COMMISSION STAFF WORKING DOCUMENT Country Report Cyprus 2017 Including an In-Depth Review and the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2017 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2017) 90 final} {SWD(2017) 67 final to SWD(2017) 93 final}
Date: 2017-02-22
Institutions: European Commission, Secretariat-General
Subjects: Cyprus, EU employment policy, EU investment, economic development, economic recovery, euro area, fiscal policy, macroeconomics, multilateral surveillance, structural adjustment

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 22.2.2017  SWD(2017) 78 final   COMMISSION STAFF WORKING DOCUMENT Country Report Cyprus 2017 Including an In-Depth Review and the prevention and correction of macroeconomic  imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP  2017 European Semester: Assessment of progress on structural reforms,  prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011  {COM(2017) 90 final} {SWD(2017) 67 final to SWD(2017) 93 final}   
 
 
CONTENTS 

Executive summary 

1. 

2. 

3. 

Economic situation and outlook 

Progress with country-specific recommendations 

Summary of the main findings from the MIP in-depth review 

4. 

Reform priorities 

Financial sector 

Labour market, education and social policies 

4.1.  Public finances and taxation 
4.2. 
4.3. 
4.4.  External competitiveness and productivity 
4.5.  Research and development, environment and climate 
4.6.  Public administration 

A.  Overview table 

B.  MIP Scoreboard 

C. 

Standard tables 

References 

LIST OF TABLES 

The MIP scoreboard for Cyprus 

Summary table on 2016 CSR assessment 

Key Economic, Social and Financial indicators - Cyprus 

1.1. 
2.1. 
3.1.  MIP assessment matrix for Cyprus 
4.2.1.  Non-financial corporations- Sectors most affected by NPLs - September 2016 
B.1. 
C.1. 
C.2. 
C.3. 
C.4. 
C.5.  Green growth 

Product market performance and policy indicators 

Labour market and social indicators (continued) 

Labour market and social indicators 

Financial market indicators 

1 

4 

11 

16 

21 

21 
25 
32 
41 
46 
48 

51 

57 

58 

63 

10 
12 
19 
25 
57 
58 
59 
60 
61 
62 

 
 
 
 
LIST OF GRAPHS 

Investment 

Potential output 

Current account balance 

Tier 1 ratio of Cypriot banks 

Interest rates developments 

Unemployment and activity rates 

Profits for the aggregate banking sector 

Outstanding loans to domestic residents 

Gross value added and contribution to growth 

1.1. 
1.2. 
1.3. 
1.4. 
1.5. 
1.6. 
1.7. 
1.8. 
1.9. 
4.1.1.  Public investment and compensation of public employees, EU Member States, 2015 
4.1.2.  Public debt trajectories 
4.2.1.  Non-performing loans, Non-financial private sector 
4.2.2.  Debt restructuring of non-financial private sector 
4.2.3.  Evolution of bank deposits 
4.2.4.  Private sector indebtedness 
4.2.5.  Ratio of loans to gross value added across sectors of economic activity 
4.2.6.  Household debt servicing ratios 
4.2.7.  Bank loans to domestic residents, annual changes 
4.2.8.  Housing sales contracts 
4.3.1.  Wage growth consistent with constant unit labour cost-based real effective exchange 

rate 

4.3.2.  Employment protection legislation indicators (2013) 
4.3.3.  Employment by type, y-o-y changes 
4.3.4.  Proportion of tertiary graduates working in ISCO categories 4-9 
4.3.5.  AROPE rate and its components 
4.3.6. 
In-work poverty rate, groups 
4.4.1.  Savings-investment balance 
4.4.2.  Net international investment position 
4.4.3. 
4.4.4.  Labour productivity, 2006-2015 
4.4.5. 
4.4.6.  Average disposition time in first instance courts (excluding criminal cases) 
4.4.7.  Corporate deaths and births, average of 2008-2014 
4.5.1.  Business enterprise expenditure on R&D (BERD) Intensity 

Travel and tourism competitiveness 

Investment, EU Member States 

LIST OF BOXES 

Contribution of the EU budget to structural change in Cyprus 

2.1. 
4.3.1.  Selected highlights: the Guaranteed Minimum Income 
4.4.1. 

Investment challenges and reforms in Cyprus 

4 
4 
5 
6 
6 
7 
7 
8 
8 
21 
22 
25 
26 
26 
28 
28 
29 
29 
30 

32 
33 
34 
36 
37 
37 
41 
41 
42 
42 
43 
43 
44 
46 

14 
40 
45 

 
 
 
EXECUTIVE SUMMARY 

This  report  assesses  Cyprus'  economy  in  light  of 
the  European  Commission's  Annual  Growth 
Survey  published  on  16 November 2016.  In  the 
survey  the  Commission  calls  on  EU  Member 
States  to  redouble  their  efforts  on  the  three 
elements  of  the  virtuous  triangle  of  economic 
policy  –  boosting  investment,  pursuing  structural 
reforms and ensuring responsible fiscal policies. In 
so  doing,  Member  States  should  put  the  focus  on 
enhancing  social  fairness  in  order  to  deliver  more 
the 
inclusive  growth.  At 
the 
Commission  published 
the  Alert  Mechanism 
Report (AMR) that initiated the sixth round of the 
macroeconomic  imbalance  procedure.  The  in-
depth  review,  which  the  2017  AMR  concluded 
should  be undertaken  for  the  Cypriot economy,  is 
presented in this report. 

same 

time, 

Cyprus’  economic  recovery  continues,  but  the 
social  situation  is  fragile  and  potential  growth 
remains  subdued.  Real  GDP  growth  was  robust 
in 2016 at 2.8 %, driven by the tourism sector and 
domestic demand, and is forecast to slow down to 
2.3 % in 2018. Inflation remained negative in 2016 
and  is  forecast  to  turn  positive  but  remain  low. 
Unemployment  decreased,  but  remains  high,  at 
13.3 %  at  end-2016.  The  economic  crisis  led  to  a 
rise  in  inequality,  risk  of  poverty  and  social 
exclusion, and this still has a bearing on key social 
indicators.  Potential  growth  remains  weak,  due  to 
stagnant productivity growth, subdued investment, 
and  high  level  of  non-performing  loans  which 
constrains credit supply. 

Macroeconomic  imbalances  have  started  to 
unwind but remain considerable. Imbalances are 
still  above  the  indicative  thresholds  provided  by 
the  macroeconomic  imbalance  procedure.  They 
affect  most  sectors  of  the  economy  and  therefore 
make  the  unwinding  process  more  reliant  on 
productivity increases and external demand. Strong 
real  GDP  growth  in  2016  and  valuation  effects 
have  helped  to  reduce  private  and  public  debt 
relative 
the  net 
international 
investment  position.  However, 
modest  nominal  growth  prospects  are  likely  to 
make  deleveraging  more  challenging.  Non-
performing loans  have started to decrease but still 
account  for  about  half  of  total  loans  and  remain 
one of the main challenges for the economy. 

to  GDP  and 

improve 

to 

Overall, Cyprus has made limited progress with 
country-specific 
implementing 

2016 

the 

the 

the 

during 

economic 

recommendations. After three years of ambitious 
reforms 
adjustment 
programme, 2016 saw a loss of reform momentum 
and  the  stalling  of  some  measures,  reflecting  a 
more  complex  political  context.  Limited  progress 
was  made  on 
implementation  of  fiscal 
structural  measures,  despite  the  completion  of  the 
fiscal  framework.  Progress  was  also  limited  with 
regard  to  measures  to  help  decrease  the  high 
private sector debt, notably concerning insolvency, 
foreclosure,  title  deeds  and  judicial  reform.  Some 
progress  was  made  on  the  recommendation  to 
reduce  the  level  of  non-performing  loans,  with 
enhancements  to  the  credit  register  and  measures 
to  accelerate  loan  restructuring.  There  was  also 
some progress with regard to the recommendation 
on  investment  promotion.  The  action  plan  for 
growth  is  gradually  being  implemented  and  some 
measures  to  improve  access  to  finance  were 
announced, yet, privatisation efforts and measures 
to facilitate strategic investments are facing delays. 
Finally,  progress  remained  limited  with  regard  to 
the  recommendation  on  employment  services  and 
healthcare  reform.  Planned  measures  to  increase 
the  capacity  of  public  employment  services  have 
not  been  implemented  yet.  And  impacts  of  active 
remain  unassessed. 
labour  market  policies 
Legislative  proposals  for 
the 
the  reform  of 
healthcare  system  are  still  under  discussion  in  the 
House of Representatives. 

the 

towards 

Regarding progress in reaching the national targets 
under the Europe 2020 strategy, Cyprus has either 
reached  or 
its 
is  making  progress 
objectives for reducing greenhouse gas emissions, 
increasing 
renewable  energy, 
improving energy efficiency, reducing early school 
leaving and increasing higher education attainment 
levels.  However,  progress  on  targets  regarding 
employment  rate,  investment  in  research  and 
development  and  reduction  of  poverty  and  social 
exclusion remains limited. 

share  of 

findings  of 

The  main 
review 
contained  in  this  report,  and  the  related  policy 
challenges, are as follows: 

in-depth 

the 

limited 

  Potential growth remains weak, constrained 
implementation  of  structural 
by 
investment.  Growth-
reforms  to  support 
enhancing  initiatives  are  being  implemented, 
albeit  rather  slowly.  This  includes  measures 
presented  in  the  action  plan  for  growth  to 

1 

 
 
stimulate investment, promote entrepreneurship 
and innovation, and facilitate access to finance. 
The 
latter  remains  challenging  for  many 
companies,  in  particular  small  and  medium 
sized enterprises. Shortcomings in the business 
environment  and  banking  sector  discourage 
productivity-enhancing investment, as reflected 
by  the  low  rate  of  private  investment,  notably 
in  innovation.  Inefficiencies  in  the  justice 
system hamper the swift resolution of civil and 
in  particular  regarding 
commercial  cases, 
contract 
and 
insolvency 
foreclosure.  Administrative  burden  remains 
high,  notably 
licensing  and  export 
procedures. 

enforcement, 

for 

  Private sector indebtedness has only recently 
started  to  decline  and  remains  very  high. 
The  debt  of  non-financial  corporations  and 
households  remains  among  the  highest  in  the 
EU at around 280% of GDP (excluding special-
purpose entities). The balance sheet adjustment 
of  households  and  non-financial  corporations 
accelerated in 2016, mainly as a result of debt 
write-offs and debt-to-asset swaps. Repayment 
of  debt  has  been  modest,  notably  due  to  weak 
contract enforcement and the limited use of the 
insolvency and foreclosure frameworks.  

  The  housing  market 

shows 

signs  of 
stabilisation,  which  might  contribute  to 
deleveraging. Housing investment has recently 
picked up and the decline in housing prices has 
moderated,  pointing  to  some  recovery  in  the 
housing market. However, demand is held back 
by  subdued  income  prospects,  tight  credit 
conditions  and  the  lack  of  an  effective  system 
for  the  issuance  and  transfer  of  title  deeds.  A 
rising  supply  of  properties  for  sale  may  also 
slow  down  the  housing  market  recovery,  as 
debtors  attempt  to  liquidate  collateral  to  repay 
their  loans  and  banks  try  to  sell  properties 
acquired through debt-to-asset swaps. 

  The  functioning  of  the  banking  sector 
though 
remains  hampered  by  a  high, 
declining,  level  of  non-performing  loans. 
Low  asset  quality  weighs  on  profitability  and 
capital  generation,  and  hinders  the  resumption 
of  wholesale  and  interbank  funding.  Better 
and 
insolvency 
tools  were 
to  help  reduce  unviable  debt, 
introduced 

foreclosure 

Executive summary 

is 

tools 

impaired  by 

incentivising  banks  and  debtors  to  agree  on 
restructuring  solutions.  Yet,  the  effectiveness 
of  such 
i.a  weak 
administrative  capacity,  the  cost of  procedures 
and  inefficiencies  in  the  court  system.  In 
addition, re-default rates remain high, pointing 
to  potential  deficiencies  in  loan  restructuring 
solutions.  Risk  provisioning  levels  increased 
but remain below euro area average, while the 
lack of a secondary market for loans and a loan 
securitisation  framework  limit  the  scope  to 
accelerate  deleveraging  and  move  non-
performing loans off banks’ balance sheets. 

  Risk 

to 

in 

the 

tolerance 

financial  sector 
appears  on  the  rise,  while  supervision  of 
insurance  and  pension funds  remains  weak. 
Banks  have  repaid  emergency  liquidity  while 
accumulating  solid  liquidity  buffers.  Negative 
central  bank  deposit  rates  are  adding  to  the 
improve  asset  quality  and 
pressure 
profitability.  Banks  increasingly  try  to  reduce 
non-performing 
through  debt-to-asset 
swaps, and appear to be seeking alternative and 
more profitable investments. This might lead to 
increased direct exposure to the housing market 
and 
the 
to  high-risk  assets.  In  addition, 
governance  and  administrative  capacity  of 
funds  supervision 
insurance  and  pension 
remain weak. 

loans 

reforms 

(e.g.  on 

  Public debt is on a downward trajectory but 
its sustainability remains subject to sizeable 
risks.  A  number  of  recent  fiscal  measures  as 
well  as  delays  in  the  implementation  of  key 
structural 
the  public 
administration  and  public  sector  wages),  are 
expected  to  lead  to  a  deterioration  of  the 
structural  balance  and  risk  reducing  the  scope 
for growth-enhancing public investments. This 
might  make  sustainable  reduction  of  public 
debt  more  challenging  In  addition,  in  the 
medium  to  long-term,  international  initiatives 
in the fight against tax avoidance could have an 
impact  on  Cyprus'  tax  revenues  and  fiscal 
position. 

  The  net  international  investment  position 
remains among the most negative in the EU. 
This  reflects  the  presence  of  special  purpose 
entities  in  Cyprus  and  the  large  proportion  of 
debt that is foreign-owned. Foreign deposits in 

2 

 
 
Executive summary 

the  financial  sector  remain  high,  at  110%  of 
GDP, exposing Cyprus to changes in depositor 
confidence  and  adverse  capital  flows.  The 
reduction  of  the  current-account  deficit  falls 
short  of  what  is  required  to  bring  the  net 
international investment position to sustainable 
levels in the medium term. 

Other key economic issues analysed in this report 
which point to particular challenges facing Cyprus’ 
economy are as follows: 

  Unemployment  is  decreasing  but  remains 
high,  especially  amongst  young  people  and 
long-term  unemployed.  The  reduction  of 
unemployment accelerated in 2016, despite the 
the  public  employment 
weak  capacity  of 
services  and  the  limited  outreach  of  active 
labour  market  policies.  A  reform  of  wage 
indexation  was  agreed  for  state-owned  entities 
linking  wage  growth  to  nominal  economic 
growth.  However,  for  the  private  sector  an 
agreement  among  social  partners 
is  still 
pending. A temporary arrangement was agreed 
with  social  partners  to  avoid  reinstating  of  the 
old system of wage indexation in 2017, which 
would have led to nominal wage cuts. 

  Weak 

labour  productivity  growth  and 
inadequate  skills  development  continue  to 
weight  on  potential  growth.  Low  business 
dynamism  and  skills  mismatches  in  the  labour 
market  limit  job  creation.  While  spending  on 
education  is  above  the  EU  average,  education 
outcomes  are  relatively  poor  and  participation 
in vocational education and training is low. The 
higher  education  attainment  rate  is  very  high, 
but  there  is  a  relatively  low  proportion  of 
graduates in fields most related to innovation. 

reflecting 

  Indicators  on  risk  of  poverty  or  social 
a 
exclusion 
deteriorated, 
worsening  of  social  conditions  during  the 
crisis. Following an almost stable path between 
2012  and  2014,  social  indicators  worsened  in 
2015 due to a rising proportion of people at risk 
of  poverty  and  living  in  low-work  intensity 
households, 
people  with 
disabilities.  This  data  does  not  yet  reflect  the 
recent  recovery  in  the  labour  market.  In-work 
poverty  also  rose,  reflecting  the  worsening  of 
working conditions during the economic crisis. 

particular 

in 

After  a  fast  increase  in  earlier  years,  income 
inequality  has  stabilised  at  a  high  level,  and 
remains  a  source  of  concern.  In  the  coming 
income 
the  guaranteed  minimum 
years, 
introduced in 2014 to make the welfare system 
better  targeted  and  more  coherent  is  expected 
to  improve  the  situation  by  reducing  the 
a 
intensity 
comprehensive assessment will be made. 

for  which 

poverty, 

of 

  Pending  reforms,  the  healthcare  sector 
remains  characterised  by 
inefficiencies, 
constraining access to adequate and effective 
care. Low public funding and inefficient use of 
resources  result  in  inadequate  access  to  care 
and  ineffective  care  delivery  in  the  public 
sector.  The  high  proportion  of  private 
expenditure  in  total  health  expenditure  is 
mostly  directed  towards  unregulated  private 
healthcare  providers.  Measures  for  public 
hospitals  autonomy  and  the  creation  of  a 
national  health  system  aiming  to  improve  the 
adequacy  and  cost-effectiveness  of  healthcare, 
are still awaiting parliamentary adoption. 

compliance  with 

is  weak  and  Cyprus 

  Enforcement  of  environmental  and  climate 
legislations  remains  poor  and  the  related 
green  growth  potential  remains  untapped. 
Despite high environmental investment in some 
environmental 
areas, 
regulations 
lacks 
framework policies to become more energy and 
resource  efficient.  There  are  major  challenges 
as regards waste and water management, while 
policy  instruments  to  reduce  greenhouse  gas 
emissions seem insufficient. The energy sector 
reform  has  made  little  progress,  as  Cyprus 
remains heavily dependent on fossil fuels. 

  Inefficiencies  in  the  public  sector  and  the 
judiciary  remain  a  matter  of  concern. 
Efforts  are  made  to  expand  e-government 
services  and  improve  regulatory  quality,  but 
public  sector  efficiency 
indicators  remain 
average despite a comparatively high wage bill. 
Critical  inefficiencies  in  the  justice  system 
persist  but  have  started  to  be  addressed  by  a 
series  of  reforms.  The  supervision  of  state-
owned  entities  does  not  allow  for  adequate 
assessment  of  risks,  while  efforts  to  attract 
investors  in  public  utilities  are  facing  major 
obstacles. 

3 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

GDP growth 

Real GDP growth accelerated and is expected to 
have reached 2.8 % in 2016. A dynamic tourism 
sector  and  robust  domestic  demand,  supported  by 
low  inflation,  provided  significant  impetus  to 
growth.  Tourism  benefited  from  several  factors:  a 
depreciation  of  the  real  effective  exchange  rate, 
downward  price  adjustments 
to  attract  more 
demand,  measures  to  extend  the  season,  better  air 
connectivity, 
in 
competing destinations.  

geopolitical 

tensions 

and 

Graph 1.1:  Gross value added and contribution to growth 

Source: Eurostat 

nominal 

prices,  while 

Real  private  consumption  expanded  rapidly  in 
2016.  In  2015,  despite  stagnating  labour  income, 
real consumption increased as a result of a drop in 
consumer 
private 
consumption remained rather stable. Meanwhile in 
2016 increasing labour income has played a  more 
important  role  in  supporting  private  consumption. 
Households have also used accumulated wealth to 
finance  consumption,  as  reflected  by  a  negative 
savings rate. Real private consumption is expected 
to have expanded by 3.0 % in 2016. 

transfers  of 

Real  investment  growth  in  2015  and  2016  was 
driven  by  sizeable 
transport 
equipment  to  Cyprus  (see  Graph  1.2).  Besides 
these  transfers,  equipment  investment  appeared  to 
be  subdued.  Survey  indicators  suggest  that  credit 
demand,  although  weak,  still  exceeds  supply. 
Weak  gross  operating  surplus  combined  with  a 

lack  of  credit,  contributed 
investment.   

to  holding  back 

Graph 1.2: 

Investment 

Source: Cystat 

Inflation 

Harmonised  index  of  consumer  prices  (HICP) 
inflation  rates  remain  negative,  averaging  
-1.2 %  in  2016.  The  decline  in  consumer  prices 
reflects  both  the  slack  in  the  economy  and 
declining  energy  prices.  Headline 
inflation, 
excluding unprocessed food and energy, remained 
also  negative  at  -0.7  %  in  2016.  Other  indicators 
for  core  inflation,  such  as  trimmed  mean  and 
weighted  median,  suggest  that  domestic  cost 
pressure 
from  negative 
territory. The decline in consumer prices was also 
observed  in  the  GDP  deflator,  which  is  estimated 
to have fallen by 0.8 % in 2016.  

is  mounting,  albeit 

Profit  margins  have  started  to  narrow.  The 
downward  adjustment  in  consumer  prices  has,  up 
to 2016, been limited compared to the drop in unit 
labour  costs.  This  suggests  that  companies  have 
increased  their  profit  margins  instead  of  passing 
the  entire  decline  in  unit  labour  costs  and  energy 
prices  on  to  consumers.  In  2016  profit  margins 
have  narrowed,  although  they  still  remain  high 
compared to the past.   

Labour market 

Labour  market  conditions  have 
improved, 
although  youth  and  long-term  unemployment 

4 

-12-8-40481209101112131415161718Net exportsInvestmentPriv. consumptionGov. consumptionInventoriesReal GDP (y-o-y%)forecastpps. 051015202530000204060810121416Q3% of GDPEquipmentConstructionTotal 
 
 
 
1. Economic situation and outlook 

exclusion  rate  for  elderly  people  has  decreased 
considerably  (from  27.2 %  in  2014  to  20.8 %  in 
2015),  the  rate  for  children  has  increased  (from 
24.6 %  in  2014  to  29.2 %  in  2015)  together  with 
the number of jobless households. In-work poverty 
has grown due to the precariousness of the labour 
market (see Section 4.3). 

Inequality has been rapidly increasing in recent 
years,  and  remains  a  source  of  concern.  The 
ratio of incomes between the richest 20 % and the 
poorest  20 %  of  the  Cypriot  population  increased 
to  5.4  in  2014  (from  4.4  in  2009),  before  falling 
slightly  in  2015,  back  to  the  EU  average  of  5.2. 
The widening inequality has been caused by faster 
income  growth  among  the  richest.  The  share  of 
total income of the richest 10 % of households rose 
by  15 %  from  2006  to  2015,  while  the  income 
share  of  the  poorest  10 %  over  the  same  period 
slightly declined. The tax-benefit system in Cyprus 
is among the least effective in the EU in reducing 
inequality.(2) and its effectiveness may deteriorate 
even further following the abolition of the property 
tax in 2017..The worsening of working conditions 
involuntary 
during 
temporary  and  part-time  employment  were 
increasing  and  wages  were  adjusted  significantly 
downwards,  seem  to  be  the  main  factors  driving 
increased inequality. Net wealth (3) inequality was 
among  the  highest  in  the  EU  (ECB  2016)..Going 
forward, an expected fall in unemployment and the 
return  to  positive  wage  growth  (see  Section  4.3) 
are  likely  to  reduce  inequality  and  minimise  its 
possible adverse effects on economic growth. 

the  crisis,  especially  as 

External position 

The current account deficit is expected to have 
narrowed to 1.6 % of GDP in 2016 from 3.0 % 
in  2015.  Higher  net  export  of  services  helped 
further to rebalance the current account. This more 
than offset  the  deterioration of  the  goods balance, 
due  to  stronger  imports  as  a  result  of  stronger 
transport 
domestic  demand  and 
income 
equipment.  The  negative 

imports  of 

secondary 

(2)  According 

to  Eurostat  2014  data  and  Commission's 
calculations  in  2014  the  gap  between  the  Gini  coefficient 
before  taxes  and  benefits  ('market  income  inequality')  and 
the Gini after taxes and benefits was only 10, as compared 
to an EU average of 19.7. Note that the Gini coefficient is 
an  indicator  with  value  between  0  and  1.  Lower  values 
indicate higher equality. 

remain  very  high.  Unemployment  fell  from  a 
peak  of  16.5 %  in  2014  to  13.2 %  in  the  third 
quarter  of  2016  (see  Graph  1.3).  This  was  driven 
by  a  gradual  improvement  in  the  job  finding  rate 
and a drop in the job separation rate (1). Youth and 
long-term  unemployment  rates  have  declined  but 
remain  high,  at  29.9 %  and  5.8 %  respectively. 
Long-term unemployment accounts for almost half 
of  the  total  unemployment.  This  continues  to  be 
source  of  concern,  also  because  one  third  of  the 
unemployed have been so for more than two years. 
Even  if  the  recent  fall  in  unemployment  could  be 
partly attributed to a decreasing activity rate, more 
recent  data  show  that  activity  rates  are  also 
recovering. .  

Graph 1.3: 

Unemployment and activity rates 

Source: Eurostat 

Productivity  growth  remains  weak,  forecast  at 
around  0.2 %  in  the  first  three  quarters  of  2016. 
This,  combined  with  increasing  compensation  per 
employee, is expected to lead to an increase of unit 
labour costs as of 2017, after four years of negative 
adjustment (see Section 4.3). 

Social developments 

The  risk  of  poverty  or  social  exclusion  rose  in 
2015  and  is  one  of  the  highest  in  the  EU.  The 
recent  recovery  in  the  labour  market  is  not  yet 
reflected  in  social  indicators,  with  an  increase  of 
the  risk  of  poverty  or  social  exclusion  of  1.5  pps. 
to  28.9  %  in  2015.  While  the  poverty  or  social 

(1)  The  job  separation  rate  measures  the  probability  that 

(3)  Difference between total assets and total liabilities. 

employed people will lose their job. 

5 

02468101214161845505560657075808500Q101Q303Q104Q306Q107Q309Q110Q312Q113Q315Q116Q3% of labour force% of populationUnemployment rate 15-74 (rhs)Activity rate 20-64Employment rate 20-64 
 
                                                           
                                                           
account  is  expected  to  have  lessened  to  around  -
2.5 %  of  GDP.  This  deficit  is  related  to  sizeable 
remittances,  but  also  to  marketing  costs  incurred 
by  Cypriot  investment  firms  trying  to  attract  new 
customers.  The  primary 
income  account  has 
worsened,  estimated  at  -2.3 %  of  GDP  in  2016, 
mainly  due  to  higher  interest  payments  to  non-
residents. 

Graph 1.4:  Current account balance 

Source: Eurostat 

international 

investment  position 
The  net 
(NIIP)  has  remained  negative.  Nevertheless,  it 
improved  from  the  trough  of  -147 %  of  GDP  in 
2014  to  -118 %  of  GDP  in  the  third  quarter  of 
2016. While special purpose entities (4) account for 
more than half of the negative NIIP (Central Bank 
of  Cyprus,  2016),  the  public  and  private  sectors 
had  a  NIIP  of  -79 %  and  -30 %  of  GDP, 
respectively (see Section 4.4.1).  

Real  GDP  growth  is  expected  to  moderate  to 
2.5 % in 2017 and slow down to 2.3 % in 2018, 
due to slowing growth in the tourism sector, fading 
support 
and 
the  negative 
depreciation  of  the  real  effective  exchange  rate. 

inflation 

from 

(4)  Special purpose entities (SPEs) are legal entities that have 
limited  operations.  They  relate  to  corporations,  often 
subsidiaries, that are typically located in other jurisdictions. 
In  Cyprus  there  are  three  major  types:  (i)  financial 
companies,  mainly  financing  and  holding  companies  that 
channel  funds  within  a  worldwide  group  on  behalf  of  a 
non-resident  parent  company,  (ii)  ship-owning  companies 
(non-financial companies), and (iii) factoring and invoicing 
companies  that  are  invoicing  the  sales  of  the  worldwide 
group on behalf of the parent. 

1. Economic situation and outlook 

Moreover,  higher  debt  servicing  and  continued 
loan  restructuring  efforts  by  banks  are  also 
projected  to  weigh  on  domestic  private  demand. 
increase 
Consumer  prices  are  expected 
moderately 
declining 
unemployment.   

alongside 

gradually 

to 

Graph 1.5: 

Potential output 

Source: European Commission 

Potential growth 

term.  Gradually 

Potential  growth  is  expected  to  increase  over 
the  medium 
expanding 
investment  is  forecast  to  support  total  factor 
productivity growth and capital deepening. This in 
turn  should  support  potential  growth.  Despite  the 
higher investment growth rates, the investment-to-
GDP  ratio  is  expected  to  remain  below  its  long 
term average since 1995. Improving labour market 
structural 
conditions 
unemployment  rate  and  hence  support  potential 
growth, which is estimated at 0.5 % in 2018.   

should 

lower 

the 

Financial sector  

loans 

The  financial  sector  is  still  heavily  burdened 
with  non-performing 
(NPLs),  which 
account  for  half  of  the  overall  loan  portfolio. 
Since the end of 2014, the proportions of NPLs in 
corporate  and  household  loan  portfolios  have 
remained at levels of around 57 % of gross loans. 
Efforts for restructuring NPLs have increased since 
the  end of 2015,  as  reflected  by  a  declining  share 
of loans more than 90 days past due. NPLs are to 
large  extent  concentrated  in  construction  and  real 

6 

-40-30-20-100102030080910111213141516Q216Q3% of GDPSecondary incomePrimary incomeServicesGoodsCurrent account balance-8-6-4-202468-4-3-2-10123400020406081012141618%Output gapCapital accumulation contributionTotal labour (hours) contributionTFP contributionPotential GDP growth% of pot. GDP 
 
                                                           
 
estate sectors and banks are increasingly resorting 
to  debt-to-asset  swaps 
restructuring 
transactions. This leads to an accumulation of real 
estate assets in their balance sheets, which in turn 
increases  their  vulnerability  to  property  price 
developments (see Section 4.2.1).  

loan 

in 

The  real  estate  market  shows  signs  of 
stabilisation.  The  Cypriot  housing  market  has 
undergone  a  sizeable  price  correction  since  2008. 
The decline in house prices moderated markedly in 
2016,  after  having  fallen  by  32 %  from  the  2008 
peak.  The  number  of  building  permits  increased, 
albeit  from  low  levels,  and  supported  residential 
investment,  pointing  to  some  stabilisation  in  the 
short  term.  While  it  remains  weak,  housing 
demand  improved  slightly,  as  reflected  by  the 
Bank Lending Survey indicators and the increased 
number  of  property  transactions  (see  Section 
4.2.5). 

Graph 1.6: 

Profits for the aggregate banking sector 

Source: European Commission 

to 

incentives 

improved 

restructure 

Risk  provisioning 
in  2016  but 
remains  below  euro  area  average.  Higher  risk 
provisioning increases the cost of holding NPLs on 
a  bank’s  balance  sheet,  and  therefore  provides 
additional 
loans. 
Following  the  supervisory  review  and  evaluation 
process  in  2015  loan  loss  reserves  increased  from 
about  33 % 
the  non-performing 
exposure.  The  coverage  rate  remains  somewhat 
lower  than  the  average  of  significant  banks  in  the 
euro  area.  This  is  mostly  due  to  banks'  relatively 
optimistic assumptions regarding cost of recovery, 
valuation  of  recovered  collateral  and  time  to 

to  38 %  of 

1. Economic situation and outlook 

recover  collateral,  combined  with  a  high  level  of 
loan collateralisation.  

Banks’ return to profitability in the short term 
is  challenged  by  provisioning  and  impairment 
costs.  Cypriot  banks  recorded  overall  losses  in 
2015, despite a relatively moderate cost-to-income 
ratio. During the first nine months of 2016, Cypriot 
banks  returned  to  profitability  due  to  a  decline  in 
provisioning  and  despite  the  lower  net  operating 
income.  In  2015,  the  Central  Bank  of  Cyprus 
narrowed the maximum authorised spread between 
Euribor  and  deposit  interest  rates.  Lending  rates 
eventually  declined  faster  than  deposit  rates, 
weakening  the  net  interest  margin,  although  the 
latter remains above the euro area average.  

Graph 1.7: 

Interest rates developments 

Source: Central Bank of Cyprus and European Central Bank. 

Overall,  the  banks’  capacity  to  generate  profits 
remains  under  pressure  (see  Graph  1.6)  in  a 
context of very low and negative interest rates and 
further  balance 
sheet  deleveraging.  Higher 
provisions  would  have  a  negative  short-term 
impact on bank profits both directly and indirectly 
via  the  recording  of  accrued  interest  on  the  non-
provisioned  part  of  NPLs.  In  addition,  the  low 
interest  rate  environment’s  impact  on  profitability 
could  lead  to  increasing  risk-taking  by  banks  (see 
Graph 1.7 and Section 4.2).   

The  Common  Equity  Tier  1  (CET1)  capital 
ratio  of  all  banks  stood  at  16 %  in  September 
2016, about 0.7 pp. higher than a year before. The 

7 

-7-6-5-4-3-2-1012310111213141516Q1-16Q3Net profit before provisions and impairmentImpairment on financial assetsProfit/loss for the yearEUR bn-1012345678200820092010201120122013201420152016%Deposits from householdsDeposits from NFCsLoans for house purchaseLoans to NFCsEuribor 1-month 
 
 
1. Economic situation and outlook 

risk-weighted  assets,  as 

higher CET1 ratio came from a further reduction in 
the  aggregate 
the 
deleveraging  process  continued.  Preserving  the 
banking  sector’s  sufficient  capital  levels  is  highly 
dependent on the successful reduction of NPLs and 
the  associated  provisioning  for  losses  on  non-
performing borrowers. 

Graph 1.8: 

Tier 1 ratio of Cypriot banks 

Cyprus  increased  by  about  EUR  3.0  billion  (or 
6.2 %)  as  of  December  2016.  By  June  2016  the 
Greek  subsidiaries  had  already  recovered  the 
liquidity that was shed in 2015, i.e. more than EUR 
600 million. By depositor types, the highest annual 
growth  rates  were  recorded  for  households  from 
the  rest  of  the  world  and  Cypriot  non-financial 
corporations. 

Graph 1.9:  Outstanding loans to domestic residents 

Source: Central Bank of Cyprus 

The  reliance  on  central  bank  funding  was 
reduced  significantly,  with  emergency  liquidity 
fully  repaid.  This  was  mainly  achieved  thanks  to 
the  broadening  of  the  deposit  base  and  the 
successful  downsizing  of  the  bank  assets.  As  of 
November  2016,  total  reliance  on  central  bank 
funding by Cypriot banks stood at EUR 1.2 billion, 
down  from  EUR  4.7  billion  at  end-2015.  The 
Eurosystem  emergency  liquidity  assistance  was 
fully repaid in January 2017.  

Source: European Commission 

Banks’  deleveraging  continues.  The  gross  stock 
of loans to domestic households and non-financial 
corporations  contracted  respectively  by  EUR  0.8 
billion  and  EUR  1.9  billion  year-on-year  as  of 
December  2016  (see  Graph  1.9).  All  sectors 
included, the total stock of loans of Cypriot banks 
decreased  by  11 %  year-on-year  as  of  December 
2016.  This  contraction  results  mainly  from  the 
growing use of debt-to-asset swaps and debt write-
offs  by  banks  in  order  to  restructure  their  non-
performing exposures. This is also due, to a lesser 
extent,  to  the  repayment  of  loans,  while  new 
lending activity is slowly picking up.  

High  private  sector  debt  limits  the  scope  for 
stronger  expansion  of  lending.  In  2015,  debt  of 
non-financial  corporations  stood  at  around  150 % 
of  GDP,  excluding  special  purpose  entities  debt 
(75 % of GDP). Debt of households stood close to 
130 %  of  GDP  (see  Section  4.2.4).  This  restricts 
the  pool  of  borrowers  able  to  take  on  additional 
debt. 

Deposits  increased  in  2016,  on  the  back  of 
in 
strengthened  confidence.  Total  deposits 

8 

02468101214161820101112131415Tier 1 Ratio, %Tier 1 ratio (%)EU (changing composition)Euro Area (changing composition)151617181920212223242526Jan-08Jul-08Jan-09Jul-09Jan-10Jul-10Jan-11Jul-11Jan-12Jul-12Jan-13Jul-13Jan-14Jul-14Jan-15Jul-15Jan-16Jul-16EUR bnNon-financial corporationsHouseholds 
 
 
1. Economic situation and outlook 

Public finances 

The  primary  surplus 
is  expected  to  have 
improved  to  2.5 %  of  GDP  in  2016,  up  from 
1.7 % of GDP in 2015. As of November 2016, the 
general  government  headline 
and  primary 
surpluses  stood  at  0.8 %  and  2.9 %  of  GDP 
respectively. Revenue increased by 0.7 % year-on-
year, driven by the increases recorded for taxes on 
income  and  wealth,  social  security  contributions 
and taxes on production and imports. This is due to 
a  stronger  cyclical  position,  better  labour  market 
conditions and higher imports. On the expenditure 
side,  general  government  expenditure  decreased 
slightly  by  0.3 %  year-on-year.  This  is  due,  in 
particular,  to  lower  intermediate  consumption  and 
compensation of employees, partly offset by rising 
social  transfers,  subsidies  and  gross  fixed  capital 
formation.  

The  primary  surplus  is  forecast  to  deteriorate 
to  2.2 %  for  2017  amid  growing  pressures  for 
fiscal  relaxation.  In  2017,  the  non-compensation 
of  the  abolition  of  the  immovable  property  tax  is 
expected  to  lower  revenues,  while  the  partial 
change 
to  professional  army  will  weigh  on 
expenditure.  

The headline balance should stabilise in 2017 at 
-0.2 % of GDP. In 2018, it is expected to improve 
to a balanced position thanks to economic growth. 
Public  debt  is  expected  to  decrease  both  as  a 
proportion  of  GDP  and  in  absolute  numbers.  It  is 
still expected to fall to 83 % of GDP by 2027. 

9 

 
 
 
 
1. Economic situation and outlook 

Table 1.1: 

Key Economic, Social and Financial indicators - Cyprus 

(1) Sum of portfolio debt instruments, other investment and reserve assets 
(2,3) domestic banking groups and stand-alone banks 
(4) domestic banking groups and stand-alone banks, foreign (EU and non-EU) controlled subsidiaries and foreign (EU and 
non-EU) controlled branches 
(5) These figures include Special Purpose Entities 
(*) Indicates BPM5 and/or ESA95 
Source: European Commission, ECB 

10 

2004-20082009201020112012201320142015201620172018Real GDP (y-o-y)4.3-1.81.30.3-3.2-6.0-1.51.72.82.52.3Private consumption (y-o-y)6.6-6.43.3-0.7-1.3-5.90.71.93.01.71.4Public consumption (y-o-y)4.06.41.22.1-2.3-8.2-7.9-0.60.30.70.8Gross fixed capital formation (y-o-y)9.9-13.6-2.6-12.1-20.5-12.9-17.512.08.37.46.3Exports of goods and services (y-o-y)2.1-4.14.55.6-2.72.14.20.06.54.63.8Imports of goods and services (y-o-y) 7.4-15.08.0-3.0-4.4-4.84.62.15.14.73.6Output gap4.01.10.5-0.4-3.1-7.2-6.3-3.8-1.11.02.6Potential growth (y-o-y)3.42.41.91.2-0.4-1.9-2.4-0.9-0.10.40.7Contribution to GDP growth:Domestic demand (y-o-y)7.0-6.91.7-2.7-5.2-7.4-3.42.63.22.42.1Inventories (y-o-y)0.4-2.51.8-1.61.1-2.22.10.3-1.30.00.0Net exports (y-o-y)-3.17.4-2.14.61.03.7-0.1-1.30.80.10.2Contribution to potential GDP growth:Total Labour (hours) (y-o-y)1.30.90.70.5-0.5-1.7-1.9-0.7-0.10.10.2Capital accumulation (y-o-y)2.11.81.51.00.40.2-0.20.00.10.20.3Total factor productivity (y-o-y)0.0-0.4-0.3-0.3-0.3-0.3-0.3-0.2-0.10.10.1Current account balance (% of GDP), balance of payments.-7.7-11.3-4.1-6.0-4.9-4.3-2.9...Trade balance (% of GDP), balance of payments.-5.4-7.3-2.9-1.51.82.10.3...Terms of trade of goods and services (y-o-y).0.20.2-0.40.9-1.10.5-0.73.3-0.60.0Capital account balance (% of GDP).0.30.30.40.21.40.80.3...Net international investment position (% of GDP).-100.3-111.2-129.9-129.2-138.9-147.3-130.3...Net marketable external debt (% of GDP) (1).-56.5-113.4-109.0-103.2-111.1-113.4-131.6...Gross marketable external debt (% of GDP) (1).620.2594.4557.7536.5485.5464.2470.1...Export performance vs. advanced countries (% change over 5 years).-1.5-9.0-3.5-12.8-7.1-18.0-15.02...Export market share, goods and services (y-o-y).12.9-14.7-4.9-8.92.30.9-7.0...Net FDI flows (% of GDP).-7.512.9-15.210.2-1.7-8.048.4...Savings rate of households (net saving as percentage of net disposable income)2.83.20.80.6-2.4-10.8-16.2-13.7...Private credit flow, consolidated (% of GDP)22.97.913.213.015.5-11.70.24.4...Private sector debt, consolidated (% of GDP)(5)264.8306.1315.5321.7327.4340.9354.2353.8...of which household debt, consolidated (% of GDP)90.3112.5118.3121.3126.5127.5131.0129.2...of which non-financial corporate debt, consolidated (% of GDP)(5)174.5193.6197.2200.4200.9213.4223.2224.6...Corporations, net lending (+) or net borrowing (-) (% of GDP)-10.62.2-1.74.83.67.714.37.14.33.63.0Corporations, gross operating surplus (% of GDP)23.119.920.220.720.322.521.921.720.520.420.6Households, net lending (+) or net borrowing (-) (% of GDP)-6.6-4.3-4.2-2.6-3.3-6.8-9.5-8.8-7.0-6.6-6.5Deflated house price index (y-o-y)5.7-6.6-7.6-4.5-5.4-4.1-1.30.2...Residential investment (% of GDP)11.19.88.16.24.94.14.14.3...GDP deflator (y-o-y)3.70.02.01.91.9-1.0-1.5-1.3-1.01.01.2Harmonised index of consumer prices (HICP, y-o-y)2.50.22.63.53.10.4-0.3-1.5-1.21.21.1Nominal compensation per employee (y-o-y)3.65.70.72.11.5-5.4-3.6-0.50.10.91.5Labour productivity (real, person employed, y-o-y)0.8-1.80.80.30.00.00.40.9...Unit labour costs (ULC, whole economy, y-o-y)2.87.7-0.21.81.5-5.4-4.0-1.50.00.60.9Real unit labour costs (y-o-y)-0.87.6-2.1-0.1-0.4-4.4-2.5-0.21.0-0.4-0.3Real effective exchange rate (ULC, y-o-y)1.24.7-2.81.5-1.7-2.3-4.2-5.70.30.1-0.8Real effective exchange rate (HICP, y-o-y)0.51.0-4.10.1-2.01.1-0.8-6.50.6-1.1.Tax rate for a single person earning the average wage (%)7.9..........Tax rate for a single person earning 50% of the average wage (%)...........Total Financial sector liabilities, non-consolidated (y-o-y)50.17.38.5-8.215.1-15.3-3.82.3...Tier 1 ratio (%) (2).9.310.76.24.510.714.215.5...Return on equity (%) (3).6.86.7-102.8-164.9-145.5-8.6-9.0...Gross non-performing debt (% of total debt instruments and total loans and advances) (4).4.35.611.918.737.135.634.7...Unemployment rate4.45.46.37.911.915.916.115.013.312.011.0Long-term unemployment rate (% of active population)0.90.61.31.63.66.17.76.8...Youth unemployment rate (% of active population in the same age group)10.713.816.622.427.738.936.032.830.1..Activity rate (15-64 year-olds)73.173.073.673.573.573.674.373.9...People at risk of poverty or social exclusion (% total population)24.823.524.624.627.127.827.428.9...Persons living in households with very low work intensity (% of total population aged below 60)4.14.04.94.96.57.99.710.9...General government balance (% of GDP)-0.6-5.4-4.7-5.7-5.8-4.9-8.8-1.10.0-0.20.4Tax-to-GDP ratio (%)32.731.831.931.931.631.533.232.732.731.932.1Structural budget balance (% of GDP)..-5.0-5.3-4.5-0.93.01.70.6-0.7-0.9General government gross debt (% of GDP)56.853.455.865.279.3102.2107.1107.5107.4103.299.6forecast 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

started  with 

Progress  made  on  recommendations  addressed 
to Cyprus in 2016 (5) has to be seen as part of a 
longer  process  which 
the 
introduction of the European Semester in 2011. 
In  March  2016,  Cyprus  completed  a  three-year 
EU-IMF 
programme 
whereby it adopted a wide range of financial, fiscal 
and  structural  reforms.  The  programme  allowed 
Cyprus to make progress in implementing most of 
the recommendations made in 2011 and 2012.  

adjustment 

economic 

The  public  financial  management  and  budgetary 
framework was strengthened, with the adoption of 
the 
and  Budget 
Framework Law.  

Financial  Responsibility 

sector 

financial 

regulations  underwent 
The 
significant 
the 
notably 
harmonisation and integration of the supervision of 
banks and cooperative credit institutions.  

reforms, 

through 

The recommendation related to the services sector 
was  successfully  implemented,  as  most  sector-
specific  obstacles  to  the  establishment  and  free 
provision of services have been removed. 

Recommendations  related  to  the  pension  system 
and  social  benefits  were  addressed  through  the 
reform  of  the  pension  system,  which  ensured  its 
long term sustainability, and the introduction of the 
guaranteed minimum income (GMI) which allows 
for more efficient and targeted social benefits. 

implemented 

Recommendations  related  to  the  labour  market 
reforming  wage 
were 
indexation,  measures 
youth 
promote 
employment  and  improvements  to  the  vocational 
education system.  

through 
to 

Measures  were  introduced  to  promote  renewable 
energy source and achieve a diversification of the 
energy  mix  as  recommended  in  2011.  However, 
Cyprus is still heavily dependent on fossil fuels for 
energy production.  

Finally,  the  past  recommendation  regarding  the 
reform  of  the  national  healthcare  system  has  not 
yet  been  implemented,  with  key  reform  bills  still 

(5)  For  the  assessment  of  other  reforms  implemented  in  the 

past, see Section 4 in particular 

awaiting 
Representatives.  

adoption 

by 

the  House 

of 

the 

Overall,  Cyprus  has  made  limited (6)  progress 
in  the  implementation  of  the  2016  country-
specific  recommendations.  Limited  progress  was 
made  on  the  implementation  of  fiscal  structural 
fiscal 
measures,  despite  completion  of 
framework.  Progress  was  also  limited  with  regard 
to  measures  to  help  decrease  the  high  private 
sector  debt,  notably  concerning 
insolvency, 
foreclosure,  title  deeds  and  judicial  reform.  Some 
progress  was  made  on  the  recommendation  to 
reduce  the  level  of  non-performing  loans,  with 
enhancements  to  the  credit  register  and  measures 
to  accelerate  loan  restructuring.  There  was  also 
some progress with regard to the recommendation 
to  promote  investments.  The  action  plan  for 
growth  is  gradually  being  implemented  although 
with delays and some measures were announced to 
improve access to finance, but privatisation efforts 
and measures to facilitate strategic investments are 
facing  delays.  Finally,  progress  remained  limited 
with regard to the recommendation on employment 
services  and  healthcare  reform.  Planned  measures 
to  increase  the  capacity  of  public  employment 
services have not been implemented yet, while the 
impact  of  active  labour  market  policies  has  not 
been  assessed.  As  mentioned  above,  legislative 
proposals  for  the  reform  of  the  healthcare  system 
are  still  awaiting  adoption  by  the  House  of 
Representatives. 

is  benefiting  from 

Cyprus 
technical  support 
provided  by  the  Commission  to  help  implement 
structural reforms in various areas including public 
administration and justice, growth and the business 
environment, 
public 
financial  management,  taxation,  and  the  financial 
sector. 

healthcare, 

education, 

(6)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  subpart  of  a  country-
specific recommendation is presented in the overview table 
in  the  Annex.  This  overall assessment  of recommendation 
1  does  not  include  an  assessment  of  compliance  with  the 
Stability and Growth Pact. Source: European Commission. 

11 

 
 
                                                           
 
                                                           
2. Progress with country-specific recommendations 

Table 2.1: 

Summary table on 2016 CSR assessment 

(Continued on the next page) 

12 

2016 CSRs to Cyprus Overall assessment of progress with the 2016 CSRs: Limited Progress1 CSR1: 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.(MIP Relevant) Limited progress*:   Substantial progress on the secondary legislation completing the new budgetary framework.  Limited progress regarding the binding mechanism containing the growth rate of the compensation of public employees.   No progress regarding the horizontal reform of the public administration.  No progress regarding the law on the governance of state-owned entities.  No progress regarding the reform of local governments. CSR2: 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. (MIP Relevant) Limited progress:  Some progress in eliminating impediments to the full implementation of the insolvency and foreclosure frameworks and in ensuring adequate resources for the Insolvency Service.   Limited progress on ensuring reliable and swift systems for the issuance of title deeds and the transfer of immovable property rights.  Limited progress on increasing the efficiency and capacity of the court system and reforming the civil procedure law. CSR3: 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. (MIP Relevant) Some progress:  Some progress on taking measures to ensure a decline in non-performing loans and accurate valuations of collateral for provisioning purposes.  Some progress in increasing the range of information available for creditors through the credit registry.  CSR4: 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. (MIP Relevant) Some progress:  Some progress in implementing the action plan for growth.   Limited progress in pursuing the privatisation plan.   Some progress in strengthening national regulatory authorities.  Limited progress in increasing access to finance. CSR5: 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. (MIP Relevant) Limited progress:  Limited progress in enhancing the capacity of the public employment services and their provision to the long-term unemployed; and some progress in improving outreach to the non-registered unemployed.                                                               
 
 
 
 
2. Progress with country-specific recommendations 

Table (continued) 

Source: European Commission 

13 

CSR5: 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. (MIP Relevant) Limited progress:  Limited progress in enhancing the capacity of the public employment services and their provision to the long-term unemployed; and some progress in improving outreach to the non-registered unemployed.   Limited progress in adopting legislation for a hospital reform and advancing with the planned implementation of universal health care coverage.  * This overall assessment of CSR1 does not include an assessment of compliance with the Stability and growth Pact   
 
 
 
 
2. Progress with country-specific recommendations 

(Continued on the next page) 

14 

Box 2.1: Contribution of the EU budget to structural change in CyprusThe total allocation of the European Structural and Investment Funds (ESIF) in Cyprus amounts to EUR 874 million under the current financial framework 2014-2020. This is equivalent to around 0.9 % of GDP annually (at 2014-2017) and 24 % of national public investment1. By 31 December 2016, an estimated EUR 49 million, which represent about 6 % of the total allocation for ESI Funds, have already been allocated to concrete projects. However, the set-up of financial instruments for maximising the effects of ESI Funds support and facilitating access to finance is still pending2.  Financing approved by the EIB Group under the European Fund for Strategic Investments (EFSI), Horizon 2020, the Connecting Europe Facility and other directly managed EU funds is additional to the ESI Funds. By end 2016, Cyprus had signed agreements for EUR 5 million for projects under the Connecting Europe Facility. In addition, the EIB Group approved financing under EFSI amounting to EUR 5 million, which is expected to trigger nearly EUR 14 million in total investments (as of end 2016).   ESI Funds helped progress on a number of structural reforms in 2015 and 2016 via ex-ante conditionalities3 and targeted investment. Examples include enhancing competitiveness and innovation, promoting Cyprus' digital strategy, improving ecosystems and biodiversity, supporting the shift towards a low-carbon economy, reducing youth unemployment, encouraging active inclusion and vocational education and training. These reforms have laid the ground for better implementation of public investment projects in general, including those financed from national sources and from the other EU instruments mentioned above. Fulfilment of the remaining ex-ante conditionalities is on track. Support to administrative reforms is available through targeted financing under the European Social Fund as well as advice and technical assistance from the European Commission's Structural Reform Support Service. Only one environmental conditionality on solid waste remains to be fulfilled, while the fulfilment of the conditionality on water is currently under assessment.  The Country-specific recommendations focusing on structural issues were taken into account when designing the 2014-2020 programmes for the funds. Particular attention was granted to challenges identified in the context of the 2013-2016 economic adjustment programme. These include boosting competitiveness (including for the agro-food sector and aquaculture enterprises) and economic growth through support to entrepreneurship and innovation. The 2014-2020 programmes also aim to promote a more efficient public administration and to support the reform of the Common Fisheries Policy (CFP). With regard to social issues the programmes seek to contribute to the reduction and prevention of poverty, promote vocational education and training, support public employment services and employment, especially youth employment and the activation of long term unemployed as well as that of vulnerable groups. To date, over 1 700 young people have been supported under Youth Employment Initiative-financed measures, of whom 443 were in employment, education or training as of end-2016. In addition to the aforementioned challenges, ESI Funds address wider structural obstacles to growth and competitiveness. The funds will help Cyprus meet EU standards in a number of areas. On energy, the funds will support the objective of reducing the annual primary energy consumption of public buildings by 3.000.000 kW. On digital policy, they will help Cyprus reach its objective to ensure high-speed broadband coverage for 50% of households. The funds will also support the objective to increase waste treatment and recycling by 50% and promote the improvement of waste water treatment. On agriculture, they will support the achievement of at least 5% of savings in water used for agriculture by investing in more efficient                                                            1 National public investment is defined as gross capital formation + investment grants + national expenditure on agriculture and fisheries 2 The necessary ex-ante assessment on the basis of which the appropriate financial instruments will be set up is expected to be delivered by June 2017. 3 Before programmes are adopted, Member States are required to comply with a number of ex-ante conditionalities, which aim at improving framework and conditions for the majority of public investments areas. For Members States that did not fulfil all the ex-ante conditionalities by the end 2016, the Commission has the possibility to propose the temporary suspension of all or part of interim payments.  
 
 
 
 
 
2. Progress with country-specific recommendations 

Box (continued) 

15 

irrigation systems on 41% of the irrigated agricultural land. They will contribute to support 300 young farmers to create viable rural businesses.  For more information, please visit: https://cohesiondata.ec.europa.eu/countries/CY   
 
 
 
 
3.  SUMMARY OF THE MAIN FINDINGS FROM THE MIP IN-

DEPTH REVIEW 

The  2017  Alert  Mechanism  Report  called  for 
further in-depth analysis to monitor progress in 
the  unwinding  of  the  excessive  imbalances 
identified in the 2016 MIP cycle. On the basis of 
the  in-depth  review  of  spring  2016,  the  excessive 
macroeconomic  imbalances  identified  in  Cyprus 
take  the  form  of  large  private,  government  and 
external  debt.  Major  weaknesses  were  also 
identified  in  the  financial  sector,  burdened  with  a 
non-performing  loans  ratio  close  to  50 %.  The 
analysis  also  identified  subdued  potential  growth 
and  relatively  high  unemployment  as  important 
adjustment issues.  

This report provides an in-depth review of how 
the  identified  imbalances  have  developed.  In 
particular,  the  in-depth  review  is  found  in  the 
following  sections:  excessive  government  debt  is 
analysed  in  Sections  4.1.1  and  4.1.2;  financial 
sector  imbalances  are  discussed  in  Section  4.2.1; 
developments  in  private  indebtedness  in  Section 
4.2.4;  and  external  imbalances  in  Section  4.4.1. 
Investment  is  analysed  in  Section  4.4.2,  given  its 
links to private indebtedness and growth.  

3.1 Imbalances and their gravity 

Cyprus  has  a  large  negative  net  international 
investment  position  (NIIP)  of  around  118 %  of 
GDP combined with a current-account deficit of 
around  1.6 %  of  GDP  in  the  third  quarter  of 
2016.  Even  excluding  special  purpose  entities 
(SPEs)  registered  in  Cyprus  (7),  which  distort  the 
liability  position,  the  NIIP  remained  at  -40 %  of 
GDP. The persisting negative current-account of -
1.6 % of GDP reflects low domestic savings, rather 
than  a  high  level  of  investment.  Although  a 
booming  tourism  sector  and  a  depreciation  of  the 
real  exchange  rate  helped  to  reduce  the  current-
account  deficit,  this was partially offset  by higher 
imports and income transfers to non-residents.  

Public  debt  is  high,  standing  at  108 %  of  GDP 
at end-2015. This makes the country vulnerable to 
financial  or  economic  shocks,  which  could 
increase its financing costs. The pace of downward 
adjustment depends, inter alia, on the ability of the 
authorities  to  ensure  responsible  fiscal  policies  in 
an  increasingly  challenging  political  environment. 

(7)  See Section 1, p. 7.   

is 

Fiscal  policy 
is 
expected to lead to a deterioration in the structural 
balance in 2017-2018. 

turning  pro-cyclical  and 

is  very  high  both 

Private sector indebtedness remains among the 
highest  in  EU,  above  350 %  of  GDP  in  2015. 
Private  sector  debt 
for 
households (close to 130 %) and for non-financial 
corporations (nearly 230 %). Even excluding ship-
the  debt  of  non-financial 
owning  SPEs, 
corporations still remains high at around 150 % of 
GDP. This limits the non-financial private sector’s 
ability  to  increase  its  currently  low  level  of 
investment.  

Almost half of the financial sector’s loan book is 
currently  non-performing.  The  deep  recession 
triggered a surge in non-performing loans, fuelled 
by  the  high  level  of  indebtedness  and  weak 
contract  enforcement.  The  high  stock  of  NPLs 
continues  to  raise  concerns  for  financial  stability, 
as it weighs on banks’ profitability and limits their 
ability  to  generate  capital  and  increase  credit 
supply. 

Low potential growth is making the unwinding 
of  accumulated  stock  imbalances  particularly 
challenging.  The  extent  of 
imbalances 
suggests  that  the  adjustment  process  will  need 
years of sustained economic growth. However, the 
drivers  of  Cyprus’  growth  potential  are  currently 
weak,  due  in  particular  to  low  investment  and 
subdued productivity growth.  

the 

The depressed housing market has deterred the 
selling  of  assets,  thereby  slowing  down  debt 
reduction and incentivising strategic defaults. A 
large proportion of loans have real estate property 
as  collateral.  However,  asset  disposals,  namely 
asset  sales,  remain  unattractive  due  to  declining 
housing  prices.  In  addition,  the  difficulties  in 
issuing  and  transferring  title  deeds  have  deterred 
demand  for  housing  and  weighed  on  the  liquidity 
of property markets. 

3.2 Evolution, prospects and policy responses 

The  current-account  balance  improved,  helped 
by a significant depreciation of the real effective 
exchange  rate.  The  current-account  balance 

16 

 
 
                                                           
3. Summary of the main findings from the MIP in-depth review 

domestic  banks  by  14 pps.  of  GDP  in  September 
2016  compared  to  September  2015.  The  debt 
reduction  was  supported  by  economic  recovery 
and  adjustments  caused  by  valuation  effects  (i.e. 
debt  write-offs  and  debt-to-asset  swaps),  rather 
than  actual  loan  repayments.  The  new  insolvency 
framework  has  been  used  only  scarcely  to  date, 
its  effective  application 
to  obstacles 
due 
(inadequate  court 
limitations, 
impediments  in  the  law)  and  inefficiencies  in  the 
judicial system. 

to 
rules,  capacity 

Continued  efforts  at  loan  restructuring  have 
helped to start a reduction of NPLs. Banks have 
intensified  their  restructuring  efforts,  leading  to 
positive results in  the performance  of  restructured 
loans.  In  absolute  terms,  NPLs  have  declined  by 
about  EUR  2.5  billion  since  end-2015.  However, 
the  ratio  of  NPLs  to  gross  loans  has  remained 
stable  at  levels  slightly  below  50 %  since  2014, 
due  to  a  corresponding  reduction  in  gross  loans. 
This stability is also due to a regulatory lag effect, 
since 
full 
compliance  with  repayment  terms  for  at  least  one 
year before being classified as "performing loans".  

restructured  NPLs  must 

show 

sector 

private 

Policy  measures  have  had  limited  effectiveness 
in  substantially  reducing  debt  levels  and  NPL 
ratios.  Weak  contract  enforcement  incentivises 
slow  repayment  of  debt,  which  continues  to 
hamper 
deleveraging.  The 
effectiveness of the policy measures introduced so 
far  remains  limited.  Weak  contract  enforcement 
stems  from  inefficiencies  in  the  judicial  system, 
bottlenecks  in  implementing  the  foreclosure  and 
insolvency frameworks and remaining information 
gaps  regarding  borrowers.  Little  progress  was 
made in addressing the significant shortcomings of 
the system of issuance and transfer of property title 
deeds.   

to 

is  expected 

A key challenge is to avoid the build-up of new 
financial  sector  imbalances  in  the  short  term. 
Banks’  profitability 
remain 
challenged  by  risk  provisioning  and  impairment 
needs,  and  a  constrained  pool  of  eligible 
borrowers.  Liquidity  buffers  continue  to  increase 
since banks limit new credit to the economy. Low 
investment 
returns  combined  with  abundant 
liquidity  might  lead  to  higher  risk-taking.  In 
addition,  banks  are  increasingly  resorting  to  debt-
to-assets  swaps.  Banks  are  therefore  engaged  in  a 
balancing  act,  trying  to  maximise  recovery  values 

improved from -4.3 % in 2014 to -1.6 % of GDP in 
the 
third  quarter  of  2016.  Tourism  exports 
benefitted  from  structural  reforms  but  also  from 
external  factors,  such  as  geopolitical  tensions  and 
safety  concerns  in  competing  tourist  destinations. 
A  current-account  close  to  balance  and  a  trade 
balance  of  close  to  10 %  would  allow  Cyprus  to 
reduce  its  NIIP  to  the  MIP  threshold  of  -35 %  of 
GDP by 2026.  

The NIIP has been improving in parallel with a 
decline of the current-account deficit. The NIIP 
adjusted from its trough of -147 % of GDP in 2014 
to  -118 %  of  GDP  in  the  third  quarter  of  2016, 
mainly  due  to  valuation  effects.  The  financial 
liabilities  of  SPEs  still  weigh  on  the  NIIP  and 
external  liabilities  of  banks  remain  high.  This 
exposes  the  financial  sector  and  the  economy  to 
volatility  risks  in  cases  of  shifts  in  investor  and 
depositor confidence. 

Government debt is projected to fall to 83 % of 
GDP by 2027, but recent changes in fiscal policy 
have  slowed  down  the  pace  of  public  debt 
reduction.  Long  term  risks  are  moderate,  mainly 
due to favourable projected costs of ageing. Yet, as 
the  economy  recovers,  fiscal  policy  has  become 
increasingly  pro-cyclical,  narrowing  the  tax  base 
and  reducing  the  scope  for  growth-enhancing 
expenditures  over  investment.  The  Commission 
winter  2017  forecast  envisages  a  deterioration  in 
the structural fiscal position in the medium term. It 
would  take  a  cumulative  improvement  in  the 
structural  primary  balance  of  1.7 %  of  GDP  over 
five years (from 2019 to 2023) for Cyprus to reach 
the debt reference value of 60 % of GDP by 2031.  

Further  reduction  of  public  debt  depends  on 
ensuring  a  responsible  fiscal  policy  stance.  A 
sound  fiscal  policy,  including  a  reduction  of  the 
public sector wage bill, and a reform of the public 
administration  and  local  governments  remain  key 
to  safeguarding  the  long-term  sustainability  of 
public  finances.  Public  expenditure  could  also 
better support potential growth by shifting towards 
more  long-term  productivity-enhancing  projects, 
including investment in R&D, in a fiscally neutral 
manner.  

Private  sector  deleveraging  gained  traction  in 
2016,  despite  the 
limited  use  of  the  new 
insolvency  tools.  Households  and  non-financial 
corporations  had  reduced  their  loans  from  the 

17 

 
3. Summary of the main findings from the MIP in-depth review 

foster efficiency in public utilities has largely been 
put on hold. 

3.3 Overall assessment 

Cyprus  still  faces  important  challenges  in  the 
form of very high NPLs burdening the financial 
sector,  combined  with  large  stocks  of  private, 
government,  and  external  debt.  The  current-
account remains negative, which does not support 
a  sustainable  correction  of  the  NIIP.  Government 
debt  is  on  a  downward  path,  although  fiscal 
slow-down  debt 
relaxation  measures  might 
reduction in a context of low potential growth and 
inflation. Private sector debt and its ratio of NPLs 
remain high. The surge in NPLs has dried up credit 
investment  and 
supply,  and 
harming  the  growth  potential  of  the  economy. 
Aggregate savings increased somewhat in 2015 but 
still  remain  insufficient  to  improve  the  saving-
investment  balance.  All  in  all,  low  savings  and 
depressed potential growth make the deleveraging 
process rather difficult. 

is  weighing  on 

Successful  implementation  of  policy  measures 
to  address  macroeconomic  imbalances  remains 
a  challenge.  The  measures  taken  to  reduce  the 
proportion of NPLs, such as the revised insolvency 
framework  and  a  strengthened  supervisory  and 
regulatory  framework  face  obstacles 
their 
effective  application.  Other  reforms  regarding 
public  administration,  justice,  title  deeds,  and 
privatisation  plan  have  lost  momentum,  while 
improvements  to  the  business  environment  are 
being implemented only slowly.  

to 

while  limiting  the  increase  of  housing  supply,  as 
the  latter  could  exert  downward  pressure  on 
housing prices and collateral values. In addition,  it 
has  been  recognised  that  more  measures  are 
needed  to  align  the  regulation  and  supervision  of 
including  pension  and 
financial 
international  best 
insurance  companies,  with 
financial 
thus 
practices, 
stability.   

further  safeguarding 

institutions, 

Signs  of  stabilisation  have  emerged  in  the 
housing  market,  yet  remaining  inefficiencies 
slow  down  the  deleveraging  process.  The 
housing  market  remains  fragile.  There  are  still 
significant  backlogs  and  delays  with  issuing  title 
deeds  and  major  obstacles  to  transferring  title 
deeds  from  property  sellers  to  final  buyers.  This, 
together with deleveraging pressure on households 
and  a  rather  subdued  outlook  for  labour  income, 
weigh on housing demand. Restructuring solutions 
based  on  debt-to-assets  swaps,  involving  the 
acquisition  and  sale  of  real  estate  pledged  as 
collateral,  may  bolster  the  supply  of  houses  for 
sale  over  the  medium  term  and  slow  down  the 
recovery in housing prices.  

Total 

imbalances. 

Labour  productivity  and  potential  growth 
remain low, slowing down the unwinding of the 
fixed 
macroeconomic 
investment, at  13 % of GDP, is among the lowest 
in  the  EU  and  productivity  has  broadly  stagnated 
since 2008. In the medium term, emerging upward 
cost  pressures  could  erode  competitiveness  if 
productivity  does  not  improve.  Low  business 
dynamism  weighs  on  productivity  and  skills 
mismatches  in  the  labour  market  are  still  largely 
unaddressed. As a result potential growth estimates 
for  Cyprus  remain  subdued  This  hampers  the 
balance  sheet  adjustment  of  most  sectors  of  the 
economy.  

Structural  reforms  to  improve  the  business 
environment are slowly being implemented. The 
action  plan  for  growth  aims  to  improve  the 
business environment, tackle the lack of alternative 
investment  and 
financing  sources  and  boost 
employment  in  key  sectors  of  the  economy, 
including  tourism  and  shipping.  In  addition,  the 
government  intends  to  lighten  the  regulatory 
burden  by  making  existing  procedures  more 
efficient,  developing  digital  public  services  and 
improving  the quality of  regulation. However,  the 
privatisation plan adopted to attract investment and 

18 

 
 
 
3. Summary of the main findings from the MIP in-depth review 

Table 3.1: 

MIP assessment matrix for Cyprus 

(Continued on the next page) 

19 

This MIP Assessment Matrix summarises the main findings of the in-depth review in the country report. It focuses on imbalances and adjustment issues relevant for the MIP.  Gravity of the challenge Evolution and prospects Policy response Imbalances (unsustainable trends, vulnerabilities and associated  risks) External Balance The NIIP stood at -118 % of GDP in the third quarter of 2016.The current account balance amounted to -1.6 % of GDP in 2016, falling short of what is required for a swift external rebalancing. There is a significant real exchange rate depreciation of -6.2 % over three years and 6.5 % y-o-y, beyond the MIP threshold of 5 %. Cyprus continues to lose export market shares. The NIIP has adjusted from its trough of -147 % of GDP in 2014 to around -118 % of GDP in 2016. This was mainly due to valuation effects and improving current account balance, supported by booming tourism exports. The real exchange depreciation, which contributed to improved current account, is a by-product of lower unit labour costs and negative inflation (see Section 1.1). Tourism exports have been stimulated by structural reforms aimed at extending the tourism season and improving air connectivity, but less has been done in other areas. Price competitiveness gains have been a key factor to current account developments in Cyprus. This highlights the importance of stronger productivity and non-price competitiveness gains, as well as contained wage inflation (see Section 4.4). Private debt Non-financial private sector debt in Cyprus climbed to above 350 % of GDP, among the highest level in the EU (see Section 1).  A large proportion of debt stocks are non-performing due to poor contract enforcement, low nominal income growth and high unemployment. Households' debt declined from 131 % of GDP in 2014 to 129 % of GDP in 2015, while for non-financial corporations (excluding ship-owning special purpose entities) the ratio remained at around 149 %. The use of the new insolvency framework has been very limited, while depressed property prices make asset disposal less attractive for debt reduction (see Section 4.2) Debt-to-asset swaps have been used as a deleveraging tool, but deficiencies in the insolvency service and the judicial system constrain the effectiveness of the new insolvency tools. Reforms of land registry regulations to enhance the definition of property rights have been delayed (see Section 4.2). New Rules of Court for insolvency are being adopted. Amendments to the Civil Procedure Law have been proposed to improve the enforcement of contracts and court decisions (see Section 4.6). Public debt General government debt stood at 108 % of GDP in 2015, exposing Cyprus to changes in financial or economic conditions that might increase financing costs (see Section 1). The debt-to-GDP ratio is projected to decline at a slower pace than what was envisaged during the macroeconomic adjustment programme. Cyprus' sovereign credit ratings have improved significantly since mid-2013, but remain below investment grade (see Section 4.1).  Fiscal relaxation and stalling implementation of fiscal-structural reforms have contributed to slowing down of adjustment (see Sections 4.1 and 4.6). Abolishing the property tax at national level reduces the range of tax instruments and increases the weight of less growth-friendly forms of taxation.  High current expenditures may crowd out public investment (see Section 4.1). Financial Sector NPLs in the Cypriot banking sector comprise around 50 % of all loans, among the highest ratio in the euro area. Depressed housing prices affect a large proportion of loans, which are backed by property collateral.  Banks' weak profitability challenges their ability to ensure adequate capitalisation in the long term. The ratio of NPLs was virtually stable at around 48 % of gross loans between 2014 and 2016. NPLs declined only from 57 % to 56 % of loans to non-financial corporations over the same period, while for households' loans the NPL ratio increased from 52 % to 55 %. The high level of collateralised lending poses challenges regarding the perception of credit risk. Relatively mild estimates of expected losses on collateralised loans have kept provisions at levels below the EA average (see Section 1).  Capacity to build up further capital buffers is still hampered by low profitability and high NPLs. The flow of credit to the economy is still limited (see Section 4.2). More information has been made available to creditors through the credit and company registry but the quality and breadth of available information can be improved. Targets for loan restructuring and early arrears management have been set and regularly updated, but are not fully met.   Despite increased capacity, there are still impediments to implement the reformed foreclosure framework. Legislation allowing the sale of NPLs has been enacted but is not leading to any transaction, notably due to adverse market conditions. Provisioning requirements have been enhanced but provisions remain below the EA average (see Section 4.2). Adjustment issues   
 
 
 
 
3. Summary of the main findings from the MIP in-depth review 

Table (continued) 

Source: European Commission 

20 

Potential growth Potential growth is estimated at around 0 %, while inflation is also low. Low nominal income growth prevents deleveraging from picking up (see Section 1). Low investment and stable productivity levels constrain potential growth.  At 13 %, the investment-to-GDP ratio remains one of the lowest in the EU (see Section 1). An Action Plan for Growth is in place to improve the business environment and help develop key sectors of the economy, but implementation is slow (see Section 4.4).  The implementation of the privatisation plan has been largely put on hold (see Section 4.6). Unemployment Unemployment was high at around 13 % at end 2016. Long-term and youth unemployment were also high at 6 % and 30 %, respectively. Unemployment declined but remains high. The capacity of the public employment services to provide services to the unemployed, reach out to NEETs, and help reduce welfare dependency remains sub-optimal. Participation in Vocational and Education Training remains low and there is a growing evidence of skill-mismatches in the economy (see Section 4.3). The reform of the public employment services has been delayed and the impact of ALMPs implemented is still to be evaluated. Measures are being undertaken to enhance vocational training and the quality of higher education, but the implementation is slow (see Section 4.3). Conclusions from IDR analysis  Cyprus faces excessive imbalances in the form of a weak financial sector and large stocks of private, public, and external debt. The very high ratio of NPLs in the domestic banking system weighs on banks' profitability and constrains  new credit to the economy. Low credit and high private debt depress domestic investment, constrain the growth potential and maintain unemployment relatively high.  Despite a major restructuring of the banking sector and improved capital positions, the ratio of non-performing loans as a share of GDP remains at very high levels and does not show a clear downward trend. Poor contract enforcement, inefficiencies in the judicial system, bottlenecks in the implementation of the foreclosure and insolvency legislation and incomplete information on borrowers hamper private sector deleveraging and the reduction of non-performing loans. Delays in reforming the system of issuance and transfer of title deeds negatively affect the property market. A current account position still in deficit implies that a large negative NIIP is not yet under correction. The major deleveraging process has affected potential growth and unemployment.. A decrease in government savings might slow down public debt reduction.  Measures have been taken to increase loan restructuring, implement foreclosure and insolvency frameworks, make the judiciary more efficient, and allow for the sale of loans. However, efforts are still needed to remove bottlenecks in the foreclosure and insolvency frameworks, improve contract enforcement, ensure well-defined property rights, and help banks resume a healthy flow of credit to the economy. Ensuring fiscal discipline is also crucial for debt-reduction. Measures are also needed to raise potential growth, including by improving the business environment, increasing productivity-enhancing investment and making the public administration more efficient. (*) The first column summarises 'gravity' issues which aim at providing an order of magnitude of the level of imbalances. The second column reports findings concerning the 'evolution and prospects' of imbalances. The third column reports recent and planned relevant measures. Findings are reported for each source of imbalance and adjustment issue. The final three paragraphs of the matrix summarise the overall challenges, in terms of their gravity, developments and prospects, policy response.   
 
 
 
4.  REFORM PRIORITIES 

4.1.  PUBLIC FINANCES AND TAXATION 

4.1.1.  PUBLIC EXPENDITURE * (8) 

Low  public  investment,  in  particular  in  R&D 
infrastructure,  continues  to  weigh  on 
and 
potential  growth.  Public  investment  in  Cyprus 
was  among  the  lowest  in  the  EU  in  2016,  a  clear 
deterioration  compared 
to  past  performance 
(European  Commission,  2014a).  Public  spending 
on R&D (0.4 % of GDP) remains one of the lowest 
in the EU. Low investment has limited progress in 
terms  of  the  quality  and  sustainability  of  basic 
public  services,  such  as  waste  and  water 
management  or  public transport (see  Section 4.5). 
Similarly,  the  low  level  of  public  spending  on 
healthcare may have contributed to lower than EU 
average health system performance outcomes (see 
Section 4.3). 

Graph 4.1.1:  Public investment and compensation of public 

employees, EU Member States, 2015 

Although  public  expenditure  in  Cyprus  is  below 
the  EU  average,  compensation  of  employees  is  a 
major  expenditure  component.  Cyprus  is  the 
Member  State  with  the  highest  proportion  of 
compensation  of  public  sector  employees  relative 
to  total  public  expenditure  (see  Graph  4.1.1). 
Although  several  measures  have  been  introduced 
since 2012, the high wage bill continues to reflect 
one of the largest public sector wage premiums in 
the  EU (10)  in  the  EU.  In  2016  the  House  of 
Representatives  rejected  a  legislative  proposal  to 
reform  the  public  sector  wage-setting  mechanism. 
the 
This  reform  aimed 
link  permanently 
to 
to 
evolution  of  public  sector  compensation 
nominal 
the 
application  of  the  mechanism  foreseen  by  the 
reform  will  be 
implemented  until  2018  via 
collective  agreements  with  public  sector  unions, 
the  lack  of  a  permanent  mechanism  increases  the 
risk  of  further  crowding  out  of  growth-enhancing 
public investment in the medium to long term.  

growth.  Although 

economic 

The  effective  interest  rate  on  public  debt 
declined to 2.6 % in 2015, down from 4.4 % in 
2012.  This  is  due  to  the  increase  in  lending  from 
the  European  Stability  Mechanism  (ESM)  and 
International  Monetary  Fund  (IMF)  and  lower 
yields  on 
the  secondary  market  for  Cypriot 
government  securities.  The  yield  for  three-month 
T-bills  fell  gradually  to  0.02 %  in  January  2017, 
notably  due  to  the  regular  frequency  of  T-bill 
auctions.  Yields  on  longer-term  debt  displayed 
similar  developments,  declining  to  3.8 %  at  the 
seven-year bond issuance in July 2016.  

Source: Eurostat. 

4.1.2.  FINANCING NEEDS AND PUBLIC DEBT 

SUSTAINABILITY* 

Compensation of public employees accounts for 
a large share of public expenditure. The latter (9) 
has  gradually  declined  from  42.1 %  of  GDP  in 
2011 to 38.3 % of GDP in 2016. At the same time, 
compensation  of  employees  also  decreased  from 
14.6%  of  GDP  in  2011  to  12.4%  in  2016. 

Public debt appears to have peaked in 2015, at 
107.5 %  of  GDP.  According  to  the  Commission  
winter  2016  analysis,  public  debt  is  expected  to 
decline  steadily  to  83 %  of  GDP  in  2027.  The 
declining debt path going forward is mainly driven 
by  primary  surpluses  and  relies  on  a  number  of 

(8)  An  asterisk  indicates  that  the  analysis  in  the  section 
contributes  to  the  in-depth  review  under  the  MIP  (see 
Section 3 for an overall summary of main findings). 

(9)  General government expenditure net of one-off exceptional 

items. 

(10)  Difference  in  average  wage  between  the  public  and  the 
private  sector  after  controlling  for  experience,  educational 
attainment,  gender,  etc.  (European  Commission,  2016b, 
p.56) 

21 

CY0510152025303505101520Compensation of  public employess, % of public expenditurePublic investment , % of  public expenditure 
 
 
                                                           
                                                           
4.1. Public finances and taxation 

to 

improve 

Commission,  2016a).  Efforts 
the 
structural  balance  would  help  placing  debt  on  a 
sustainable downward trajectory (see Graph 4.1.2). 
Sensitivity  analyses  suggest  that  reducing  real 
GDP  growth  by  one  standard  deviation  over  the 
horizon  would  trigger  an  upward  revision  of  the 
debt trajectory, leading to a stabilisation in the debt 
ratio.  Assuming  an  additional  effect  of  lower  real 
GDP  growth  on  the  primary  balance  would  put 
debt  on  an  upward  path.  Medium-term  debt 
developments  are  also  sensitive  to  changes  in 
market access terms, vulnerabilities in the financial 
fiscal  performance (IMF,  2016; 
system  and 
European Commission, 2017a). 

Graph 4.1.2:  Public debt trajectories 

Source: European Commission. 

4.1.3.  FISCAL FRAMEWORK 

as 

such 

The  budgetary  framework  has  been  reformed 
and  should  be  fully  implemented  as  of  2018. 
Beyond  laying  down  the  key  blocks  of  the 
the 
framework, 
fiscal 
domestic 
independent  Fiscal  Council, 
the  2014  Fiscal 
Responsibility  and  Budgetary  Framework  Law 
(FRBFL) has introduced a more strategic approach 
to  budget  preparation,  notably  based  on  project 
evaluation  and  more  rigorous  selection  processes. 
the 
It  also  set  out  procedures 
monitoring  of 
from 
guarantees,  payment  arrears  and  state  owned 
enterprises. The FRBFL secondary legislation was 
adopted by the House of Representatives in 2016, 
setting  out  procedures  for  budget  preparation, 
the 
within-year  budgetary  adjustments,  and 
responsibilities  of  commitment  control  officers. 
Practical  steps  remain  necessary  to  make  the 
budgetary framework fully functional, such as new 

improving 

stemming 

fiscal 

risks 

assumptions (11).  The  high  stock  of  debt  and  the 
assumed gradual normalisation of the interest rates 
are  expected  to  bring  about  a  higher  interest  bill. 
This  will  offset  the  positive  impact  from  nominal 
growth.  The  debt  trajectory  will  be  dependent  on 
the  development  of  both  the  structural  fiscal 
position and potential growth. 

Total  debt  redemptions  and  fiscal  needs  are 
contained  until  end-2017  and  remain  lower  than 
the existing cash buffer. In 2017, debt repayments 
and  fiscal  needs  are  estimated  at  EUR  0.4  billion 
and  EUR  0.1  billion,  respectively.  However, 
medium-term  financing  needs  for  2019  and  2020 
remain high, estimated at around 10 % of GDP in 
each year.  

Cyprus’  sovereign  credit  rating  has  continued 
to  increase.  Cyprus’  ratings  by  all  four  major 
rating  agencies  remain  below  investment  grade 
despite several rating upgrades over the past year. 
The most favourable rating, by Standard & Poor’s, 
remains  two  notches  below  investment  grade  at 
’BB’. Better-than-expected macroeconomic, public 
debt  and  fiscal  budgetary  developments  were  the 
main  drivers  for  the  recent  upgrades.  However, 
according  to  the  rating  agencies,  weaknesses 
related  mainly  to  the  high  level  of  NPLs  in  the 
financial sector and the still high public debt could 
hold back further upgrades.  

The  high  public  debt  still  poses  risks  to 
medium-term debt sustainability, leaving limited 
room  for  further  fiscal  relaxation.  Overall,  the 
economic  recovery  remains  supportive  for  the 
evolution  of  the  debt  trajectory.  However,  the 
situation  proves  challenging,  due  to  still-low 
potential  growth  and  inflation,  and  an  expected 
deterioration  of  the  structural  balance  (European 

(11)  The  starting  point  for  the  baseline  debt  projection  is  the 
Commission’s 2016 autumn forecast. After 2018, the debt 
projection is based on the following technical assumptions; 
(i) the structural primary fiscal balance remains at a surplus 
of  0.8 %  of  GDP  under  the  no-fiscal  policy  change 
assumption, (ii) inflation converges to 2.0 % by 2021 (year 
of  output  gap  closure)  and  remains  stable  thereafter;  (iii) 
the nominal long-term interest rate on new and rolled-over 
debt  converges  linearly  to  5 %  by  the  end  of  the  10-year 
projection horizon in line with the assumptions agreed with 
the Economic Policy Committee’s (EPC) Ageing Working 
Group (AWG), (iv) real GDP grows at the rate projected by 
the  EPC’s  Output  Gap  Working  Group  until  t+10  and 
thereafter  according  to  the  AWG’s  projections  (level  of 
around  1.5 %);  and  (v)  ageing  costs  develop  according  to 
the Commission and EPC’s 2015 Ageing Report. 

22 

607080901001101112131415161718192021222324252627% of GDPCommission Post-Programme Surveillance Report 2016Combined macro and fiscal shockStandardized (permanent) negative shock (-0.5p.p.) on GDP growth 
                                                           
 
4.1. Public finances and taxation 

collection  remain  separated.  Delays  are  also 
observed in the integration of regional tax offices. 
A  project  for  developing  an  integrated  IT  system 
for  the  new  tax  department  has  started.  The  tax 
procedure code is being drafted and its adoption is 
not planned before mid-2017.  

The  abolition  of  the  immovable  property  tax 
(IPT)  leads  to  a  revenue  shortfall  and  risk 
negatively  affecting  the  quality  of  the  tax  base. 
The  reform  of  the  IPT  was  a  key  commitment 
under 
the  economic  adjustment  programme 
expected  to  be  adopted  in  2016.  The  tax  was 
instead  reduced  by  75 %  for  2016  fully  abolished 
as  of  2017.  In  the  absence  of  compensatory 
measures,  this  will  result  in  a  shortfall  of  public 
revenues.  It  also  risks  negatively  affecting  the 
quality  of  the  tax  base,  as  property  taxation  is 
widely considered as one of the least distortionary 
and most growth-friendly taxes. The abrogation of 
the  IPT  tends  to  favour  property  owners  and 
therefore  goes  against  efforts 
towards  more 
progressive  taxation.  Revenues  from  recurrent 
property  taxation,  as  a  proportion  of  GDP,  were 
lower  in  Cyprus  (1.1%)  than  the  EU  average 
(1.6%) in 2014. This indicates that there could be 
scope  to  increase  this  kind  of  taxation  while 
diversifying the tax base.  

tax 

and 

transparency 

the  signing  of 

Tax 
information 
exchange  continue  to  improve.  In  2014  the  US-
Cyprus  Foreign  Accounts  Tax  Compliance  Act 
(FATCA)  agreement  was  signed.  This  was 
followed  by 
the  US-Cyprus 
Competent  Authority  Agreement  in  2016,  which 
allows  FATCA  to  be  implemented.  Cyprus  also 
committed  to  the  early  implementation  of  the 
OECD’s  new  common  reporting  standard  for  the 
automatic 
account 
information.  The  first  exchange  of  information 
under this new standard will take place in 2017. In 
the  area  of  transparency  of  rulings,  Cyprus  has 
issued a circular which sets out the procedure to be 
followed  for  issuing  advance  cross-border  tax 
rulings.  This  stems  from  the  revision  of  the 
Directive on Administrative Cooperation (DAC-3) 
on the automatic exchange of cross border rulings. 

exchange 

financial 

of 

Some  of  Cyprus's  tax  rules  may  be  used  in 
structures  of  aggressive  tax  planning (12) (13). 

(12)  For  an  overview  of  the  most  common  structures  of 
aggressive tax planning and the provisions (or lack thereof) 

implementation  circulars  and  upgrades  of  IT 
systems.  The  budgetary  framework  is  expected  to 
be fully implemented as of January 2018. 

notably 

selection 

The  modernisation  of  public 
investment 
management  is  still  at  the  early  stages.  New 
guidelines  for  public  investment  projects  were 
issued in July 2015. There has been some progress 
implementation, 
with 
on 
their 
strengthening 
processes. 
project 
Investment  projects  will  need  a  pre-selection 
screening  before  qualifying  for  a  general  project 
pool.  Projects  will  eventually  be  prioritised  based 
on  political  choices  and  available  resources.  It  is 
likely to take several years to fully implement this 
reform.  Current  efforts  focus  on  building  the 
necessary  administrative  capacity  by  providing 
training  and  acquiring  related  IT  management 
systems. 

public 

Cyprus’ 

internal 

information 
The  public  accounting  and 
management  systems  still  lack  comprehensive 
coverage  and  adequate 
control 
mechanisms. 
accounting 
information system does not cover all government 
levels and is not in line with the latest accounting 
and  financial  reporting  standards.  The  authorities 
intend to gradually adopt a new enterprise resource 
planning  (ERP)  system  to  tackle  this  issue  and 
improve  the  quality  and  reliability  of  financial 
information.  With 
technical 
assistance,  the  chart  of  public  accounts  will  be 
updated,  in  line  with  the  new  ERP  which  will  be 
selected by tender. The ERP implementation aims 
at  three  main  objectives,  i.e.  modernisation  of  the 
treasury, shift from cash to accrual accounting, and 
improvement of the public procurement system.  

support 

from 

4.1.4.  TAXATION 

for 

The  current  tax  administration  reforms  aim  to 
improve  the  efficiency  of  the  tax  system.  A 
risk 
comprehensive  compliance  strategy 
identification  and  analysis  was  developed 
to 
address  collectible  and  unencumbered  debt,  but  it 
has  not  been  fully  implemented.  The  single 
registration process for existing tax payers is being 
prepared  but 
registration 
programme.  The  integration  of  the  VAT  service 
and  the  Inland  Revenue  Department  into  a  single 
tax  department  has  not  been  completed,  as  key 
functions such as audit, risk management and debt 

an  online 

lacks 

23 

 
                                                           
4.1. Public finances and taxation 

2016b)  has  been  amended  in  order  to  bring  it  in 
line  with  Action  5  of  the  Base  Erosion  and  Profit 
Shifting project (see OECD, 2015), as endorsed by 
the  Code  of  Conduct  for  Business  Taxation.  This 
means 
link  between  profits 
registered in Cyprus and the underlying R&D will 
have to be proven in order for profits to qualify for 
the reduced patent box rate.  

that  a  stronger 

and 

The  absence  of  certain  anti-abuse  rules (European 
absence  of 
the 
Commission,  2016b) 
withholding 
interest  and 
taxes  on  dividend, 
royalty (14)  payments  vis-à-vis  third  countries  are 
features  of  the  tax  system  which  may  facilitate 
aggressive  tax  planning.  Moreover,  the  minimum 
fixed  margins  approved  by  Cyprus  for 
the 
remuneration of intragroup back-to-back financing 
activities  can  narrow  the  taxable  base  (European 
Commission,  2016c),  and  has  the  potential  to 
facilitate  aggressive 
tax  planning.  However, 
Cyprus has taken steps to terminate the current tax 
treatment  on  back  to  back  loans  within  the  first 
semester  of  2017  and  is  currently  drafting  a  new 
transfer  pricing  framework  covering  back-to-back 
financing  activities.  In  that  respect,  the  very  high 
inward  and  outward  foreign  direct 
level  of 
investments (FDI) positions, but also the high level 
of dividend and interest payments(15) as percentage 
of GDP would suggest that the country’s tax rules 
are  used  by  companies  that  engage  in  aggressive 
tax  planning.  Within  this  context  however,  it  is 
important to note that corporate tax initiatives (for 
example  the  Anti-Tax  Avoidance  Directive)  will 
strengthen  Member  States'  anti-abuse  framework 
and  boost  tax  transparency  (for  example  through 
the  automatic  exchange  of  information  on  tax 
rulings or on country-by-country reports). It should 
be  noted  that  the  anti-hybrid  rule  introduced  by 
Cyprus  with  effect  from  January  2016,  applied  to 
dividend  income  flows  from  within  or  from 
outside  the  EU  and  irrespective  of  the  level  of 
holding. 

Cyprus has taken steps to adjust some of its tax 
rules  facilitating  aggressive  tax  planning.  The 
patent  box  regime  (see  European  Commission, 

necessary  for  these  structures  to  work,  see  Ramboll 
Management Consulting and Corit Advisory (2016), Study 
on  Structures  of  Aggressive  Tax  Planning  and  Indicators, 
European  Commission  Taxation  Paper  n°61.  It  should  be 
noted  that  country-specific  information  provided  in  the 
study gives the state of play by May/June 2015. 

(13)  Aggressive tax planning consists in taking advantage of the 
technicalities  of  a  tax  system  or  of  mismatches  between 
two  or  more  tax  systems  for  the  purpose  of  reducing  tax 
liability.  –  source:  Commission  Recommendation  of  6 
December 2012 on aggressive tax planning (2012/772/EU)  
(14)  There  is  a  withholding  tax  on  royalties  if  intellectual 

property rights are used locally. 

(15)  In  2015,  the  level  of  inward  and  outward  foreign  direct 
investment amounted respectively to 905 % and 906 % of 
GDP. The flows of dividends and interests paid amounted 
respectively to 9.3 % and 0.9 % of GDP. 

24 

 
                                                                                   
4.2.  FINANCIAL SECTOR 

4.2.1.  BANKING SECTOR * 

The  financing  of  the  Cypriot  economy  remains 
at  a  standstill  as  it  is  largely  dependent  on  the 
banking sector. Bank lending accounts for almost 
all  credit  supply 
in  Cyprus.  Monetary  and 
Financial  Institutions  (MFI)  loans  accounted  for 
about 470 % of GDP at end 2015, about four times 
higher  than  the  EU  average.  On  the  other  hand, 
non-bank  financing  via  equity  markets,  debt 
issuance  and  venture  capital 
relatively 
underdeveloped  and  remains  well  below  the  EU 
rate  of  Cypriot 
average.  The  self-financing 
businesses  is  close  to  the  EU  average.  Credit 
conditions 
improved 
(availability  and  cost) 
gradually in 2016 for all types of clients, including 
SMEs, and a slow pick-up in credit supply can be 
observed.  However,  due  to  banks’  still  high  risk 
perception and low risk tolerance, but also subdued 
solvent  demand,  the  decline  of  the  credit  stock 
continues. 

is 

remained  constant  at  about  55%  as  of  October 
2016 (see Graph 4.2.1).  

NPLs  ratios  remain  high  but  uneven  across 
corporate  sectors.  The  distribution  of  NPLs 
shows that, although the root of the problem lies in 
the  construction  and  property  sectors,  the  broad 
spectrum  of  businesses  is  burdened  with  a  high 
level  of  NPLs.  The  construction  sector  accounts 
for  the  largest  part  of  total  NPLs,  and  is  also  the 
sector with the highest NPL ratio, followed by real 
estate  activities  (see  Table  4.2.1).  SMEs  had  a 
NPL ratio of 59 % of total loans in October 2016.  

Table 4.2.1:  Non-financial corporations- Sectors most 

affected by NPLs - September 2016 

Graph 4.2.1:  Non-performing loans, Non-financial private 

Source: Central Bank of Cyprus 

sector 

their  efforts  on 

Debt restructuring continues, leading to positive 
results  in  terms  of  performing  restructured 
loans. In October 2016, compared to a year before, 
the  proportion  of  restructured  loans  (performing 
and  non-performing)  increased  both  for  non-
financial  corporations  and  for  households.  The 
proportion  of  restructured  loans  for  non-financial 
corporations  is  higher  than  for  households,  as 
larger 
banks  firstly  focused 
exposures. This could also explain the fact that the 
proportion of performing restructured loans to total 
loans  increased  for  non-financial  corporations  but 
slightly  dropped  for  households  over  the  same 
period.  The  proportion  of  private  sector  loans  in 
arrears over 90 days slightly decreased to 42 % in 
October  2016  from  45 %  a  year  earlier.  The 
provisioning rate remained broadly stable since the 
end  of  2015,  from  38 %  to  39%  of  NPLs  in 
October  2016  (see  Graph  4.2.2),  which  is  lower 
than the EU average. Despite these developments, 
the  high  level  of  arrears  shows  that  the  Cypriot 
private sector is still excessively leveraged.  

Banks are meeting the targets set for the level of 
loan  restructuring  activity,  but  have  more 
difficulties  ensuring  sustainable  results.  The 
Central Bank of Cyprus has set for banks a series 
of targets in order to better monitor and assess loan 

Source: Central Bank of Cyprus 

it  remained  stable 

Despite  an  absolute  reduction  in  the  stock  of 
NPLs, 
in  2016  as  a 
proportion  of  total  loans.  In  absolute  terms,  the 
amount  of  NPLs  for  the  non-financial  private 
sector fell by approximately 12 %, from EUR 28.1 
billion  in  October  2015  to  EUR  24.6  billion  in 
October  2016.  However, 
loans 
decreased by a similar proportion, the NPL ratio as 
a whole remained broadly constant at about 48 %. 
For the non-financial private sector, the NPL ratio 

since 

total 

25 

0510152025303035404550556065Jun-13Sep-13Dec-13Mar-14Jun-14Sep-14Dec-14Mar-15Jun-15Sep-15Dec-15Mar-16Jun-16Sep-16% of  loansTotal private sector (rhs)Households (lhs)NFCs (lhs)Total private sector (lhs)EUR bnShare of total NPLsSector NPL ratioProvisioning coverage ratioConstruction17%72%39%Real estate activities9%54%41%Wholesale and retail trade8%46%45%Accommodation and food service activities4%53%31%Manufacturing3%50%42% 
 
 
 
 
 
4.2. Financial sector 

restructuring  efforts 
(European  Commission, 
2016b, p. 18). As of September 2016, banks over-
achieved the targets set for the number of proposed 
and  concluded  restructuring  solutions.  However, 
the re-default rates of restructured loans turned out 
slightly  higher  than  the  targets  envisaged  by  the 
Central  Bank  of  Cyprus.  This  highlights 
difficulties  in  designing  sustainable  restructuring 
solutions.  The  increasing  recourse  to  converting 
amortising  loans  (loans  with  scheduled  periodic 
payments) 
loans  may 
into  bullet-repayment 
weaken  the  reliability  of  monitoring  statistics,  as 
the  debt  service  burden  is  lifted  in  the  short  term 
and pushed to the end of the loan maturity. 

Graph 4.2.2:  Debt restructuring of non-financial private 

sector 

put additional pressure on profitability and capital 
adequacy. 

Pressure  to  increase  profitability  could  pose 
risks  to  asset  quality.  The  narrowing  net  interest 
margin,  low  interest  rates  environment  and  need 
for risk provisioning are putting pressure on banks’ 
profitability.  As  Cypriot  banks  display  a  cost-to-
income  ratio  below  the  EU  average,  the  potential 
for  increasing  profits  substantially  by  cutting 
operational costs appears relatively limited. Banks 
are  therefore  seeking  ways  to  use  the  abundant 
available liquidity (see Section 1.2) to bolster their 
profitability  and  generate  capital.  The  scope  for 
expanding domestic credit supply is limited by the 
scarcity  of  viable  domestic  borrowers,  more 
requirements  and 
restrictive 
limited  capital  headroom.  The  lack  of  low-risk 
alternative  investments  with  substantially  higher 
returns  prompts  banks  to  place  excess  liquidity  at 
the  European  and  Cypriot  central  banks,  despite 
negative deposit rates. This may provide incentives 
to  diversify  lending  activities  towards  alternative 
and riskier asset classes.  

loan  origination 

Graph 4.2.3:  Evolution of bank deposits 

Source: Central Bank of Cyprus 

Increased  use  of  debt-to-asset  swaps  could 
impact  the  real  estate  market  and  ultimately 
banks.  The  use  of  debt-to-asset  swaps  in  loan 
restructuring  transactions  as  a  cheaper  and  more 
expedient  alternative  to  foreclosure  is  leading 
banks to book an increasing amount of real estate 
assets  on  their  balance  sheets.  Although  risks  are 
expected  to  be  contained  by  exposure  limits,  the 
large  volume  of  swapped  assets  might  eventually 
lead to fire sales or excess supply of properties. In 
a  context  of  housing  market  adjustment,  a 
significant  increase  of  supply  could  negatively 
affect  property  prices  and  therefore  drive  down 
loan  collateral  values.  As  Cypriot  banks’ 
outstanding loans are predominantly collateralised, 
this  could  lead  to  higher  provisioning  needs  and 

Source: Central Bank of Cyprus 

in 

issuing 

face  challenges 

operations.  They 

Banks 
funding 
instruments  with  longer  maturities.  Cypriot 
banks  are  mostly  reliant  on  deposits  to  fund  their 
lending 
enjoy 
comfortable  liquidity  levels  (see  Section  1.2). 
However, there are risks in relying exclusively on 
a  broad  but  potentially  volatile  deposit  base  (see 
Graph  4.2.3),  notably  concerning 
large 
proportion  of  non-resident  deposits.  As  of 

currently 

the 

26 

202530354045505560Dec-14Feb-15Apr-15Jun-15Aug-15Oct-15Dec-15Feb-16Apr-16Jun-16Aug-16Oct-16%NPLs (% total loans)Restructured NPLs (% total loans)Provisions (% NPLs)-60-40-20020406080Jun-07Dec-07Jun-08Dec-08Jun-09Dec-09Jun-10Dec-10Jun-11Dec-11Jun-12Dec-12Jun-13Dec-13Jun-14Dec-14Jun-15Dec-15Jun-16Dec-16NFCs, CyprusHouseholds, CyprusNFCs, RoWHouseholds, Rowy-o-y, % 
 
 
4.2. Financial sector 

September  2016,  the  majority  of  deposits  had  a 
maturity  below  one  month.  There  is  currently  no 
interbank market in Cyprus, while banks are facing 
difficulties in raising medium to long-term funding 
on wholesale capital markets, mainly due to weak 
credit  ratings.  This  is  likely  to  become  a  more 
pressing  issue  as  banks  seek  to  prevent  maturity 
mismatches  and  to  contain  their  loan-to-deposit 
ratio while expanding credit supply. Debt issuance 
will  also  be  necessary  to  deal  with  regulatory 
requirements  concerning  loss-absorption  capacity, 
such  as  the  minimum  requirement  for  own  funds 
and eligible liabilities (MREL), which is meant as 
a  complement  to  the  bail-in  mechanism  under  the 
and  Resolution  Directive. 
Bank  Recovery 
Therefore, 
is  a  key 
improving  asset  quality 
challenge,  as  it  will  determine  the  conditions  for 
raising funds in the future. 

system 

is expected to be fully integrated with the register 
of  the  cooperative  banks.  This  is  to  provide  a 
comprehensive  view  of  a  borrower’s 
total 
liabilities.  In  addition,  the  company  managing  the 
credit  register  has  been  required  to  develop  a 
scoring 
for  better  appreciation  of 
households’  risks.  The  Central  Bank  of  Cyprus 
continues  to  reflect  on  how  to  include  the  credit 
register’s  data  in  its  supervisory  activity  and 
economic  research.  It  is  assessing  how  to  submit 
more  granular  data 
the  ECB  AnaCredit 
to 
database,  starting  from  2018.  The  companies' 
register  has  been  updated  and  submission  of 
financial statements and other data has been made 
electronic. 

4.2.3.  PENSION AND INSURANCE * 

4.2.2.  FINANCIAL REGULATION * 

The  supervisory  and  regulatory  framework  is 
being  improved  to  allow  for  the  creation  of  a 
secondary market for loans. The loan origination 
directive  was  simplified  in  2016  and  clarifies  that 
financial leases and syndicated loans are outside of 
its  scope.  To  stimulate  a  secondary  market  for 
legal 
the  authorities  are  preparing  a 
loans, 
framework  for  loan  securitisation.  The  legislation 
on  the  sale  of  loans  has  not  yet  had  tangible 
impacts:  it  appears  that  no  loan  has  been  sold  so 
far,  which  may  be  explained  by  the  burdensome 
licensing 
requirements  placed  on  potential 
purchasers  of  those  assets.  In  addition,  other 
factors  such  as 
the  heterogeneity  and 
granularity  of  assets,  (ii)  the  impact  of  loan  sales 
values on the capital position, (iii) the lack of loan 
servicers  in  Cyprus  and  (iv)  the  poor  liquidity  in 
the property market also play an important role. It 
is possible that the provisions of the securitisation 
the 
law  will  remain  equally 
effective  functioning  of  a  secondary  market  for 
bank loans remains one of the main challenges for 
the Cypriot financial sector. 

inactive.  Thus, 

(i) 

Financial  information  is  improving  through 
strengthening  the  credit  register  and  registrar 
of  companies.  The  availability  of  reliable  and 
comprehensive financial information on borrowers 
is a key condition to promote lending based on the 
actual  repayment  ability  of  borrowers.  Therefore 
the credit register of commercial banks’ borrowers 

The 

Insurance 

Pension  Authority 

governance 
the 
of 

relatively  weak 
capacity 

and 
The 
relevant 
administrative 
supervisory  authorities  pose  risks  to  financial 
and 
stability. 
European 
Occupational 
(EIOPA) 
identified  in  a  2015  report  (EIOPA,  2015)  the 
challenges  related  to  maintaining  the  current 
supervisory  framework  of  insurance  companies 
and  pension  funds.  These  sectors  hold  assets 
amounting  to  about  40 %  of  GDP.  While  the 
insurance  sector  contains  about  30  entities  and  is 
highly  concentrated,  the  pension  and  provident 
funds  sector  is fragmented  into  a  large number of 
small  entities.  According  to  EIOPA,  the  current 
supervisory 
needs 
reinforcement  with 
to  capacity  and 
regard 
technical resources, in order  to adequately identify 
weaknesses  and  promote  adequate  prudential 
measures. 

framework 

authorities 

Following 
the  2015  recommendations  of 
EIOPA,  the  authorities  are  taking  steps  to 
integrate  the  regulation  and  supervision  of 
insurance  companies  and  pension  funds  into  a 
single  supervisory  authority.  This  authority  will 
be  able  to  perform  a  forward-looking,  risk-based 
supervision,  covering  not  only  prudential  aspects 
but  also  market  conduct.  While  the  supervisory 
integration  is not yet in  effect,  much  progress  has 
been  achieved 
the  sectors.  A 
in  diagnosing 
technical  project  management  team  was  set  up  in 
September  2016  with  a  view  to  implementing  the 
integration of the regulation and supervision of the 
sectors.  

27 

 
4.2. Financial sector 

4.2.4.  PRIVATE INDEBTEDNESS * 

The  overall  indebtedness  of  the  non-financial 
private  sector  remains  high  at  354 %  of  GDP, 
significantly  over  the  MIP  threshold  of  133 %. 
Non-financial  private  sector  debt  as  a  percentage 
of GDP remained almost unchanged in 2015, being 
the highest in the EU. While the debt-to-GDP ratio 
of  non-financial  corporations  (excluding  SPEs) 
remained  stable  at  149 %  in  2015,  the  debt  of 
households  decreased  to  129 %  of  GDP  in  2015, 
from  131 %  of  GDP  in  2014  (see  Graph  4.2.4). 
The  debt  of  SPEs  accounted  for  75 %  of  GDP. 
However,  as  mentioned  in  Section  1,  SPEs  have 
limited interaction with the domestic economy. 

Graph 4.2.4:  Private sector indebtedness 

period  of  time,  suggesting  potential  solvency 
problems.  The  debt-to-equity  ratio  of  firms, 
excluding SPEs, increased to 171 % in 2015 from 
166 % in the previous year.  

The leverage levels are high and above the euro 
area  average  across  most  economic  sectors. 
Although  the  majority  of  sectors  deleveraged  in 
2016,  many  sectors  remain  highly  indebted,  such 
as  real  estate  activities  and  industry  (see  Graph 
4.2.5).  Construction  is  the  most  heavily  indebted 
sector;  its  ratio  of  loans  to  gross  value  added 
accounted  for  approximately  720 %  in  the  third 
quarter of 2016. The sectors that have deleveraged 
the  most  in  the  third  quarter  of  2016  are  industry 
(51 %) and construction (21 %).  

Graph 4.2.5:  Ratio of loans to gross value added across 
sectors of economic activity 

Source: Eurostat and Central Bank of Cyprus 

to 

Alternative  indebtedness  indicators  also  point 
to  excessive  debt  and  potential  solvency 
problems  of  the  non-financial  private  sector  in 
Cyprus.  Both  households  and  non-financial 
corporations  have  high  debt  to  income  ratio, 
repay  debt. 
indicating  a  weak  capacity 
Households’  debt  stood  at  198 %  of  gross 
disposable income in 2015 (from around 130 % ten 
years 
earlier).  The  debt  of  non-financial 
corporations  stood  at  931 %  of  gross  operating 
in  2005). 
surplus 
Furthermore, financial liabilities as a percentage of 
financial 
assets  decreased  marginally.  For 
households, financial liabilities accounted for 56 % 
of  financial  assets  in  the  second  quarter  of  2016. 
For  non-financial  corporations,  the  proportion  of 
financial  liabilities  was  171 %  over  the  same 

(from  435 % 

in  2015 

A: Agriculture, forestry and fishing, B_E:  Industry (except 
construction), F: Construction, G-I: Wholesale and retail 
trade, transport, accommodation and food service 
activities, J: Information and communication, L: Real estate 
activities, M-N: Professional, scientific and technical 
activities; administrative and support service activities  
K:  Financial and insurance activities, O_Q: Public 
administration, defence, education, human health and 
social work activities, R-U: Arts, entertainment and 
recreation; other service activities; activities of household 
and extra-territorial organizations and bodies  
Source: Eurostat 

The aggregate  effective debt  servicing  ratio  for 
households  has  declined  since  2011,  as  a 
significant  proportion  of  loans  have  not  been 
served.  The  debt  servicing  ratio,  which  accounts 
for  amortisation  of  loans  and  the  interest  burden 
(interest paid as a share of disposable income), has 
remained  stable  since  2011  (around  14.5 %). 
However,  the  ratio  adjusted  for  non-payments 
(effective debt servicing ratio) has declined sharply 

28 

0100200300400010203040506070809101112131415% of GDPHousehold debtNon-financial special purpose entities (SPE) debtNon-financial corporations debt, excluding non-financial SPEPrivate non-financial sector debtMIP Private sector debt threshold01002003004005006007008009001000AB-EFG-IJLM-N% of GVA13Q314Q315Q316Q3 
 
 
4.2. Financial sector 

Graph 4.2.7:  Bank loans to domestic residents, annual 

changes 

and  is  increasingly  below  the  unadjusted  debt 
servicing  ratio  (see  Graph  4.2.6).  This  shows  the 
increasing  proportion  of  income  that  Cypriot 
households  did  not  allocate  to  debt  servicing  and 
instead  made  available  for  other  purposes,  for 
example 
have 
contributed to recent economic growth. 

consumption.  This  might 

Graph 4.2.6:  Household debt servicing ratios 

Source: Cystat, Eurostat, IMF, European Commission 

The  debt  of  the  private  non-financial  sector 
decreased  in  2016,  mostly  due  to  restructuring 
solutions  involving  debt  write-offs  and  debt-to-
asset swaps. To a lesser extent, it was also due to 
the  servicing  of  loans  and  the  subdued  credit 
environment.  The  stock  of  loans  to  non-financial 
corporations and households in Cyprus, relative to 
GDP, declined by 17 % in the third quarter of 2016 
in  2015(16). 
compared 
the  same  quarter 
However,  the  reduction  in  debt  is  mainly  due  to 
valuation  effects  (i.e.  debt  write-offs  and  debt-to-
asset  swaps)  rather  than  repayment  of  debt.  The 
increased use of debt-to-asset swaps  allows  banks 
to hold property assets on their balance sheets for 
up  to  three  years,  instead  of  liquidating  them  at 
currently  low  prices,  and  suffering  losses  (see 
Section  4.2.1)  thus  not  impacting  adversely  their 
current profitability. 

to 

(16)  Given  the  high  reliance  on  banking  loans  from  the 
domestic  banking  system,  developments  in  the  stock  of 
loans  from  the  domestic  banking  system  provide  an  early 
indication of developments in the scoreboard indicator. 

Source: Central Bank of Cyprus, Eurostat and European 
Commission 

the  use  of 

to  obstacles 

too.  However, 

The  new  insolvency  and  foreclosure  schemes 
have  been  used  only  to  a  limited  extent.  The 
corporate  and  personal  insolvency  laws  and  the 
revised foreclosure legislation are currently in full 
effect, (European  Commission,  2016b, 
legal 
legal  procedures  are  being 
pp. 32-33)  and 
modernised 
the 
insolvency  processes  remains 
foreclosure  and 
their  effective 
limited  due 
application.  This  is  coupled  with  still  inadequate 
legal  procedures  and  some  deficiencies  in  the 
judicial system. As a result, according to the ECB 
(European  Central  Bank,  2016,  pp.  5-6),  debt 
recovery costs in Cyprus remain very high. This is 
demonstrated by the high amount of fees to be paid 
when  enforcing  a  claim  through  the  legal  system 
(e.g. court fees, government levies). Consequently, 
Cypriot banks tend to use the threat of foreclosure 
as  a  way  to  improve  the  payment  discipline  of 
borrowers to send a signal rather than as a tool to 

to 

29 

024681012141696980002040608101214%Interest rateInterest burdenDebt servicing ratioEff. debt servicing ratio-15-10-505101510111213141516pps(a) Non-financial corporations-10-505101510111213141516pps(b) HouseholdsTransactionsOtherReal growthInflationTotal bank loans (% GDP) 
 
                                                           
 
4.2. Financial sector 

The  housing  market  shows  early  signs  of 
stabilisation. In 2015, house prices in Cyprus still 
appeared  over-valued  in  terms  of  price-to-income 
ratio  (European  Commission,  2016b,  pp.  32-33). 
However, thanks to a pick-up in housing demand, 
the decline in nominal house prices had moderated 
to  –1.7 %  year-on-year  in  the  second  quarter  of 
2016  according  to  the  Central  Bank  of  Cyprus. 
This  is  reflected  in  the  slowly  increasing  number 
of  housing  sales,  albeit  from  a  subdued  level  (see 
Graph  4.2.8).  The  foreign  segment  of  the  market 
appears to be recovering more slowly. The supply 
side  of  the  housing  market  appears  to  have 
bottomed  out,  with  construction  confidence 
becoming less pessimistic and housing investment 
going  up.  Looking  forward,  an  improved  income 
outlook could help to increase demand for housing, 
although credit standards are likely to remain tight 
in  the  short-term.  Furthermore,  the  rising  use  of 
debt-to-asset  swaps,  together  with  a  more  intense 
use  of  asset  foreclosure,  might  increase  housing 
supply.  

Graph 4.2.8:  Housing sales contracts 

Source: Department of Lands and Surveys 

Deficiencies  in  the  title  deeds  system  hamper 
the recovery of the housing market. Cypriot and 
foreign property buyers are becoming increasingly 
aware of the delays in issuing and transferring title 
deeds and the fact that a number of properties sold 
or available for sale are encumbered by mortgages 
from other creditors. As household debt in Cyprus 
is  to  a  large  extent  backed  by  real  estate  assets, 
obtaining  a  title  deed  for  a  property  is  a  key 
determinant  of  households’  solvency  and  banks’ 

collect outstanding debt. Envisaged reforms of the 
justice  system  (see  Section  4.6.2)  are  expected  to 
facilitate the use of the insolvency and foreclosure 
frameworks  and  contribute  to  accelerating  debt 
reduction in the private sector. 

4.2.5.  HOUSING MARKET DEVELOPMENTS * 

The housing market in Cyprus is experiencing a 
less  prominent  but  longer  price  adjustment  in 
comparison  to  those  in  Ireland  and  Spain.  The 
Cypriot,  Irish  and  Spanish  housing  markets  are 
relevant comparisons as they recently experienced 
the highest house price inflation in the EU. In these 
countries,  house  prices  and  transactions  dropped 
following the start of the financial crisis. This was 
because  demand  for  houses  reduced  due  to  tight 
credit  conditions,  weak  economic  prospects  and 
increased unemployment.  

Cypriot  house  prices  appear  to  be  approaching  a 
trough, while the Irish and Spanish troughs were in 
2012  and  2013  respectively.  When  assessing  the 
trough's  depth  across  the  three  countries,  and 
assuming there is no further decline in house prices 
in  Cyprus,  the  intensities  of  the  downward  price 
adjustments  (17)  show  that  the  decrease  in  house 
prices  in  Cyprus  has  been  less  prominent  than  in 
Ireland and Spain. The downward price adjustment 
cycle  was  also  faster  in  Ireland  and  Spain  than  in 
Cyprus. In Cyprus, it took almost eight years from 
peak to trough compared to five and six years for 
Ireland  and  Spain  respectively.  In  terms  of  the 
cumulative  decrease  in  nominal  house  prices,  the 
decline  in  Ireland  (54 %)  was  also  much  stronger 
than in Spain (37 %) and Cyprus (32 %).  

The  smoother  house  price  adjustment  in  Cyprus 
can be attributed to several factors. The economic 
situation,  with  a  subdued  outlook  for  labour 
income, contributed to slower house price growth. 
Furthermore,  although  most  loans  to  households 
and  developers  are  collateralised  by  real  estate 
property,  asset  disposal  by  debtors  and  banks 
resorting to debt-to-asset swaps have been limited. 
The  deficiencies  of  the  system  for  issuing  and 
transferring  title  deeds hinder  debt  reduction  and 
affect  the  housing  demand  negatively  (European 
Commission, 2016b, pp. 34-35).   

(17)  The ratio between the cumulative decrease in house prices 

and the duration of the decline. 

30 

020040060080010001200140016001800Jan-08Jul-08Jan-09Jul-09Jan-10Jul-10Jan-11Jul-11Jan-12Jul-12Jan-13Jul-13Jan-14Jul-14Jan-15Jul-15Jan-16Jul-16TotalForeignersCypriots 
                                                           
 
4.2. Financial sector 

soundness.  This  enables  the  enforcement  of  loan 
payments  and  the  restructuring of  non-performing 
loans.  The  lack  of  progress  on  reforming  the 
system  for  transferring  title  deeds  is  negatively 
impacting  the  recovery  of  the  housing  market.  It 
prevents 
the  completion  of  some  mortgage 
transactions  and  lowers  confidence  in  the  sector. 
However,  reforms  of  the  issuance  of  title  deeds 
aiming  to  streamline  issuance  procedures  may 
ultimately contribute to a further adjustment in the 
housing market. 

31 

 
4.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

4.3.1.  LABOUR MARKET  

in 

situation 

labour  market 

The 
is 
the 
improving,  but  major  challenges  remain.  As 
discussed  in  Section  1,  labour  market  indicators 
started  to  improve  in  2015,  with  unemployment 
decreasing  fast  in  the  first  quarters  of  2016. 
Unemployment  remains  however  well  above  the 
EU  average  and  pre-crisis 
the 
levels  and 
reabsorption  of 
long-term  unemployed 
continue  to  be  an  important  issue.  The  labour 
market  recovery  has  not  contributed  to  reducing 
underemployed 
the 
workers (18).  In  this  context,  most  of  the  policy 
challenges  identified  in  the  2016  country  report 
remain valid. 

proportion 

large 

the 

of 

automatic  nominal  wage  cuts.  Until  an  agreement 
is reached, the Ministry of Labour has put forward 
a  temporary  arrangement  to  avoid  nominal  wage 
reductions in 2017. For the public and semi-public 
sector, 
semi-governmental 
the 
organisations,  collective  agreements  have  been 
signed  with  the  labour  unions  pegging  payroll  to 
nominal growth.  

including 

Graph 4.3.1:  Wage growth consistent with constant unit 

labour cost-based real effective exchange 
rate 

The  downward  adjustment  of  wages  came  to  a 
halt  in  2016.  Labour  costs  in  Cyprus  were  on  a 
downward  adjustment  path  between  2012  and 
2015.  This  allowed  for  a  continued  alignment  of 
unit  labour  costs  compared  to  other  EU  Member 
States and the international markets. This helped to 
improve  price  competitiveness  and 
the 
external position of Cyprus. In 2016, positive wage 
growth  returned  for  the  first  time  since  the  crisis, 
but  at  a  moderate  pace.  According  to  current 
estimations,  wage  growth  converged  towards  the 
value  consistent  with  a  constant  real  effective 
exchange rate (Arpaia and Kiss, 2015), a proxy for 
(cost-based)  external  competitiveness  (see  Graph 
4.3.1). 

thus 

employees  and 
Social  dialogue  between 
employers 
is  taking  place,  aiming  to  an 
agreement on wage indexation. As agreed within 
the  economic  adjustment  programme,  indexation 
to inflation of the cost of living allowance (COLA) 
in the private sector remained suspended until the 
end  of  2016.  After  the  suspension  ended,  the 
application of the previously used wage indexation 
would have led to a nominal reduction in wages, as 
the  equation  is  backward-looking  and  would have 
taken  into  account  the  negative  inflation  in  2016. 
Negotiations  on  COLA  in  the  private  sector 
therefore  began  in  October  2016  in  the  form  of 
social  dialogue.  These  are  expected  to  lead  to  a 
that  would  prevent 
new  calculation  method 

(18)  Cyprus  presents  the  highest  proportion  of  underemployed 
part-time workers (i.e. working part-time, but wish to work 
additional  hours  and  are  available  to  do  so)  in  the  EU, 
amounting  to  8.6 %  of  total  employment  in  Q3-2016 
(against an EU average of 4.3 %).  

Source: Eurostat, Cystat, European Commission 

Active  labour  market  policies  (ALMPs)  are 
launched  regularly,  but  without  appropriate 
follow-up  tools.  The  current  list  of  ALMPs 
includes measures targeting long-term unemployed 
and  youth  (under  the  National  Action  Plan  for 
Youth Employment). It also includes measures for 
other  vulnerable  groups,  including  persons  with 
disabilities.  However,  the  effectiveness  of  the 
ALMPs  in  addressing  labour  market  needs  is 
considered to be limited. This is due to their short 
time frame and frequently narrow scope, including 
the limited availability of training. Also the lack of 
a  comprehensive  continuous  monitoring  and 
evaluation tool prevents a more systematic analysis 
of  the full impact  of  ALMPs  and  their  limitations 
as  tools  for  getting  unemployed  people  back  to 
work.  The  availability  of  such 
tools  would 
facilitate  decision-making  and  rapid  corrective 
actions.  

Public  employment  services  (PES)  are  not  yet 
equipped  to  respond  effectively  in  line  with 
their strengthened role. The comprehensive plan 

32 

-6-4-202468100001020304050607080910111213141516%Actual nominal wage growthWage growth consistent with constant UCL-based REER 
 
                                                           
 
4.3. Labour market, education and social policies 

following unfair dismissal and (iii) a reinstatement 
option.  Regarding  procedural  hurdles 
and 
notification  periods  for  individual  dismissal,  the 
strictness  of  the  legislation  is  comparable  to  the 
OECD average. 

Furthermore,  EPL  for  temporary  contracts  is 
quite  strict,  with  Cyprus  scoring  substantially 
above  the  average  of  EU  Member  States.  This 
reflects  the  need  for  employers  always  to  present 
an  objective  reason  for  a  fixed-term  employment 
contract (20). In addition, fixed-term employees are 
considered  to  have  open-ended  contracts  after  30 
months  of  employment  with  the  same  employer 
(irrespective of the number of contract renewals). 

Graph 4.3.2:  Employment protection legislation indicators 

(2013) 

for  reforming  PES,  including  launching  a  tender 
for  the  recruitment  of  additional  staff,  has  been 
continuously delayed. Some PES reform measures 
have already started, e.g. joint actions with private 
employment  services  and  the  training  of  PES 
officers, while others are still in the pipeline. These 
measures  are  intended  to  meet  labour  market 
demand needs, provide individual counselling and 
single  points  of  contact,  and  to  assist  the  welfare 
reform  programme, 
including  activation  of 
Guaranteed  Minimum  Income  (GMI)  recipients. 
The limited specialisation and functionalisation of 
PES services makes it difficult for them to fulfil all 
the  requirements  for  implementing  the  Youth 
Guarantee  and  the  Long  Term  Unemployment 
Initiative recommendations.   

The  proportion  of  young  people  not 
in 
employment, education,  or training  (NEETs)  is 
decreasing  but  remains  high.  It  amounted  to 
15.2 %  in  2015  (15-24  age  group)  compared  to 
17 % in 2014, against an EU average of 12 %. The 
Ministry  of  Labour  has  started  efforts  to  identify 
and reach out to non-registered unemployed young 
people  and  NEETs  in  coordination  with  the 
Ministry  of  Education  and  Culture  (MoEC)  and 
youth  organisations.  However,  results  are  not  yet 
available. 

labour 

Employment  protection  legislation  (EPL)  is 
relatively  flexible  in  Cyprus,  thereby  allowing 
for smooth job transitions. Following the OECD 
methodology  (OECD,  2013)  and  based  on  the 
current 
the  European 
in 
Commission  has  calculated  EPL  indicators  for 
Cyprus  for  the  first  time.  Results  show  that  the 
overall  legislation  for  individual  and  collective 
flexible, 
dismissals 
especially  when  comparing  with  other  European 
countries (see Graph 4.3.2).  

in  Cyprus 

relatively 

force, 

law 

is 

However,  EPL  shows  some  marked  deviations 
from European practice in some categories. For 
example,  some  aspects  of  EPL  for  individual 
dismissals  are  relatively  strict (19),  as  revealed  by 
three  sub-components  of  the  EPL  index:  (i) 
relatively high severance payments, which are paid 
to  all  dismissed  workers  except  those  lay-offs 
justifiably,  (ii)  a  relatively  high  compensation 

(19)  For  further  information,  see  Termination  of  Employment 
Law 24/1967 and subsequent amendments of the Republic 
of Cyprus. 

A low score reflects more flexible employment protection 
legislation. 
Source: OECD and European Commission 

In  spite  of  the  restrictive  regulation,  the 
proportion  of  temporary  contracts  is  fairly 
high. Temporary employees represented 18.4 % of 
total employees in 2015 (one of the highest rates in 
the  EU),  against  an  EU  average  of  14.1 %.  This 
proportion  increased  sharply  over  the  crisis  (from 
2011  to  2014),  also  due  to  a  drop  in  permanent 
contracts (see Graph 4.3.3). However, it stabilised 
in  2015  and  only  slightly  decreased  in  the  first 
three quarters of 2016, along with an improvement 
in  labour  market  conditions.  This  improvement 
was  also  translated  into  an  increase  of  the  yearly 
transition rate to permanent contracts, from 17.9 % 
in 2014 to 27.9 % in 2015 (still among the lowest 

(20)  Protection  of  Employees  (Fixed-  term  Work)  Act  Section 

7(2). 

33 

0.00.51.01.52.02.53.03.54.04.5UKCYIEHUFINSKDKESSIPLELLTATSECZPTLUXFDEITLVNLBEIndividual and collective dismissalTemporary contracts 
                                                           
 
                                                           
4.3. Labour market, education and social policies 

include  the  reinforcement  of  its  role  with  new 
legislation  and  the  modernisation  of  the  social 
insurance process. 

4.3.2.  EDUCATION AND SKILLS  

of 

total 

invests 

general 

significantly 

in 
Although  Cyprus 
education  and  training,  educational  results  are 
below  average.  Cyprus  features  a  relatively  high, 
though  decreasing,  level  of  general  government 
expenditure on education. It was 6.5 % of GDP in 
2013  and  5.8 %  in  2014.    However,  education 
spending  has  been  considerably  reduced  as  a 
proportion 
government 
expenditure,  from  15.7 %  in  2013  to  11.8 %  in 
2014,  moving  towards  the  EU-28  average  of 
10.2 %.  Expenditure  per  pupil  for  2013  remained 
relatively  higher  than  for  other  countries  with  a 
similar 
level  of  socioeconomic  development, 
especially  at  primary  and  secondary  level.  The 
education  system’s  slow  adaptation 
the 
country’s changing economic structure (e.g. smart 
specialisation  areas (21))  is  still  a  major  concern. 
The  low  level  of  digital  skills  is  particularly 
worrying  as  in  2015  only  43%  of  Cypriots  had  at 
least  basic  levels  of  digital  skills,  below  the  EU 
average of 56% (European Commission, 2017b). 

to 

of 

continuous 

deterioration 

The 
the 
performance  of  Cypriot  students  in  basic  skills 
is  worrying.  The  proportion  of  low  achievers  in 
Cyprus  is  the  largest  in  the  EU  for  mathematics 
(43 %)  and  science  (42 %),  and  it  is  the  third 
largest  for  reading  (36 %)  according  to  results 
from  the  OECD's  Programme  for  International 
Student  Assessment  (PISA  2015).  The  results  for 
Cyprus have further deteriorated in comparison to 
2012  in  all  tested  areas,  placing  the  country  well 
below both the OECD and the EU averages. At the 
same  time  the  proportion  of  top  performers  has 
also decreased across the board, therefore showing 
a 
in  general 
trend 
achievement levels (OECD, 2016). 

significant  downward 

Early school leaving is generally decreasing but 
remains  very  high  for  foreign-born  male 
students.  The  early  school  leaving  rate  decreased 

(21)  Smart  specialisation  is  a  new  innovation  policy  concept 
designed  to  promote  the  efficient  and  effective  use  of 
public investment in research. Its goal is to boost regional 
innovation  in  order  to  achieve  economic  growth  and 
prosperity, by enabling regions to focus on their strengths. 

in  the  EU).  However,  a  large  majority  of  fixed-
term  employment  is  involuntary,  as  92.9 %  of 
fixed-term  employees  in  2015  declared  that  they 
had  to  accept a  temporary job  because  they  could 
not find a permanent one. This proportion has not 
changed  significantly  compared  to  the  pre-crisis 
period.  

Graph 4.3.3:  Employment by type, y-o-y changes 

Source: Eurostat (Labour Force Survey) 

A  relatively  high  proportion  of  temporary 
contracts  have  long  durations,  in  spite  of  time 
limits set in the legislation. There is no evidence 
of  a  prevalence  of  very  short-term  contracts  in 
Cyprus:  those  lasting  less  than  three  months 
amount to only 3.4 % of the total in 2015. On the 
contrary, almost 28 % of total temporary contracts 
lasted more than 36 months (against an average of 
7.5 % in the EU). This evidence conflicts with the 
duration  limits  enshrined  in  the  legislation,  and 
suggests  cases  of  potential  non-compliance  with 
the  legal  requirements.  However,  according  to 
administration  sources,  only  a  few  complaints 
were filed. 

is 

currently 

The  Ministry  of  Labour,  Welfare  and  Social 
Insurance 
considering  new 
measures  to  curb  undeclared  work.  According 
to the results of labour inspections in the first nine 
months of 2016, undeclared work stands at around 
16 % and is a challenge, especially for low-skilled 
professions.  The  reform  measures  currently  taken 
by  the  Ministry  of  Labour,  Welfare  and  Social 
Insurance 
the 
include  structural  changes 
organisation  of  the  Labour  Inspectorate.  These 

in 

34 

-30-20-10010203006Q106Q307Q107Q308Q108Q309Q109Q310Q110Q311Q111Q312Q112Q313Q113Q314Q114Q315Q115Q316Q116Q3thsPermanent employeesTemporary employeesSelf employmentOverall 
 
                                                           
4.3. Labour market, education and social policies 

of  graduates  in  the  fields  most  strongly  linked 
to innovation. The tertiary attainment rate reached 
52.5 % in 2014 and 54.6 % in 2015, well above the 
EU  average.  However,  a  widening  gender  gap 
persists,  with  women  outperforming  men  by  12.2 
pps.  in  2014  and  14.9  pps.  in  2015.  In  2014,  as 
many  as  44 %  of  students  were  in  the  fields  of 
social science, business and law, one of the largest 
proportion in the EU. On the other hand, there is a 
low proportion of science, technology, engineering 
and maths graduates, 9.2 per 1000 individuals (age 
20-29),  below  EU  average  of  19  per  1000 
individuals  (age  20-29),  which  may  hamper  the 
development of the digital economy. However, this 
seems to be a legacy of the previous growth model 
of  the  country  (based  on  financial  and  legal 
services).  It  does  not  necessarily  correspond  to 
future developments based on smart specialisation. 

Improving  the  quality  of  higher  education 
institutions is a challenge and study programme 
accreditation  operations  are  still  not  fully  in 
place.  After  a  long  period  of  consultation  the 
Cypriot  House  of  Representatives  adopted  a  law 
setting  up  an  Agency  of  Quality  Assurance  and 
Accreditation  in  Higher  Education.  This  Agency 
aims  to  help  ensure  the  quality  of  the  higher 
education  offered  by  Cypriot  institutions  and 
establish  Cyprus  as  a  regional  higher  education 
centre  of  excellence.  However,  it  is  not  fully 
operational 
cannot  yet  proceed  with 
accreditation activities.  

and 

The  overall  rate  of  adult  participation  in 
lifelong  learning  is  low  and  below  the  EU 
average.  The participation rate was 7.5 % for the 
25-64  age  group  in  2015.  More  participation  in 
lifelong  learning by  adults with  lower educational 
attainment  (ISCED  levels  0-2)  is  needed  to  keep 
skills up-to-date and help prevent early retirement.  

Changes  were  recently  introduced  to  provide 
financial  support  for  companies  that  invest  in 
lifelong  learning  for  their  employees.  There  are 
also relevant EU-funded schemes and programmes 
at  Cyprus'  two  evening  technical  schools.  These 
programmes  are  meant 
to  offer  good-quality 
mainstream  VET  education  to  adults.  They  help 
adults  re-enter  the  formal  school  system,  obtain  a 
qualification at upper secondary level, move on to 
tertiary  education  if  they  wish  and/or  re-enter  the 
labour market as skilled workers.  

from  6.8 %  in 2014  to  5.3 %  in  2015,  well  below 
the  EU  average  of  11.0 %  in  2015.  While  native-
born students have an early school leaving rate of 
only  3.1 %,  the  rate  for  foreign-born  is  16.7%  of 
which  females  account  for  10.7 %,  and  males  for 
23.3 %.  This  gender  gap  of  12.6  pps.  for  foreign-
born  individuals  is  much  wider  than  the  EU 
average (2.3 pps.).   

include 

(i)  enhancement  of 

Participation 
in  vocational  education  and 
training  (VET)  in  Cyprus  is  relatively  low, 
pointing  to  potential  scope  for  raising  the 
relevance  and  attractiveness  of  VET  systems. 
The  strategic  goals  set  out  in  the  MoEC  strategic 
plan  for  2016-2018,  the  strategic  plan  for  the 
system  of  technical  and  vocational  education  and 
training  for  2015-2020  and  the  upgrade  of  the 
apprenticeships  scheme  aim  to  improve  skills 
provision  and  reform  the  VET  system.  Some 
measures 
the 
technical  and 
cooperation  between  secondary 
vocational  education  (STVE)  and  businesses 
through  social  partner  dialogue,  (ii)  promotion  of 
practical  training  (industrial  placement)  of  STVE 
the 
pupils 
percentage of time STVE pupils spend in industry 
for  their  practical  training,  introduced  as  of  the  
2016-2017  school  year.  The  new  apprenticeship 
scheme  provides  preparatory  and  core  measures 
and develops about 40 specialisations based on the 
apprentices’ demand, labour market needs and the 
readiness of organised employers to cooperate with 
the MoEC. 

industry,  and  (iii) 

increasing 

in 

the 

fields  of 

As  of  2016, 
study  and 
specialisations and the existing curricula started 
being reviewed. New curricula will be developed, 
oriented  towards  learning  results  and  based  on 
learning modules and the European Credit System 
for Vocational Education and Training units. A set 
of  80  new  standards  will  be  developed  within  the 
system  of  vocational  qualifications  in  2016-2017. 
In  the  period  2014-2020,  the  existing  and  new 
standards  will  be  revised  and  around  10 000 
certificates will be awarded (22).  

Cyprus  has  a  very  high  tertiary  education 
attainment rate, but a relatively low proportion 

(22)  The courses for the certification in fluorocarbon refrigerant 
use  and  handling,  and  also  for  certification  in  the 
requirements  for  electrical 
installations  have  already 
started. 

35 

 
                                                           
4.3. Labour market, education and social policies 

The  skills  mismatch  is  a  challenge  for  Cyprus 
and employment rates vary strongly in line with 
the  level  of  education.  For  lower  qualifications 
(ISCED  0-2  level)  the  employment  rate  was 
55.5 %  in  2015,  only  slightly  above  the  EU 
average.  For  medium  qualifications  (ISCED  3-4) 
the  rate  was  69.4 %  in  2015,  this  time  slightly 
below  the  EU  average.  For  higher  qualifications 
(ISCED 5-8) it stood at 80.2 % in 2015, but below 
the EU average (23). 

Graph 4.3.4:  Proportion of tertiary graduates working in 

ISCO categories 4-9 

proportion  of  tertiary  graduates  are  working  as 
clerical  support  workers  or  as  service  and  sales 
workers. Here the potential of university education 
technological 
to  productivity, 
to  contribute 
innovation  and  growth  may  be  weaker  than  if  the 
graduates  were  working  as  managers,  (associate) 
professionals or technicians. 

4.3.3.  SOCIAL POLICY 

The  ‘at  risk  of  poverty  or  social  exclusion’ 
(AROPE)  rate  increased  in  2015  by  1.5  pps.  to 
28.9 % and is now one of the highest in the EU. 
Notably  the  ‘at  risk  of  poverty’  rate  and  the 
proportion  of  households  with  very  low  work 
intensity  were  on  the  rise  in  2015  (see  Graph 
4.3.5). Recent developments make it more difficult 
for Cyprus to meet its 2020 poverty target.  

from 

effect 

the  positive 

In-work  poverty  is  also  increasing.  The  number 
of  working  poor  is  on  the  rise  (see  Graph  4.3.5) 
while 
increased 
employment is still to materialise. However, given 
that  2015  poverty  figures  refer  to  2014  income 
data, the rise of in-work poverty mostly reflects the 
worsening of working conditions during the crisis. 
This  is  especially  the  case  as  temporary  and  part-
time  employment  have  increased  in  recent  years, 
and a significant wage adjustment has taken place. 
Additionally,  in  line  with  the  still  fragile  labour 
market  conditions,  the number  of  people  living  in 
households  with  very  low  work  intensity  has  also 
been  increasing  (10.9 %  in  2015  from  9.7 %  in 
2014), close to the EU average (10.5 % in 2015). 

The  poverty  or  social  exclusion  rate  among 
children has worsened. In 2015, the AROPE rate 
for  children  (aged  0-17)  grew  by  4.2  pps.  to 
28.8 % and is now above the EU average. On the 
other hand, the rate for people over 65 continues to 
improve  (20.8 %  in  2015  compared  to  27.2 %  in 
2014)  due  to  continued  actions  targeting  this  age 
group. Cyprus also has one of the highest risks of 
poverty  or  social  exclusion  for  people  with 
disabilities,  at  38.1 %  (2014).  The  average  gap 
between  people  with  disabilities  and  people 
without  activity  limitations  is  also  one  of  the 
highest.  

The indicator measures the share of tertiary qualified workers 
who work in jobs classified in ISCO categories 4-9. 
Source: Eurostat, European Commission 

Cyprus is among the countries with the highest 
proportion  of  tertiary  graduates  working  in 
occupations 
sometimes  considered  as  not 
requiring a university education. Notably, 35 % 
of  tertiary  graduates  were  in  jobs  classified  under 
of 
International 
Occupations 
(EU 
average:  23 %),  considered  by  the  International 
Labour  Organisation  (2007)  as  not  requiring  a 
tertiary  degree.  In practice  this  means  that a  large 

Classification 
(ISCO)  categories (24)  4-9 

Standard 

(23)  Systematic  employment  forecasting  and  the  identification 
of skills gaps is done by the Human Resource Development 
Authority,  which  provides  10-year  employment  forecasts 
on  a  regular  basis  (latest  2014-2024).  For  further  analysis 
see European Commission (2016b). 
(24)  The  ISCO  one-digit  classification 

is  as  follows:  1: 
Managers;  2:  Professionals;  3:  Technicians  and  associate 
professionals;  4:  Clerical  support  workers;  5:  Service  and 
sales  workers;  6:  Skilled  agricultural,  forestry  and  fishery 
workers;  7:  Craft  and  related  trades  workers;  8:  Plant  and 
machine  operators  and  assemblers;  9:  Elementary 
occupations; 10: Armed forces occupations. 

36 

0510152025303540LUMTPTCZHUHRDKSINLSEDELVPLBEFIITROSKFREU28LTBGUKEEATELIECYES 
 
                                                           
4.3. Labour market, education and social policies 

Graph 4.3.5:  AROPE rate and its components 

Graph 4.3.6:  In-work poverty rate, groups 

Source: Eurostat 

Cyprus  experiences  a  large  gender  gap  in 
pensions. At 48.8 %, it is one of the highest in the 
EU.  The  adequacy  of  pensions  to  meet  living 
standards  for  older  women  is  low  due  to  low 
employment  rates  and  participation  in  unpaid 
work.  This  occurs  in  the  informal  sector  of  the 
economy  or  in  family  businesses,  with  no  or  low 
social insurance contributions.   

Cyprus  has  had  one  of  the  highest  increases  in 
inequality  in  the  EU  in  recent  years,  which 
remains  a  source  of  concern.  As  mentioned  in 
Section  1,  the  ratio  between  the  incomes  of  the 
20 %  of  the  population  with  the  highest  incomes 
and  the  incomes  of  the  20 %  with  the  lowest 
incomes  (S80/S20)  increased  to  5.4  in  2014  from 
4.4 in 2009. It only showed a slight decrease to 5.2 
in  2015.  The  precariousness  of  the  labour  market 
and the significant wage adjustment that took place 
in  recent  years  contributed  to  increased  income 
inequalities. Furthermore, the tax-benefit system in 
Cyprus plays a limited role in reducing inequality 
and  poverty.  The  ‘at  risk  of  poverty’  rate  after 
social  transfers  has  actually  increased  in  recent 
years  (16.2 %  in  2015  compared  to  14.4 %  in 
2014).  

In-work-poverty rate (% of employed). Employed who have 
an equivalised disposable income below 60 % of the 
national equivalised median income. 
Source: Eurostat 

The  social  welfare  system  of  Cyprus  has 
undergone  a  major  reform  in  recent  years.  In 
2014 the Guaranteed Minimum Income and Social 
Benefits Act was adopted (European Commission, 
2016b, pp. 63-64). The GMI system is now fully in 
place,  and  as  of  September  2016  only  6577 
beneficiaries  of  the  old  public  assistance  system 
remain,  requiring  more  thorough  examination.  In 
the  last  quarter  of  2016,  around  27 000  families 
were  receiving  GMI.  Initial  feedback  shows  that 
the  GMI  seems  to  perform  well,  but  due  to  the 
system's  complexity  further  monitoring  of  the 
scheme is essential (see Box 4.3.1). 

4.3.4.  HEALTHCARE  

Cyprus has announced the implementation of a 
dual strategic healthcare reform programme. If 
adopted  by  the  House  of  Representatives,  the 
reform  programme  will  include  the  establishing 
autonomous  health  organisations  (by  June  2017), 
the reform of primary healthcare services (by June 
2019) and full implementation of a national health 
system (NHS) (by June 2020). 

There  is  currently  no  universal  healthcare 
coverage  in  Cyprus  and  healthcare  is  provided 
by  two  uncoordinated  sub-systems  leading  to 
inefficiencies  and  increased  spending.  Around 
85 %  of  the  population  is  entitled  to  public 

37 

0510152025300506070809101112131415% of populationAt-risk-of-poverty-or-social-exclusion rateAt-risk-of-poverty rateSevere material deprivationPeople living in low work intensity households0510152025300506070809101112131415% of employedTotalTemporaryPart-timeLone parents 
 
 
4.3. Labour market, education and social policies 

the public sector. Furthermore, 6 308 patients have 
been  referred  to  the  private  sector  to  skip  waiting 
lists  in  public  hospitals.  Cyprus  is  considering 
expanding  the  scheme  further  to  cover  unmet 
health needs. Improved cooperation with other EU 
Member  States,  under  the  Directive  2011/24/EU 
on  patients’  rights  in  cross-border  healthcare, 
would also increase treatment options that are not 
currently available in Cyprus.  

A  comprehensive  human  resources  strategy  to 
improve  efficiency  is  lacking.  The  total  number 
of  practising  physicians  per  100  000  inhabitants 
(338 in 2014) is lower than the EU average (350 in 
2014).  In  addition,  Cyprus  has  the  lowest  ratio  of 
nurses to doctors in the EU (in 2014, 1.6 compared 
to 2.4 on average). Health professionals belong to 
high-shortage  occupations  for  Cyprus  (as  per 
CEDEFOP  skills  needs  analysis).  There  is  no 
health  workforce  planning  system  aligning  the 
provision of future health education graduates with 
public  health  needs.  This  prevents  Cyprus  from 
developing 
in 
balanced 
multidisciplinary  teams  that  would  strengthen  the 
healthcare sector(26).  

skill-mix 

a 

Spending  on  prevention  and  public  health 
policies is low in Cyprus and is a major source 
inefficiency.  Chronic  non-communicable 
of 
diseases are the main cause of death and disability 
in  Cyprus.  Although 
the  main  risk  factors 
associated  with  these  diseases  are  preventable, 
Cyprus  dedicates  relatively  little  expenditure  to 
preventive  care  (0.6 %  of  total  current  healthcare 
expenditure 
in  2014).  Expenditure  on  health 
promotion and prevention, as a proportion both of 
GDP  and  of  total  current  health  expenditure,  are 
below the EU average (0.1 % of GDP and 1.4 % of 
total  current  health  expenditure 
in  Cyprus 
respectively, as against 0.2 % and 2.5 % in the EU 
(European Commission, 2016d)).  

Cyprus'  healthcare  sector 
is  not  making 
effective  use  of  open  and  competitive  public 
procurement.  This  is  shown  by  the  scarcity  of 
EU-wide  public  tenders  in  this  sector.  Therefore 
the benefits from centralised purchasing of medical 
supplies  and  services  through  public  procurement 

healthcare, but many opt for private healthcare and 
pay  out  of  pocket.  However,  there  are  no  links 
between public and private providers to ensure the 
continuity of care, while in many cases citizens are 
spending  additionally  for  the  same  health  service. 
In  2014  households’  out-of-pocket  payment  for 
health  reached  49.9 %  of  health  expenditure, 
which  is  the  highest  in  the  EU  (17.6 %).  The 
current situation generates inefficiencies related to 
the  fragmentation  of  care  provision  while  a 
significant part of the population is not adequately 
protected  from  the  financial  consequences  of 
illness. 

also 

The  proposed  design  of  the  NHS  would  entitle 
access  to  care  for  the  whole  population  and 
significantly  reduce  current  high  out-of-pocket 
payments.  The  draft  bill 
envisages 
implementing  the  NHS  on  the  basis  of  a  single-
payer  system,  funded  by  payroll  contributions 
from  the  state,  employers  and  employees.  Any 
budgetary  shortfall  is  expected  to  be  covered  by 
the building-up of financial buffers. The timelines 
for  NHS  implementation  will  particularly  depend 
on  the  duration  of  parliamentary  discussions  and 
the successful roll-out of the NHS IT solutions.  

Currently,  there  is  no  formal  referral  system 
from  primary  to  specialist  and  hospital  care. 
The  restructuring  of  primary  healthcare  is  key  for 
national  authorities 
to  establish  a  gatekeeper 
system (25).  Authorities  have  announced  plans  to 
enhance  primary  healthcare  services  by  clustering 
small  healthcare  facilities,  extending  opening 
hours,  standardising  procedures  and  improving 
synergies  and  coordination  with  community  care 
centres.  

Increasing  waiting  times  result  in  accessibility 
problems.  An  increase  of  waiting  times  for 
specific  treatments  is  evident  since  2011.  In  fact, 
there  are  long  waiting  lists  for  certain  surgical 
operations,  and  high-cost  screening  tests  worsen 
inequalities  in  access  to  care.  (Theodorou  et  al., 
2012).  In  response, 
the  Ministry  of  Health 
established a voucher project for two schemes. As 
of  September  2016,  942  patients  have  benefited 
from financial assistance for services not offered in 

(25)  Mechanism  of  care  referral  where  the  general  practitioner 
is  the  first  point  of  contact  in  the  patient’s  care  path.  The 
general practitioner refers the patient to a specialist or any 
other form of secondary care.  

(26)  The  EU  Joint  Action  on  health  workforce  planning  and 
tools  which 
forecasting  provides  methodologies  and 
Member States can draw on for national implementation of 
planning systems, see http://healthworkforce.eu/.  

38 

 
                                                           
                                                           
4.3. Labour market, education and social policies 

4.3.5.  LONG-TERM CARE (LTC)   

by 

partly 

explained 

low  coverage  and 

Despite recent reforms, Cyprus’ long-term care 
system  remains  fragmented  and  characterised 
by  a  relatively 
limited 
financing. Public expenditure on long-term care is 
one  of  the  EU's  lowest  (0.3 %  of  GDP  in 
comparison  to  an  EU  average  of  1.6 %).  This  is 
only 
favourable 
demography (27).  Without  a  comprehensive  public 
system  for  long-term  care,  these  services  are 
mostly provided by the private sector or informally 
by  family  members.  Therefore,  some  people  with 
care  responsibilities,  mainly  women,  might  be 
pushed into flexible working arrangements or even 
out  of  the  labour  market.  However,  recently  an 
increase  in  the  number  of  live-in  carers  (mostly 
from  non-EU  countries)  has  had  a  positive  effect 
on  female  employment.  The  implementing  of  the 
scheme  for  training  the  unemployed  to  assist  in 
providing  long-term  care  services  in  2017  is  also 
positive.  Overall,  long-term  care  lags  behind  in 
many  areas  such  as  the  governance  framework, 
availability of long-term care services and support 
for  informal  carers.  A  peer  review  of  this issue  is 
expected to take place in 2017. 

remain  widely  untapped.  Competition  is  also 
insufficiently  encouraged,  as  from  2012  to  2015 
about  a  third  of  contracts  were  awarded  through 
for 
negotiated  procedure  without  prior  call 
competition.  In  addition,  only  one  single  bid  was 
attracted  in  close  to  half  of  EU-level  tenders.  In 
most  procurement  procedures,  the  lowest  price  is 
used  as  sole  award  criterion.  This  suggests  that 
public  procurement  in  the  healthcare  sector  is  not 
sufficiently professionalised (see Section 4.6.4).  

Stronger  governance  and  coordination  of  the 
pharmaceutical  market  can  improve  efficiency. 
Without universal coverage, many citizens are not 
covered  for  pharmaceutical  products  and  have  to 
pay directly out of pocket. In 2014, Cyprus had the 
lowest  public  coverage  of  outpatient  medicinal 
goods  in  the  EU  (20.2 %  compared  to  70.1 %  in 
the  EU).  In  addition,  prescribing  habits  of  private 
doctors  are  not  monitored,  therefore  presenting 
difficulties  for  the  authorities  following-up  on 
current recommendations for the cost-effective use 
of  medicines. Cyprus has high  levels  of  antibiotic 
consumption 
of 
antibiotics. In addition to implementing the current 
national  strategy  for  antimicrobial  resistance, 
introducing  e-prescription  tools  would  increase 
efficiency.  Furthermore, 
the  authorities  have 
announced plans to develop by the end of 2017 an 
autonomous  medicines  organisation  seeking  to 
obtain an overview of the situation. 

non-prescription 

and 

use 

(27)  In  2016  the  population  aged  65  and  over  amounted  to 
14.6 % of the total, against an EU average of 18.9 %. 

39 

 
 
 
                                                           
4.3. Labour market, education and social policies 

40 

 Box 4.3.1: Selected highlights: the Guaranteed Minimum IncomeDuring the economic adjustment programme, Cyprus overhauled its welfare system to cushion the social impact of the economic crisis. In 2012, Cyprus' welfare system proved ineffective to cope with the rapid deterioration of the economic and social environment and the need to support an increasing number of people at risk of poverty and social exclusion. It suffered from fragmentation, poor targeting, weak coordination, frequent abuses, and lacked incentives for reintegration in the labour market. In July 2013, as part of the economic adjustment programme, Cyprus adopted a welfare reform plan aiming at rationalising and better targeting social benefits to those most in need. The plan also intended to reduce benefits-dependence and promote social inclusion, while providing support to certain groups that were not eligible under the previous scheme. The reform of the welfare system addressed inefficiencies in order to better support vulnerable households, while keeping the social budget envelope unchanged. At the core of the new social welfare system is the reformed public assistance programme, the Guaranteed Minimum Income (GMI), which was adopted in 2014. The GMI covers the basic needs of different household types defined on the basis of a new minimum consumption basket and additional allowances for housing cost and taxes (European Commission, 2016a, p.63). The scheme is designed to incentivise work, as beneficiaries that are able to work must be registered with the public employment services and be willing to participate in active labour market programmes. The implementation of the GMI and the streamlining of all benefits with specific criteria and control processes enabled a more effective allocation of benefits to those in need, avoiding the waste of valuable resources. More importantly, this allowed Cyprus to service the growing number of persons in need at a time when Cyprus was experiencing its economic crisis. The system is now fairer, as the eligibility criteria are clearer and the extent of abuses is limited by extended investigative powers given to the administration. The key success factors for this reform are that it combined increased effectiveness with a more efficient use of public resources. The Guaranteed Minimum Income is expected to help reduce the intensity of poverty in Cyprus. The number of GMI applications has risen steadily since its introduction, although a limited number of cases are still treated under the old system (see Section 4.3.3). According to first preliminary simulations during the design phase, the GMI contributes to reducing absolute poverty and the intensity of relative poverty. However, its full impact on reducing poverty has not yet been assessed.  
 
 
 
 
 
4.4. EXTERNAL COMPETITIVENESS AND PRODUCTIVITY 

4.4.1.  EXTERNAL COMPETITIVENESS * 

than  offset  a  rise 

The  current  account  improved  on  the  back  of 
higher savings. The current account improved to -
3.0 %  of  GDP  in  2015.  This  was  due  to  higher 
savings,  which  more 
in 
investment.  Savings  by  households  and  non-
financial corporations grew in 2015, but remained 
the  savings-investment 
negative.  As  a  result 
balances 
and  non-financial 
of 
corporations  also  remained  negative  (-9.2 %  of 
GDP  and  -7.5 %  of  GDP,  respectively).  The 
financial 
savings-investment 
corporations increased to 12.9 % of GDP in 2015. 
This was mainly due to the need for banks to raise 
risk-provisioning 
internal 
capital, and therefore to save more.  

levels  and  generate 

households 

balance 

of 

Graph 4.4.1:  Savings-investment balance 

Source: Eurostat 

international 

The  net 
investment  position 
(NIIP)  continued  to  improve  in  2016.  The  NIIP 
improved from -147 % of GDP in 2014 to -118 % 
of  GDP  in  the  third  quarter  of  2016.  While  SPEs 
accounted  for  more  than  half  of  the  negative 
NIIP (Central  Bank  of  Cyprus,  2016),  the  public 
sector had a NIIP of around  -80 % of GDP (EUR 
14.5 billion).  Public  external  debt  is  mainly  long-
term  and  includes  EUR  7.3 billion  in  loans  from 
the  European  Stability  Mechanism  and 
the 
International  Monetary  Fund,  and  a  EUR 
2.5 billion  loan  from  the  Russian  government. 
Although  the  NIIP  for  the  private  sector  was 
positive,  external  debt  remained  high  for  the 
financial  sector.  This  is  due  to  the  still  sizeable 

amount  of  foreign  (predominately  short  term) 
deposits, which amounted to 110 % of GDP in the 
third quarter of 2016. 

Graph 4.4.2:  Net international investment position 

Source: Central Bank of Cyprus 

Higher tourism receipts explain the bulk of the 
improvement  in  the  service  account.  Tourist 
arrivals 
in  2016, 
increased  by  around  20 % 
reaching  levels  not  observed  for  more  than  a 
decade.  The  strong  growth  in  the  tourism  sector 
came notably from gains in price competitiveness, 
as  shown  by  the  real  effective  exchange  rate 
depreciation  in  2015.  This  was  mainly  due  to  a 
nominal effective exchange rate depreciation vis-à-
vis  the  US  dollar  and  the  British  pound,  and  was 
partly  offset  by  a  large  appreciation  vis-à-vis  the 
Russian  rouble.  Furthermore,  lower  inflation  in 
Cyprus  compared  to  its  large  trading  partners 
contributed  to  the  large  real  effective  exchange 
rate depreciation. 

tourism  competitiveness 

The  non-price  competitiveness  of  the  tourism 
sector  ranks  among  the  lowest  in  the  EU  and 
lack of investments limits future tourism sector 
growth. Growth in the tourism sector in 2016 was 
supported by measures taken to extend the season 
and improve air connectivity. As regards the travel 
(see 
and 
Graph 4.4.3),  although 
infrastructure  and 
prioritisation  indexes  rank  high,  several  structural 
features  push  down  the  overall  performance  (e.g. 
environmental 
natural 
sustainability).  Increased  accommodation  capacity 
in  existing  facilities  has  helped  house  the  rising 
low 
number  of 

tourist  arrivals.  However, 

resources 

indicator 

and 

the 

41 

-40-30-20-1001020309597990103050709111315% of GDPHouseholdsGeneral governmentFinancial corporationsNon-financial corporationsTotal-290-240-190-140-90-40106011016010111213141516Q3% of GDPDirect investmentPortfolio investmentFin derivativesOther investmentReserve assetsFinancial accounts 
 
 
 
4.4. External competitiveness and productivity 

investment  in  tourism  facilities  is  likely  to  hold 
back  growth  and  productivity.  Exploiting  new 
forms of tourism could boost further tourism sector 
growth. 

Graph 4.4.3:  Travel and tourism competitiveness 

Graph 4.4.4:  Labour productivity, 2006-2015 

Note: 2006-2014 average for all industries in CZ and IE, 'C', 
'G_N' and  'J61_J63' in EU28, 'J61_J63' in CY, DE, ES, FR, LT, LV, 
PL, PT, RO, SE; 2008-2014 average in HR; 2009-2010 change 
excluded in HU due to methodological change; no 
available data for MT 
Source: Eurostat and OECD. 

Source: World Economic Forum. 

4.4.2.  PRODUCTIVITY AND INVESTMENT * 

growth  has 

Labour  productivity 
fallen 
noticeably in the post-crisis period and is below 
EU average. Generally, productivity growth tends 
to  slow  down  in  the  initial  phase  of  a  recession, 
due to the lagged employment reactions, and then 
to  pick  up  when  employment  starts  to  adjust. 
However,  productivity  growth  in  Cyprus  has 
remained  low  since  2008,  due  also  to  underlying 
structural weaknesses. In almost all manufacturing 
sectors  Cyprus  ranks  among  the  EU  Member 
States  with  the  lowest  productivity  growth  rates, 
notably 
information  and 
communication  technology  (ICT)  services  (see 
Graph  4.4.4).  Poor  productivity  performance 
points to several competition issues in product and 
service  markets  and  also  to  some  regulatory  and 
financing barriers that inhibit the growth of healthy 
businesses. 

in  construction  and 

to  2015, 

investment 

The  deterioration  in  productivity  growth  was 
accompanied  by  weak  productivity-enhancing 
investments.  Overall,  low  private  and  public 
investment  levels,  particularly  in  research  and 
development, and a subpar quality of infrastructure 
help  explain  low  productivity  growth  in  Cyprus. 
From  2008 
in  Cyprus 
contracted  by  almost  15  pps.  of  GDP,  which  was 
among  the  largest  declines  in  the  EU.  This  was 
partially due to the current tight credit conditions. 
Alternative  financing,  through  venture  and  seed 
capital,  is  only  marginally  benefiting  young  and 
innovative  firms (European  Central  Bank,  2015).  
Business  sector 
in  research  and 
involvement 
innovation  activities  and  investment  in  intangible 
assets is among the lowest in the EU (see Section 
limits  productivity  and  economic 
4.5).  This 
growth,  which 
from 
investments in knowledge creation.   

in  good  part 

stems 

42 

020406080100120140Business environment(12)Safety and security(13)Health and hygiene(28)Human resources andlabour market (9)ICT readiness (27)Prioritization of Travel& Tourism (2)Internationalopenness (26)Price competitiveness(16)Environmentalsustainability (28)Air transportinfrastructure (17)Ground and portinfrastructure (13)Tourist serviceinfrastructure (2)Natural resources(23)Cultural resources &business travel (21)1  Enabling environment T&T policy and enabling conditions Infrastructure Natural and cultural resources ()  Ranking in the EU-5-4-3-2-1012345678EU28ELLUFIHRITHUUKCYSEBEFRNLSIDEDKATCZPTESEELVSKIELTPLBGALL SECTORSManufacturing (C)Construction (F)Marketable Services (G_N)ICT Services (J61_J63) 
 
 
 
4.4. External competitiveness and productivity 

Graph 4.4.5:  Investment, EU Member States 

Graph 4.4.6:  Average disposition time in first instance courts 

(excluding criminal cases) 

Source: European Commission, European Commission for 
the Efficiency of Justice 

Low  business  dynamism  continues  to  hinder  a 
more  efficient  allocation  of  labour  and  capital. 
Cyprus  shows  one  of  the  lowest  corporate  birth 
and death rates and the lowest percentage of high-
growth enterprises (see Graph 4.4.7). Most sectors 
of  the  economy  are  heavily  indebted.  The  high 
ratio  of  non-performing  loans  and  low  corporate 
death rates suggest the presence of unviable firms 
throughout the Cypriot economy. This locks labour 
and  capital  into  unprofitable  firms,  while  they 
could  be  used  more  effectively.  The  new 
insolvency  framework  intends  to  provide  second 
chances for insolvent entrepreneurs but its use has 
been  limited,  due  to  obstacles  to  their  effective 
application (see Section 4.2.4). 

Source: Eurostat. 

The  non-price  competitiveness  of  the  business 
environment is declining. Since 2012, Cyprus has 
dropped  25  places  in  the  Global  Competitiveness 
Index (World  Economic  Forum,  2016).  The  most 
problematic areas are access to finance, corruption 
and  government  bureaucracy  (see  Section  4.6). 
Cyprus also lost four places in 2017 (45th instead 
of  41st  in  2016)  in  the  Ease  of  Doing  Business 
indicator  and  has  a  low  EU  ranking  in  this  area 
(World Bank, 2016). Sizeable barriers exist in the 
area  of  building  permits,  where  Cyprus  ranks 
125th  out  of  189  countries.  It  takes  almost  four 
times longer (617 days) than the OECD average to 
obtain  a  building  permit.  The  procedure  for 
updating  land  titles,  which  is  required  in  order  to 
sell  property,  is  particularly  burdensome.  This 
procedure  can  take  six  to  eight  months  and 
long  as  eight  years.  Contract 
sometimes  as 
enforcement  is  also  weak  in  Cyprus,  which  has  a 
low EU ranking (see Graph 4.4.6). Inefficiencies in 
the justice system (see Section 4.6.2), in particular 
lengthy  judicial  procedures,  hamper  the  swift 
resolution  of  civil  and  commercial  cases  and 
therefore impact negatively on the general business 
environment.  Weak  contract  enforcement  also 
deters  debtors  from  swiftly  repaying  their  debt 
making  a  reduction  in  the  stock  of  NPLs  more 
difficult (see Section 4.2).  

43 

CY-20-15-10-505152025303540Change in investment, 2008 -2015Investment, 2008, % of GDP020040060080010001200DKEEATPLHULTBGNLSIFISEHRROCZLULVSKESFRITMTELPTCY20102014Days 
 
 
4.4. External competitiveness and productivity 

Graph 4.4.7:  Corporate deaths and births, average of 2008-

2014 

available,  while  many  companies  remain  over-
indebted.  

to  SMEs 

integrated  and 

to  SMEs  under 

Financial SME support measures introduced in 
recent  years  are  limited  and  not  sufficiently 
well-targeted.  A  number  of  non-repayable 
schemes  are  available 
the 
operational programmes and the rural development 
programme co-funded by the 2014-2020 European 
Investment  Funds.  However, 
Structural  and 
support 
is 
is  not 
insufficiently  targeted  towards  sectors  with  high 
added-value  products  and  services,  as  defined  by 
Cyprus’ Smart Specialisation Strategy. This limits 
support  for  the  modernisation  of  those  sectors, 
which  is  a  key  condition  for  attracting  new 
businesses  and  creating  new  jobs.  The  SME 
initiative could be also an effective tool to address 
the  liquidity  problem  faced  by  SMEs  in  Cyprus. 
The  Cyprus  Entrepreneurship  Fund  supports  both 
working  capital  and  investment  loans  for  SMEs. 
Results  in  2016  for  this  risk-sharing  facility  are 
more  promising  as  more  financing  intermediaries 
are participating in it.  

on 

SMEs, 

through 

the  Enhancement 

The  European  Investment  Bank  directed  more 
funds  to  the  Cypriot  economy  in  2016,  especially 
to 
its  Multi-Beneficiary 
Intermediated  Lending  facility. This  programme 
has  helped  cut  the  cost  of  funding  for  businesses. 
The need to develop alternative forms of financing 
the  National  Policy 
has  been  recognised 
in 
the 
Statement 
Entrepreneurial  Ecosystem  in  Cyprus.  Despite 
several  initiatives  from  the  public  and  private 
sector,  alternative  financing  (equity  financing, 
venture  capital,  crowdfunding,  business  angels)  is 
still marginal. Cyprus has so far made little use of 
the  European  Fund  for  Strategic  Investments 
(EFSI)  (28),  which  provides  financial  guarantees 
and  aims  to  stimulate  private  investment  in  large 
and/or  risky  projects  such  as  infrastructure,  low 
carbon economy and small businesses. 

of 

(28)  On  EFSI  use  Cyprus  is  at  the  bottom  of  the  EU  ranking 

(European Commission, 2016e) 

Source: Eurostat 

includes 

for 
enhancing 

framework 
and 

The  action  plan  for  growth  is  gradually  being 
implemented,  but  tangible  results  are  still 
limited.  The  action  plan 
several 
initiatives  supporting  higher  business  dynamism 
and  innovative  growth.  The  June  2016  progress 
report shows progress in some areas, including the 
development  of  a  tourism  growth  strategy  and  a 
promoting 
strategic 
SME 
entrepreneurship 
development.  Some  measures  were  also  taken  to 
reduce administrative burden and improve the law-
making  process  (see  Section  4.6).  However,  other 
reforms are lagging behind, notably the setting-up 
of  fast-track  procedures  for  strategic  investment. 
The  legislative  proposal  to  attract  and  facilitate 
investments  is  still  in  the  draft  stage.  More 
in  productivity  and 
generally, 
competitiveness  will  depend  on  continuing  the 
reform process and implementing successfully the 
action plan for growth.  

improvements 

Access  to  finance  remains  the  most  pressing 
issue  for  businesses (Schwab,  2016;  European 
Central  Bank,  2015).  Cyprus  ranks  below  the  EU 
average  regarding  access  to  finance.  This  is 
because  of  the  restructuring  and  consolidation  of 
the  financial  sector,  which  has  led  financial 
institutions to set more stringent lending standards. 
Although  credit  conditions  appear  to  be  slowly 
easing, the financing environment remains difficult 
for  SMEs  which  have  limited  or  no  collateral 

44 

CY0510152025300510152025Corporate deaths, % of existing companiesCorporate births, % of existing companies 
 
                                                           
 
4.4. External competitiveness and productivity 

45 

 Box 4.4.1: Investment challenges and reforms in CyprusMacroeconomic perspective  Since 2008, investment in Cyprus has significantly decreased and currently stands among the lowest in the EU, at around 13% of GDP. The decline in investment concerned mainly private residential investment, although public sector and non-construction investment were also reduced. The decline was mainly driven by high public and private debt levels as well as tight credit conditions, resulting from high stock of non-performing loans in the banking sector. As demand is expected to strengthen in 2017 and 2018, investment is forecast to gradually expand and support total factor productivity and capital deepening, which in turn should support growth potential.  Assessment of barriers to investment and ongoing reforms  In addition to macroeconomic constraints, the overall business environment in Cyprus does not appear to facilitate investment (European Commission, 2016a).  An action plan for growth has been developed and is slowly being implemented. The plan mainly aims to improve the business environment, lighten the administrative burden for companies as well as support growth and investment. Furthermore, a wide range of reforms have been adopted or are envisaged, in particular in the areas of the judicial system and labour legislation. Nevertheless, some barriers remain to be addressed in areas such as contract enforcement and judicial procedures.  1. Firms’ access to finance remains wholly dependent on bank lending, which has been significantly reduced over recent years. Banking sector vulnerabilities still persist and capital markets remain underdeveloped, while Cypriot banks are not equipped to assess early-stage business risks and innovative projects. This is a significant constraint, particularly for small and medium-sized businesses. Access to alternative financing sources such as venture capital remains limited. More intensive use of the new insolvency and foreclosure frameworks, material progress with reforming the system of issuing and transferring title deeds, and modernising the legal procedures are necessary to support the much-needed clean-up of banks’ balance sheets. 2. The regulatory and administrative burden remains high and hampers business activities and investment decisions. There are significant inefficiencies in the public administration, low quality and availability of digital public services, and the perception of corruption is particularly high. Additionally, the low quality of Cypriot regulations and inadequate enforcement due to lengthy administrative and court proceedings weaken the effectiveness of Cyprus' legislation and overall legal certainty. Regulatory/ administrative burdenTaxationPublic administrationCSRAccess to financeCSRPublic procurement /PPPsCooperation btw academia, research and businessJudicial systemCSRFinancing of R&D&IInsolvency frameworkCSRBusiness services / Regulated professionsCompetition and regulatory frameworkCSRRetailEPL & framework for labour contracts CSRConstructionWages & wage settingDigital Economy / TelecomEducation EnergyLegend:TransportNo barrier to investment identifiedCSRInvestment barriers that are also subject to a CSRSome progressNo progressSubstantial progressLimited progressFully addressedPublic administration/ Business environmentFinancial Sector / TaxationR&D&ISector specific regulationLabour market/ Education 
 
 
 
 
 
4.5. RESEARCH AND DEVELOPMENT, ENVIRONMENT AND 

CLIMATE 

4.5.1.  RESEARCH AND DEVELOPMENT (R&D) 

R&D investment remains modest in Cyprus. In 
2015, total R&D intensity stood at 0.46 % of GDP, 
with  public  R&D  intensity  accounting  for  0.31 % 
of  GDP.  Investment  in  R&D  carried  out  by  the 
private  sector  was  0.08 %  of  GDP,  which  is  the 
lowest across all Member States (see Graph 4.5.1). 
These  very  low  values  illustrate  the  nascent  and 
significantly  underdeveloped  nature  of  the  R&D 
system  in  Cyprus.  This  can  notably  be  explained 
by  structural  limitations  such  as  Cyprus’  remote 
location,  small  market  size,  and  service-oriented 
economy.  The  low  levels  of  R&D  hinder  Cyprus' 
ability  to  diversify  its  economic  structure  and 
boost productivity. 

Graph 4.5.1:  Business enterprise expenditure on R&D (BERD) 

Intensity 

Source: European Commission 

Although some  measures have  been  adopted  to 
redirect scarce public funding towards priority 
areas, there are still some shortcomings in R&D 
governance  and  evaluation  of  funding.  Cyprus 
has  adopted  a  series  of  policy  instruments  to 
promote  R&D.  For  example,  a  scheme  to  support 
private  R&D  investment  has  been  introduced  and 
to  set  up  a  national 
the  government  plans 
knowledge  transfer  office.  However,  there  is  still 
limited  monitoring  and  evaluation  of  how  public 
research  is  structured  and  strategically  steered. 
to  boost 
Sustained  monitoring 
science-business linkages and ensure the relevance 
of public research. Overall, reforms undertaken by 

is  necessary 

Cyprus  go  in  the  direction  of  building  a  more 
robust R&D policy system.  

4.5.2.  ENVIRONMENT AND CLIMATE 

by 

Investment 

Total  environmental  investments  in  Cyprus  in 
GDP  terms  are  close  to  the  EU  average,  but 
there is potential to improve their efficiency and 
specialised 
targeting. 
environmental  protection  service  providers 
in 
Cyprus  is  among  the  highest  in  the  EU  as  a 
proportion  of  GDP,  and  benefit  from  strong 
support  by  EU  funds.  However,  there  is  potential 
to  further  raise  the  standard  of  environment 
protection in the country, as shown by a still weak 
eco-innovation  performance.  Cyprus  also  faces 
critical  environmental  needs  in  the  water,  waste 
treatment and energy sectors.   

Cyprus’ waste management performance is one 
of  the  main  environmental  concerns.  This  is 
reflected  in  an  increase  of  the  GDP-intensity  of 
waste generation well above the EU average, a low 
waste  recovery  rate  and  a  strong  dependence  on 
landfilling,  including  in  illegal  facilities.  Cyprus’ 
transition towards a more circular economy hinges 
upon  the  country's  ability  to  move  away  from 
landfilling  and  sub-optimal  treatment  options. 
Several  measures  have  been  taken  to  protect  the 
environment  by  promoting  separate  collection  to 
increase  recycling  rates,  updating  the  national 
waste management plan (for municipal waste only) 
and  approving  a  waste  prevention  programme. 
However, managing waste efficiently and fulfilling 
the  obligations  from  the  EU  waste  legislation 
remain  a  challenge.  An  increased  policy  focus, 
incentives  
more 
towards  reducing  waste  generation  and  increasing 
recycling  rates,  by  implementing  the  separate 
collection obligation, would be beneficial. In view 
of  its  relatively  low  waste  recovery  rate  and  the 
very low amount of toxic waste as a proportion of 
total  waste  volume,  the  economic  potential  for 
waste treatment seems high.  

investments  and  economic 

Cyprus  faces  major  challenges  concerning 
water  management,  in  the  context  of  severe 
water 
of 
groundwater.  The  level  of  the  water  exploitation 
index  is  among  the  highest  in  the  EU.  This 
indicates  a  severe  and  increasing  water  scarcity. 

over-abstraction 

scarcity 

and 

46 

-6061218240.00.40.81.21.62.02.4BERD intensity -compound annual growth (%), 2007-2015BERD intensity, 2015 (% GDP) CY 
 
 
4.5. Research and development, environment and climate 

attention  as  Cyprus  is  among  the  Member  States 
with the highest ratio of greenhouse gas emissions 
from  transport  to  GDP  (in  2014,  the  ratio  was 
220.4  tonnes  of  CO2-equivalent  per  million  EUR 
of  GDP  in  Cyprus  versus  93.7  in  the  EU  as  a 
whole). This shows a high reliance on private road 
transport,  as  Cyprus  has  one  of  the  highest  car 
ownership ratios in the world (more than 600 cars 
per  1 000  inhabitants),  although  passenger  traffic 
intensity  in  the  country  is  lower  than  the  EU 
average. It also reflects the lack of fuel efficiency 
policies  which  would  provide  incentives  for  a 
more  fuel  efficient  fleet  of  private  vehicles.  The 
use of private road transport is also encouraged by 
the  currently  insufficient  availability  of  public 
transport. 

Measures  have  not  yet  been  taken  to  ensure 
continued  compliance  with 
the  Industrial 
Emissions  Directive  once  current  derogations 
have  expired.  Cyprus’  electricity  is  generated 
mostly by plants using heavy fuel oil (HFO) which 
Industrial  Emissions 
the 
must  comply  with 
Directive.  These 
enjoy 
facilities 
derogations  under  the  Directive  until  the  end  of 
2019,  while  one  of  the  plants  will  benefit  from  
derogations  until  2023.  To  date,  no  action  to  deal 
with  the  expiry  of  the  derogation,  for  example  by 
using  natural  gas  instead  of  HFO,  has  been 
reported to the Commission. 

currently 

the  EU  average.  Thus, 

Furthermore, the water use intensity in Cyprus has 
been  increasing  faster  than  for  the  rest  of  the 
Member  States  since  2008,  despite  remaining 
the  water 
below 
management  framework  remains  inadequate  for 
the 
government’s 
investment  in  desalination  and  water  recycling. 
The  water  pricing  policy  is  not  in  line  with  the 
Water Framework Directive, as it has not yet been 
fully implemented with new tariffs only adopted in 
January 2017. 

challenges, 

despite 

the 

to 

Cyprus appears on track to meet its greenhouse 
gas  emissions  target  in  2020,  according  to  the 
latest  national  projections  submitted 
the 
Commission in 2016 which take existing measures 
into  account.  Cyprus  adopted  a  "low  carbon 
development  strategy"  and  aims  to  fulfil  its 
commitments  on  greenhouse  gas  emissions  by 
reducing  its  dependence  on  fossil  fuels.  This 
the  promotion  of  renewable  energy 
involves 
sources,  energy  efficiency  and  climate-friendly 
technologies.  While  Cyprus  is  on  its  planned 
trajectory for increasing the share of renewables in 
final  energy  consumption,  an  acceleration  of 
renewable energy supply is likely to be needed to 
meet the target for 2020. Preliminary data indicate 
that,  also  as  a  consequence  of  the  recovery  in 
economic  activity,  sales  of  petroleum  products 
increased  substantially  in  2016,  which  might 
translate  into  rising  energy  consumption  and, 
consequently, greenhouse gas emissions. 

energy  market 

The  reform  of  Cyprus’  energy  sector  has  not 
progressed.  Cyprus’ 
is 
characterised  by  the  dominance  of  the  former 
public  electricity  monopoly  and  by  an  over-
imported  fossil  fuels  (European 
reliance  on 
Commission,  2016b,  pp. 73-74).  The  timeline  for 
the  ownership  unbundling  of 
the  Electricity 
Authority of Cyprus (EAC) has been significantly 
pushed  back.  Moreover,  the  approval  process  of 
the  new  electricity  trade  and  settlement  rules  is 
proving  very  slow.  The 
transmission  system 
operator's  limited  capacity  and  dependence  on 
EAC might also result in a slow implementation of 
the new market rules. Finally, no progress has been 
made in designing a solution that would allow the 
introduction of natural gas in the domestic market 
by 2020. 

There  is  no  specific  climate-related  transport 
in  Cyprus.  Transport  policy  merits 
policy 

47 

 
4.6. PUBLIC ADMINISTRATION 

4.6.1.  PUBLIC ADMINISTRATION * 

and 

Public administration continues to suffer from a 
number of inefficiences. Although Cyprus’ public 
sector wage bill is among the highest in the EU (as 
a share of GDP), perceptions of the government’s 
effectiveness  are  barely  above  the  EU  average. 
This is particularly due to (i) the large influence of 
institutional  rules,  rather  than  performance,  on 
wage-setting 
(ii)  weak 
performance  assessment  tools  and  (iii)  limited 
mobility of human resources. Several international 
rankings  confirm  these  challenges.  According  to 
the World Bank, Cyprus ranks only in the bottom 
half  of  the  EU  for  the  efficiency  of  its  public 
administration  (World  Bank,  2015).  Also,  Cyprus 
is  among  the  worse  rated  EU  member  states  on 
executive  capacity  and  executive  accountability 
(Bertelsmann Institute, 2016). 

promotion, 

the  public  administration 
The  reform  of 
remains  a  critical  issue  in  Cyprus.  A  series  of 
reforms  were 
the  House  of 
rejected  by 
Representatives in December 2016. These reforms 
were  designed  during  the  economic  adjustment 
programme  and negotiated  and  agreed with  social 
partners.  They  provided 
for  a  mechanism 
contributing  to  better  control  of  the  public  sector 
wage bill.  

These  reforms  also  aimed  to  modernise  the 
appraisal  system 
through  written  exams  and 
interviews,  and  make  the  promotion  system  more 
open  and  more  closely  linked  to  merit.  They 
addressed the insufficient flexibility and resilience 
of  the  public  administration  by  incentivising  staff 
mobility and enhancing redeployment rules.  

The reform of the public administration could have 
a  cross  cutting  impact  on  the  functioning  of 
government  services.  The  negative  parliamentary 
vote on the current reform plans is therefore likely 
to  delay  progress  in  other  reforms,  notably  the 
reform  of 
increased 
local  governments  and 
autonomy of public hospitals. 

particularly aims at making the issuing of building 
permits  and  certificates  more  efficient.  It  also 
improves  public 
financial  management  by 
addressing  the  current  gaps  in  local  government 
financial  reporting  with  the  establishing  of  a 
common accounting and reporting framework. 

to 

the  previous  year 

The supply of digital public services is currently 
weak.  Cyprus’  performance  in  the  provision  of 
digital  public  services  is  below  the  EU  average, 
with  a  low  degree  of  sophistication  of  certain 
electronic services (e-services). Cyprus features in 
the  bottom  half  of  EU  countries  in  the  Digital 
Economy  and  Society  Index,  dropping  two  places 
compared 
(European 
Commission, 2017b). Better online public services 
the  percentage  of  e-
are 
government  users  in  Cyprus  (29 %  of  Internet 
users have submitted forms with public authorities 
online  in  2016,  below  the  EU  average  of  33 %). 
The  design  of  effective  online  services  and  tools 
can increase the transparency and efficiency of the 
public  administration.  Well-functioning  digital 
public services are also effective tools to improve 
citizens’ trust and participation.  

improve 

likely 

to 

on 

intends 

advanced 

technical, 

operational 

Cyprus’  e-government  strategy 
to 
remedy  the  lack  of  digital  public  services.  The 
strategy applies to the broad public administration, 
focusing 
and 
organisational  aspects  of  e-services.  It  envisages 
the  provision  of 
electronic 
(i) 
identification  and  signatures,  (ii)  an  integrated 
information  system  covering  the  judicial  system 
and  automating  all  court  procedures,  and  (iii)  the 
creation of an integrated health information system 
(see  Section  4.3).  An  Electronic  Governance 
Council  was  established  in  2015  to  approve  and 
implement  all  e-government  projects  and  monitor 
policy  developments  in  this  area.  In  2016,  the 
government decided to create a single portal for all 
digital public services.   

4.6.2.  JUSTICE SYSTEM * 

The  reform  of  local  governments  has  stalled. 
The draft bill on local governments is still pending 
adoption by the House of Representatives and the 
implementation deadlines remain vague. The local 
government  reform  affects  the  delivery  of  vital 
local public services and plays an important role in 
the  process  of  issuing  title  deeds.  The  reform 

through 

The  Cyprus 
faces  serious 
justice  system 
challenges as regards its efficiency. According to 
data  collected 
the  2017  EU  Justice 
Scoreboard  (forthcoming),  the  time  needed  to 
reach  a  first-instance  judicial  decision  in  civil, 
commercial and administrative cases is particularly 
long.  The  backlog  of  pending  cases  is  also 

48 

 
 
4.6. Public administration 

relevant  stakeholders  including  the  Ministry  of 
Finance and the MJPO. 

4.6.3.  BETTER REGULATION  

Regulatory  quality  has  weakened  considerably 
in Cyprus in the last five years. According to the 
World Bank (World Bank, 2015) Cyprus ranked in 
the bottom half of EU member states in 2015 with 
regard to regulatory quality, dropping seven places 
compared  to  2011.  Key  challenges  include  the 
limited use of both ex-ante evaluations and ex-post 
assessment  of 
impacts  on  small  businesses. 
Although  public  consultations  reach  stakeholders, 
results  are  often  not  made  publicly  available. 
Efforts  are  being  made  to  improve  the  quality  of 
legislation.  A  new  impact  assessment  mechanism 
was  approved  in  August  2016,  with  the  aim  to 
ensure  more 
impact 
assessments.  It  will  enter  into  force  in  January 
2017 and introduce an SME test, which will aim to 
assess  all  possible  impacts  of  new  legislation  on 
SMEs. 

focused  and 

thorough 

to  reforms 

initiated  under 

The operation of the Law Office of the Republic 
and  the  Attorney  General  is  under  strain. 
Litigation  cases  linked  to  the  restructuring  of  the 
banking sector have increased the workload of the 
Attorney  General’s  office.  There  has  been  a 
considerable  increase  in  regulatory  and  legislative 
activity  due 
the 
economic  adjustment  programme.  Therefore  the 
drafting  and  legal  vetting  of  legislation,  which 
require coordination with ministries and the House 
of  Representatives,  is  not  taking  place  in  an 
efficient  or 
lack 
developed  skills  for  the  preparation  of  legislation, 
while the Law Office’s vetting unit lacks capacity 
to  cope  efficiently  with  the  increased  workload. 
Significant  delays  have  appeared  in  the  clearance 
of legislation for adoption by the government and 
consideration by the House of Representatives.  

timely  manner.  Ministries 

improve 

Efforts  are  being  made  to 
legal 
drafting and vetting processes. The Government 
provides specialised training for relevant personnel 
in  the  Ministries.  An  action  plan  has  been 
developed, 
legal 
drafting  for  relevant  officers,  (ii)  an  increased 
focus on impact assessment and (iii) guidelines for 
preparing  legislation.  With  technical  assistance 
from  the European Commission, a comprehensive 

including  (i)  workshops  on 

dispute 

alternative 

significant  (European  Commission,  2016b  p.  22). 
These  problems  stem  mainly  from  complex 
procedural  rules  prone  to  abuse  and  the  low  level 
of  ICT  use  in  courts,  in  particular  for  case 
management.  Furthermore,  there  are  discussions 
concerning (i) the relatively low level of budgetary 
resources  dedicated  to  the  judiciary,  (ii)  the 
resolution 
underuse  of 
mechanisms  (in  particular  the  voluntary  use  of 
mediation), and (iii) the lack of organised lifelong 
training  of  judges.  Most  of  these  issues  were 
recognised  in  a  report  adopted  by  the  Supreme 
Court in June 2016. The inefficiency of the justice 
system is an obstacle to the swift resolution of civil 
and  commercial  cases.  This  particularly  concerns 
credit enforcement and the proper implementation 
of  the  insolvency  and  foreclosure  frameworks. 
More  generally,  it  may  deter  investments  and 
dampen economic activity.  

a 

intends 

Some  reform  initiatives  have  been  launched. 
Draft  bills  have  been  proposed  to  improve  civil 
procedures, by reforming interlocutory appeals (29) 
during  proceedings  and  by  amending  the  Civil 
Procedure  Law  to  strengthen  the  enforcement  of 
judgments.  To  increase  the  use  of  ICT,  the 
set  up 
government 
court 
to 
administration/management 
information  system 
for  the  Cypriot  courts.  The  use  of  alternative 
dispute  resolution  mechanisms  remains  low,  as 
few  mediation  took  place  in  2016  despite  an 
increasing  number  of  registered  mediators  (over 
300).  For  this  reason,  the  Ministry  of  Justice  and 
Public  Order  (MJPO)  has  commissioned  a  study 
on  how  better  to  promote  voluntary  use  of 
mediation.  To  increase  courts’  specialisation,  the 
MJPO  and  the  Supreme  Court  have  announced  a 
feasibility  study  on  establishing  a  commercial 
court.  To  improve  judicial  training,  the  Supreme 
Court is examining the creation of a special section 
in charge of the lifelong training of judges, which 
may  become  operational  in  2018.  Following  a 
technical  assistance  request  from  the  Supreme 
Court  to  the  European  Commission,  a  review  of 
the operations of the court system is expected to be 
conducted  in  2017  to  further  support  the  reform 
momentum. The effectiveness of the reform of the 
judicial system will depend on the full support not 
only  of  the  Supreme  Court  but  also  of  all  the 

(29)  Interlocutory appeals are appeals of a ruling by a trial court 
that  are  made  before  all  claims  are  resolved  as  to  all 
parties. 

49 

 
                                                           
4.6. Public administration 

review  of  the  Law  Office's  operations  has  started 
in  2017  to  address  its  various  shortcomings. 
Particular  emphasis  is  to  be  given  to  the  drafting 
and vetting of legislation.   

draft  law  on  whistleblower  protection  has  not  yet 
been  submitted  to  House  of  Representatives, 
despite 
face 
significant  obstacles  in  Cyprus  (Transparency 
International, 2015).  

that  whistleblowers 

evidence 

4.6.4.  CORRUPTION 

4.6.5.  STATE-OWNED ENTERPRISES 

Trust  in  the  public  institutions  is  undermined 
by  a  high  perceived  level  of  corruption.(30) 
Recurrent  surveys  highlight  the  perception  that 
patronage,  bribery  or  abuse  of  power  are 
the  Cypriot  public 
in 
significant  problems 
administration  (World  Bank,  2015;  Transparency 
International, 2017). 87 % of companies agree that 
corruption  hampers  business  competition 
in 
Cyprus. According to the World Economic Forum, 
corruption  is  seen  as  the  third  most  problematic 
factor  for  doing  business  in  Cyprus.  The  2016-
2017  Global  Competitiveness  Report 
ranked 
Cyprus  103rd  out  of  138  countries  regarding 
favouritism  in  decisions  of  government  officials 
(Schwab,  2016).  This  might  affect  competition  in 
public 
public 
procurement. For example, in 2015, 40 % of public 
procurement  procedures  involved  only  a  single 
bidder, while 24 % of procedures did not feature a 
call  for  tender,  the  highest  percentage  in  the  EU 
(European  Commission,  2016f).  From  2009  to 
2015,  only  9 %  of  public  tenders  were  assessed 
according 
the  most 
economically advantageous tender, resulting in one 
of the lowest scores in the EU. 

the  principle  of 

efficiency 

tenders 

and 

of 

to 

Some  reforms  have  been  undertaken  to  tackle 
corruption. Recent developments include reforms 
to  professionalise  public  procurement  at  local 
level, and a political party funding law enacted in 
December  2015.  A  constitutional  amendment 
enabling  asset  disclosure  for  public  officials  has 
been adopted in 2016. However, the Coordinating 
Body against Corruption remains without full-time 
staff,  while  the  national  anti-corruption  strategy 
has been under preparation since September 2015, 
with no tangible outcome to date. Moreover, many 
weaknesses  in  the  disciplinary  regime  for  public 
servants  highlighted 
the  2014  EU  Anti-
in 
Corruption Report remain unaddressed. (European 
Commission,  2014b)    Finally,  the  government’s 

(30)  Cyprus  is  one  of  the  countries  where  the  perception  of 
corruption  has  increased  most  over  the  last  two  years 
(European Commission, 2015). 

The  framework  for  managing  state-owned 
enterprises  (SOEs)  still  poses  certain  risks. 
During  the  economic  adjustment  programme  the 
authorities had identified several weaknesses in the 
management  framework  of  SOEs.  There  are  no 
established  common  reporting  standards, financial 
data  are  not  centralised  and  benchmarked,  while 
line 
direct 
ministries.  There  are  no  common  standards 
regarding  corporate  governance.  The 
lack  of 
visibility  and  long-term  strategy  regarding  SOEs 
may pose risks concerning contingent liabilities, as 
the State is their ultimate guarantor.   

scattered  among 

supervision 

is 

The reform of SOE’s management has not been 
adopted  yet.  The  draft  law  on  SOEs  aims  to 
improve  their  corporate  governance  and  ensure  a 
more  effective  monitoring  of  their  functioning, 
while minimising fiscal risks related to contingent 
liabilities  and  losses.  The  law  was  submitted  for 
discussion in the House of Representatives in April 
2015, but has so far not been adopted. The delays 
in adopting this law undermine the public sector's 
efficiency,  by  holding  up  the  improvement  of 
SOEs' governance and preventing the mitigation of 
SOE-related fiscal risks.  

The  privatisation  process  of  Cyprus’  main 
SOEs  has  been  halted.  The  privatisation  plan 
adopted by Cyprus in 2013 aimed at privatising, at 
least  partially,  the  main  SOEs  such  as  the  Cyprus 
Telecom  Authority  (CyTA)  and  the  Electricity 
Authority  of  Cyprus  (EAC).  The  plan's  main 
objective  is  to  attract  strategic  investors  in  key 
utilities,  in  order  to  (i)  improve  governance,  (ii) 
bring in foreign technical expertise and capital, and 
increase  productivity.  The  privatisation 
(iii) 
proceeds  are  also  intended  to  accelerate  the 
reduction of Cyprus’ public debt. However, strong 
political opposition to privatisation has resulted in 
the withdrawal of budgetary appropriations for the 
privatisation  unit,  while  the  government  repealed 
several privatisation decrees. 

50 

 
                                                           
ANNEX A 

Overview table 

Commitments 

2016 Country-specific recommendations (CSRs) 

Summary assessment(31) 

respect 

CSR  1:  Following  the  correction  of  the  excessive 
the  medium-term  budgetary 
deficit, 
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 
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.(MIP-relevant) 

law  on 

the 

Cyprus  has  made  limited  progress  in  addressing 
CSR  1  despite  the  completion  of  the  budgetary 
framework. Indeed, limited progress has been made 
to  adopt  the  draft  bills  regarding  the  wage  bill 
while no progress was made concerning the public 
administration  reform.  No  progress  was  made 
regarding the reform of state owned enterprises and 
local  government,  which  related  bills  are  still 
pending adoption by the House of Representatives. 

  Following  the  correction  of  the  excessive 
deficit,  respect  the  medium-term  budgetary 
objective in 2016 and in 2017. 

  The  assessment  of  compliance  with 

the 
Stability  and  Growth  Pact  will  be  included  in 
spring  2017,  when  final  data  for  2016  will  be 
available 

  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-

  There has been limited progress with regard to 
the  binding  mechanism  containing  the  growth 
rate  of  the  compensation  of  public  employees. 
The mechanism has been introduced until 2018 
in  collective  agreements  with  public  sector 
unions.  However,  the  legislative  proposal  to 
make  this  mechanism  permanent  has  been 
rejected by the House of Representatives. 

  There has been no progress with regard to the 
horizontal  reform  of  the  public  administration. 
The draft laws have been rejected by the House 

(31)  The following categories are used to assess progress in implementing the 2016 country-specific recommendations: 
No progress: The Member State has not credibly announced nor adopted any measures  to address the CSR. Below a number of 
non-exhaustive typical situations  that could be covered under this, to be interpreted on a case by case basis taking into account 
country-specific conditions: 
no  legal,  administrative,  or  budgetary  measures  have  been  announced  in  the  National  Reform  Programme  or  in  other  official 
communication  to  the  national  House  of  Representatives  /  relevant  parliamentary  committees,  the  European  Commission,  or 
announced in public (e.g. in a press statement, information on government's website);  

no non-legislative acts have been presented by the governing or legislator body;   
the  Member  State  has  taken  initial  steps  in  addressing  the  CSR,  such  as  commissioning  a  study  or  setting  up  a  study  group  to 
analyse possible measures that would need to be taken (unless the CSR explicitly asks for orientations or exploratory actions), 
while clearly-specified measure(s) to address the CSR has not been proposed. 

Limited progress: The Member State has: 
announced certain measures  but these only address the CSR to a limited extent;    
and/or 
presented  legislative  acts  in  the  governing  or  legislator  body  but  these  have  not  been  adopted  yet  and  substantial  non-legislative 

further work is needed before the CSR will be implemented;  

presented non-legislative acts, yet with no further follow-up in terms of implementation which is needed to address the CSR. 
Some progress: The Member State has adopted measures that partly address the CSR  
and/or  
the Member State has adopted measures that address the CSR, but a fair amount of work is still needed to fully address the CSR as 
only  a  few  of  the  adopted  measures  have  been  implemented.  For  instance:  adopted  by  national  parliament;  by  ministerial 
decision; but no implementing decisions are in place. 

Substantial progress: The Member State has adopted measures that go a long way in addressing the CSR and most of which have 

been implemented. 

Full implementation: The Member State has implemented all measures needed to address the CSR appropriately. 

51 

 
 
 
 
 
                                                           
 
A. Overview table 

owned entities 

of Representatives.  

  and 

implement 

the 

reform 

of 

local 

governments. 

  By  the  end  of  2016,  adopt  the  secondary 
legislation  to  complete  the  new  budgetary 
framework. 

CSR  2:  By  June  2017,  eliminate  impediments  to 
the  full  implementation  of  the  insolvency  and 
frameworks  and  ensure  adequate 
foreclosure 
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. 
(MIP-relevant) 

  There has been no progress with regard to the 
law  on  the  governance  of  state-owned  entities, 
and  the  reform  of  local  governments.  These 
reforms  have  not  yet  been  adopted  by  the 
House of Representatives.  

  There  has  been  substantial  progress  as  the 
legislation  to  complete  the  new  budgetary 
framework  has  been  adopted  by  the  House  of 
Representatives  but  implementation  steps  are 
still missing for it to be effective. 

Cyprus  has  made  limited  progress  with  regard  to 
CSR  2  on  implementation  of  the  insolvency  and 
foreclosure  frameworks  and  improving  the  title 
deeds issuance and transfer system. Some measures 
have  been  announced  but  remain  to  be  adopted, 
while  no  full  review  of  the  insolvency  and 
foreclosure  frameworks,  nor  title  deeds  reform 
legislation have been tabled. 

  By June 2017, eliminate impediments to the full 
implementation 
and 
foreclosure  frameworks  and  ensure  adequate 
resources for the Insolvency Service. 

insolvency 

the 

of 

  Ensure  reliable  and  swift  systems  for  the 
issuance  of  title  deeds  and  the  transfer  of 
immovable property rights. 

  There  has  been  some  progress  in  eliminating 
barriers  to  fully  implementing  the  insolvency 
and  foreclosure  frameworks  and  in  ensuring 
adequate  resources  for  the  Insolvency  Service. 
Necessary  amendments  to  the  legislation  on 
insolvency  have  been  identified  but  not  yet 
drafted, and no timetable has been released for 
their 
of 
to 
Representatives.  Rules  of  Court  have  been 
adopted for personal insolvency procedures and 
are  being  prepared  for  corporate  insolvency 
procedures.  The  capacity  of  the  Insolvency 
Service  has  been  increased.  The  foreclosure 
infrastructure has been developed.  

the  House 

submission 

  There  has  been  limited  progress  on  ensuring 
reliable and swift systems for issuing title deeds 
and  transferring  immovable  property  rights. 
Administrative  and  legislative  measures  have 
been  taken  to  facilitate  the  issuance  of  title 
deeds,  but  no  draft  legislation  for  transfer  of 
title deeds has been prepared due to the lack of 
among 
understanding 
stakeholders. 

agreement 

and 

 

Increase the efficiency and capacity of the court 
system. Reform the civil procedure law. 

  There has been limited progress on increasing 
the efficiency and capacity of the court system 
and  reforming  the  civil  procedure  law,  as 
several reform initiatives have been announced 

52 

 
 
 
 
 
 
 
 
 
A. Overview table 

but remain at a preliminary stage. 

CSR  3:  By  the  end  of  2016,  take  measures  to 
ensure  a  decline  in  non-performing  loans  and 
accurate  valuations  of  collateral  for  provisioning 
purposes. 
information 
available  for  creditors  to  make  the  credit  registry 
fully operational. (MIP-relevant) 

the  range  of 

Increase 

There  has  been  some  progress  overall  on  CSR  3, 
regarding  measures  to  ensure  a  decline  in  non-
performing 
the  range  of 
information  available  for  creditors  through  the 
credit  registry,  which  is  now  fully  operational  for 
loan origination purposes. 

loans  and 

increase 

  By  the  end of 2016,  take  measures  to  ensure  a 
decline  in  non-performing  loans  and  accurate 
valuations  of  collateral 
for  provisioning 
purposes. 

  There  has  been  some  progress  on  taking 
measures to ensure a decline in non-performing 
loans  and  accurate  valuations  of  collateral  for 
provisioning  purposes.  In  particular,  due  to 
increased loan restructuring efforts incentivised 
by  Government  and  Central  Bank  of  Cyprus 
measures,  the  stock  of  NPLs  has  started  to 
decline, but remains at a very high level. Some 
steps  were  also  taken  to  create  a  secondary 
market  for  loans  although  no  transaction  has 
taken place. 

 

Increase  the  range  of  information  available  for 
creditors  to  make  the  credit  registry  fully 
operational. 

  There has been some progress in increasing the 
range  of  information  available  for  creditors 
through  the  credit  registry,  which  is  currently 
operational for loan origination purposes. 

CSR  4:  Remove  impediments  to  investment, 
notably  by  implementing  the  action  plan  for 
the  privatisation  plan  and 
growth,  pursuing 
strengthening  the  national  regulatory  authorities. 
Take  measures  to  increase  access  to  finance  for 
small  and  medium-sized  enterprises. 
(MIP-
relevant) 

  Remove impediments to investment, notably by 

implementing the action plan for growth. 

  Remove impediments to investment, notably by 

pursuing the privatisation plan. 

to 

Cyprus has made some progress towards removing 
impediments 
started 
investment 
implementing the action plan for growth and made 
some  minor  progress  with  regard  to  privatisation, 
while limited progress was achieved concerning the 
facilitation of SME's access to finance. 

as 

it 

  There has been some progress in implementing 
the  action  plan  for  growth.  However,  many 
workstreams 
their 
implementation phase. 

enter 

have 

yet 

to 

the  privatisation  process  of 

  There  has  been  limited  progress  in  pursuing 
the  privatisation  plan.  Draft  bills  aimed  at 
launching 
the 
Cyprus Telecommunications Authority (CyTA) 
were  abandoned  at  the  eve  of  the  May  2016 
general  election,  due 
to  strong  political 
opposition.  Alternative  proposals  have  not  yet 
been  formulated.  Although  minor  privatisation 
projects  still  follow  their  course,  budgetary 
funding  for  the  privatisation  unit  has  been 
cancelled. 

  There has been some progress in strengthening 
the  national  regulatory  authorities,  notably 

53 

 
 
 
 
 
 
 
 
 
 
 
  Remove impediments to investment, notably by 
regulatory 

national 

the 

strengthening 
authorities. 

  Take measures to increase access to finance for 

small and medium-sized enterprises. 

CSR  5:  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. 
(MIP-relevant) 

  Enhance the capacity of the public employment 
services  and  their  provision  to  the  long-term 
unemployed;  improve  outreach  to  the  non-
registered unemployed. 

A. Overview table 

through  the  capacity  increase  of  the  energy 
regulator CERA. 

  There  has  been  limited  progress  in  increasing 
access  to  finance  for  SMEs,  as  most  new 
initiatives  from  the  authorities  remain  at  a 
preliminary stage. 

There  has  been 
addressing CSR 5.  

limited  progress  overall 

in 

  Limited  progress  has  been  made  concerning 
the  enhancement  of  the  capacity  of  the  public 
employment  services.  This  is  because  the 
recruitment  of  additional  counsellors  has  been 
continuously  delayed  and 
for 
improving  the  service  remain  vague.  Some 
progress  has  been  made  to  reach  out  to  the 
non-registered  unemployed,  especially  young 
people,  but  the  outcome  of  these  initiatives  in 
terms of outcomes is not yet known. 

the  plans 

  There  has  been  limited  progress  in  adopting 
legislation for a hospital reform and advancing 
with  the  planned  implementation  of  universal 
healthcare  coverage.  Two  bills  for  the  creation 
of 
the 
the  National  Health  System  and 
autonomy of public hospitals were submitted to 
the House of Representatives, and are currently 
under discussion. 

  Adopt  legislation  for  a  hospital  reform  and 
advance  with  the  planned  implementation  of 
universal health care coverage. 

Europe 2020 (national targets and progress) 

Target 

Summary assessment 

Employment  rate:  75 %  -  77 %  of  the  population 
aged 20-64 should be employed by 2020. 

and  development 

Research 
Increase 
research  and  development  expenditure  to 0.5 % of 
GDP by 2020. 

target: 

In 2015 the employment rate in the age class 20-64 
stood at 67.9 %, 7.1 pps. below the lower bound set 
in  the  national  target.  The  employment  rate  is 
increasing,  but  remains  largely  below  the  values 
reached  in  the  pre-crisis  period,  when  Cyprus  was 
already fulfilling its national target. 

Overall,  Cyprus  has  taken  a  step  back with regard 
to  its  R&D  target,  with  R&D  intensity  falling  by 
2 pps. at 0.46 % of GDP in 2015. Cyprus plans to 
the  annual  expenditure  on  research, 
increase 
development  and  innovation  until  2020,  and  to 

54 

 
 
 
 
 
 
 
A. Overview table 

focus on the quality of spending. 

According  to  the  Innovation  Union  Scoreboard 
2016 index, Cyprus is a "moderate innovator" with 
a declining performance from 2012 onwards.                                                                                                                                                                                                                                                                                                                                                                                                                                   

The  National  Committee  for  Research,  Innovation 
identified 
and  Technological  Development 
complex  and  lengthy  procedures  in  the  system  of 
incentives  and  a 
lack  of  policies  promoting 
cooperation  between  academia  (universities  and 
research centres) and businesses. 

The  current  governance  of  the  R&D  system  may 
not be  robust enough  to  allow  a  focused  approach 
of the limited financial resources at hand. 

With  a  renewable  energy  share  of  9.1 %  in 
2015 (32) , Cyprus is on track to reach the target for 
2020. It has met the second interim target of 5.6 %. 
However, since the trajectory is not linear, the final 
target  will  need  to  be  achieved  by  means  of  a 
stronger  annual  growth  of  the  renewable  energy 
share,  in  line  with  Cyprus's  high  potential  in  this 
area.  

With  2.7 %  share  in  2014,  Cyprus  is  lagging 
behind  in  the  use  of  renewable  energy  sources  in 
transport  and  could  have  difficulty  reaching  the 
binding 10 % target by 2020.    

to 

the 

According 
latest  national  projections 
submitted  to  the  Commission  and  taking  into 
account  existing  measures,  the  target  might  be 
achieved by 2020.  

in 

the 

increased 

Although gross inland primary energy consumption 
was  reduced  significantly 
last  years, 
predominantly  due  to  the  economic  recession,  in 
2015  Cyprus 
its  primary  energy 
consumption  by  2  %  (from  2.21  Mtoe  in  2914  to 
2.25  Mtoe).  Furthermore,  over  90 %  of  Cyprus's 
energy consumption is still covered by imported oil 
and oil products. More efforts are needed to further 
decrease  Cyprus'  primary  energy  consumption  in 
order to achieve its 2020 target.  

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

Emissions  in  the  sectors  not  covered  by  the  EU 
ETS  must  decrease  by  5 %  in  2020  compared  to 
2005. 

Energy efficiency target: absolute level of primary 
consumption of 2.2 Mtoe 

Early  school  leaving  target:  Reduce  the  rate  of  Cyprus  has  already  reached  the  Europe  2020 
national  target  as  regards  early  school  leaving, 

(32)  Renewable energy shares for 2015 are approximations and not official data, reflecting the available data (04.10.2016). See the 
the  2016  Report  on  Renewable  Energy,  

in  Realisation  of 

Öko-Institut  Report:  Study  on  Technical  Assistance 
http://ec.europa.eu/energy/en/studies. 

55 

 
                                                           
A. Overview table 

early school leavers to 10 % by 2020. 

while  still  continuing  to  make  significant  progress 
in  tackling  this  issue.  In  2014,  the  early  school 
leaving  rate  was  5.3 %  (compared  to  an  EU 
average  of  11 %),  down  from  11.4 %  in  2012. 
However  this  improvement  masks  a  significant 
number  of  disparities.  In  Cyprus  young  men  are 
more  likely  to  leave  school  prematurely  (7.7 %) 
than  young  women  (3.1 %),  although  the  gender 
gap is narrowing.  

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

education 

is  generalised,  but 

Higher 
the 
employability  of  recent  graduates  is  still  a  major 
issue.  Cyprus  has  one  of  the  highest  tertiary 
education  attainment  rates  in  the  EU  with  54.6 %, 
compared  to  the  European  average  of  38.7 %  in 
2015  and  largely  outperforms  its  Europe  2020 
national target of 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. 

The  number  of  people  at  risk  of  poverty  or  social 
exclusion had been increasing since 2008, reaching 
27.8 %  of  the  total  population  in  2013.  In  2015  it 
increased to 28.9 % (corresponding to 63 000 more 
people  at-risk-of-poverty  or  social  exclusion  than 
in 2008). Based on these figures, the national target 
for 2020 appears far from reach. 

56 

 
ANNEX B 

MIP Scoreboard 

Table B.1: 

The MIP scoreboard for Cyprus 

Flags: b: break in time series. e: estimated. p: provisional 
Source: European Commission, Eurostat and Directorate General for Economic and Financial Affairs (for Real Effective 
Exchange Rate), and International Monetary Fund 

57 

Thresholds201020112012201320142015Current account balance, (% of GDP) 3 year average-4%/6%-11.5-7.7-7.1-5.0-5.1-4.1-35%-111.2-129.9-129.2-138.9-147.3-130.3Real effective exchange rate - 42 trading partners, HICP deflator3 years % change±5% & ±11% 0.0-3.0-5.9-0.8-1.7-6.2Export market share - % of world exports5 years % change-6%-15.7e-11.2e-21.5e-14.6-23.7-16.8Nominal unit labour cost index (2010=100)3 years % change9% & 12% 10.69.43.1-2.3-7.8p-10.5p6%-7.6p-4.5p-5.4p-4.1p-1.3p2.9bp14%13.213.015.5-11.70.24.4133%315.6321.6327.4340.9354.3353.760%55.865.279.3102.2107.1107.5Unemployment rate3 year average10%5.16.58.711.914.615.716.5%8.4-6.16.3-15.0-3.52.8-0.2%-0.3-0.10.50.00.80.40.5%0.61.13.04.86.13.22%6.413.413.922.313.65.1Activity rate - % of total population aged 15-64 (3 years change in p.p)Long-term unemployment rate - % of active population aged 15-74 (3 years change in p.p)Youth unemployment rate - % of active population aged 15-24 (3 years change in p.p)External imbalances and competitivenessNew employment indicatorsNet international investment position (% of GDP)Deflated house prices (% y-o-y change)Total financial sector liabilities (% y-o-y change)Private sector credit flow as % of GDP, consolidatedPrivate sector debt as % of GDP, consolidatedGeneral government sector debt as % of GDPInternal imbalances 
 
 
 
 
 
ANNEX C 

Standard tables 

Table C.1: 

Financial market indicators 

1) Latest data Q2 2016. 
2) Quarterly values are not annualised 
* Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

58 

201120122013201420152016Total assets of the banking sector (% of GDP)667.1658.2498.3518.9516.1476.7Share of assets of the five largest banks (% of total assets)60.762.664.163.467.6-Foreign ownership of banking system (% of total assets)36.135.531.031.615.6-Financial soundness indicators:1)              - non-performing loans (% of total loans)11.918.736.235.634.735.8              - capital adequacy ratio (%)8.67.313.515.316.616.7              - return on equity (%)2)-75.6-100.8-37.9-7.1-7.63.2Bank loans to the private sector (year-on-year % change)6.94.2-9.4-4.23.6-10.7Lending for house purchase (year-on-year % change)4.80.3-6.8-2.8-3.0-0.7Loan to deposit ratio112.6119.3152.3152.1152.0118.1Central Bank liquidity as % of liabilities5.19.015.712.46.92.0Private debt (% of GDP)321.6327.4340.9354.3353.7-Gross external debt (% of GDP)1) - public------    - private------Long-term interest rate spread versus Bund (basis points)*317.9550.5493.0483.7404.1371.7Credit default swap spreads for sovereign securities (5-year)*638.01196.2943.9423.1330.6262.5 
 
 
 
 
 
C. Standard tables 

Table C.2: 

Labour market and social indicators 

1 The unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within 2 weeks. 
2 Long-term unemployed are those who have been unemployed for at least 12 months. 
3 Not in education employment or training. 
4 Average of first three quarters of 2016. Data for total unemployment and youth unemployment rates are seasonally 
adjusted.   
Source: European Commission (EU Labour Force Survey). 

59 

201120122013201420152016 4Employment rate(% of population aged 20-64)73.470.267.267.667.968.6Employment growth (% change from previous year)0.0-3.2-5.9-1.90.82.6Employment rate of women(% of female population aged 20-64)67.764.862.263.964.064.0Employment rate of men (% of male population aged 20-64)79.676.172.671.672.373.5Employment rate of older workers (% of population aged 55-64)54.850.749.646.948.551.7Part-time employment (% of total employment, aged 15-64)9.09.711.913.513.013.4Fixed-term employment (% of employees with a fixed term contract, aged 15-64)14.215.117.519.018.417.1Transitions from temporary to permanent employment22.724.319.117.927.9:Unemployment rate1 (% active population, age group 15-74)7.911.915.916.115.013.1Long-term unemployment rate2 (% of labour force)1.63.66.17.76.85.8Youth unemployment rate (% active population aged 15-24)22.427.738.936.032.829.1Youth NEET3 rate (% of population aged 15-24)14.616.018.717.015.3:Early leavers from education and training (% of pop. aged 18-24 with at most lower sec. educ. and not in further education or training)11.311.49.16.85.2:Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)46.249.947.852.554.5:Formal childcare (30 hours or over; % of population aged less than 3 years)17.019.022.020.0:: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard tables 

Table C.3: 

Labour market and social indicators 
(continued)

1 People at risk of poverty or social exclusion: individuals who are at risk of poverty and/or suffering from severe material 
deprivation and/or living in households with zero or very low work intensity.  
2 At-risk-of-poverty rate: proportion of people with an equivalised disposable income below 60 % of the national equivalised 
median income.  
3 Proportion of people who experience at least four of the following forms of deprivation: not being able to 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: proportion of people aged 0-59 living in households where the 
adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 month 
5 For EE, CY, MT, SI and SK, thresholds in nominal values in euros; harmonised index of consumer prices = 100 in 2006 (2007 
survey refers to 2006 incomes).    
Source: For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC. 

60 

Expenditure on social protection benefits (% of GDP)201020112012201320142015Sickness/healthcare4,54,64,54,54,5:Disability0,70,70,70,70,7:Old age and survivors9,210,011,112,012,3:Family/children1,91,81,51,41,4:Unemployment1,01,21,72,01,9:Housing1,00,90,60,40,3:Social exclusion n.e.c.1,41,41,21,11,1:Total19,620,621,222,122,2:of which: means-tested benefits2,72,62,92,72,6:Social inclusion indicators201020112012201320142015People at risk of poverty or social exclusion1 (% of total population)24,624,627,127,827,428,9Children at risk of poverty or social exclusion  (% of people aged 0-17)21,823,427,527,724,728,9At-risk-of-poverty  rate2 (% of total population)15,614,814,715,314,416,2Severe material deprivation rate3  (% of total population)11,211,715,016,115,315,4Proportion of people living in low work intensity households4 (% of people aged 0-59)4,94,96,57,99,710,9In-work at-risk-of-poverty rate (% of persons employed)7,37,37,98,97,89,1Impact of social transfers (excluding pensions) on reducing poverty33,637,037,437,041,536,2Poverty thresholds, expressed in national currency at constant prices5908893048958814873637072Gross disposable income (households; growth %)3,12,2-1,6-5,4-6,2-2,5Inequality of income distribution (S80/S20 income quintile share ratio)4,54,34,74,95,45,2GINI coefficient before taxes and transfers41,741,542,943,844,8:GINI coefficient after taxes and transfers30,129,231,032,434,8: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard tables 

Table C.4: 

Product market performance and policy indicators 

1 The methodologies, including the assumptions, for this indicator are shown in detail at: 
http://www.doingbusiness.org/methodology.  
2 Average of the answer to question Q7B_a. '[Bank loan]: If you applied and tried to negotiate for this type of financing over 
the past six months, what was the outcome?'. Answers were scored as follows: zero if received everything, one if received 
most of it, two if only received a limited part of it, three if refused or rejected and treated as missing values if the application is 
still pending or if the outcome is not known. 
3 Percentage population aged 15-64 having completed tertiary education. 
4 Percentage population aged 20-24 having attained at least upper secondary education. 
5 Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are 
shown in detail at :  http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm   
6 Aggregate OECD indicators of regulation in energy, transport and communications. 
Source:  "European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD 
(for the product market regulation indicators); SAFE (for outcome of SMEs' applications for bank loans)." 

61 

Performance indicators201020112012201320142015Labour productivity (real, per person employed, year-on-year % change)Labour productivity in industry4.24-10.75-5.092.794.402.22Labour productivity in construction-2.97-1.47-6.436.58-0.54-0.16Labour productivity in market services2.932.120.98-0.45-1.970.13Unit labour costs (ULC) (whole economy, year-on-year % change)ULC in industry3.4212.5911.61-19.22-1.20-2.10ULC in construction4.652.893.10-3.91-3.25-0.77ULC in market services1.531.470.80-2.85-0.83-0.57Business environment201020112012201320142015Time needed to enforce contracts1 (days)735.0735.0735.0735.01100.01100.0Time needed to start a business1 (days)8.08.08.08.08.08.0Outcome of applications by SMEs for bank loans2na0.70na1.411.341.76Research and innovation201020112012201320142015R&D intensity0.450.450.430.460.480.46Total public expenditure on education as % of GDP, for all levels of education combined7.927.876.677.07nanaNumber of science & technology people employed as % of total employment424547485050Population having completed tertiary education3323435353636Young people with upper secondary education4868888909294Trade balance of high technology products as % of GDP-3.03-1.40-1.00-0.23-1.25-0.25Product and service markets and competition200320082013OECD product market regulation (PMR)5, overallnana1.65OECD PMR5, retailnana1.67OECD PMR5, professional servicesnana3.11OECD PMR5, network industries6nana2.64 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
C. Standard tables 

Table C.4:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2005 prices) 
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR) 
          Carbon intensity: greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR) 
          Resource intensity: domestic material consumption (in kg) divided by GDP (in EUR) 
          Waste intensity: waste (in kg) divided by GDP (in EUR) 
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP   
Weighting of energy in HICP: the proportion of 'energy' items in the consumption basket used for the construction of the HICP 
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % 
change) 
Real unit energy cost: real energy costs as a percentage of total value added for the economy  
Environmental taxes over labour taxes and GDP: from European Commission'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 2005 EUR)  
Real unit energy costs for manufacturing industry excluding refining : real costs as a percentage of value added for  
manufacturing sectors 
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP 
Electricity and gas prices for medium-sized industrial users: consumption band 500–20 00MWh and 10 000–100 000 GJ; figures 
excl. VAT.   
Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste 
Public R&D for energy or for the environment: government spending on R&D for these categories as % of GDP 
Proportion of GHG emissions covered by EU Emissions Trading System (ETS) (excluding aviation): based on greenhouse gas 
emissions (excl. land use, land use change and forestry) as reported by Member States to the European Environment Agency. 
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value 
added (in 2005 EUR)   
Transport carbon intensity: GHG emissions in transport activity divided by gross value added of the transport sector 
Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of 
international bunker fuels 
Aggregated supplier concentration index:  covers oil, gas and coal. Smaller values indicate larger diversification and hence 
lower risk.   
Diversification of the energy mix: Herfindahl index over natural gas, total petrol products, nuclear heat, renewable energies 
and solid fuels 
* European Commission and European Environment Agency 
Source: European Commission (Eurostat) unless indicated otherwise 

62 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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