Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Cyprus and delivering a Council opinion on the 2017 Stability Programme of Cyprus
Date: 2017-05-22
Institutions: European Commission, Secretariat-General
Subjects: Cyprus, budgetary equilibrium, credit policy, economic policy, economic reform, educational reform, investment, labour market, legal system, stability programme

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   EUROPEAN COMMISSION  Brussels, 22.5.2017  COM(2017) 512 final   Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Cyprus  and delivering a Council opinion on the 2017 Stability Programme of Cyprus  
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2017 National Reform Programme of Cyprus 

and delivering a Council opinion on the 2017 Stability Programme of Cyprus 

THE COUNCIL OF THE EUROPEAN UNION, 

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

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies,1 and in particular Article 5(2) thereof, 

Having  regard  to  Regulation  (EU)  No 1176/2011  of  the  European  Parliament  and  of  the 
Council  of  16 November  2011  on  the  prevention  and  correction  of  macroeconomic 
imbalances,2 and in particular Article 6(1) thereof, 
Having regard to the recommendation of the European Commission,3 
Having regard to the resolutions of the European Parliament,4 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

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

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On  16 November  2016,  the  Commission  adopted  the  Annual  Growth  Survey,5 
marking  the  start  of  the  2017  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on  9-10 March  2017.  On  16 November  2016,  on  the  basis  of  Regulation  (EU) 
No 1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report,6  in  which  it 
identified Cyprus as one of the Member States for which an in-depth review would 
be carried out. On the same day, the Commission also adopted a recommendation for 
a  Council  Recommendation  on  the  economic  policy  of  the  euro  area.  That 

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OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
COM(2017) 512 final. 
P8_ TA(2017)0038, P8_ TA(2017)0039, and P8_ TA(2017)0040. 
COM(2016) 725 final. 
COM(2016) 728 final. 

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Recommendation  was  endorsed  by  the  European  Council  on  9-10 March  2017  and 
adopted by the Council on 21 March 2017.7  

As a Member State whose currency is the euro and in view of the close interlinkages 
between the economies in the economic and monetary union, Cyprus should ensure 
the full and timely implementation of the Recommendation for the euro area which is 
reflected in recommendations 1 to 5 below. 
The 2017 country report for Cyprus8 was published on 22 February 2017. It assessed 
Cyprus’ progress in addressing the country-specific recommendations adopted by the 
Council  on  12 July  2016,  the  follow-up  given  to  the  recommendations  adopted  in 
previous years and Cyprus’ progress towards its national Europe 2020 targets. It also 
included an in-depth  review under Article 5 of Regulation (EU)  No 1176/2011, the 
results  of  which  were  also  published  on  22 February  2017.9  The  Commission’s 
analysis  leads  it  to  conclude  that  Cyprus  is  experiencing  excessive  macroeconomic 
imbalances. In particular, it is essential that it tackles the large stock of imbalances in 
the  form  of  private,  public  and  external  debt  overhang,  and  the  high  level  of  non-
performing loans. 

On 27 April 2017, Cyprus submitted its 2017 Stability Programme and on 28 April 
2017  Cyprus  submitted  its  2017  National  Reform  Programme.  To  take  account  of 
their  interlinkages,  the  two  programmes  have  been  assessed  at  the  same  time. 
Cyprus’ National  Reform  Programme includes commitments  both  for the short and 
the  medium  term.  In  particular,  it  includes  measures  to  reduce  private  sector 
indebtedness,  improve  the  business  environment,  facilitate  access  to  finance, 
overhaul the healthcare sector, and commits to reforms of the public sector and the 
justice  system.  The  National  Reform  Programme  also  covers  the  challenges 
identified  in  the  2017  country  report  and  the  Recommendation  for  the  euro  area, 
including  the  need  to  re-launch  investment  and  ensure  the  sustainability  of  public 
finances. If fully implemented within the indicated timelines, these measures would 
help 
country-specific 
recommendations.  Based  on  the  assessment  of  Cyprus’  policy  commitments,  the 
Commission confirms its previous assessment that at this stage no further steps are 
warranted  in  the  framework  of  the  Macroeconomic  Imbalances  Procedure.  The 
implementation  of  the  policy  reform  agenda  will  be  followed  closely  by  means  of 
specific monitoring. 

address  Cyprus’  macroeconomic 

imbalances 

and 

The relevant country-specific recommendations have been taken into account in the 
Member States’ programmes for the European Structural and Investment Funds (ESI 
Funds) covering the 2014-2020 period. As foreseen in the legislation governing the 
ESI Funds,10 where it is necessary to support the implementation of relevant country-
specific  recommendations,  the  Commission  may  request  a  Member  State  to  review 

OJ C92/01, 24.3.2017, p. 1. 
SWD(2017) 78 final. 
COM(2017) 90 final. 
Article  23  of  Regulation  (EU)  No  1303/2013  of  the  European  Parliament  and  of  the  Council  of  17 
December  2013  laying  down  common  provisions  on  the  European  Regional  Development  Fund,  the 
European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and 
the  European  Maritime  and  Fisheries  Fund  and  laying  down  general  provisions  on  the  European 
Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime 
and  Fisheries  Fund  and  repealing  Council  Regulation  (EC)  No  1083/2006,  OJ  L  347,  20.12.2013,  p. 
320. 

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and  amend  its  relevant  ESI  Funds  programmes.  The  Commission  has  provided 
further guidelines on the application of those rules.11 

Cyprus  is  currently  in  the  preventive  arm  of  the  Stability  and  Growth  Pact  and 
subject  to  the  debt  rule.  In  its  2017  Stability  Programme,  the  government  plans  a 
budgetary surplus in headline terms over 2016-2020 (headline balance around 0.4% 
of GDP over the programme period). The medium-term budgetary objective, set at a 
balanced  budgetary  position  in  structural  terms,  is  planned  to  be  reached  in  2017. 
The  recalculated12  structural  balance  is  projected  to  steadily  move  away  from  the 
medium-term  objective  in  the  following  years,  which  is  not  in  line  with  the 
requirements  of  the  preventive  arm  of  the  Stability  and  Growth  Pact.  The  general 
government debt-to-GDP ratio is expected to have reached 107.8 % in 2016 and to 
decline  to  99.7%  in  2018  and  further  to  88.8  %  by  2020.  The  macroeconomic 
scenario underpinning these budgetary projections is plausible. The risks associated 
to  the  macroeconomic assumptions  presented in the Stability Programme are  to the 
downside,  mainly  linked  to  the  high  stock  of  non-performing  loans  and  a  possible 
deterioration of the external environment.   

On  12  July  2016,  following  the  correction  of  the  excessive  deficit,  the  Council 
recommended Cyprus to respect the medium-term budgetary objective in 2016 and in 
2017. Based on the Commission 2017 spring forecast, Cyprus is compliant with that 
requirement  in  2017  following  an  overall  assessment.  For  2018,  Cyprus  is 
recommended  to  remain  at  the  medium-term  budgetary  objective.  Based  on  the 
Commission 2017 spring forecast, this is consistent with a maximum nominal growth 
rate of net primary government expenditure13 of 0.3%, corresponding to a structural 
adjustment of 0.2% of GDP. Under unchanged policies, Cyprus would be at risk of 
some  deviation  from  that  requirement  in  2018  following  an  overall  assessment. 
Cyprus  is  forecast  to  comply  with  the  debt  rule  in  2017  and  2018.  Overall,  the 
Council is of the opinion that Cyprus needs to stand ready to take further measures to 
ensure compliance in 2018. 

Public debt is on a downward trajectory but its sustainability remains subject to risks. 
A number of recent fiscal measures as well as delays in the implementation of key 
structural reforms are expected to lead to a deterioration of the structural balance and 
risk reducing the scope for growth-enhancing public investments. 

Despite having one of the euro area’s highest wage bills (as a percentage of GDP), 
the  Cypriot  public  sector  remains  characterised  by  inefficiencies.  Under  the 
macroeconomic  adjustment  programme,  a  series  of  reforms  aiming  to  address  this 
issue were designed and agreed with social partners. These included the introduction 
of a binding permanent mechanism limiting wage growth for public employees and a 
comprehensive reform of the public administration. However, the adoption of these 
legislative  reforms  is  facing  obstacles,  in  particular  after  a  negative  vote  by  the 
House of Representatives in December 2016. Pending adoption in its binding form, 

COM(2014) 494 final. 
Cyclically-adjusted  balance  net  of  one-off  and  temporary  measures,  recalculated  by  the  Commission 
using the commonly agreed methodology. 
Net  government  expenditure  is  comprised  of  total  government  expenditure  excluding  interest 
expenditure,  expenditure  on  Union  programmes  fully  matched  by  Union  funds  revenue  and  non-
discretionary  changes  in  unemployment  benefit  expenditure.  Nationally  financed  gross  fixed  capital 
formation  is  smoothed  over  a  4-year  period.  Discretionary  revenue  measures  or  revenue  increases 
mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted 
out. 

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the  mechanism  limiting  growth  of  public  sector  wages  is  being  implemented  under 
collective bargaining agreements and is applicable until 2018. 

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 is not adequately staffed, and  weaknesses in 
the disciplinary regime for public servants remain unaddressed. 

Cyprus  also  continues  to  face  critical  challenges  for  the  functioning  of  the  judicial 
system. Inefficient court procedures and limited capacity lead to significant delays in 
processing  court  cases.  This  in  turn  undermines  the  business  environment  and 
notably the functioning of the new foreclosure and insolvency frameworks. The latter 
have  been  introduced  to  help  reduce  unviable  private  debt,  providing  incentives  to 
banks and debtors to agree on restructuring solutions. Yet, the effectiveness of these 
tools is impaired by a number of factors, including the aforementioned inefficiencies 
in the court system, weak administrative capacity and a low level of awareness of the 
procedures  among  debtors.  Backlogs  and  delays  with  issuing  and  transferring  title 
deeds also remain significant. These contribute to undermining debt reduction efforts 
and weigh on the recovery of the housing market. 

The level of non-performing loans is declining but remains very high, hampering the 
proper  functioning  of  the  banking  sector  and  impacting  credit  supply  to  the  real 
economy. Banks underperform the loan restructuring targets agreed with the Central 
Bank  of  Cyprus,  pointing  to  the  need  to  broaden  the  targeting  system  and  make  it 
more efficient and binding, notably by setting ambitious targets for the reduction of 
non-performing  loans,  consistent  with  banks’  non-performing  loans  reduction 
strategies.  Re-default  rates  remain  high,  exposing  potential  deficiencies  in  loan 
restructuring solutions. Risk provisioning levels increased but remain below the euro 
area  average,  underscoring  the  need  to  ensure  that  collateral  valuations  are  reliable 
and underpin appropriate risk provisioning. The lack of a secondary market for loans 
and a loan securitisation framework limit the scope for accelerating deleveraging and 
moving  non-performing  loans  off  banks’  balance  sheets,  which  calls  for  additional 
regulatory and legislative actions to complete the necessary tools to facilitate banks' 
balance sheet management. In addition, the governance and administrative capacity 
of  insurance  and  pension  funds  supervision  remain  weak,  posing  risks  to  financial 
stability. 

Cyprus’  economic  recovery  continues.  Yet,  potential  growth  remains  weak, 
constrained  by  limited  implementation  of  structural  reforms,  bottlenecks  to 
investment  and  shortcomings  in  the  business  environment.  Growth-enhancing 
initiatives  presented  in  the  action  plan  for  growth  are  being  implemented,  albeit 
rather slowly. A legislative proposal to attract and facilitate strategic investments is 
still in the draft stage. The government is working on improving access to finance for 
medium-sized and small businesses. In order to solve this pressing issue, some new 
targeted  initiatives  have  been  launched,  as  reported  in  the  National  Reform 
Programme. However, most of these new initiatives on access to finance still remain 
at  a  preliminary  stage.  Privatisation  efforts,  aimed  at  attracting  productivity-
enhancing  foreign  investments,  are  facing  political  opposition  and,  in  many  cases, 
have come to a standstill. The reform of the energy sector can also be an important 
driver for competitiveness, yet  there have  been delays in its implementation. These 
notably  concern  the  unbundling  of  the  Electricity  Authority  of  Cyprus  and  the 

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establishment  of  the  new  electricity  market,  which  still  hinges  upon  ensuring  the 
effective independence of the transmission system operator. 

improve 

Unemployment is decreasing but remains high, especially among young people and 
the  long-term  unemployed.  Plans  to  increase  the  numbers  of  counsellors  in  public 
their  specialisation  have  not  yet  been 
employment  services  and 
implemented. Moreover, their recruitment is likely to occur on temporary contracts, 
therefore not addressing the challenge in structural terms. As a consequence, there is 
still  insufficient  capacity  to  meet  the  needs  of  jobseekers,  especially  those  having 
more  difficulties  to  integrate  in  the  labour  market,  and  to  put  in  place  outreach 
measures  for  their  activation.  The  impact  of  active  labour  market  programmes  and 
income  support  schemes  continues  to  be  constrained  by  limited  quality  assessment 
and follow-up measures. 

Cyprus maintains a level of spending in education that is above the EU average. But, 
educational  outcomes  are  low  and  have  even  declined  compared  to  previous  years. 
According  to  the  2015  results  of  the  Programme  for  International  Student 
Assessment, Cyprus ranks among the lowest in the EU on the level of basic skills in 
mathematics, science and reading. While recently introduced remedial measures such 
as a better system for appointing teachers and a modernisation of school curricula are 
first steps in the right direction, further action to complete planned reforms, including 
of teachers’ evaluation, could significantly contribute to improving the situation. 

Skills  mismatches  in  the  labour  market  are  still  largely  unaddressed,  affecting 
prospects  for  long-term  sustainable  growth.  Participation  levels  are  low  in  upper-
secondary  vocational  education  and  training  and  the  labour  market  relevance  of 
higher education is weak, resulting in  a high share  of tertiary graduates working in 
occupations that do not necessarily require a tertiary degree. 

The Cypriot healthcare sector remains characterised by a lack of universal coverage 
and various levels of inefficiency. This limits access to adequate and effective care. 
Legislation  aiming  to  create  a  national  health  system  and  provide  public  hospitals 
with greater autonomy is key to improving the capacity and cost-effectiveness of the 
healthcare sector but is still pending parliamentary adoption. 

In  the  context  of  the  European  Semester  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Cyprus’  economic  policy  and  published  it  in  the  2017 
country report. It has also assessed the Stability Programme and the National Reform 
Programme and the follow-up given to the recommendations addressed to Cyprus in 
previous  years.  It  has  taken  into  account  not  only  their  relevance  for  sustainable 
fiscal and socioeconomic policy in Cyprus, but also their compliance with EU rules 
and guidance, given the need to strengthen the EU’s overall economic governance by 
providing EU-level input into future national decisions.  

In  the  light  of  this  assessment,  the  Council  has  examined  the  Stability  Programme 
and its opinion14 is reflected in particular in recommendation 1 below. 

In  the  light  of  the  Commission’s  in-depth  review  and  this  assessment,  the  Council 
has  examined  the  National  Reform  Programme  and  the  Stability  Programme.  Its 
recommendations  made  under  Article  6  of  Regulation  (EU)  No 1176/2011  are 
reflected in recommendations 1 to 4 below, 

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

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HEREBY RECOMMENDS that Cyprus take action in 2017 and 2018 to: 

1. 

2. 

3. 

4. 

5. 

Pursue  its  fiscal  policy  in  line  with  the  requirements  of  the  preventive  arm  of  the 
Stability  and  Growth  Pact,  which  implies  to  remain  at  its  medium-term  budgetary 
objective  in  2018.  By  end-2017,  adopt  key  legislative  reforms  aiming  to  improve 
efficiency  in  the  public  sector,  notably  on  the  functioning  of  public  administration, 
governance of State-owned entities and local governments. 

Increase  the  efficiency  of  the  judicial  system  by  modernising  civil  procedures, 
implementing  appropriate  information  systems  and  increasing  the  specialisation  of 
courts. Take additional measures to eliminate impediments to the full implementation 
of  the  insolvency  and  foreclosure  frameworks,  and  to  ensure  reliable  and  swift 
systems for the issuance of title deeds and the transfer of immovable property rights. 

Accelerate the reduction of non-performing loans by setting related quantitative and 
time-bound  targets  for  banks  and  ensuring  accurate  valuation  of  collateral  for 
provisioning  purposes.  Create  the  conditions  for  a  functional  secondary  market  for 
non-performing  loans.  Integrate  and  strengthen  the  supervision  of  insurance 
companies and pension funds. 

Accelerate the implementation of the action plan for growth, focussing in particular 
on  fast-tracking  strategic  investments  and  improving  access  to  finance  and  by  end-
2017, resume the implementation of the privatisation plan. Carry out the ownership 
unbundling of the Electricity Authority of Cyprus by the end of 2017. 

Speed  up  reforms  aimed  at  increasing  the  capacity  of  public  employment  services 
and  improving  the  quality  of  active  labour  market  policies  delivery.  Complete  the 
reform  of  the  education  system  to  improve  its  labour  market  relevance  and 
performance,  including  teachers'  evaluation.  By  end-2017,  adopt  legislation  for  a 
hospital reform and universal health care coverage. 

Done at Brussels, 

For the Council 
The President 

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