Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Cyprus and delivering a Council opinion on the 2016 stability programme of Cyprus
Date: 2016-05-18
Institutions: European Commission, Secretariat-General
Subjects: Cyprus, budget deficit, credit policy, economic policy, economic reform, fight against unemployment, investment, public administration, seizure of goods, stability programme

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 18.5.2016  COM(2016) 333 final   Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Cyprus  and delivering a Council opinion on the 2016 stability programme of Cyprus  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2016 national reform programme of Cyprus 

and delivering a Council opinion on the 2016 stability programme of Cyprus 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 121(2) and 148(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 5(2) thereof, 

Having  regard  to  Regulation  (EU)  No  1176/2011  of  the  European  Parliament  and  of  the 
Council  of  16  November  2011  on  the  prevention  and  correction  of  macroeconomic 
imbalances2, and in particular Article 6(1) thereof, 
Having regard to the recommendation of the European Commission3, 
Having regard to the resolutions of the European Parliament4, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

Cyprus was subject to a macroeconomic adjustment programme until 31 March 2016 
in  line  with  Article  1(2)  of  Council  Implementing  Decision  2013/463/EU5.  Under 
Article 12 of Regulation (EU) No 472/2013  of the European Parliament  and  of the 
Council6, Cyprus was exempt from the monitoring and assessment of the European 

1 
2 
3 
4 
5 

6 

OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
COM(2016) 333 final. 
P8_TA(2016)0058, P8_TA(2016)0059, and P8_TA(2016)0060. 
Council Implementing Decision 2013/463/EU of 13 September 2013 on approving the macroeconomic 
adjustment programme for Cyprus and repealing Decision 2013/236/EU (OJ L 250, 20.9.2013, p. 40). 
Regulation (EU) No 472/2013 of the European Parliament and of the Council of 21 May 2013 on the 
strengthening of economic and budgetary surveillance of Member States in the euro area experiencing 
or threatened with serious difficulties with respect to their financial stability (OJ L 140, 27.5.2013, p. 
1). 

EN 

2 

   EN 

 
 
 
 
                                                 
(2) 

(3) 

(4) 

(5) 

Semester  for  economic  policy  coordination  for  the  duration  of  the  programme. 
Having  exited  the  programme,  Cyprus  is  now  fully  re-integrated into  the  European 
Semester. 
On  26  November  2015,  the  Commission  adopted  the  Annual  Growth  Survey7, 
marking  the  start  of  the  2016  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on  17-18  March  2016.  On  26  November  2015,  on  the  basis  of  Regulation  (EU) 
No 1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report8,  in  which  it 
indicated  that  the  situation  of  Cyprus  will  be  assessed  in  the  context  of  the 
macroeconomic  imbalances  procedure  after  the  conclusion  of  the  macroeconomic 
adjustment  programme.  On  the  same  day,  the  Commission  also  adopted  a 
recommendation for a Council recommendation on the economic policy of the euro 
area9.  This  recommendation  was  endorsed  by  the  European  Council  on  18-19 
February  2016  and  adopted  by  the  Council  on  8  March  2016.  As  a  country  whose 
currency is the euro and in view of the close interlinkages between the economies in 
the  economic  and  monetary  union,  Cyprus  should  ensure  the  full  and  timely 
implementation of the recommendation. 
The  2016  country  report  for  Cyprus10  was  published  on  7  April  2016.  It  assessed 
Cyprus’  economic  and  social  situation  and  challenges  following  its  exit  from  the 
macroeconomic  adjustment  programme  on  31  March  2016,  and  Cyprus'  progress 
towards its national Europe 2020 targets. It also included the in-depth review under 
Article  5  of  Regulation  (EU)  No  1176/2011.  On  7  April  2016,  the  Commission 
presented the results of the in-depth review. 11 The Commission’s analysis leads it to 
conclude  that  Cyprus  is  experiencing  excessive  macroeconomic  imbalances.  In 
particular, it is  essential that it tackles the large stock of imbalances  in the form of 
private,  public  and  external  debt  overhang,  and  the  high  level  of  non-performing 
loans. 

On 28 April 2016, Cyprus submitted its 2016 national reform programme, and on 13 
May 2016, after the deadline, its 2016 stability programme. To take account of their 
interlinkages, the two programmes have been assessed at the same time. 

recommendations  have  been  addressed 

Relevant  country-specific 
the 
programming  of  the  European  Structural  and  Investment  Funds  for  the  2014-2020 
period.  As  foreseen  in  Article  23  of  Regulation  (EU)  No  1303/2013,  where  it  is 
necessary  to  support  the  implementation  of  relevant  Council  recommendations,  the 
Commission may request a Member State to review and propose amendments to its 
Partnership  Agreement  and  relevant  programmes.  The  Commission  has  provided 
further  details  on  how  it  would  make  use  of  this  provision  in  guidelines  on  the 
application  of  the  measures  linking  effectiveness  of  the  European  Structural  and 
Investment Funds to sound economic governance12. 

in 

(6) 

[Following  the  abrogation  of  the  excessive  deficit  procedure,  Cyprus  is  in  the 
preventive arm of the Stability and Growth Pact and subject to the transitional debt 

7 
8 
9 
10 
11 
12 

COM(2015) 690 final. 
COM(2015) 691 final. 
COM(2015) 692 final. 
SWD(2016) 120 final. 
COM(2016) 95 final. 
COM(2014) 494 final. 

EN 

3 

   EN 

 
                                                 
rule.]  Based  on  the  Commission  2016  spring  forecast,  the  medium-term  budgetary 
objective is expected to be met in 2016. However, under unchanged policies, there is 
a risk of some deviation from the medium-term budgetary objective in 2017. Cyprus' 
structural  balance  is  projected  to  deteriorate  more  than  what  is  allowed  under  the 
transitional debt rule. Based on its assessment of the stability programme and taking 
into account the Commission 2016 spring forecast, the Council is of the opinion that 
there  is  a  risk  that  Cyprus  will  not  comply  with  the  provisions  of  the  Stability  and 
Growth  Pact.  Therefore,  further  measures  will  be  needed  to  ensure  compliance  in 
2017. 

important 

implemented 

fiscal-structural 

reforms  under 

Cyprus  has 
its 
macroeconomic adjustment programme. Certain pieces of secondary legislation have 
still to be adopted as regards the procedures for budget preparation, requirements for 
within-year  budgetary  adjustments  and  the  responsibilities  of  commitment  control 
officers.  The  public  sector  is  still  characterised  by  inefficiencies.  In  particular,  the 
public administration is marked by one of the highest wage bills (as a percentage of 
GDP) in the euro area, while efficiency indicators remain average and can be traced 
to  the  lack  of  mobility  and  performance  incentives.  State-provided  utilities 
(telecommunications,  energy)  are  marked  by  high  prices  and  are  still  relatively 
shielded  from  competition.  Under  the  programme,  Cyprus  has  committed  itself  to 
adopting a binding mechanism for limiting wage increases for public employees as a 
means  of  guaranteeing  the  long-term  sustainability  of  public  finances.  While  the 
draft law has been prepared and submitted to the House of Representatives, it is still 
awaiting  adoption.  Under  the  programme,  a  horizontal  reform  of  the  public 
administration, a reform plan of local governments and a new law on the governance 
of state-owned entities have been put forward to improve the efficiency of the public 
sector, but have not yet been adopted. 

Private sector debt in Cyprus remains excessive. While the reformed foreclosure and 
insolvency frameworks constitute an important step towards balancing the rights of 
borrowers and creditors, there is scope for improving their efficiency and extending 
their use.  A number of  deficiencies in  the functioning of these frameworks hamper 
putting  private debt  on a  sustainable downward path and  a faster reduction  of non-
performing loans. This also weighs on the capacity to offer second opportunities to 
entrepreneurs.  A  number  of  deficiencies  also  remain  in  the  functioning  of  private 
sector  debt  restructuring  solutions.  Furthermore,  the  adoption  of  all  necessary 
regulations  and  rules  of  Court  is  important  for  the  effective  implementation  of  the 
insolvency  legislation.  To  be  fully  operational,  the  Insolvency  Service  needs 
appropriate staffing, IT infrastructure and a sufficient number of properly trained and 
licensed  insolvency  practitioners.  Furthermore,  reliable  and  swift  systems  for  the 
issuance  and  transfer  of  title  deeds  are  crucial  to  avoid  backlogs  and  to  provide 
purchasers  with  safeguards,  ensuring  the  proper  determining  of  property  rights  and 
contributing to the return of confidence in the housing market.  

Cyprus also faces critical challenges as regards the functioning of the judicial system. 
Inefficient  court  procedures  and  limited  capacity  lead  to  significant  delays  in 
processing  court  cases,  which  hamper  the  functioning  of  the  foreclosure  and 
insolvency  framework  and  weaken  the  business  environment  in  general.  In  the 
absence  of  a  reform  of  the  civil  procedure  law,  the  processing  and  enforcement  of 
court decisions and the reduction of backlogs remain slow. 

(7) 

(8) 

(9) 

(10) 

Significant progress has been made under the programme to restructure and restore 
confidence in the Cypriot financial system. However, Cyprus still faces the challenge 

EN 

4 

   EN 

 
of  restoring  normal  lending  to  the  economy  and  reducing  non-performing  loans, 
which  stand  at  around  55%  of  total  loans  to  households  and  non-financial 
corporations. High corporate debt makes businesses less competitive and weighs on 
their  capacity  to  invest  and  grow.  Banks'  efforts  to  restructure  the  debt  of  viable 
borrowers have not yet shown tangible results, while the provisioning of their non-
in  contract 
performing  exposure  remains  relatively  moderate.  Weaknesses 
enforcement  and  the  repayment  discipline  weigh  on  the  capacity  to  tackle  strategic 
defaults and to stem the formation of non-performing loans. Banks also have limited 
access  to  information  on  borrowers'  income  and  assets,  despite  the  creation  of  the 
credit registry. 

incentives 

Cyprus  has  come  a  long  way  in  steering  the  economy  out  of  recession,  but 
investment remains low and the growth potential of the economy is subdued.  Under 
the  programme,  Cyprus  adopted  an  action  plan  for  growth,  which  was  aimed  at 
improving  competition,  enhancing 
innovation  and  facilitating 
investment by creating a more transparent and efficient environment for conducting 
business  and  easing  licensing  and  permit  procedures.  The  implementation  of  the 
privatisation  plan  and  the  strengthening  of  national  regulatory  authorities  aim  at 
attracting  productivity-enhancing  foreign  investment.  Start-ups  and  SMEs  currently 
have very limited options for access to finance, amid tight bank credit conditions and 
the lack of alternative sources of financing. Access to finance is also hampered by a 
lack  of  coordination  in  the  management  of  EU  instruments  such  as  the  European 
Structural  and  Investment  Funds,  the  European  Fund  for  Strategic  Investments  and 
EU competitive programmes. 

to 

The  labour  market  started  recovering  in  2015,  but  unemployment  remains  high.  In 
particular,  youth  and  long-term  unemployment  are  a  source  of  concern.  Some 
measures  have  been  taken  in  the  areas  of  active  labour  market  policies  and  public 
employment services. However, the latter still lack the capacity to meet demand, to 
deliver  quality  job-search  assistance  and  counselling  and  to  reach  out  to  the  non-
registered unemployed. Plans to strengthen the administrative capacity of the public 
employment  services,  including  specialisation  of  and  an  increase  in  the  number  of 
counsellors directly serving customers' needs, have been delayed. The effectiveness 
of active labour market policies is limited by the lack of effective monitoring of the 
quality of current programmes.  

Participation of young people in vocational education and training remains low and 
is  characterised  by  a  lack  of  employer  engagement  in  the  education  of  students. 
However,  measures  are  currently  being  implemented,  in  line  with  the  strategy  on 
vocational education and training.  

Cyprus lacks universal healthcare coverage and its healthcare system fails to provide 
adequate and effective access to care. With low public funding for healthcare, unmet 
needs – due to cost as well as out-of-pocket payments – are significantly higher than 
in  other  EU  countries.  There  is  scope  for  improving  efficiency  in  the  use  of 
resources. More autonomy for public hospitals and the creation of a national health 
system  are  among  the  measures  that  have  been  considered  relevant,  but  not  yet 
adopted,  to  improve  the  adequacy  and  cost-effectiveness  of  the  Cypriot  health 
system. 

(11) 

(12) 

(13) 

(14) 

(15) 

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Cyprus’s  economic  policy  and  published  it  in  the  2016 
country report. It has also assessed the stability programme and the national reform 

EN 

5 

   EN 

 
programme  of  Cyprus.  It  has  taken  into  account  not  only  their  relevance  for 
sustainable fiscal and socioeconomic policy in Cyprus but also their compliance with 
EU  rules  and  guidance,  given  the  need  to  strengthen  the  EU’s  overall  economic 
governance  by  providing  EU-level  input  into  future  national  decisions.  The 
recommendations under the European Semester are reflected in recommendations 1 
to 5 below. 

(16) 

(17) 

In the light of this assessment, the Council has examined the stability programme and 
its opinion13 is reflected in particular in recommendation 1 below. 

In  the  light  of  the  Commission’s  in-depth  review  and  this  assessment,  the  Council 
has  examined  the  national  reform  programme  and  the  stability  programme.  Its 
recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in 
recommendations 1 to 5 below, 

HEREBY RECOMMENDS that Cyprus take action in 2016 and 2017 to: 

1. 

2. 

3. 

4. 

5. 

Following the correction of the excessive deficit, respect the medium-term budgetary 
objective  in  2016  and  in  2017.  By  the  end  of  2016,  adopt  a  binding  mechanism 
containing the growth rate of the compensation of public employees. By the end of 
2016,  adopt  the  horizontal  reform  of  the  public  administration  and  the  law  on  the 
governance of state-owned entities, and implement the reform of local governments. 
By the end of 2016, adopt the secondary legislation to complete the new budgetary 
framework. 

By  June  2017,  eliminate  impediments  to  the  full  implementation  of  the  insolvency 
and  foreclosure  frameworks  and  ensure  adequate  resources  for  the  Insolvency 
Service.  Ensure  reliable  and  swift  systems  for  the  issuance  of  title  deeds  and  the 
transfer  of  immovable  property  rights.  Increase  the  efficiency  and  capacity  of  the 
court system. Reform the civil procedure law. 

By the end of 2016, take measures to ensure a decline in non-performing loans and 
accurate  valuations  of  collateral  for  provisioning  purposes.  Increase  the  range  of 
information available for creditors to make the credit registry fully operational.  

Remove  impediments  to  investment,  notably  by  implementing  the  action  plan  for 
growth,  pursuing  the  privatisation  plan  and  strengthening  the  national  regulatory 
authorities. Take measures to increase access to finance for small and medium-sized 
enterprises. 

Enhance  the  capacity  of  the  public  employment  services  and  their  provision  to  the 
long-term  unemployed;  improve  outreach  to  the  non-registered  unemployed.  Adopt 
legislation  for  a  hospital  reform  and  advance  with  the  planned  implementation  of 
universal health care coverage. 

Done at Brussels, 

For the Council 
The President 

13 

Under Article 5(2) of Council Regulation (EC) No 1466/97. 

EN 

6 

   EN