employees with a fixed term contract)
Unemployment rate1 (% of labour force)

Long-term unemployment

2

  (% of labour force)

Youth unemployment rate 
(% of youth labour force aged 15-24)

2006

2007

2008

2009

2010

2011

75.8

76.8

76.5

75.7

75.4

73.8

2.7

5.8

1.3

-0.4

1.0

-2.5

65.9

67.7

68.2

68.1

68.5

67.3

86.2

86.4

85.2

83.5

82.5

80.4

53.6

55.9

54.8

56.0

56.8

55.2

7.9

7.5

8.0

8.7

9.6

10.3

12.2

11.0

11.6

12.7

12.9

13.3

4.4

4.6

5.0

5.4

6.8

7.8

13.1

13.2

13.9

13.4

13.5

13.6

4.6

0.9

3.9

0.7

10.0

10.2

5.3

0.6

6.2

1.3

7.8

1.6

13.8

16.7

22.4

3.7

0.5

9.0

9.7

:

:

:

-0.1

-0.2

0.1

0.0

2.0

0.0

Youth NEET

3

 rate (% of population aged 15-24)

10.7

9.0

10.1

11.7

Early leavers from education and training (% of 
pop. 18-24 with at most lower sec. educ. and not 
in further education or training)
Tertiary educational attainment (% of population 
30-34 having successfully completed tertiary 
education)
Labour productivity per person employed 
(annual % change )
Hours worked per person employed  (annual % 
change)
Labour productivity per hour worked (annual % 
change; constant prices)
Compensation per employee (annual % change; 
constant prices)
Nominal unit labour cost growth (annual % 
change)

14.9

12.5

13.7

11.7

12.6

44.6

47.0

48.0

47.5

47.9

2.3

0.9

1.4

1.8

1.4

-0.5

-0.5

2.3

1.9

-0.1

-1.3

-1.3

0.9

1.2

1.8

-1.3

-0.3

-1.0

5.2

6.7

6.6

1.1

0.0

1.1

-1.9

-1.3

-2.9

Real unit labour cost growth (annual % change)

-2.4

-3.0

-2.7

Notes:

1 According to ILO definition, age group 15-74)
2 Share of persons in the labour force who have been unemployed for at least 12 months.
3 NEET are persons that are neither in employment nor in any education or training.

Sources: 
Commission (EU Labour Force Survey and European National Accounts) 

34

 
 
 
 
 
 
 
Table VIII Labour market and social indicators (continued) 

Expenditure on social protection 
benefits (% of GDP)
Sickness/Health care
Invalidity
Old age and survivors
Family/Children
Unemployment
Housing and Social exclusion n.e.c.
Total
of which:  Means tested benefits
Social inclusion indicators
Risk-of-poverty or exclusion1 (% of total 
population)
Risk-of-poverty or exclusion of children (% of 
people aged 0-17)
Risk-of-poverty or exclusion of elderly (% of 
people aged 65+)
At-risk-of-poverty rate2 (% of total population)
Value of relative poverty threshold (single 
household per year) - in PPS
Severe material deprivation3  (% of total 
population)
Share of people living in low work intensity 
households 4 (% of people aged 0-59 not 
student)
In-work at-risk-of poverty rate (% of persons 
employed)

Notes:

2005

2006

2007

2008

2009

4.54
0.68
7.18
2.12
1.09
0.41
18.4
1.53

4.64
0.71
7.20
1.94
1.22
0.49
18.5
1.61

4.51
0.66
7.17
1.93
0.91
0.63
18.2
1.83

4.47
0.67
7.08
2.07
0.86
0.82
18.5
2.22

5.07
0.75
7.92
2.19
0.95
1.11
20.9
2.75

2006

2007

2008

2009

2010

25.4

25.2

22.2

22.2

24.0

21.3

20.8

18.8

17.6

21.4

55.6

15.6

55.6

15.5

50.7

16.2

50.1

16.2

47.2

17.0

9817

10951

11451

11781

11840

12.6

13.3

8.2

7.9

9.1

3.8

7.2

3.7

6.3

4.1

6.4

4.0

7.0

4.0

7.7

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 (SM D) and/or living in households with zero or very low 
work intensity (LWI).

2 At-risk-of poverty rate: share of people with an equivalised disposable income below 60% of the national 
equivalised median income. 

3 Share of people who experience at least 4 out of 9 deprivations: people cannot afford to i) pay their rent or 
utility bills, ii) keep their home adequately warm, iii) face unexpected 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.

4 People living in households with very low work intensity: share of people aged 0-59 living in households 
where the adults work less than 20% of their total work-time potential during the previous 12 months.

Sources: 
For expenditure on social protection benefits ESSPROS; for social inclusion EU-SILC.

35

 
 
 
 
Table IX Product markets performance and policy indicators 

Performance indicators

Labour productivity1 total economy (annual 
growth in %)
Labour productivity1 in manufacturing (annual 
growth in %)
Labour productivity1 in electricity, gas, water 
(annual growth in %)
Labour productivity1 in the construction sector 
(annual growth in %)
Patent intensity in manufacturing2 (patents of the 
EPO divided by gross value added of the sector)

Policy indicators

Enforcing contracts3 (days)
Time to start a business 3 (days)
R&D expenditure (% of GDP)
Tertiary educational attainment 
(% of 30-34 years old population)
Total public expenditure on education 
(% of GDP)

Product market regulation4, Overall
(Index; 0=not regulated; 6=most regulated)
Product market regulation4, Retail
(Index; 0=not regulated; 6=most regulated)
Product market regulation4, Network Industries 5
(Index; 0=not regulated; 6=most regulated)

2002-
2006

0.2

-1.5

2007

2008

2009

2010

2011

1.9

1.3

0.8

1.9

-1.2

1.4

1.2

-5.0

-2.4

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

-0.2

0.8

2002-
2006

n.a.

n.a.
0.4

2.6

0.8

-0.5

-1.6

-3.4

n.a.

0.8

n.a.

n.a.

n.a.

2007

2008

2009

2010

2011

n.a.

n.a.
0.4

735

8
0.4

735

8
0.5

735

8
0.5

40.8

46.2

47.1

44.7

45.1

735

8
n.a.

n.a.

6.9

6.9

7.4

n.a.

n.a.

n.a.

2005

2006

2008

2009

2010

2011

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

Notes:
1Labour productivity is defined as gross value added (in constant prices) divided by the number of persons employed.
2 Patent data refer to applications  to the European Patent Office (EPO). They are counted according to the year in which 
they were filed at the EPO. They are broken down according to the inventor's place of residence, using fractional counting if 
multiple inventors or IPC classes are provided to avoid double counting. 
3 The methodologies, including the assumptions, for this indicator are presented in detail on the website 
http://www.doingbusiness.org/methodology. 
4 The methodologies for the product market regulation indicators are presented in detail on the website 
http://www.oecd.org/document/1/0,3746,en_2649_34323_2367297_1_1_1_1,00.html. The latest available product market 
regulation indicators refer to 2003 and 2008, except for Network Industries.

5 Aggregate ET CR.

*figure for 2007.

Source :

Commission, World Bank - Doing Business  (for enforcing contracts and time to start a business) and OECD (for the 
product market regulation indicators). 

36

 
 
 
 
 
 
Table X – Indicators on green growth 

Cyprus

Green Growth performance

Macroeconomic
Energy intensity 
Carbon intensity 
Resource intensity (reciprocal of resource productivity)
Waste intensity 
Energy balance of trade 
Energy weight in HICP
Difference between change energy price and inflation 
Environmental taxes over labour taxes
Environmental taxes over total taxes

Sectoral 

Industry energy intensity 
Share of energy-intensive industries in the economy
Electricity prices for medium-sized industrial users 
Public R&D for energy 
Public R&D for the environment
Recycling rate of municipal waste
Share of GHG emissions covered by ETS
Transport energy intensity
Transport carbon intensity
Change in the ratio of passenger transport and GDP

kgoe / €
kg / €
kg / €
kg / €
% GDP
%
%
ratio
ratio

kgoe / € 
% GDP
€ / kWh
% GDP
% GDP
ratio
%
kgoe / €
kg / €
%

2001-
2005

0.23
0.85
1.59
n.a.
-3.6%
8
5.4
32.7%
10.4%

0.33
5.8
0.09
n.a.
n.a.
10.4%
n.a.
1.03
1.75
n.a.

Security of energy supply
Energy import dependency
Diversification of oil import sources 
Diversification of energy mix
Share of renewable energy in energy mix

%
HHI
HHI
%

97.8% 102.5%

n.a.
0.93
2.0%

0.00
0.93
2.1%

2006

2007

2008

2009

2010

0.21
0.80
1.54
0.10
-5.5%
11
9.6
29.8%
9.0%

0.21
5.8
0.11
0.00%
0.00%
12.6%
54.2%
0.96
2.08
n.a.

0.21
0.77
1.60
0.12
-5.6%
11
-1.5
31.1%
8.2%

0.20
5.8
0.10
0.00%
0.00%
12.8%
54.8%
0.90
2.02
n.a.

95.9%
0.00
0.92
2.6%

0.21
0.77
2.03
0.14
-7.1%
12
12.5
28.4%
8.0%

0.21
5.3
0.14
0.00%
0.01%
12.8%
54.8%
0.87
1.96
n.a.

97.6%
0.00
0.91
3.2%

0.21
0.72
1.95
n.a.
-5.0%
12
-16.5
23.6%
8.2%

0.19
5.2
0.12
0.00%
0.01%
12.9%
57.0%
0.90
2.01
n.a.

97.3%
0.00
0.92
3.5%

0.20
n.a.
n.a.
n.a.
-6.6%
11
18.9
n.a.
n.a.

n.a.

n.a.
0.15
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

n.a.
n.a.
n.a.
n.a.

Country-specific notes: 
The year 2011 is not included in the table due to lack of data.
General explanation of the table items:
Source: Eurostat unless indicated otherwise; ECFIN explanations given below
All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2000 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 M aterial 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  
Energy weight in HICP: the share of the "energy" items in the consumption basket used in the construction of the HICP
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual %-change)
Environmental taxes over labour or total taxes: from DG TAXUD's database "Taxation trends in the European Union"
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in EUR) 
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP
Recycling rate of municipal waste: ratio of municipal waste recycled over total municipal waste
Public R&D for energy or for the environment: government spending on R&D (GBAORD) for these categories as % of GDP
Share of GHG emissions covered by ETS: based on greenhouse gas emissions as reported by M ember States to EEA (excl LULUCF)
Transport energy intensity: final energy consumption of transport (in kgoe) divided by gross value added of industry (in EUR) 
Transport carbon intensity:  greenhouse gas emissions in transport divided by gross value added of the transport sector
Passenger transport growth : measured in %-change in passenger kilometres
Energy import dependency: net energy imports divided by gross inland energy consumption incl. of international bunkers

Diversification of oil import sources: Herfindahl index (HHI), calculated as the sum of the squared market shares of countries of origin 

Diversification of the energy mix: Herfindahl Index over natural gas, total petrol products, nuclear heat, renewable energies and solid fuels

Share of renewable energy in energy mix: percentage-share in  gross inland energy consumption, expressed in tonne oil equivalents

37