COMMISSION STAFF WORKING DOCUMENT Country Report Cyprus 2018 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2018 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011
Date: 2018-03-07
Institutions: European Commission, Secretariat-General
Subjects: Cyprus, economic situation, education, investment, labour market, macroeconomics, public finance, social policy, structural adjustment, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 7.3.2018 SWD(2018) 211 final  COMMISSION STAFF WORKING DOCUMENT Country Report Cyprus 2018 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances  Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2018 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2018) 120 final}   
 
 
CONTENTS 

Executive summary 

1.  Economic situation and outlook 

2.  Progress with country-specific recommendations 

3.  Summary of the main findings from the Macroeconomic Imbalance Procedure 

in-depth review 

4.  Reform priorities 

4.1.   Public Finances and Taxation 

4.2.  Financial sector 

4.3.  Labour market, education and social policies 

4.4.   Investment 

4.5.   Sectoral policies 

Annex A: Overview Table 

Annex B: Macroeconomic Imbalance Procedure Scoreboard 

Annex C: Standard Tables 

References 

LIST OF TABLES 

Table 1.1: 

Key economic and financial indicators - Cyprus 

Table 2.1: 

Summary assessment of CSR implementation 

Table 3.1 

Macroeconomic Imbalance Procedure assessment matrix for Cyprus 

Table 4.2.1: 

Financial soundness indicators for domestic and foreign banks" 

Table 4.2.2:  NPL and coverage ratios across main sectors of economic activity 

Table B.1: 

The MIP scoreboard for Cyprus (AMR 2018) 

Table C.1: 

Financial market indicators 

Table C.2: 

Headline Social Scoreboard indicators 

Table C.3: 

Labour market and education indicators 

Table C.4: 

Social inclusion and health indicators 

Table C.5: 

Product market performance and policy indicators 

Table C.6: 

Green growth 

1 

5 

14 

19 

24 

24 

29 

35 

43 

49 

53 

60 

61 

67 

13 

15 

22 

29 

30 

60 

61 

62 

63 

64 

65 

66 

 
 
 
 
 
LIST OF GRAPHS 

Graph 1.1: 

Real GDP and contribution to growth 

Graph 1.2: 

Investment (in current prices) 

Graph 1.3: 

Housing sales by residency and housing credit to residents 

Graph 1.4: 

Labour market situation 

Graph 1.5: 

Real effective exchange rates 

Graph 1.6: 

Total factor productivity 

Graph 1.7: 

Current account developments, SPEs and  non-SPEs (based on 4 quarters rolling sum) 

Graph 1.8: 

Private sector indebtedness 

Graph 1.9: 

Private sector NPLs and coverage ratios, June 2017 

Graph 1.10:  Private sector debt 

Graph 2.1:  Overall multiannual implementation of 2011-2017 CSRs to date 

Graph 4.1.1:  Public debt projections 

Graph 4.1.2: 

Tax structure in 2015 

Graph 4.2.1:  Development of restructured loans 

Graph 4.2.2:  Private sector debt gap compared with prudential and fundamentals-based 

benchmarks 

Graph 4.2.3:  MFI loans to domestic residents, annual changes 

Graph 4.2.4:  Ratio of loans to gross value added across sectors of economic activity 

Graph 4.2.5:  Cypriot households savings gap 

Graph 4.3.1:  Adjusted wage gap between public and private employees by age group 

Graph 4.3.2:  Adjusted wage gap between permanent and temporary employees (% of the 

average hourly earnings of temporary employees) 

Graph 4.3.3:  NEET rate (15-24 years old) by educational attainment, 2008-2016 

Graph 4.3.4:  Expenditure on Education (% of GDP) compared to PISA results, 2015 

Graph 4.3.5:  Change in income inequality and its components, 2008-2015 

Graph 4.3.6:  At risk-of-poverty  or social exclusion rate, age groups 

Graph 4.3.7:  Share of healthcare in public expenditure 

Graph 4.4.1: 

Investment by category (2000-2016) 

Graph 4.4.2: 

Interest rates on loans to NFCs 

Graph 4.4.3:  Environmental investment 

Graph 4.5.1:  Changes in number of tourist arrivals 

5 

5 

6 

7 

7 

8 

8 

9 

10 

10 

14 

25 

27 

30 

31 

31 

32 

32 

35 

37 

38 

39 

41 

41 

42 

43 

43 

47 

51 

 
 
 
LIST OF BOXES 

Box 1.1: The impact of special-purpose entities on statistics and the real economy 

Box 2.1: Tangible results delivered through EU support to structural change in Cyprus 

Box 2.2: Technical support for the implementation of structural reforms in Cyprus 

Box 4.3.1:  Monitoring performance in light of the European Pillar of Social Rights 

Box 4.3.2: Policy highlights: Undeclared Work 

Box 4.4.1: Investment challenges and reforms in Cyprus 

12 

17 

18 

36 

38 

48 

 
 
 
 
EXECUTIVE SUMMARY 

of 

Cyprus'  robust  economic  recovery  can  help 
accelerate 
excessive 
correction 
the 
macroeconomic 
imbalances  and  provide  a 
window  of  opportunity  to  implement  growth-
enhancing  reforms.  Macroeconomic  imbalances 
are  declining  but  remain  significant  in  several 
areas. These include high levels of public, private 
and external debt, a large negative net international 
investment  position  and  a  high  stock  of  non-
performing loans. Unemployment is also declining 
but  remains  high,  in  a  context  of  weak  potential 
growth. 
macroeconomic 
positive 
developments,  a  renewed  reform  momentum  in 
key  areas  –  e.g.  the  insolvency  and  foreclosure 
frameworks,  the  judicial  system,  the  business 
environment,  the  public  sector,  education  and  the 
labour  market  –  could  help  improve  potential 
growth,  reduce  vulnerabilities  and  the  risk  of  a 
slowdown,  should  the  external  environment  and 
financial conditions become less supportive. (1) 

Amid 

Cyprus is experiencing strong economic growth 
and  the  labour  market  is  rapidly  improving. 
Real  GDP  growth  was  robust  in  2017  at  3.8 % 
driven  by  domestic  demand,  in  particular  private 
consumption. Investment was mainly concentrated 
on construction linked to the tourism boom and the 
recovery of the real estate sector. Employment rate 
rose  by  2.5 pps  in  2017Q3  year  on  year,  standing 
at  around  71.5 %,  while  the  unemployment  rate 
decreased significantly to 10.5 %. Inflation started 
to  turn  positive  albeit  at  low  level.  In  2018, 
economic  growth  is  forecast  to  remain  strong  but 
decelerate to 3.2 %.  

Overall, Cyprus has made limited progress with 
implementing 
country-specific 
government’s 
recommendations.  After 
adoption  and  implementation  of  an  ambitious 
reform  agenda  during  the  economic  adjustment 

2017 

the 

the 

(1)  This  report  assesses  Cyprus’  economy  in  the  light  of  the 
European Commission’s Annual Growth Survey published 
on 22 November 2017. In the survey, the Commission calls 
on  Member  States  to  implement  reforms  to  make  the 
European  economy  more  productive, 
resilient  and 
inclusive.  In  so  doing,  Member  States  should  focus  their 
efforts  on  the  three  elements  of  the  virtuous  triangle  of 
economic  policy  —  boosting 
investment,  pursuing 
structural reforms  and ensuring responsible fiscal policies. 
At  the  same  time,  the  Commission  published  the  Alert 
Mechanism Report (AMR) that initiated the seventh round 
of  the  macroeconomic  imbalance  procedure.  The  2018 
AMR  concluded  that  an  in-depth  review  should  be 
undertaken  for  the  Cypriot  economy.  The  review  is 
presented in this report. 

1 

notably 

structural 

concerning 

to  address 

programme, the reform momentum has been more 
modest  since  2016. Key  public  sector  reforms  are 
pending, 
public 
those 
administration,  local  government  and  state-owned 
entities.  Some  measures  have  been  taken  or 
announced to improve the efficiency of the judicial 
system, but a more comprehensive reform is still at 
an early stage. Administrative measures have been 
taken  to  reduce  the  backlog  in  issuing  title  deeds. 
Yet,  a 
the 
solution 
inadequacies  of  the property transaction  system  is 
still lacking. Progress on reducing non-performing 
loans and effectively implementing the insolvency 
and foreclosure frameworks is also limited. While 
the privatisation plan remains largely on hold, the 
action  plan 
is  gradually  being 
implemented, focussing on improving the business 
environment  and  boosting  strategic  investments. 
Concrete steps were taken to increase the capacity 
of  the  public  employment  services,  while  only 
limited  progress  was  made  on  education.  Finally, 
key  legislation  establishing  a  National  Health 
System  was  adopted 
its 
implementation is under way.  

in  June  2017  and 

for  growth 

Regarding progress in reaching the national targets 
under  the  Europe  2020  strategy,  Cyprus  has 
reached its objectives for R&D expenditure and is 
making  progress  in  increasing  the  proportion  of 
renewable energy. The rise in energy consumption, 
in line with the economic recovery, weighs on the 
capacity to reduce greenhouse gases emissions and 
meet  the  energy  efficiency  target.  Cyprus  over-
achieved its targets on higher education attainment 
level  and  on  reducing  early  school  leaving.  Some 
progress  was made  on  increasing  the  employment 
rate,  but  targets  on  reducing  poverty  and  social 
exclusion remain distant.  

translated 

Cyprus  faces  challenges  with  regard  to  a 
number  of  indicators  of  the  Social  Scoreboard 
supporting the European Pillar of Social Rights. 
Strong  economic  growth  has 
into 
improved  employment  outcomes  and  a  declining 
proportion  of  people  at  risk  of  poverty,  except 
among  children.  However,  a  growing  gender 
employment  gap,  the  high  share  of  young  people 
not  in  education,  employment  or  training  and  an 
increasing  number  of  early  school  leavers  may 
future  equality  of 
weigh  on  current  and 
opportunities. 

 
 
                                                           
Executive summary 

repayment  discipline 

exposure to the property market increases. The 
limited  use  of  the  insolvency  and  foreclosure 
framework remains an obstacle to the reduction 
of  NPLs.  Banks  still  face  impediments  in 
enforcing  their  claims  on  defaulted  borrowers 
and  weak 
remains 
problematic.  The  lack  of  a  secondary  market 
for  loans  and  a  loan  securitisation  framework 
also hinders progress. Supervisory pressure has 
led banks to increase their risk provisioning in 
line  with  the  euro  area  average.  This  has 
weighed  on  profitability  and  the  ability  to 
increase credit supply. 

  Banks are improving their fundamentals but 
still face challenges as regards performance. 
In 2017, the emergency liquidity assistance was 
repaid and banks continued to accumulate large 
liquidity  buffers.  This  behaviour  is  explained 
by banks’ reliance on potentially volatile short-
term deposits, notably from non-residents. The 
poor  asset  quality  and  the  lack  of  inter-bank 
markets  are  hindering  wholesale  long-term 
funding  and  the  build-up  of  loss  absorption 
capacity. Banks’ operational costs remain high. 
Improvements 
and 
the 
administrative  capacity  of 
insurance  and 
pension funds’ supervision remain pending.  

governance 

to 

findings  of 

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

in-depth 

the 

  Private  debt  continues  to  be  among  the 
highest  in  the  EU.  The  debt  of  non-financial 
corporations  and  households  has  decreased  to 
around 250 % of GDP (excluding non-financial 
SPEs) 
in  2017Q3,  primarily  driven  by 
households’  debt  reduction.  Despite  the  robust 
recovery, 
repayment  of  debt  has  only 
marginally  improved  as  contract  enforcement 
remains weak and the use of the insolvency and 
foreclosure frameworks is limited.  

  Although  still  high,  public  debt  is  falling 
markedly. Cyprus has significantly accelerated 
debt  reduction,  notably  thanks  to  a  prudent 
fiscal  stance  and  active  debt  management 
operations.  While  risks  related  to  high  private 
debt  levels  in  the  economy  remain  significant, 
they  are  mitigated  by  the  country’s  favourable 
fiscal  position.  Cyprus  remains  vulnerable  to 
external  shocks  and  changes  in  fiscal  stance 
and  economic  outlook.  Significant  reliance  on 
corporate 
the 
tax 
presence  of  tax  planning  businesses  exposes 
the  country  to  changes  in  international  tax 
systems. 

revenues  and 

income 

  The  net  international  investment  position 
(NIIP) remains very negative, but nearly two 
thirds  are  linked  to  SPEs.  The  NIIP  has 
decreased  in  recent  years,  but  remains  largely 
negative  at  120.6 %  of  GDP  in  2017Q3. 
Excluding  the  external  debt  of  SPEs,  the 
negative NIIP is smaller but still substantial at 
around  44 %  of  GDP.  This  highlights  Cyprus’ 
dependency  on  foreign  financing  sources  and 
its  vulnerability 
international 
to  shifts 
financial  market  sentiment.  The  widening 
current account deficit warrants monitoring.  

in 

  The  high  level  of  non-performing  loans 
(NPLs)  remains  the  key vulnerability  of the 
banking  sector  and  affects  credit  supply. 
NPLs decreased, albeit unevenly across banks, 
as  a  result of debt restructuring  through  write-
offs  and  debt-to-asset  swaps.  Uncertainties 
the  sustainability  of  banks 
remain  over 
reduction strategies, as loan re-defaults and re-
restructuring  remain  high  and  banks'  direct 

  Inefficiencies  in  the  justice  system  continue 
to  affect  contract  enforcement  and  swift 
resolution  of  civil  and  commercial  cases. 
Cumbersome  civil  procedures  and  weak 
enforcement  of  court  decisions  weigh  on 
banks’  incentives  to  use  the  insolvency  and 
foreclosure frameworks to reduce their stock of 
NPLs.  A  series  of  reforms  have  started  to 
address the most critical problems in the justice 
system, in particular low digitalisation of courts 
and the lack of life-long training of judges. 

  The  housing  market  is  recovering.  Housing 
transactions  have  picked  up  and  prices  are 
recovering,  particularly  in  the  luxury  segment. 
This  may  incentivise  mortgage  holders  in 
difficulty to liquidate the underlying real estate 
collateral,  which  might  in  turn  help  to  reduce 
private  debt.  The 
increased  construction 
activity  is  supported  mainly  by  self-financing 
investment.  However,  major 
and 
obstacles  to  transferring  and  issuing  property 
title deeds have not yet been resolved.  

foreign 

2 

 
 
Executive summary 

functional  in  2020,  important  implementation 
challenges and investment needs are expected. 

insufficient 

to  achieve 

  Enforcement  of  environmental  and  climate 
regulations remains weak. Recent investment 
has  proved 
full 
compliance  with  environmental  regulations,  in 
particular  in  waste  and  water  management. 
Cyprus still lacks effective tools to sustainably 
increase  energy  and  resource  efficiency.  The 
energy  sector  reform  has  made  some  progress 
and  could  encourage  growth  in  renewable 
energy.  However,  Cyprus  remains  heavily 
dependent on fossil fuels.  

facilitate 

  Some  indicators  suggest  that  Cypriot  tax 
rules  are  used  by  companies  engaged  in 
aggressive  tax  planning.  Cyprus  has  taken 
steps  to  amend  aspects  of  its  tax  system  that 
may 
tax  planning. 
aggressive 
However,  the  existence  of  specific  tax  rules 
(e.g.  the  corporate  tax  residency  rules,  the 
absence  of  withholding  taxes  on  dividend, 
interest  and  royalty  payments  by  Cyprus 
companies  and  potential  risks  associated  with 
the  design  of  notional 
interest  regimes), 
combined  with  the  lack  of  some  anti-abuse 
rules,  suggest  that  Cyprus’  corporate  income 
tax  rules  may  still  be  used  in  tax  avoidance 
structures.  

improve 

competition 

  Inefficiencies in  the  public  sector  impact  on 
the business environment. Planned reforms to 
modernise 
the  public  administration  and 
improve  its  efficiency  are  pending.  Some 
efforts are being made to expand e-government 
services  and 
regulatory  quality. 
Measures  to  simplify  permits  and  licensing 
procedures,  notably  for  strategic  investments, 
have  also  been  taken.  According  to  relevant 
indicators, 
qualitative 
assessment  in  public  tenders  could  be  further 
enhanced 
and 
strengthen 
transparency 
in  public  procurement.  The 
governance framework for state-owned entities 
remains unconducive to adequate assessment of 
risks  and  performance  improvements.  This 
might 
the  build-up  of  public 
contingent  liabilities  and  hinder  investment 
capacity  in  key  utilities  such  as  telecoms  and 
energy.  Perceived  levels  of  corruption  in  the 
public  sector  are  high,  which  could  deter 

efficiency 

facilitate 

and 

to 

  Potential  growth  is  recovering  but  remains 
subdued.  Higher  investment  and  employment 
are  lifting  potential  growth,  but  it  remains 
below  the  EU  average.  The  main  constraining 
factors  are  low  productivity,  modest  growth-
boosting  investment,  notably  in  innovation, 
difficulties  to  access  finance,  in  particular  for 
small  businesses,  and  shortcomings  in  the 
business environment. 

Other  key  structural  issues  analysed  in  this  report 
and  pointing  to  particular  challenges  for  Cyprus' 
economy are the following: 

  The 

is 

labour  market 

improving. 
Employment  is  on  the  rise  and  unemployment 
is  rapidly  decreasing,  even  though  it  remains 
high  among  young  people  and  the  long-term 
unemployed.  The  capacity  of 
the  public 
employment  services  and  activation  measures 
improving  but  are  still  sub-optimal. 
are 
Outreach  to  young  people  not  in  employment, 
education  or  training  is  limited.  Conditions  of 
employment  differ 
significantly  between 
temporary  and  permanent  contracts  and 
between public and private sectors, pointing to 
segmentation  of  the  labour  market.  The  share 
of employees covered by collective bargaining 
is lower than the EU average. 

  The  modernisation  of  the  education  sector 
has  advanced  albeit  important  challenges 
remain.  Poor  educational  achievements  and 
skills  mismatches  continue 
to  weigh  on 
potential  growth.  Participation  in  vocational 
education and training is low and the reform of 
the teachers’ evaluation system is still pending. 
Recent reforms on the appointment of teachers, 
curricula  and  plans  to  increase  vocational 
education and training capacity are expected to 
improve the current situation.  

  Key  steps  to  reform  the  healthcare  sector 
have  been  taken  and  the  focus  is  now  on 
implementation.  Legislation  establishing  the 
new  National  Health  System,  providing  for 
universal  health  coverage,  was  adopted.  The 
new  system  aims  at  improving  access  to  care, 
reduce  high  levels  of  out-of-pocket  payments 
and  increase  efficiency  of  care  delivery  in  the 
public  sector.  Until  the  system  becomes  fully 

3 

 
 
Executive summary 

investment.  The  authorities  have  announced 
measures 
the  anti-corruption 
framework.  

to  strengthen 

4 

 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

GDP growth 

Cyprus’  economy  is  in  a  vigorous  upswing 
phase  of  the  economic  cycle,  with  real  GDP 
expected  to  have  grown  by  3.8 %  in  2017.  It  is 
the  third  consecutive  year  of  firm  economic 
growth, confirming a sturdy recovery. For 2017 as 
a whole, the growth rate in Cyprus is estimated to 
have  been  among  the  highest  in  the  euro  area.  It 
was driven by private consumption and exports of 
services,  the  latter  mainly  linked  to  the  booming 
tourism  (see  Graph 1.1).  For  the  first  time  in 
several  years,  public  consumption  posted  a 
positive contribution.  

Graph 1.1: 

Real GDP and contribution to growth 

low  of  11.7 % 

2017(2),  gross  fixed  capital  formation  reached 
16.4 % of GDP,  coming  closer  to  the  EU  average 
(20.0 %),  from  a 
in  2014. 
Investment was driven by construction, boosted by 
the tourism industry as well as the recovery of the 
residential real estate market, and shipping (which 
heavily influenced the equipment investment). Key 
indicators  in  the  construction  sector  and  plans  for 
large  tourism-related  projects,  amongst  others, 
point to strong construction investment in the near 
future.  

Graph 1.2: 

Investment (in current prices) 

Source: Cystat 

Net  exports  in  2017  are  expected  to  have 
positively  contributed  to  growth.  Exports  of 
services  were  strong,  on  the  back  of  record 
numbers  of  tourists  visiting  Cyprus  and  a  big 
increase  in  tourism  revenues;  exports  of  goods, 
after  a  sharp  contraction  in  2016,  rebounded 
in  2017.  Imports  remained  more 
somewhat 
moderate; if one excludes one-offs relating to ship 
registrations  in  2016,  they  have  risen  in  line  with 
consumption and investment.  

The  economic  recovery  is  broad-based,  fuelled 
by  tourism.  Substantial  gains  were  recorded  in 
most  sectors,  except  the  financial  sector,  which 
remains  heavily  burdened  with  non-performing 
loans  (NPLs).  Tourism,  booming  for  the  second 
year  in  a  row,  had  a  positive  impact  on  other 
sectors,  particularly  transport,  trade,  construction, 
food  and  accommodation.  Business  services, 
public  administration,  defence  and  education  are 

(2)  Based on three quarters data. 

Source: European Commission 

Real  private  consumption  is  the  main  growth 
driver.  It  is  estimated  to  have  increased  by  more 
than  3  %  in  2017,  driven  by  steadily  rising 
household  disposable  income,  solid  employment 
and the first aggregate wage increases after a four-
year  drop.  Consumer  confidence  is  high,  well 
above pre-crisis levels, signalling a continuation of 
the  current  strong  consumption  in  the  near  term. 
Apart from these positive cyclical factors, Cypriot 
households continue to use accumulated wealth to 
finance  consumption,  as  reflected  by  a  negative 
savings rate.  

is  recovering,  particularly 

Investment 
in 
construction  and  equipment.  After  contracting 
sharply  during  the  crisis,  investment  started  to 
recover in 2015, before increasing significantly in 
2016 and levelling-off in 2017 (see Graph 1.2). In 

5 

-12-8-40481210111213141516171819Net exportsInvestmentPriv. consumptionGov. consumptionInventoriesReal GDP (y-o-y%)forecastpps. 051015202530010305070911131517Q3% of GDPTransport eqipmentEquipmentConstructionTotal 
 
 
 
                                                           
1. Economic situation and outlook 

also growing strongly. Meanwhile potential growth 
is improving on the back of recovering investment 
and increasing employment, but remains weak.  

Graph 1.3:  Housing sales by residency and housing 

credit to residents 

Inflation 

Inflation  based  on  the  harmonised  index  of 
consumer  prices  (HICP)  turned  positive  but 
remains  modest.  After  a  few  years  of  aggregate 
price  declines,  inflation  in  2017  was  positive  at 
0.7 %, driven mainly by rising energy prices in the 
first  half  of  the  year.  Core  inflation  also  turned 
marginally positive, as a result of rising prices for 
services.  HICP  inflation  is  expected  to  increase 
moderately in 2018-2019, driven by the economic 
recovery and anticipated wage rises. 

Housing market  

real 

residential 

The 
estate  market  has 
completed its downward adjustment and is in a 
modest recovery. Housing sale contracts were up 
by double-digit percentage in 2017.  A number of 
government  incentives,  such  as  lower  property 
tax  exemption, 
transfer 
abolishing  the  immovable  property  tax,  and  a 
citizenship  scheme  based  on  property  acquisition, 
have  contributed  to  the  recovery.  Eurostat  and 
Central Bank of Cyprus indicators show that house 
prices have started to rise since the end of 2016.  

fees,  capital  gains 

Real  estate  acquisitions  are  funded  mainly  by 
savings  and  foreign  investment  (see  Graph 1.3). 
Domestic  buyers  funded  property  transactions 
mostly from their own savings. Foreign buyers, in 
particular  from  Russia,  Asia  and  the  Middle  East, 
were  responsible  for  fewer,  but  much  more 
in  cash. 
transactions,  predominantly 
sizeable 
Mortgage  interest  rates  have  substantially  come 
down initially as a result of directives issued by the 
Central  Bank  of  Cyprus.    Other  historical  factors 
included the European Central Bank (ECB) policy 
rates,  and  strong  competition  among  banks  for 
viable  borrowers  in  the  mortgage  refinancing 
segment.  However,  banks  in  Cyprus  remain  very 
cautious when it comes to granting new mortgages 
(given  the  very  high  proportion  of  NPLs  in  their 
household credit portfolios, see Section 4.2). 

6 

Source: Department of Lands and Surveys, European 
Central Bank, European Commission 

The  real  estate  supply  side  is  responding  to 
positive  demand  developments.  Construction 
activity  has  been  on  the  rise  since  mid-2016  and 
this trend is expected to continue, as the number of 
increasing.  Construction 
building  permits  are 
companies  also  face 
tough  constraints  when 
seeking to obtain bank credit for new projects, due 
to  heavy  corporate  indebtedness  in  the  sector  and 
the prevalence of NPLs. Therefore, they fund most 
residential real estate projects by pre-sales. 

Labour market  

25).  However, 

The  labour  market  improves  rapidly  on  the 
back  of  economic  recovery.  The  number  of 
people employed is expected to increase at around 
3  %  in  2017,  mainly  in  the  services  sectors  and 
construction.  Unemployment  rate  dropped 
to 
10.5 % in 2017Q3, falling faster than expected on 
the  basis  of 
its  pre-crisis  relationship  with 
economic  growth  (European  Commission,  2017a, 
p. 
remains 
particularly  high  among  young  people  (25.1 %  in 
2017Q3,  above  the  EU  on  average)  and  for  long-
term unemployed (4.3 % in 2017Q3 as against the 
EU  average  of  3.5 %).  The  employment  rate 
increased  and  in  2017Q3  was  only  slightly  below 
the  EU  average  (71.5 %,  as  compared  to  72.3 %, 
respectively), but still significantly below the pre-
crisis level (76.8 % in 2007; see Graph 1.4). While 
headcount  employment  increased,  the  number  of 
hours  worked  still  lags  behind.  This  is  associated 

unemployment 

-10-505101520253035 01 0002 0003 0004 0005 0006 00004Q104Q405Q306Q207Q107Q408Q309Q210Q110Q411Q312Q213Q113Q414Q315Q216Q116Q417Q3%UnitsHousing sales to non-residentsHousing sales to residentsHousing credit to residents, y-o-y % change (rhs) 
 
1. Economic situation and outlook 

with the rise in part-time work and employment on 
temporary  contracts,  both  still  above  pre-crisis 
levels.  Underemployment,  which 
increased 
substantially  as  a  consequence  of  the  crisis,  has 
subsided only marginally: in 2017Q3, 6.3 % of the 
labour force reported that they would like to work 
more hours (as against 7.4 % in 2016Q3).   

%  in  2016,  slightly  below  the  EU  average  (see 
Section 4.3.2).  However,  wealth 
inequality 
remains  among  the  highest  in  the  euro  area.  The 
Gini  coefficient  of  net  wealth  (assets  minus 
liabilities)  was  0.72  in  2014 (4),  reflecting  a  high 
proportion of indebted households.  

Graph 1.4: 

Labour market situation 

Competitiveness  

rate 

effective 

Real 
(REER) 
exchange 
developments  may  erode  cost  competitiveness 
gained  during 
the  crisis.  The  REER  has 
depreciated significantly in the crisis years, in line 
with the euro area trend (see Graph 1.5). With the 
euro appreciation against major currencies in 2017, 
the  drop  in  REER  is  expected  to  have  come  to  a 
to  be 
halt.  The  Cypriot  REER 
reversing,  particularly  as  wages  start  to  rise  and 
inflation  is  no  longer  negative,  and  the  euro  is 
projected to appreciate in 2018.  

is  expected 

Graph 1.5: 

Real effective exchange rates 

Source: Eurostat – Labour force survey 

for 

competitiveness 

Wage  growth  remained  modest,  even  as  the 
recovery  gained  strength.  Nominal  wages  had 
previously  declined  over  a  4-year  period,  partly 
compensating 
losses 
accumulated  since  the  early  2000s.  In  2017,  they 
are expected to have returned moderately positive, 
held  back  by  labour  market  slack. (3)  Collective 
agreements  reached 
in  all  unionised  sectors, 
covering  about  30  % of  private  sector  employees, 
provide  for  gradual  wage  increases  and  partial 
adjustment to the price index in the coming years.  

Social developments 

Social  conditions  are  still  challenging  but  have 
begun  to  improve  as  a  result  of  the  labour 
market  recovery.  Gross  household  disposable 
income fell more steeply than GDP in 2010-2015, 
leading to a sharp rise in income inequality. Many 
young people are not in employment, education, or 
training (NEET). Income inequality receded to 4.9 

(3)  The  labour  market  slack  is  a  sum  of  the  persons  available 
to work but not seeking work, those seeking work but not 
immediately 
involuntarily 
part-time-employed (European Commission, 2017a). 

available, 

and 

Source: AMECO 

Cyprus  has  continued  to  lose  export  market 
shares since 2010, despite depreciating REER and 
downwards  adjustment  of  the  unit  labour  costs 
over  several  years.  This  suggests  that  structural 
factors,  such  as  low  business  dynamism,  are  at 
play  (see  Section 4.4.2).    The  foreseen  wage 

(4)  The  Gini  coefficient  is  a  summary  statistic  of  inequality. 
The  closer  the  Gini  is  to  1,  the  more  unequal  is  the 
distribution of income or wealth. If there is no inequality in 
a society, the indicator is equal to 0. If all national income 
or  wealth  is  earned  by  one  person  alone,  the  Gini 
coefficient is equal to 1. 

7 

62646668707274767805101520253035404501020304050607080910111213141516% %Employment rate 20-64Unemployment rate 15-74 (lhs)Long-term unemployment rate 15-74 (lhs)Youth unemployment rate 15-24 (lhs)NEET rate 15-24 (lhs)708090100110120130140150000102030405060708091011121314151617IEELESCYPT 
 
                                                           
 
                                                           
1. Economic situation and outlook 

increases  are  expected  to  drive  unit  labour  costs 
higher as of 2018. 

both  the  SPE  sector  and  the  real  sector  (on  four 
quarter rolling basis) (see Graph 1.7).   

in 

Total factor productivity remains weak. After a 
long decline, total factor productivity has started to 
improve  slightly 
the  past  3  years  (see 
Graph 1.6). A substantial proportion of investment 
(around 30 % in 2017) is linked to the construction 
of  dwellings,  while 
the  equipment  category, 
accounting  for  around  half  of  all  investments,  is 
partially  driven  by 
(see 
Graph 1.2).  This  data  points  to  potentially  limited 
impacts on productivity. 

registrations 

ship 

External position 

based 

deficit, 

current-account 

on 
The 
four-quarter  rolling  sum,  is  widening.  After 
increasing  to  4.9 %  in  2016,  it  widened  further  to 
6.9 %  in  the  third  quarter  of  2017  (on  a  fours 
quarter  rolling  sum  basis).  This  was  driven  partly 
by  recovering  investment,  which  has  high  import 
content,  and  more  generally  by  the  consumption 
resuming  after  the  crisis.  As  such,  the  widening 
may  be  temporary,  but  developments  should  be 
monitored carefully.  

The current-account deficit is largely influenced 
by  special  purpose  entities  (SPEs). (5)  The  size 
and  the  current  trend  of  the  current  account  are 
driven  to  a  very  large  extent  by  the  activities  of 
SPEs (see Box 1.1). When one excludes these, the 
current-account determined  by  the  real sector was 
balanced  in 2016, but  turned negative  in  2017  for 

(5)  Although  no  internationally  agreed  definition  of  SPEs 
exists,  BPM6,  ESA2010  and  the  fourth  edition  of  the 
OECD’s  Benchmark  Definition  of  Foreign  Direct 
Investment  (BD4)  identify  four  distinctive  features  of 
SPEs,  namely  (a)  legal  entities  incorporated  by  non-
residents,  (b)  small  footprint  on  the  real  economy  and  (c) 
balance  sheets 
largely  consisting  of  claims  on  and 
liabilities to non-residents. In the case of Cyprus, the major 
types  of  SPEs  identified  so  far,  can  be  classified  in  the 
following two broad categories: 
− 
Financial companies 
− 
Financing  and  holding  companies,  which  channel 
funds  within  a  global  group  on  behalf  of  a  non-
resident parent company. 
Factoring/invoicing  companies,  which  invoice  the 
sales of a group with global operations on behalf of 
the parent. 
Non-financial  companies  (mainly  ship-owning), 
which  own  non-financial  assets  that  are  usually 
financed through a loan from a non-resident bank or 
from their parent companies. 

− 

− 

Graph 1.6: 

Total factor productivity 

Source: AMECO 

Graph 1.7:  Current account developments, SPEs and  
non-SPEs (based on 4 quarters rolling sum) 

Source: Central Bank of Cyprus 

international 

The  net 
investment  position 
(NIIP)  remains  very  negative,  but  nearly  two 
thirds  of  it  is  attributable  to  the  presence  of 
SPEs. As of 2017Q3, they determined a proportion 
of the negative NIIP equivalent to 76.4 % of GDP, 
while the total NIIP was equivalent to -120.6 % of 
GDP.  This  mitigates  to  a  marked  extent  the  risks 
stemming from the very large NIIP, as SPEs’ links 
to the real economy are rather limited.  

8 

808590951001051100001020304050607080910111213141516172000 = 100CYEA-19EU-28-10-8-6-4-20214Q415Q115Q215Q315Q416Q116Q216Q316Q417Q117Q217Q3% GDPCA, excluding SPEsCA, SPEs 
                                                           
 
 
 
 
The  NIIP  continued  narrowing.  The  NIIP 
contracted  quite  markedly,  by  7pps,  from  the  end 
of  2016  till  the  third quarter  2017.  The  correction 
of the NIIP since 2014 was driven by adjustments 
in the real sector, a positive sign, proving that the 
real  Cypriot  economy  is  becoming  less  reliant  on 
foreign  funds.  Meanwhile  the  part  of  NIIP  linked 
to the SPE sector has remained broadly stable and 
is  expected  to  somewhat  increase  in  the  future. 
This indicates that the substantial negative overall 
NIIP is likely to persist in the medium term. 

Debt of non-financial private sector 

imbalance  procedure 

While  non-financial  private  sector  debt 
is 
falling,  it  is  still  very  high.  Private  sector  debt 
stood at 329 % of GDP in 2017Q3 — down from 
345 % in 2016 (see Graph 1.8), but well above the 
macroeconomic 
(MIP) 
threshold of 133%. Non-financial SPEs accounted 
for  a  substantial  proportion  of  the  accumulated 
private  debt,  at  79 %  of  GDP  in  2017Q3.  They 
have  limited  links  to  the  real  economy  and  their 
debt  is  funded  mostly  by  foreign  banks,  which 
markedly  diminishes  the  risks  to  the  domestic 
economy.  In  nominal 
terms,  household  and 
non-financial  corporate  debt  (including  SPEs)  has 
remained 
at 
stable 
EUR 62 billion.  However,  even  when  excluding 
SPEs,  non-financial  private  sector  debt  remained 
very  high,  at  250 %  of  GDP,  at  2017Q3  (see 
Section 4.2.2).  

broadly 

since 

2014 

Financial sector  

the 

sector 

private 

non-financial 

The  high  level of  non-performing  loans (NPLs) 
remains  the  key  vulnerability  of  the  banking 
sector.  NPLs  in  the  banking sector  started  to  fall, 
but  are  still  very  high,  accounting  for  around  half 
of 
loan 
portfolio.   The  proportion  of  NPLs  in  corporate 
loan  portfolios  have  slightly 
and  household 
declined  to  52.7%  in  June  2017  (compared  with 
54.8% at end 2016), by EUR 1.4 billion. The most 
important  NPL  reduction  has  been  in  the  sectors 
related to real estate and tourism activities, such as 
construction  as  well  as  accommodation  and  food 
services.  NPLs 
loan 
restructuring in the form of cash repayments, debt-
to-asset  swaps  and,  to  a  lesser  extent,  loan  write-
offs. The recourse to debt-to-asset swaps led to an 
accumulation  of  real  estate  assets  by  banks, 

the  back  of 

fell  on 

1. Economic situation and outlook 

increasing  their  exposure  to  the  property  market 
(see Section 4.2.1).  

Graph 1.8: 

Private sector indebtedness 

Source: Eurostat, Central Bank of Cyprus 

supervisory  mechanism 

Risk  provisioning  improved  substantially  in 
2017  and  is  now  in  line  with  the  euro  area 
average.  Supervisory  pressure,  notably  through 
the 
(SSM) 
single 
supervisory 
review  and  evaluation  processes 
(SREP),  led  to  gradual  improvements  in  the 
provisioning  coverage  of  NPLs  since  2014,  i.e. 
from 31.7 % to 46.2 % as of June 2017 (see Graph 
1.9  and  Table  4.2.1).  Provisioning 
is  now 
comparable with the EU average and should reflect 
more  accurately  the  real  value  of  the  real  estate 
collateral.  However, 
improved  average 
the 
coverage  masks  differences  across  banks.  As 
banks  accelerate  the  cleaning-up  of  their  balance 
to  be 
sheets,  further  provisioning 
necessary in order to maintain and, in some cases, 
improve  coverage,  where 
the  valuation  of 
collateral might not fully reflect market prices.  

likely 

is 

Banks were loss making in the first nine months 
of  2017.  The  results  for  the  first  nine  months  of 
2017  show  a  hefty  deterioration  in  the  banks’ 
profitability relative to the same period in 2016, as 
the net interest income declined by about EUR 158 
million.  In  addition,  the  big  increase  in  loan  loss 
provisions  announced  by  banks,  notably  by  the 
Bank  of  Cyprus,  led  to  a  system-wide  increase  in 
provisions  by  more  than  EUR  850  million.  It 
tipped  financial  results 
into  deeply  negative 
territory of about EUR 535 million in the first nine 

9 

010020030040001020304050607080910111213141516% of GDPHouseholds, debt-to-GDP rationon-financial special purpose entities, debt-to-GDP ratioNon-financial corporations, debt-to-GDP ratio excludingdebt of non-financial special purpose entitiesPrivate sector, debt-to-GDP ratio 
 
months  of  2017,  relative  to  a  profit  of  EUR  317 
million  in  the  same  period  of  2016.  Overall,  the 
banks’  capacity  to  generate  profits  remains  under 
pressure in a context of tighter interest margins and 
the need to work out the extremely high volume of 
NPLs.  

Banks are taking measures to reduce operating 
expenses.  Cypriot  banks  made  progress 
in 
reducing numbers of branches and employees, but 
the number of customers and assets per branch or 
employee remains significantly lower than the euro 
area average.  

Graph 1.9: 

Private sector NPLs and coverage ratios, June 
2017 

1. Economic situation and outlook 

are  planning  to  issue  additional  tier 1  or  tier 2 
capital  in  order  to  strengthen  their  capital  buffers 
as  a  pre-requisite  for  achieving  NPL  reduction 
targets. 

Deleveraging  appears  to  have  come  to  a  halt, 
but the clean-up of the balance sheets continues. 
As  of  November  2017,  the  stock  of  loans  to 
domestic  non-financial  corporates  (NFCs)  and 
households  remained  relatively  flat  year  on  year. 
This  masks  underlying  movements  and  efforts  by 
banks  to  clean  up  their  balance  sheets.  New 
lending  picked  up  slightly,  while  unpaid  interests 
on NPLs are capitalised, which increases the credit 
stock.  On  the  other  hand,  banks’  growing  use  of 
debt-to-asset swaps and debt write-offs in order to 
exposures, 
restructure 
together with debt repayments, tends to reduce the 
stock  of  credit.  Amid  strong  growth,  the  private 
sector  debt  to  GDP  continued  declining  (see 
Graph 1.10).  

non-performing 

their 

Graph 1.10:  Private sector debt 

(1) Data for Portugal is not available. 
Source: ECB consolidated banking data. 

The common equity tier 1 (CET 1) capital ratio 
of  all  banks  declined  to  15 %  in  September 
2017,  from  16 %  a  year  before,  and  remains 
vulnerable  to  further  loss  recognition.  The 
overall solvency ratio fell by 0.6 pps to 16.3 % in 
September  year  on  year.  The  CET 1  ratio  is  still 
higher than the EU average (around 13%), but this 
reflects  the  great  uncertainty  associated  with  the 
high  ratio  of  impaired  loans.  While  capital  ratios 
did not decline in 2015 and 2016 despite negative 
financial  results,  the  acceleration  of  the  NPL 
workout has started to take a toll on banks’ capital 
buffers. Banks that are more advanced in terms of 
balance-sheet clean-up have seen their CET 1 ratio 
fall  well  below  average.  If  banks  continue  to 
increase  their  provisioning  and  recognise  losses, 
maintaining current capitalisation is likely to prove 
challenging.  Therefore,  some  of  the  largest  banks 

Source: Eurostat 

loans 

New  lending  is  gradually  recovering.  The  gross 
volume  of  new 
to  domestic  residents 
increased  in  the  first  half  of  2017  to  EUR 1.4 
billion, from a very low base of EUR 890 million 
in  the  first  half  of  2016.  The  latest  bank  lending 
survey  shows  that  credit  standards  for  loans  to 
businesses  and  households  remained  unchanged 
increasingly 
since  end  of  2014.  Banks  are 
venturing into new lending opportunities, given the 
large  amount  of  liquidity  on  their  balance  sheets 

10 

010203040506070050100150200250300350400bn EUR% GDPStock of loans bn EUR  (rhs)Stock of loans % GDP0102030405060CYELBGHRITIEHUSIROLVPLESMTATCZLTSKFRDEBEDKNLEEUKFILUSENPLsCoverage ratio 
 
 
1. Economic situation and outlook 

measures  of  2017,  such  as  the  abolition  of  the 
immovable  property 
the 
tax, 
temporary  wage  levy  and  the  additional  hiring  of 
soldiers. The structural balance is forecast to be in 
surplus  (0.4%  of  GDP)  in  2017  and  close  to  a 
balanced position in 2018 and 2019. 

termination  of 

increases 

expenditure 

There  are  risks  associated  with  financing 
permanent 
from 
temporary revenue windfalls. Public expenditure 
is  projected  to  increase,  albeit  more  slowly  than 
revenue. However, the still-uncertain fiscal impact 
the  absence  of  a 
of  health  system  reform, 
mechanism 
to  contain  public  payroll  growth 
beyond  2018  and  pressures  for  fiscal  relaxation 
may pose further risks in the medium term.  

The  debt  ratio  is  expected  to  decline  steadily 
and  fall  below  94 %  of  GDP  in  2019.  The 
downward  debt  trajectory  reflects  expected  high 
primary  surpluses  and  favourable  debt  dynamics 
due to strong nominal growth. In the medium term, 
the  high  public  debt  remains  subject  to  downside 
risks  stemming  from  macroeconomic  shocks, 
vulnerabilities  in  the financial  system  and  gradual 
deterioration  of  the  structural  fiscal  position  (see 
Section 4.1.1). 

and  the  pressing  need  to  improve  their  financial 
results.  

Deposits  increased  in  2017  on  the  back  of 
strengthened  confidence.  Total  deposits  had 
increased  by  about  EUR 240  million  year-on-year 
(2.4 %)  as  of  end  November  2017.  The  highest 
annual  growth  rates  were  recorded  for  domestic 
and other euro area residents. 

Public finances 

Cyprus  is  expected  to  post  sizeable  budgetary 
surpluses in 2017-2019. The Commission projects 
general  government  surpluses  of  above  1 %  of 
GDP in 2017 and 2018 and close to 2 % in 2019. 
The primary surplus for 2017-2019 is expected to 
be among the highest in the EU, at 3.5 % of GDP 
in  2017  and  just  below  4 %  of  GDP  in  2018  and 
2019.  Strong  fiscal  performance 
is 
expected  to  have  been  driven  by  high  revenue 
collection  on 
favourable 
the  back  of 
macroeconomic  situation,  positive  developments 
in  the  labour  market  and  the  fact  that  the 
government  concluded  gas  exploration  contracts 
for  2017-2019.  Revenue  collection  is  expected  to 
more than offset the impact of expansionary fiscal 

in  2017 

a 

11 

 
1. Economic situation and outlook 

Box 1.1: The impact of special-purpose entities on statistics and the real economy 

Special Purpose Entities (SPEs) are used to legally register and hold assets in Cyprus, including for 
risk  insulation  and  tax  planning purposes.  SPEs are  legal  entities  registered and  tax  resident in  Cyprus 
with  few  employees  and/or  no  production,  which  are  controlled  by  non-resident  entities.  They  are  mainly 
used by non-residents to channel funds to other non-residents, notably in the case of holding companies or 
intra-group  financing  operations.  Companies  can  use  SPEs  to  legally  separate  risk-bearing  activities  from 
other operations and valuable assets, for example at the request of their creditors. SPEs are also legal tools 
used  to  protect  assets  from  bankruptcy  proceedings,  notably  for  economic  agents  originating  from 
jurisdictions where contract enforcement is poor or characterised by high levels of corruption. Setting up an 
investment  vehicle,  a  subsidiary  or  a  shipping  company  in  Cyprus  currently  allows  benefitting  from 
relatively low taxation and a local pool of specialised expertise.  

SPEs  are  also  widely  used  to  register  ships  in  Cyprus.  Shipping  activities  usually  take  place  offshore. 
Therefore, shipping companies have an interest in structuring these activities through SPEs in favourable tax 
regimes  such  as  Cyprus  (see  Section  4.1.3).6  Available  data  on  non-financial  SPEs  (mostly  linked  to 
shipping activities) show that they had total liabilities of about EUR 18 billion at end-2016, or about 100% 
of  Cyprus'  GDP.  Non-financial  SPEs  are  significantly  leveraged  (debt  to  equity  ratio  of  3.7)  and  mostly 
funded from abroad (97% of outstanding loans).  

SPEs introduce a bias in Cyprus' economic statistics. The economic transfer of transport equipment by 
non-financial  entities  owned  by  a  resident  of  Cyprus  has  a  large  impact  on  external  accounts,  while  its 
impact on the real domestic economy is limited to the leasing fee charged by these entities, which increases 
GDP. Under ESA2010, a vessel/aircraft is a Cypriot economic resident independently from the location of 
its  activities  if  its  economic  owner  is  a  resident  of  Cyprus.  The  gross  financial  assets  and  liabilities  of 
financial SPEs offset each other, but considerably inflate the size of the financial accounts. 

Shipping-related transactions increase the volatility of investment, imports and exports statistics and 
have  an  impact  on  the  GDP  through  the  leasing  services  provided  by  ship-owning  entities  whose 
economic owners are residents of Cyprus. The registration of a ship in Cyprus increases investment. This 
is however offset by a corresponding increase in imports of goods. Likewise, when a vessel is de-registered 
from  Cyprus,  this  reduces investment,  but  increases exports.  Neither  registration nor  de-registration  affect 
GDP, but the size of some important transactions (some ships can be worth several hundred million euros) 
can distort the analysis of investment and external trade.  

The  debt  of  ship-owning  SPEs  weighs  on  the  net  international  investment  position.  The  capital-
intensive nature of the shipping industry weighs significantly on the NIIP, as ship-owning SPEs have large 
financial liabilities towards foreign creditors, while they mostly hold tangible assets. Since the NIIP shows 
the  financial  position,  and  does  not  include  real  assets,  the  inclusion  of  ship-owning  SPEs  worsens 
significantly the NIIP. However, the impact risks for the real domestic economy are limited, as non-financial 
SPEs  are  currently  overwhelmingly  funded  by  foreign  financial  institutions  or  other  related  non-resident 
entities and own assets located outside Cyprus. 

The  significance  of  the  large  and  negative  NIIP  is  reduced  when  excluding  SPEs.  The  NIIP  stood  at 
minus EUR 22.5 billion (127.8 % of GDP) in 2016. As of end-2016, the net external debt of non-financial 
SPEs reached EUR 11.3 billion, or 62.5 % of the NIIP. According to the Central Bank of Cyprus, the NIIP 
corrected from the impact of non-financial SPEs' own movable equipment was -71 % of GDP in 2015 and -
50.6 % of GDP in 2016. Furthermore, a large part of the external debt is composed of general government 
debt to the ESM and the IMF, which has a very long term maturity structure and therefore is not exposed to 
short  term  refinancing  risk.  Taking  these  factors  into  account,  the  "underlying"  NIIP  could  be  considered 
closer to the MIP threshold of  -35% of GDP. However, it still highlights Cyprus' high reliance on external 
credit to finance its economy. 

6 Source: http://www.investcyprus.org.cy/en/establishing-business-cyprus/tax--legal-framework/competitive-corporate-tax-system 

12 

 
                                                           
Table 1.1: 

Key economic and financial indicators - Cyprus 

2. Progress with country-specific recommendations 

(1) NIIP excluding direct investment and portfolio equity shares.        
(2) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. The aggregate NPL ratio, which covers all loan and advances, may be misleading for Cyprus 
due to the large exposures of domestic and foreign banks to central banks (representing 14% of gross loans) and other 
financial institutions (10% of gross loans). For Cyprus the NPL ratio for the private sector, comprising only exposures to non-
financial corporations and households is more appropriate indicator (see Section 4.2). 
Source:  Eurostat and ECB as of 30 Jan 2018, where available; European Commission for forecast figures (Winter forecast 2018 
for real GDP and HICP, Autumn forecast 2017 otherwise) 

13 

2004-072008-122013-1420152016201720182019Real GDP (y-o-y)4,40,1-3,72,03,03,83,22,8Potential growth (y-o-y)3,41,7-2,1-1,40,41,11,41,7Private consumption (y-o-y)6,30,5-2,72,63,3...Public consumption (y-o-y)3,62,7-7,6-2,8-0,4...Gross fixed capital formation (y-o-y)9,9-8,6-15,213,635,0...Exports of goods and services (y-o-y)2,70,53,26,33,9...Imports of goods and services (y-o-y) 6,1-0,9-0,28,16,6...Contribution to GDP growth:Domestic demand (y-o-y)6,7-1,1-5,42,96,8...Inventories (y-o-y)-0,30,4-0,1-0,1-2,1...Net exports (y-o-y)-2,00,51,8-0,9-1,7...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)1,30,6-1,8-1,10,00,50,50,6Capital accumulation (y-o-y)2,01,50,0-0,10,50,70,80,9Total factor productivity (y-o-y)0,0-0,3-0,3-0,3-0,20,00,20,2Output gap3,60,3-7,3-3,6-1,11,32,73,7Unemployment rate4,67,016,015,013,011,010,09,3GDP deflator (y-o-y)3,52,1-1,3-1,2-0,91,21,11,6Harmonised index of consumer prices (HICP, y-o-y)2,12,70,1-1,5-1,20,71,21,3Nominal compensation per employee (y-o-y)3,72,7-4,5-1,2-0,81,71,51,8Labour productivity (real, person employed, y-o-y)0,9-0,10,20,5-0,1...Unit labour costs (ULC, whole economy, y-o-y)2,82,7-4,7-1,7-0,71,00,50,5Real unit labour costs (y-o-y)-0,70,7-3,4-0,50,2-0,2-0,5-1,1Real effective exchange rate (ULC, y-o-y)1,10,6-3,2-6,1-0,11,91,1-1,2Real effective exchange rate (HICP, y-o-y)-0,1-0,40,2-6,50,70,31,4.Savings rate of households (net saving as percentage of net disposable income)3,80,3-13,5-13,7....Private credit flow, consolidated (% of GDP)23,717,5-6,84,110,2...Private sector debt, consolidated (% of GDP)259,7311,3346,3353,5344,6...of which household debt, consolidated (% of GDP)87,2116,3128,9127,7121,2...of which non-financial corporate debt, consolidated (% of GDP)172,5195,0217,4225,8223,4...Gross non-performing debt (% of total debt instruments and total loans and advances) (2).8,936,434,733,8...Corporations, net lending (+) or net borrowing (-) (% of GDP)-11,70,511,07,01,61,50,90,4Corporations, gross operating surplus (% of GDP)23,820,322,221,620,820,720,921,5Households, net lending (+) or net borrowing (-) (% of GDP)-5,7-4,9-8,1-8,7-7,8-8,5-9,2-9,8Deflated house price index (y-o-y)6,9-4,7-2,70,31,6...Residential investment (% of GDP)10,98,24,14,24,6...Current account balance (% of GDP), balance of payments.-8,9-4,6-1,5-4,9-5,4-6,2-6,8Trade balance (% of GDP), balance of payments.-6,01,90,8-0,8...Terms of trade of goods and services (y-o-y)0,5-0,2-0,3-0,50,10,0-0,20,0Capital account balance (% of GDP).0,31,10,30,2...Net international investment position (% of GDP).-109,9-142,9-145,0-127,8...Net marketable external debt (% of GDP) (1).-84,2-109,3-136,1-118,4...Gross marketable external debt (% of GDP) (1).578,3512,5500,3492,3...Export performance vs. advanced countries (% change over 5 years)-13,5-8,7-13,7-10,6-5,7...Export market share, goods and services (y-o-y)..1,6-1,54,7...Net FDI flows (% of GDP).1,7-4,847,4-7,8...General government balance (% of GDP)-0,9-4,1-6,9-1,20,51,11,41,9Structural budget balance (% of GDP).-4,61,21,61,10,40,0-0,1General government gross debt (% of GDP)59,860,1105,0107,5107,1103,098,393,9Tax-to-GDP ratio (%)32,232,432,533,133,334,033,934,2Tax rate for a single person earning the average wage (%)7,9.......Tax rate for a single person earning 50% of the average wage (%)6,3.......forecast 
 
 
2. Progress with country-specific recommendations 

2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

with 

implementing 

the 
Progress 
recommendations  addressed 
to  Cyprus in 
2017 (7)  has  to  be  seen  in  a  longer  perspective 
since the introduction of the European Semester 
in 2011. Looking at the multi-annual assessment of 
the  implementation  of  the  CSRs  since  these  were 
first  adopted,  69 %  of  all  CSRs  addressed  to 
Cyprus  have  recorded  at  least  ʻsome  progressʼ. 
31 %  of  these  CSRs  recorded  ʻlimitedʼ  or  ʻno 
progressʼ (see Graph 2.1). Full implementation and 
substantial progress have been achieved in a wide 
range of reforms, in particular fiscal and financial 
ones  supported  by 
the  2013-2016  EU-IMF 
economic  adjustment  programme.  These  reforms 
address most of the CSRs made in 2011 and 2012. 
As regards CSRs made in 2016, these mostly cover 
persisting  challenges,  which  are  also  reflected  in 
the 2017 CSRs.  

Graph 2.1:  Overall multiannual implementation of 2011-

2017 CSRs to date 

* The overall assessment of the country-specific 
recommendations related to fiscal policy excludes 
compliance with the Stability and Growth Pact.  
** 2011-2012: Different CSR assessment categories  
***The multiannual CSR assessment looks at the 
implementation since CSRs were first adopted until February 
2018 Country Report.  
****The multi-annual CSR assessment excludes the years 
when Cyprus was under an economic adjustment 
programme.  
Source: European Commission 

to 

financial  management 

and 
The  public 
significantly 
framework  was 
budgetary 
strengthened 
and 
ensure 
sustainability  of  public  finances.  The  pension 
system  was  reformed  to  ensure  its  long-term 
sustainability. CSR on social benefits and the high 
‘at  risk  of  poverty’  rate  among  the  elderly  were 
addressed  by  the  guaranteed  minimum  income 

transparency 

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

past, see Section 4. 

allowing  for  more  efficient  and  targeted  social 
benefits. 

including 

Insolvency 

framework. 

the  modernisation  of 

The  financial  sector  also  underwent  significant 
the 
reforms, 
supervisory 
and 
foreclosure  frameworks  were  also  modernised. 
Sector-specific  obstacles  to  the  establishment  and 
free  provision  of  services  have  been  mostly 
removed.  Measures  were  introduced  to  promote 
renewable  energy  production  and  diversify  the 
energy  mix.  However,  energy  production  is  still 
heavily 
fuels. 
Recommendations  on  the  labour  market  have 
been  implemented  through  a  reform  of  wage 
indexation,  measures  addressing  unemployment 
(notably  youth  and  long-term)  and  policies  to 
upgrade skills in the labour force.  

dependent 

fossil 

on 

Cyprus  has  made  so  far  limited (8)  progress  in 
addressing the 2017 CSRs. Reforms of the public 
administration,  local  government  and  state-owned 
entities remain pending, even though new rules on 
staff mobility  were adopted. Some  measures were 
taken  or  announced  to  improve  the  efficiency  of 
the judicial system, but a comprehensive reform is 
still  at  an  early  stage.  Administrative  measures 
were taken to reduce the backlog in the issuing of 
title deeds, but no extensive solution has yet been 
proposed.  Measures  were  announced  to  help 
accelerate  the  reduction  of  NPLs,  in  line  with  the 
euro area recommendation (EAR) 4, and to ensure 
the effective implementation of the insolvency and 
foreclosure  frameworks,  yet  progress 
is  still 
limited.  Implementation  of  the  action  plan  for 
growth  advances,  focussing  on  improving  the 
business environment, in line with the EAR 1. The 
privatisation plan is largely on hold, while plans to 
open up the electricity market somewhat advance. 
Steps were made on increasing the capacity of the 
public  employment  services,  in  line  with  EAR  3, 
while  on  education  reform  only  limited  progress 
was achieved. Finally key legislation establishing a 
National Health System was adopted in June 2017 
and implementation is underway. 

(8)  Information  on  progress  and  action  taken  to  address  the 
policy advice in each subpart of a CSR is presented in the 
overview  table  (see  Annex  A).  This  overall assessment  of 
CSR 1 does not include an assessment of compliance with 
the  Stability  and  Growth  Pact.  Source:  European 
Commission. 

14 

14%17%46%20%3%No ProgressLimited ProgressSome ProgressSubstantial ProgressFull Implementation 
 
                                                           
                                                           
Table 2.1: 

Summary assessment of CSR implementation 

Source: European Commission 

15 

2017 CSRs to Cyprus Overall assessment of progress with the 2017 CSRs: Limited Progress CSR1: By the end of 2017, adopt key legislative reforms aiming to improve efficiency in the public sector, notably to the functioning of public administration, governance of State-owned entities and local governments.  (MIP Relevant) Limited progress*:   Some progress regarding the legislative reforms for the functioning of public administration.   No progress regarding the law on the governance of state-owned entities.  No progress regarding the reform of local governments. CSR2: Increase the efficiency of the judicial system by modernising civil procedures, implementing appropriate information systems and increasing the specialisation of courts. Take additional measures to eliminate impediments to the full implementation of the insolvency and foreclosure frameworks, and to ensure reliable and swift systems for the issuance of title deeds and the transfer of immovable property rights. (MIP Relevant) Limited progress:  Limited progress on increasing the efficiency of the judicial system, modernisation of civil procedures and on increasing the specialisation of courts.   Limited progress in eliminating impediments to the full implementation of the insolvency and foreclosure frameworks.   Limited progress on ensuring reliable and swift systems for the issuance of title deeds and the transfer of immovable property rights. CSR3: Accelerate the reduction of non-performing loans by setting related quantitative and time-bound targets for banks and ensuring accurate valuation of collateral for provisioning purposes. Create the conditions for a functional secondary market for non-performing loans. Integrate and strengthen the supervision of insurance companies and pension funds. (MIP Relevant) Limited progress:  Limited progress on accelerating the reduction of non-performing loans by setting up a task force to develop national strategy and to evaluate comprehensive solutions including a new targeting framework.   Limited progress regarding the creation of the conditions for a functional secondary market for non-performing loans.   Limited progress on strengthening the supervision of insurance companies and pension funds.  CSR4: Accelerate the implementation of the action plan for growth, focusing in particular on fast-tracking strategic investments and improving access to finance, and, by the end of 2017, resume the implementation of the privatisation plan. Take decisive steps towards the ownership unbundling of the Electricity Authority of Cyprus and, in particular, proceed with the functional and accounting unbundling by the end of 2017.  (MIP Relevant) Limited progress:  Some progress in accelerating the implementation of the action plan for growth focusing in particular on business environment, facilitating strategic investments and improving access to finance.   Limited progress regarding the implementation of the privatisation plan.   Limited progress regarding the ownership unbundling of the Electricity Authority of Cyprus.  CSR5: Speed up reforms aimed at increasing the capacity of public employment services and improving the quality of active labour market policies delivery. Complete the reform of the education system to improve its labour market relevance and performance, including teachers’ evaluation. By the end of 2017, adopt legislation for a hospital reform and universal healthcare coverage. (MIP Relevant) Some progress:  Some progress in increasing the capacity of the public employment services and improving the quality of active labour market policies.     Limited progress regarding the reform of the education system to improve its labour market relevance and performance.   Substantial progress regarding the adoption of the legislation for a hospital reform and universal healthcare coverage.   * This overall assessment of CSR1 does not include an assessment of compliance with the Stability and Growth Pact   
 
 
 
 
2. Progress with country-specific recommendations 

ESI  Funds  are  pivotal 
in  addressing  key 
challenges to inclusive growth and convergence 
in  Cyprus,  notably  by 
the  promotion  and 
expansion  of  e-services  and  e-government,  the 
support  for  women's  and  youth  entrepreneurship, 
the  enhancement  of  the  energy  efficiency,  the 

strengthening of links between vocational training 
and  adult  learning  and  the  labour  market  needs. 
ESI  Funds  are  also  instrumental  in  promoting 
R&D in the private sector, for improving the links 
between research,  development  and  innovation on 
one hand and industry on the other.   

16 

 
2. Progress with country-specific recommendations 

Box 2.1: Tangible results delivered through EU support to structural change in Cyprus 

Cyprus  is  a  beneficiary  of  European  Structural  and  Investment  Funds  (ESI  Funds)  support  and  can 
receive up to EUR 917 million until 2020. This represents around 1 % of GDP annually over the period 2014-
2018 and 20% of public investment (1). By 31 December 2017, an estimated EUR 330 million (36 % of the total) 
was allocated to projects on the ground. EU funding has paved the way for over 100 enterprises to be supported 
in  introducing  over  80  new  products  and  over  250  enterprises  are  supported  in  the  manufacturing  sector. 
Approximately EUR  17  million  has  been  contracted  to  investments  to  modernise  and  restructure  the  agro-food 
sector and promote young farmers entrepreneurship. Additional funds have been also allocated to boosting youth 
employment under the Youth Employment Initiative. Out of the EU financing, EUR 40 million is to be delivered 
via financial instruments i.e. twice the amount delivered in the 2007-2013 period.  

ESI  Funds  help  address  structural  policy  challenges  and  implement  country-specific  recommendations. 
Actions financed  cover,  among others,  boosting  competitiveness  and  economic growth;  promoting R&D  in  the 
private  sector;  strengthening  links  between  R&D,  innovation  and  industry;  supporting  women  and  youth 
entrepreneurship; promoting e-services and e-government; helping develop more sustainable economy; assisting 
Cyprus to meet EU standards, in particular as regards waste treatment and recycling; strengthening links between 
vocational training and the labour market and adult learning development. 

Various  reforms  were  undertaken  already  as  precondition  for  ESI  Funds  support.  Smart  Specialisation 
Strategies  for  research  and  innovation  were  developed  to  focus  efforts  on  product  specialisation  with  strong 
market  potential.  A  strategic  policy  framework  was  set  up  for  digital  strategy  which  will  stimulate  the  ICT 
products  and  services  and  increase  the  development  of  ICT  applications  for  e-government.  The  adoption  of 
adequate  water  pricing  policy,  a  river  basin  management  plan  and  solid  waste  management  plans  will  ensure 
efficient  use  of  resources,  promotion  of  sustainable  investments  as  well  as  respect  of  the  EU  environmental 
acquis.  Efforts  are  made  to  complete  the  outstanding  ex-ante  conditionality  related  in  particular  to  re-use  and 
recycling as soon as possible in order to avoid a possible suspension of interim payments. 

Cyprus is advancing the take up of the European Fund for Strategic Investments (EFSI). As of December 
2017, overall financing volume of operations approved under the EFSI for Cyprus amounted to EUR 45 million, 
which is expected to trigger total private and public investment of EUR 81 million. More specifically, 1 project 
under  the  Infrastructure  and  Innovation  Window  has  been  approved  so  far  in  the  energy  sector,  amounting  to 
EUR  35  million  in  EIB  financing  under  the  EFSI.  This  is  expected  to  trigger  nearly  EUR  53  million  in 
investments.  Under  the  SME  Window,  2  agreements  with  financial  intermediaries  have  been  approved  so  far. 
European  Investment  Fund  financing  enabled  by  the  EFSI  amounts  to  EUR  10  million,  which  is  expected  to 
mobilise more than EUR 28 million in total investment. About 125 smaller companies or start-ups will benefit 
from this support.  

Funding under Horizon 2020, the Connecting Europe Facility and other directly managed EU funds is additional 
to the ESI Funds. By the end of 2017, Cyprus has signed agreements for EUR 51 million for projects under the 
Connecting Europe Facility.  

https://cohesiondata.ec.europa.eu/countries/CY   

(1) Public investment is defined as gross fixed capital formation + investment grants + national expenditure on agriculture and 
fisheries.  (2)  Before  programmes  are  adopted,  Member  States  are  required  to  comply  with  a  number  of  so-called  ex-ante 
conditionalities, which aim at improving conditions for the majority of public investments areas. 

17 

 
2. Progress with country-specific recommendations 

Box 2.2: Technical support for the implementation of structural reforms in Cyprus 

Cyprus  is  benefiting  from  technical  support  provided  by  the  Commission's  SRSS1  to  help  implement 
structural  reforms  in  various  areas  including  public  administration  and  justice,  growth  and  the  business 
environment, healthcare, education, public financial management and taxation. 

With SRSS support, the Cypriot authorities intend to improve the efficiency of the judicial system. In 
this  context,  an  in-depth  functional  review  of  the  operations,  processes  and  management  of  courts  is 
ongoing. In addition, the reforms underway to improve the operations of the Law Office are being supported 
through a review of the latter's functions, processes, structures and management. 

The Cypriot authorities have drawn on SRSS support for the implementation of the Action Plan for 
for  monitoring  entrepreneurial  activity,  developing  social 
Growth.  Assistance  was  provided 
entrepreneurship, and assessing and developing the non-credit cooperative sector.  In addition, the SRSS has 
mobilised  support  for  strengthening  the  administrative  capacity  for  public  investment  management.  In  an 
effort  to  streamline  the  issuance  of  building  permits  and  title  deeds,  the  Cypriot  authorities  have,  with 
technical  support,  reviewed  the  legislative  framework  for  planning  and  construction.  The  authorities  have 
also benefited from technical support to prepared reforms in the area of energy. This includes assistance for: 
revising  the  National  Action  Plan  for  Renewable  Energy  Sources;  developing  the  forthcoming  Integrated 
National  Energy  and  Climate  Plan;  developing  a  national  energy  efficiency  strategy,  revising  electricity 
tariffs;  and  assessing  the  potential  of  high-efficiency  cogeneration  of  heat  and  power.  In  the  area  of 
environment,  technical  support  has  enabled  the  authorities  to  develop,  economic  tools  for  the 
implementation of its Municipal Waste Management Plan.  

In  the  area  of  health,  Cyprus  has  benefited  from  technical  support  on  the  design,  financing  and 
management of the National Health Insurance System, reimbursement methods of outpatient laboratory 
tests,  on  capacity  planning  and  health  technology  assessment  and  options  for  designing  and  negotiating 
agreements on outpatient pharmaceuticals.  

In the area of education, the SRSS assisted the authorities towards the development of an IT School 
Management System and the improvement of the teachers' professional learning initiative.  Also, the SRSS 
has been providing support for the introduction of performance based funding in higher education and the 
reorganisation of the school boards. 

In the area of public finance, the Cypriot authorities have made progress, using technical support, in 
bringing accounting practices in line with best international practices and international public-sector 
accounting  standards.  In  the  area  of  revenue  administration,  technical  support  has  focused  on  the 
integration of the Inland Revenue Department and VAT Services into a function-based, compliance strategy 
driven  tax  department.  Support  was  also  provided  for  the  implementation  of  an  information  security  risk 
assessment  of  the  main  IT  tax  systems,  the  preparation  of  the  procurement  procedure  for  a  new  tax  IT 
system, and the development and implementation of a strategy for promoting TaxisNet, the online system 
for  electronic  submission  of  income  tax  returns.  Additional  support  included  training  on  VAT  laws  and 
regulations,  revision  of  the  audit  manuals,  and  improvements  of  data  collection  and  analysis  through  a 
survey on taxpayer compliance behaviour and satisfaction.  

1   The Structural Reform Support Service (SRSS) provides, in cooperation with the relevant Commission services, tailor-
made technical support, which does not require co-financing and is provided at a Member State's request. The support 
addresses priorities identified in the context of the EU economic governance process (i.e., implementation of country-
specific  recommendations),  but  the  scope  of  the  SRSS  support  is  wider  as  it  can  also  cover  reforms  linked  to  other 
Commission priorities, or reforms undertaken at the initiative of Member States. 

18 

 
 
3.  SUMMARY OF THE MAIN FINDINGS FROM THE 

MACROECONOMIC IMBALANCE PROCEDURE IN-DEPTH 
REVIEW 

The in-depth review for the Cyprus' economy is 
presented  in  this  report.  In  spring  2017,  Cyprus 
was identified as having excessive macroeconomic 
imbalances,  in  particular  relating  to  the  very  high 
share of non-performing loans, which burdens the 
financial  sector  and  the  high  stock  of  private, 
public, and external debt weighing on the economy 
in  the  context  of  high  unemployment  and  weak 
potential  growth.  The  2018  Alert  Mechanism 
Report  (European  Commission,  2017d)  concluded 
that  a  new  in-depth  review  should  be  undertaken 
for  Cyprus  to  assess  developments  relating  to 
identified  imbalances.  Excessive  government  debt 
is  discussed  in  Section 4.1.1,  financial  sector 
imbalances  in  Section 4.2.1,  private  indebtedness 
in  Section 4.2.2  and  external 
in 
Section 1. Investment is analysed in Section 4.4.1, 
given its links to private indebtedness and growth. 
(9). 

imbalances 

3.1 Imbalances and their gravity 

Non-financial private sector debt is high (albeit 
decreasing  slowly)  and  remains  far  above  the 
levels estimated by fundamental and prudential 
benchmarks  (see  Section 4.2.1).  It  contracted 
from 353.5 % of GDP in 2015 to 344.6 % of GDP 
in 2016, as a result of deleveraging by households. 
The  drop  was  driven  by  an  absolute  reduction  in 
the  stock  of  loans  and  ‘passive  deleveraging’ 
(i.e. when nominal economic growth is faster than 
the  accumulation  of  debt).  Households’  debt  fell 
from  127.7 %  of  GDP  to  121.2 %,  mainly  as  a 
result of asset disposals and swaps as well as debt 
forgiveness  and  restructuring  rather  than  actual 
repayment.  NFCs  indebtedness  remained  broadly 
unchanged at 223.3 % of GDP in 2016, among the 
into 
the  EU,  even  when 
highest 
consideration  that  non-financial  SPEs  account  for 
over a third of the NFCs’ debt stock. The high debt 
level  contains  growth  and  the  scope  for  more 
investment from the non-financial private sector.  

taking 

in 

Public  debt  has  decreased  significantly,  but 
remains high, at around 99 % of GDP in 2017. 
High  public  debt  makes  Cyprus  vulnerable  to 

(9)  An  asterisk  indicates  that  the  analysis  in  the  section 

contributes to the in-depth review under the MIP. 

financial  or  economic  shocks.  However,  the  large 
proportion of long-term low-interest debt provided 
by  external  creditors  during 
the  economic 
adjustment  programme,  the  current  low  sovereign 
bond  yields  and  relatively  low  medium-term 
financing needs mitigate refinancing risks. Cyprus 
has  significantly  reduced  debt  thanks  to  robust 
fiscal  performance  and  active  debt  management 
operations.  

still  has  a 

investment  position 

large  negative  net 
Cyprus 
international 
(NIIP), 
combined  with  a  current-account  deficit.  The 
NIIP  stood  at  -120.6%  of  GDP  in  2017Q3. 
Excluding non-financial SPEs registered in Cyprus 
(see  Section 1  and  box 1.1),  which  distort  the 
liability  position,  the  NIIP  was  about  -44 %  of 
GDP,  and  has  been  on  a  declining 
trend, 
suggesting  that  the  non-SPE  sector  of  the  Cypriot 
economy  is  adjusting.  The  persistent  current-
account  deficit,  however,  weights  on  NIIP  and 
reflects  low  domestic  savings  compounded  by 
increased investment.  

Around half of the financial sector’s loan book 
is  currently  non-performing.(10)  The  deep 
recession triggered a surge in NPLs, which are still 
very high, fuelled by the high level of indebtedness 
and weak contract enforcement. The high stock of 
NPLs  continues  to  raise  concerns  for  financial 
stability,  as  it  weighs  on  banks’  profitability  and 
limits their ability to generate capital and increase 
credit supply. 

The recovery of the housing market may help to 
reduce  NPLs  and  household  debt.  A  large 
proportion of loans have real estate collateral. The 
long  downward  price  adjustment  discouraged 
mortgage  holders  and  banks  from  selling  their 
assets and may have incentivised strategic defaults. 
Guiso  et  al.   (2013)  show  that  willingness  to 
default  depends  on  and  increases  with  both  the 
absolute value and the value of mortgage in excess 
of  current  house  price. (11)  The  recent  increase  in 

(10)  The  text  refers  to  the  NPL  ratio  for  the  private  sector, 
comprising only of exposures to non-financial corporations 
and households. See section 4.2.1. 

(11)  Alongside  other  factors,  such  as  others  having  defaulted 
previously and the probability of becoming unemployed. 

19 

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

shifting  public  expenditure  towards  more  growth-
enhancing projects in a fiscally neutral manner.  

The  NIIP  is  on  a  downwards  trend  but  is  still 
largely  negative.  It  improved  from  -145 %  of 
GDP  in  2015  to  -127.8 %  of  GDP  in  2016  and 
further to -120.6% in the third quarter of 2017. The 
NIIP  of  non-financial  SPEs,  which  have  limited 
links  to  the  real  economy,  accounted  for  a  very 
large share of NIIP, at -76.4 % of GDP, while the 
contraction  of  overall  NIIP  was  achieved  by 
adjustment 
real  sector.  The  general 
international 
government 
creditors accounts for a large part of the remaining 
position,  which  further  mitigates  risk.  However, 
banks’  external  liabilities  remain  high,  exposing 
the  financial  sector  and  the  economy  to  shifts  in 
investor and depositor confidence. 

long-term  debt 

the 

in 

to 

The  current-account  deficit  has  widened. 
Activities  of  SPEs  heavily  influence  Cyprus' 
current  account  and  influence  its  volatility,  which 
complicates  its  timely  monitoring.  The  current 
account deficit increased in 2016 to 4.9 % of GDP 
from  1.5 %  in  2015,  notably  due  to  negative 
household  savings  (-3.1 %  of  GDP  in  2016).  In 
2017, it has continued further widening (data up to 
third quarter, on a four quarter rolling basis) and is 
expected  to  remain  in  deficit  in  the  medium  term 
amid  strong  economic  recovery.  Cyprus  would 
need  a  current-account  balance  close  to  zero  to 
reduce  its  NIIP,  excluding  SPEs,  to  the  MIP 
threshold of -35 % of GDP by 2026.  

The  household  savings  rate  remained  negative. 
It  is  estimated  to  have  been  negative  for  the  fifth 
year  in  a  row,  suggesting  that  households  have 
been  running  down  their  accumulated  savings 
(assets)  in  order  to  repay  debt  and  smooth 
consumption.  The  persistence  of  negative 
household  savings  in  good  times  is  worrisome. 
Other factors, such as a change of attitude towards 
savings  after  the  2013  bail-in,  low  interest  rates 
and  currently  high  out-of-pocket  payments  in 
health,  might  have  caused  Cypriot  households  to 
save less. 

Continued  loan  restructurings  have  reduced 
NPLs.  Banks  have  continued  to  restructure  loans, 
prioritising  measures  such  as  debt-to-assets  swaps 
and debt write-offs. Recently, the ratio of NPLs to 
gross  loans  started  to  fall,  albeit  slowly  (see 
Section 4.2.1).  

house  prices  and  transactions  is  expected  to  help 
both  creditors  and  debtors  to  dispose  debt  and 
liquidate the collateral underlying NPLs. However, 
difficulties in the issuing and transfer of title deeds 
remain and deter some prospective buyers.  

to 

the 

total 

unwind 

is  expected 

accumulated 

support 
is  expected 

Potential  growth 
increase 
somewhat  over  the  medium  term,  helping  to 
slowly 
stock 
imbalances.  Recovering  investment,  the  return  of 
discouraged  workers  to  the  labour  force  and 
declining  unemployment  are  expected  to  raise 
factor 
growth  potential  and 
productivity.  The 
to  start 
latter 
contributing  positively  in  2018  after  a  decade  of 
negative contribution. At the same time, very high 
the 
debt  still  weighs  on  growth, 
availability  of  credit  and  impeding  the  expansion 
of existing businesses and the start-up of new ones. 
Potential  growth  is  estimated  at  1-1.6 %  in  the 
medium  term;  closer  to,  though  still  below,  the 
euro  area  average,  and  far  below  the  historical 
levels for Cyprus. Furthermore, the composition of 
investment  may  not  be  very  conducive  to  long-
term  growth  and  productivity  (see  Sections 1  and 
4.4.2).  

limiting 

3.2 Evolution, prospects and policy responses 

Private  sector  deleveraging 
is  progressing 
slowly, despite limited use of the new insolvency 
tools. Private debt reduction has been supported by 
the  better  economic  situation  and  more  so  by 
valuation effects (debt write-offs and debt-to-asset 
swaps).  The  insolvency  framework  has  still  been 
used  only  scarcely  to  date,  due  to  obstacles  to  its 
effective  application  (i.e.  inadequate  court  rules, 
impediments)  and 
legal 
capacity 
inefficiencies in the judicial system.  

limitations, 

Supposing  Cyprus  maintains  a  prudent  fiscal 
policy  stance,  government  debt  is  projected  to 
fall  below  68%  of  GDP  by  2028.  Medium-term 
fiscal sustainability risks are moderate, mainly due 
to  the  favourable  fiscal  position.  To  that  end,  a 
sound  fiscal  policy,  in  particular  limiting  public 
expenditure  increases  to  medium-term  potential 
growth,  remains  key.  However,  there  are  risks  
such  as  the  lack  of  a  mechanism  to  contain 
increases in the public wage bill beyond 2018 and 
the  slow  pace  of 
the  public 
administration  and  local  governments.  Cyprus 
could  also  better  support  potential  growth  by 

reforms  of 

20 

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

promote 

environment, 

Structural  reforms  to  improve  the  business 
environment  are  gradually  being  implemented. 
The  action  plan  for  growth  aims  to  improve  the 
alternative 
business 
financing  sources  and  boost 
investment  and 
employment  in  priority  sectors,  including  tourism 
and  shipping.  In  addition,  the  government  intends 
to cut the regulatory burden by making procedures 
more  efficient,  developing  digital  public  services 
and improving the quality of regulation. However, 
the privatisation plan, which was adopted to attract 
investment and foster efficiency in public utilities, 
has largely been put on hold. 

3.3 Overall assessment 

Cyprus  still  faces  significant  challenges  in  the 
form of very high levels of NPLs burdening the 
financial  sector,  combined  with  large  stocks  of 
private,  government  and  external  debt.  The 
current-account  deficit  is  not  conducive  to  a 
sustainable  correction  of  the  NIIP.  Government 
debt is on a downward path, but the prudent fiscal 
policy needs to be maintained if the projected pace 
of  debt  reduction  is  to  materialise.  In  the  private 
sector,  debt  and  the  NPL  ratio  remain  high.  The 
surge  in  NPLs  has  dried  up  credit  supply  and  is 
weighing  on  investment  and  harming  the  growth 
potential  of  the  economy.  Private  sector  savings 
fell  in  2016  and  are  expected  to  have  remained 
weak  in  2017,  leading  to  a  worsening  of  the 
savings-investment balance.  

the 

regarding 

The  implementation  of  policy  measures  to 
address  macroeconomic  imbalances  remains  a 
limited  progress  has  been 
challenge.  Only 
implementation  of 
recorded 
the  macroeconomic 
addressing 
measures 
imbalances 
(see  Section  2  and  Annex  A). 
Measures  taken  to  reduce  NPLs,  such  as  the 
revised  insolvency  framework  and  a  strengthened 
supervisory  and  regulatory  framework,  still  face 
obstacles  to  effective  application.  Other  reforms 
regarding public administration, the justice system, 
title  deeds  and  improvements  to  the  business 
environment are on-going but at a slow pace, while 
privatisation plan has lost momentum. 

fosters  debt 

Meanwhile  policy  measures  have  had  a  limited 
impact  on  debt  reduction  and  NPLs.  Weak 
contract  enforcement 
repayment 
indiscipline,  which  continues  to  hamper  private 
sector deleveraging. It stems from inefficiencies in 
the  judicial  system,  limited  use  of  the  foreclosure 
and 
frameworks,  and  persistent 
information  gaps  regarding  borrowers.  Some 
progress was made in addressing the shortcomings 
in the system for issuing and transferring property 
title deeds, but significant policy gaps remain.  

insolvency 

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  impairments, 
while credit growth is likely to be constrained by a 
limited pool of eligible borrowers. Low investment 
returns  in  the  banking  sector  combined  with 
abundant liquidity might incentivise risk-taking. At 
to 
the  same 
debt-to-asset swaps leads banks to accumulate real 
estate assets on their balance sheet. This may pose 
challenges in the future as they will need to devote 
(see 
resources 
Section 4.2.1). 

to  managing 

increasing 

recourse 

assets 

time, 

the 

the 

The  housing  market 
is  recovering,  but 
regulatory  inefficiencies  remain.  House  prices 
have bottomed out and property sales have picked 
up, but significant backlogs and delays continue to 
affect the issuing of title deeds. Major obstacles to 
the  transfer  of  title  deeds  from  sellers  to  final 
buyers  have not been  resolved. Housing  supply is 
responding 
is 
obstructed  by  long  delays  in  issuing  building 
permits  and  restricted  credit availability.  The  lack 
of  a  reliable  and  transparent  property  transactions 
system  does  not  allow  banks  to  monitor  the 
proceeds 
and 
of 
non-performing developers.  

increased  demand,  but 

indebted 

sales 

from 

the 

to 

Still-low  labour  productivity  might  constrain 
long-term  growth.  Productivity  has  broadly 
stagnated since 2008 and investments that improve 
it  (i.e.  those  not  linked  to  ship  registrations  or 
residential  construction)  remain  relatively  limited 
(see Section 4.4.1). In the medium term, emerging 
upward cost pressures could erode competitiveness 
if  productivity  does  not  improve.  Moreover,  the 
labour-market  relevance  and  quality  of  young 
jobseekers’ education remain a concern.  

21 

 
Table 3.1 

Macroeconomic Imbalance Procedure assessment matrix for Cyprus 

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

(Continued on the next page) 

22 

This MIP Assessment Matrix summarises the main findings of the in-depth review in the country report. It focuses on imbalances and adjustment issues relevant for the MIP.  Gravity of the challenge Evolution and prospects Policy response Imbalances (unsustainable trends, vulnerabilities and associated  risks) External Balance The NIIP stood at -127.8% of GDP in 2016. The current account balance, based on 3-year average, stood at -3.6%. This falls short of what is required for a swift external rebalancing.  The NIIP and the current account are biased by non-financial SPEs (see Box 1.1). The REER depreciated by 6.5% over three years, beyond the MIP threshold of -5%.  Over the last 5 years Cyprus lost 3% of world export shares. The NIIP kept contracting in 2017. The current account deficit, however, is not conductive to durable NIIP reduction. The current account deficit widened to 4.9% in 2016 and remained in deficit in 2017.   The real effective exchange rate started appreciating in 2016 and continued in 2017, eroding cost competitiveness. Unit labour costs fell in 2016 but the downwards adjustment seems to have paused in 2017.  Domestic savings are low due to negative savings of households. This increases the gap between savings and investment. Tourism exports have been stimulated by structural reforms aimed at extending the tourism season and improving connectivity, but less has been done in other areas. Authorities try to control wage growth. A new wage indexation mechanism (CoLA) for the private sector has been agreed by social partners for 2018-2020 based on 50% of inflation once a year. In the public sector the same mechanism applies permanently, in addition to the existing collective agreement until 2018.  Private debt Private debt in Cyprus stood at 344.6% of GDP in 2016, among the highest level in the EU.  A large proportion of debt stock is non-performing, despite the economic recovery, due to poor contract enforcement and inefficient implementation of the foreclosure and insolvency frameworks. Deleveraging continues at a slow pace, with trend continuing in 2017 as a result of declining debt stock, strong real growth and inflation.  The capitalisation of unpaid interest on the large stock of NPLs inflates the debt stock.  The use of insolvency procedures remains limited. Recovery of property prices and more active real estate market may help to reduce debt. Debt-to-asset swaps have been used as a deleveraging tool, as inefficiencies in the insolvency service and the judicial system deter the use of the new insolvency tools. Banks have increased debt write offs. Reforms aiming to improve the protection of property rights (notably regarding title deeds) are being adopted at a slow pace. Rules of Court for insolvency have been partly updated, while amendments to civil procedure have been proposed to better enforce contracts and court decisions. Public debt The Government debt-to-GDP ratio was high, at around 99 % in 2017, exposing the country to changes in financial or economic conditions that may increase financing costs. However, large share of long-term low-interest debt provided by external creditors during the economic adjustment programme mitigates risks to some extent. The debt-to-GDP ratio peaked in 2015 and is projected to gradually decline below 94% and 68% of GDP in 2019 and 2028, respectively. Cyprus' sovereign credit rating has improved significantly since mid-2013, but remains at least one notch below investment grade.  Yields on the longest term marketable debt (8-year) have declined substantially: from 3.5% at the end of 2016 to 1.5% in January 2018.  The tax base is concentrated on a few components, in particular on corporate income tax and VAT, and the immovable property tax was abolished. This might pose risks to the long-term sustainability of tax revenue. Active debt-management policy has allowed containing refinancing risk, smoothing-out the debt repayment schedule in the medium-term and quicker reduction of debt.    
 
 
 
 
Table (continued) 

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

Source: European Commission 

23 

Financial Sector At around 45% of the total loan stock, non-performing loans (NPLs) in the Cypriot banking sector remain among the highest in the euro area. Banks have a strong exposure to the property market. A large proportion of loans are collateralised, while banks increasingly take over real estate collateral as part of NPL resolution efforts.  Banks' weak underlying profitability and sustained provisioning needs are negatively affecting capitalisation. The ratio of non-performing loans kept declining slowly in 2017, to 52.7% for households and non-financial corporations loans at end-June 2017 from 54.8% at end 2016. The high level of collateralised lending and relatively benign estimates of expected losses on collateralised loans have kept provisions at levels below the EU average, although there has been some catching up.  Capacity to build up further capital buffers is still hampered by low profitability and high NPL risks. The flow of credit to the economy is still limited. More information has been made available to creditors through the credit and company registry but the quality and breadth of available information can be enhanced. Targets for loan restructuring and early arrears management have been set but it had been difficult for banks to meet them.   There are still impediments to the implementation of the reformed foreclosure framework. Legislation allowing the sale of non-performing loans was enacted but some provisions are considered overly restrictive. Provisioning requirements have been enhanced. Provisions improved and are now in line with the euro area averages. Adjustment issues Potential growth Potential growth is estimated at around 1-1.6% in the medium term, while higher rates would be needed to permit the economy to rapidly grow out of debt.  Potential growth was revised up in line with increasing investment and improving labour market.  The investment to GDP ratio markedly increased, although a fair share of investment is linked to construction and ship registrations. Productivity growth remains weak. An action plan for growth is in place to improve the business environment and help develop key sectors of the economy, but has only been partially implemented.  A privatisation plan was adopted to attract investment, increase competition and reduce prices in network industries, but its implementation has stalled. Unemployment Unemployment was high at 11.3 % in 2017. The 3-year average was 13.1%, still above the MIP threshold.  Youth and long term unemployment are also high but already within the threshold. The activity rate has reached 73.4% in 2016, 0.2 p.p. lower than in 2013 but within the MIP threshold Unemployment has markedly shrunk in 2017 on the back of economic recovery, to 10.5% in 2017Q3. Youth and long-term unemployment also contracted, albeit still high at respectively 25.1% and 4.3% in 2017Q3.  The capacity of the public employment services to provide quality services to the unemployed, reach out to NEETs, and help reduce welfare dependence remains sub-optimal. Participation in Vocational and Education Training remains low and the relevance and quality of young entrants in the labour market remains a concern. Activity rate is increasing alongside economic recovery. The reform of the public employment services has been delayed and the impact of ALMPs implemented is still to be evaluated. Measures are being taken to enhance vocational training and the quality of higher education, but the implementation is slow. Conclusions from IDR analysis  Cyprus faces important imbalances in the form of a weak financial sector, combined with large stocks of private, public, and external debt. The high ratio of non-performing loans in the domestic banking system constrains deleveraging and banks' profitability, reducing the amount of credit that can be channelled to the economy.    Private sector deleveraging and the reduction of the non-performing loans continue to be hampered by poor contract enforcement, inefficiencies in the judicial system, obstacles to the use of foreclosure and insolvency legislation and insufficient information on borrowers. Delays in reforming the system of issuance and transfer of title deeds continue, posing problems in the context of a large proportion of collaterised loan stocks. The Cypriot current account deficit is larger than what is required to bring down the NIIP to more manageable levels, reflecting very low domestic savings amid recovering investment.    Measures have been taken to review the insolvency legislation, improve the credit and companies' registries, enhance the efficiency of the judiciary, and allow for the sale of non-performing loans. However, efforts are still needed to improve available information on borrowers, to identify and remove obstacles to the use of the foreclosure and insolvency framework, to improve contract enforcement, to ensure well defined property rights, and to help banks resume a healthy flow of credit to the economy. Ensuring fiscal discipline is also crucial for debt-reduction. Measures are still needed to foster efficiency and competition in network industries and to reduce labour market frictions.         (*) The first column summarises 'gravity' issues which aim at providing an order of magnitude of the level of imbalances. The second column reports findings concerning the 'evolution and prospects' of imbalances. The third column reports recent and planned relevant measures. Findings are reported for each source of imbalance and adjustment issue. The final three paragraphs of the matrix summarise the overall challenges, in terms of their gravity, developments and prospects, policy response.   
 
 
4.  REFORM PRIORITIES 

4.1. PUBLIC FINANCES AND TAXATION 

4.1.1.  PUBLIC DEBT AND RISKS TO FISCAL 

SUSTAINABILITY* (12)  

vulnerabilities  relating  to  NPLs  are  addressed 
separately below. 

to 

debt 

came 

government 

strong  economic  growth, 

down 
General 
significantly  in  2017  but  remains  high.  After 
rising  sharply  in  the  years  following  the  financial 
crisis, it peaked at 107.5 % of GDP in 2015, about 
62 percentage  points  (pps)  above  its  2008  trough. 
Owing 
fiscal 
performance  and  an  early  debt  repayment  in 
November  2017,  it  fell  below  100%  of  GDP  in 
2017.  The  Commission’s  autumn  2017  forecast 
projects  that  it  will  fall  to  below 94 % of GDP  in 
2019 (about 14 pps above the EU average) (13), on 
the  back  of  sizeable  fiscal  primary  surpluses 
combined with strong nominal growth.  

to 

thanks 

is  mainly 

Cyprus does not appear to face immediate risks 
of  fiscal  stress,  owing  to  its  favourable  fiscal 
position. (14)  This 
the 
improvement  of  the  general  government  fiscal 
balance  and  primary  balance,  low  gross  financing 
needs  and  relatively 
low  short-term  general 
government  debt.  These  more  than  offset  the 
still-sizeable  public  debt.  However,  short-term 
remain 
risks  on 
significant.  According 
indicator 
breakdown,  several  factors  remain  sources  of 
vulnerability.  These  include  households’  negative 
net  saving  rate,  the  large  negative  NIIP,  the 
current-account deficit  and  the  high private  sector 
debt,  a  significant  proportion  of  which 
is 
short-term. (15)  This  is  partly  mitigated  by,  in 
particular,  the  slope  of  the  sovereign  bond  yield 
curve  and  improved  cost  competitiveness.  The 

the  macro-financial 

the  S0 

side 

to 

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

(13)  This does not take into account the outturn data for 2017. 
(14)  Short-term fiscal stress is measured by the S0 indicator, an 
early-detection  indicator  designed  on  the  basis  of  past 
crises  to  highlight  short-term  (1-year  horizon)  fiscal  risks 
stemming from the macro-financial or the fiscal side of the 
economy.  According  to  the  Commission’s  autumn  2017 
forecast,  the  S0  indicator  for  Cyprus  stood  slightly  below 
the  critical 
its  macro-financial  and 
competitiveness  sub-index  exceeded  the  critical  value 
(European Commission, 2018a). 

threshold,  but 

(15)  The  NIIP,  the  private  sector  debt  and  the  current-account 

deficit are affected by SPEs (see Section 1). 

Given its initial high public debt stock, Cyprus 
faces  medium  fiscal  sustainability  risks  in  the 
medium  term.  (16)  Debt  sustainability  analysis 
shows  that,  under  normal  economic  conditions 
with  no  fiscal  policy  change  (baseline  scenario), 
the  general  government  debt-to-GDP  ratio  would 
fall to around 68 % by 2028, still above the critical 
60 %  threshold  (see  Graph 4.1.1).  The  projected 
significant decrease of around 26 pps in 2020-2028 
would  be  driven  by  persistent  primary  surpluses 
and 
lesser  extent)  by  a  negative 
interest-rate/growth  differential.  In  public  debt 
projections taking into account potential shocks to 
nominal growth, fiscal  stance  and  interest  rates  in 
alternative  scenarios  and  sensitivity  tests,  debt-to-
GDP  does  not  exceed  the  critical  90 %  threshold 
and  does  not  rise  over  the  projection  period.  The 
S1  medium-term 
is 
assessed  as  pointing  to  medium  (almost  low)  risk 
(European Commission, 2018a). 

sustainability 

indicator 

(to  a 

Risks relating to the debt structure are low and 
investor  confidence  has improved. In  mid-2017, 
the  average  maturities  of  total  public  debt  and 
marketable  debt  were  7.6  and  4.8  years, 
respectively. (17) The latter, relatively short period, 
was  partly  driven  by  the  fact  that  the  last  foreign 
bond issuances targeted 7-year, rather than longer, 
maturity  bonds.  A  large  proportion  of  debt  (79 % 
in 2016) is held by non-resident creditors. (18) This 
is  largely  because  much  of  the  borrowing  is  from 
official  sources,  in  particular  in  the  context  of  the 
macro-financial  assistance  programme.  Although 
Cyprusʼ sovereign credit rating remains one notch 
below  investment  grade, (19)  excluding  its  bonds 

(16)  The  assessment  of  medium-term  sustainability  challenges 
relies on the joint use of debt sustainability analysis (for a 
10-year  period)  and  the  S1  medium-term  sustainability 
indicator.  

(17)  Source: 

http://www.mof.gov.cy/mof/pdmo/pdmo.nsf/All/B473D27
6A2304DD2C2257C6E003439D5?OpenDocument 

(18)  Source: Eurostat.  
(19)  Although four rating agencies upgraded Cyprus’ sovereign 
rating in 2017, its most favourable rating, by S&P, remains 
one  notch  below 
(see  European 
Commission, 2017b, Section 6). In December 2017, DBRS 
changed the outlook to positive from stable. 

investment  grade 

24 

 
 
                                                           
                                                           
4.1. Public Finances and Taxation  

funds 

Commission’s 
systemic  model  of  banking 
originated losses (Symbol), Cyprus is the Member 
State  most  exposed  to  short-term  fiscal  risks  in  a 
severe  stress  scenario  of  a  repeat  of  the  recent 
financial  crisis. (22)  On  the  basis  of  the  current 
level of NPLs and conservative loss assumptions, a 
recapitalisation  of  Cyprusʼ  systemic  banks  by 
their 
public 
risk-weighted assets could increase sovereign debt 
by  4.1 %  and  7.6 %  of  GDP,  respectively,  in  the 
short term. However, the country’s exposure to the 
banking sector is seen as decreasing to below 1 % 
of  GDP  by  2028,  given  that  the  safety  nets  will 
have  been  fully  phased  in  and  assuming  that  the 
effect of NPLs will become negligible in the long 
term. 

to  8 %  and  10.5 %  of 

The  setting-up  of  a  sovereign  wealth  fund 
(SWF) could improve public debt sustainability 
in the long term. The House of Representatives is 
still  discussing  the  bill  laying  out  the  governance 
structure  of  the  SWF  and  the  draft  legislation 
governing SWF inflows and outflows. Adoption of 
the 
to  ensure 
sustainable use of revenue from the exploitation of 
hydrocarbon  reserves  and  to  improve  public  debt 
sustainability outlook.  

legislation  would  contribute 

4.1.2.  FISCAL FRAMEWORK AND POLICY* 

The  reformed  budgetary  framework,  currently 
being implemented, plays a key role in ensuring 
sustainable  public  finances.  The  2014  Fiscal 
Responsibility  and  Budget  System  Law  (FRBSL) 
establishes  a  comprehensive  and  transparent  legal 
framework  for  the  entire  general  government,  in 
the 
line  with  EU  requirements.  Importantly, 
FRBSL  links  ministries’  strategic  objectives  and 
government  policy  priorities  with  the  annual 
budget  and  medium-term  budgetary  planning, 
key 
including 
performance  indicators  for  each  policy.  It  also 
governs  the  management  and evaluation of public 
investment  and  the  monitoring  of  fiscal  risks 

expenditure 

ceilings 

and 

(22)  Symbol  simulates  the  short-  and  medium-term  fiscal 
impact  of  a  financial  crisis  similar  to  the  2008  crisis.  The 
short-term simulation is run on the basis of December 2016 
data  for  the  first  quarter  of  2018.  Symbol  estimates  the 
public  bailout  required  to  keep  the  systemic  banks  open 
and  sufficiently  capitalised  after  applying  the  safety  net 
tools.  The  improvement  in  Symbol  results  for  Cyprus  as 
compared  to  the  previous  year  is  due  to,  amongst  others, 
enlarging the sample of covered banks. 

from  ECB 
refinancing  and  asset  purchase 
programmes,  investor  confidence  has  improved 
significantly.  In  particular,  sovereign  yield  spread 
(versus German bond) on the longest-term (8-year) 
marketable  debt  has  declined  substantially:  from 
3.5 % at the end of 2016 to 1.5 % in January 2018. 

Graph 4.1.1:  Public debt projections 

Source: European Commission 

(SOEs).  Guarantees 

Government  guarantees  have  declined,  but 
there  are  risks  associated  with  state-owned 
dropped 
enterprises 
significantly, to around 9 % of GDP, at the end of 
2016, down from 15.1 % the previous year (20), but 
still  remain  somewhat  above  the  EU  average. 
Although  the  risk  of  guarantees  being  called  is 
limited 
of 
state-guaranteed  loans  being  made  up  of  NPLs 
(representing less than 0.6 % of GDP), the lack of 
comprehensive  and  public  information  on  the 
state’s  exposure  to  SOEs,  in  particular  through 
their  long-term  liabilities  relating  to  pensions, 
makes it difficult to assess Cyprus’ fiscal risks.  

proportion 

low 

due 

the 

to 

Contingent  risks  remain  in  the  banking  sector, 
notably  in  the  short  term,  mainly  due  to  a  high 
ratio  of  NPLs.  They  are  more  significant  in  the 
short  term,  since  safety  nets  in  the  form  of 
requirements,  bail-in  and 
increasing  capital 
national and supranational resolution funds are still 
the 
being  put 

in  place. (21)  According 

to 

(20)  This excludes guarantees on general government debt. 
(21)  As set out in the new Capital Requirement Regulation and 
Directive IV, the Bank Recovery and Resolution Directive 
and Single Resolution Mechanism Regulation.  

25 

657585951051151213141516171819202122232425262728% of GDPCommission 2017 autumn forecastCombined macro and fiscal shockStandardised (permanent) negative shock (-0.5 pps) onGDP growthStandardised (permanent) negative shock on the PB equalto 50 % of the forecast cumulative change over the forecastyears 
 
                                                           
                                                           
4.1. Public Finances and Taxation  

includes  medium-term  macroeconomic 
and 
budgetary  forecasts,  and  expenditure  ceilings  for 
the  following  3  years.  The  first  framework  was 
issued in 2014, covering the period of 2015-2017. 
The appropriations in the annual budgets in 2015-
2018  should 
the 
expenditure  ceilings  in  the  frameworks.  As  there 
are only small differences for certain years (below 
0.3 %  of  GDP) (25), 
the  frameworks  can  be 
assessed  to  have  improved  the  budgetary  process 
in terms of transparency and predictability. 

therefore  be 

line  with 

in 

4.1.3.  TAXATION AND TAX ADMINISTRATION* 

Value  added  tax  (VAT)  and  corporate  income 
tax  (CIT)  are  major  sources  of  revenue  in 
Cyprus,  with  CIT  revenue  subject  to  potential 
decreases.  As  percentages  of  GDP  (9.2 %  and 
5.8 %  respectively 
in  2016),  VAT  and  CIT 
revenues  are  above  the  EU  average  (7 %  and 
2.6 %),  although  the  effective  CIT  rate  (13.1 %, 
2016)  is  below  the  EU  average  (20.9 %). (26)  The 
discrepancy  between  the  higher  revenue  and  the 
lower  rate  can  be  explained  by  a  larger  aggregate 
tax  base  at  a  lower  statutory  tax  rate  and  the 
presence  of  businesses  engaging  in  tax  planning. 
(27).  As  a  result,  Cyprus  appears  exposed  to  CIT 
revenue  decreases  due  to  potential  changes  in  the 
international  corporate  tax  framework  eliminating 
incentives  for  tax  planning.  The  VAT  gap  (7.4 % 
of  theoretical  VAT  liability  in  2015)  is  below  the 
EU  average  (12.8 %),  indicating  lower  revenue 
losses  due  to  non-compliance  (Center  for  Social 
and  Economic  Research,  2017).   Graph  4.1.2 
shows  the  tax  structure  in  Cyprus  as  compared  to 
that  of  the  EU  and  selected  Member  States  for 
2015. 

tax  burden  on 

The 
low  and 
consumption  and  environmental  tax  revenues 
tax  structure 
are  high,  making  Cyprus’ 
relatively growth- and environment-friendly. As 

labour 

is 

(25)  The  expenditure  ceilings  in  the  framework  do  not  include 
expenditure  on  loans  and  interest  payments,  while  the 
appropriations in the budget law do. These differences have 
been taken into account in this analysis. 

(26)  Source: 

stemming  from  guarantees,  payment  arrears  and 
SOEs. The budgetary framework is expected to be 
fully implemented in 2018. 

The reform of public financial management will 
take several years. Current efforts are focused on 
the selection and evaluation of investment projects. 
Administrative  capacity  is  being  improved  in  the 
key  institutions  involved  in  investment  projects, 
including public-private  partnerships,  in  particular 
through  specific  guidance,  training  programmes 
and  the  acquisition  of  suitable  IT  management 
local 
systems.  Budget-data 
authorities  and  SOEs  is  also  improving,  although 
the data are not sufficiently homogenised to ensure 
comparability  and 
fiscal 
positions.  

full  assessment  of 

reporting 

from 

to 

ensure 

long-term 

Solutions 
fiscal 
sustainability  of  the  public  sector  wage  bill  are 
lacking.  The  containment  of  the  public  sector 
wage  bill  has  been  a  significant  factor  in  fiscal 
in  Cyprus. (23)  To 
consolidation 
instil  more 
flexibility 
in  workforce  management,  a  bill 
adopted  in  May  2017  facilitates  staff  mobility 
between  the  public  service  and  SOEs.  However, 
the  current  collective  agreement  (covering  also 
SOEs) 
the  growth  of  public  sector 
compensation to nominal economic growth expires 
in 2018.  

limiting 

Budgetary regulations were slightly amended to 
the  Budgetary  Frameworks 
comply  with 
Directive by improving the transparency of public 
finances.  In  particular,  the  amendment  to  the 
Budget Law requires comprehensive publication of 
tax  expenditures  as  part  of  the  annual  budgetary 
documentation. Also, the publication on contingent 
liabilities  was  considerably  improved  recently,  in 
particular  as  regards  information  on  NPLs  in  the 
general  government  sector  and  state  participation 
in the capital of corporations.  

The  medium-term  budgetary  framework (24) 
effectively  strengthens  the  transparency  and 
the  budgetary  process. 
predictability  of 
Published and rolled over for a year each spring, it 

(23)  This  results  mainly  from  a  reduction  in  the  number  of 
public  sector  employees  through  natural  attrition  and  the 
freezing  of  wages  in  the  broader  public  sector  in  2012-
2016.  

(24)  In  Cyprus,  referred  to  as  the  medium-term  strategic 

framework for fiscal policy. 

https://ec.europa.eu/taxation_customs/business/economic-
analysis-taxation/data-taxation_en.  

(27)  Aggressive  tax  planning  allows  businesses  to  reduce  tax 
liabilities  through  debt  shifting,  strategic  location  of 
intellectual  property  rights  and  intangible  assets,  and/or 
(mis)use of transfer pricing. 

26 

 
                                                           
                                                           
4.1. Public Finances and Taxation  

Commission’s  analysis  of  the  tax  structure  shows 
that the tax base is concentrated on a few drivers, 
in  particular  CIT  and  VAT.  It  was  narrowed  in 
2017,  when  the  immovable  property  tax  was 
abolished, despite being widely considered one of 
the most growth-friendly sources of tax revenue. 

Graph 4.1.2:  Tax structure in 2015 

(1) The countries were selected on the basis of legal and 
economic indicators of aggressive tax planning. 
(2) ‘Other taxes on capital’ include immovable property tax 
revenues. 
Source: European Commission 

high. 

remains 

inequality 

The  tax  and  benefits  system  has  become  more 
effective  in  addressing  income  inequality,  but 
wealth 
The 
redistributive effects of the tax and benefits system 
in  respect  of  revenue  have  grown  almost  twofold 
since the crisis (in 2009-2016), but remain slightly 
below  the  EU  average.  The  system  performs 
relatively  well  (better  than  the  EU  on  average)  in 
reducing  the  number  of  people  at  risk  of  poverty. 
However, the abolition of the immovable property 
tax undermined efforts to reduce wealth inequality, 
which  was  among  the  highest  in  the  euro  area  in 
2014 (see Section 1). (29) 

to  suggest 

indicators  continue 

Some 
that 
Cyprus’  CIT  rules  are  used  by  companies 
engaged  in  aggressive  tax  planning.  A  study 
shows  that  Cyprus’  high  inward  and  outward 
foreign direct investment stocks can be only partly 

(29)  Given  the  absence  of  recurrent  property  tax,  inheritance 
and gift tax and net wealth tax in Cyprus, the redistributive 
effect  of  the  tax  and  benefit  system  concerning  wealth  is 
assessed to be very low. 

in 

the  period 

to  2039 
the 

insurance  contributions 

a  percentage  of  GDP,  revenues  from  labour  taxes 
are low compared with the EU average (11.3 %, as 
against 19.3 % in 2015). Taxes on labour are set to 
increase  in  the  future  due  to  legislated  rises  in 
social  contributions  in  relation  to  the  pension 
(European 
system 
introduction  of 
Commission  2017c)  and 
to 
compulsory  health 
finance the recently adopted national health service 
(see Section 4.3.2). However, labour tax revenue is 
not expected to catch up fully with the EU average. 
This  is  mainly  due  to  the  significantly  lower 
revenue from  personal income tax as a result of a 
threshold  for  untaxable  income  that  is  one  of  the 
highest  in  the  EU.  On  the  other  hand,  revenues 
from  consumption  and  environmental 
taxes 
(12.9 % and 3 % of GDP respectively in 2015) are 
above  the  EU  averages  (11.1 %  and  2.4 %). 
Vehicle taxation in Cyprus is also linked to carbon 
dioxide emissions. 

Tax  revenues  are  currently  supported  by 
temporary  tax  buoyancy  effects,  which  could 
generate  risks  if  used  to  finance  long-term 
expenditure.  Commission  analysis  of  CIT  and 
VAT in Cyprus points to significant tax buoyancy 
effects, leading to revenue windfalls in the current 
economic cycle. (28) This is because real revenues 
from  CIT  and  VAT  increase  faster  than  their  tax 
bases (i.e. final consumption expenditure and gross 
operating  surpluses)  along  the  business  cycle. 
There is also evidence, but to a lesser extent, of tax 
buoyancy  effects  in  the  case  of  the  personal 
income  tax  revenues.  The  use  of  the  additional 
revenue  stemming  from  tax  buoyancy  effects 
should  be  monitored  carefully,  to  avoid  risks 
associated with using temporary revenue to finance 
increases in long-term expenditure. Given the high 
public  debt  stock  and  low  potential  growth  in 
Cyprus,  the  additional  revenue  could  be  used  to 
reduce  public  debt  further  or  support  growth- 
enhancing investment. 

Cyprus’  tax  base  has  narrowed  and  become 
more  dependent  on  specific  components.  The 

(28)  Tax buoyancy effects represent the deviation of short-term 
elasticities from long-term elasticities (usually close to one) 
as  a  result  of  changes  in  tax  rates,  tax  collection  or  tax 
efficiency  ratios.  In  the  long  term,  tax  revenues  are 
expected to move  closely in line with tax bases. Based on 
the  Commission’s  assessment  of  tax  buoyancy  in  Cyprus, 
the  additional  annual  revenues  from  the  VAT  and  CIT 
stemming  from  buoyancy  effects  are  estimated  at  above 
0.5 % of GDP in 2017. 

27 

05101520253035404550% GDPOther taxes on capitalCorporate income taxTaxes on labourOther taxes on consumptionVAT 
                                                           
 
                                                           
4.1. Public Finances and Taxation  

of 

evidence 

economic 

rights  that  can  benefit  and  the  R&D  that  created 
them.  While 
the 
effectiveness  of  patent  boxes  as  a  means  of 
encouraging  R&D  remains  limited  (CPB,  2014), 
they  may  be  used  as  a  tax  competition  tool 
(Alstadsæter et. al., 2017, pp. 131-177). A circular 
amending  the  rules  on  the  tax  treatment  of 
financing  companies  from  1  July  2017  provides 
additional  guidance  on  substance  and  transfer 
pricing 
line  with  OECD 
in 
guidelines.  Finally,  in  November  2017,  the  tax 
authorities  launched  a  public  consultation  on  the 
transposition  into  national  law  of  the  two  EU 
Directives  on  Anti-Tax  Avoidance  (ATADs).  The 
transposition should take place by the end of 2018 
and  2019. (35)  The  extent  to  which  the  new 
measures  and  the  transposition  of  ATADs  will 
limit the scope for aggressive tax planning and the 
impact on the CIT revenue in the medium term is 
still to be assessed.  

requirements 

After  progress 
in  previous  years,  revenue 
administration  reforms  have  slowed  down.  The 
single tax registration process has been completed 
for both direct and indirect taxes, which now share 
common procedures. Measures to step up the fight 
against  tax  evasion  are  under  way,  notably  on 
social  contributions  for  previously  undeclared 
work (see Box 4.3.2). The tax procedure code has 
been drafted and some chapters are expected to be 
adopted 
in  2018.  However,  progress  on 
implementing  the  integrated  tax  administration 
system  (ITAS)  is  slow.  The  merger  of  the  VAT 
service  and  the  Inland  Revenue  department  into  a 
single  department  has  not  been  completed  yet, 
although  the  Large  Taxpayer  Office  now  carries 
out joint audits. ITAS implementation requires the 
full  deployment  of  the  new  tax  IT  system,  which 
will  take  several  years.  In  the  meantime,  the 
current  online  system 
to 
improve 
tax  administration  (e.g. allowing  for 
online VAT, tax income and debt payments). 

is  being  upgraded 

(35)  These entail rules for interest limitation, controlled foreign 
companies,  and  general  anti-avoidance  (to  take  effect  as 
taxation  (from  2020);  and  hybrid 
from  2019);  exit 
mismatch (from 2020-2022).    
See https://ec.europa.eu/taxation_customs/business/compan
y-tax/anti-tax-avoidance-package/anti-tax-avoidance-
directive en and http://europa.eu/rapid/press-release_IP-17-
1433_en.htm. 

Studies, 

for  Advanced 

explained by real economic activity in the country 
(Institute 
2018). 
Furthermore,  the  high  levels  of  dividend  and 
interest  payments  as  percentage  of  GDP  continue 
to suggest that its tax rules are used by companies 
that  engage  in  aggressive  tax  planning. (30)  As 
explained  above,  CIT  revenue  as  a  percentage  of 
GDP in Cyprus (5.8 %) was much higher than the 
EU  average  (2.6 %)  in  2016.  The  absence  of 
withholding taxes on dividend, interest and royalty 
payments by Cyprus-based companies may lead to 
those payments escaping tax altogether, if they are 
also not subject to tax in the recipient jurisdiction. 
(31)  This  absence,  together  with  the  corporate  tax 
facilitate 
residency 
aggressive 
interest 
deduction  regimes,  while  helping  to  reduce  the 
debt equity bias, can also be used for tax avoidance 
purposes  if  not  properly  safeguarded.  Therefore, 
there is a need to closely monitor the effectiveness 
of anti-avoidance rules in this regime. 

rules,  may  continue 
tax  planning. (32)  Notional 

to 

Cyprus has taken measures to amend aspects of 
its  tax  system  that  were  facilitating  aggressive 
tax  planning.  The  Code  of  Conduct  on  Business 
Taxation Group has approved amendments to align 
the  patent  box  scheme (33)  with  international 
developments 
nexus 
approach, (34)  and  the  closure  of  the  old  patent 
box. The latter is subject to a grandfathering clause 
until June 2021. The new amendments will make a 
stronger  link  between  the  intellectual  property 

the  modified 

and 

(30)  The  inward  and  outward  foreign  direct  investment  stocks 
were  1 048%  and  1 029%  of  GDP  respectively  in  2016, 
among  the  highest  in  the  EU.  In  2016,  the  flows  of 
dividends  paid  and  received  amounted  to  19.8 %  and 
11.4 % of GDP respectively, and the flows of interests paid 
and received to 3.3% and 2.3% of GDP respectively, all of 
those among the highest in the EU. 

(31)  There  is  a  withholding  tax  on  royalties  if  the  intellectual 
property  rights  are  used  locally.  For  more  information  on 
the interaction between withholding tax and aggressive tax 
planning structures, see  ZEW 2016. 

(32)   A  company  is  resident  if  its  management  and  control  is 
exercised  in  Cyprus.  A  company  may  be  incorporated  in 
Cyprus but not regarded as resident there if its management 
and control is exercised abroad.  
following 
As 
tax 
regards 
the  Global  Forum  on  Tax 
recommendations 
Transparency,  Cyprus 
tax 
in  2012 
introduced 
reporting of companies that are incorporated in Cyprus but 
non-resident. 

corporate 
from 

residency, 

local 

(33)  A tax scheme that offers a substantially reduced rate of CIT 
on  the  income  derived  from  patents.  In  Cyprus,  the  rate 
was 2.5%. 

(34)  The  nexus  approach  allows  a  taxpayer  to  benefit  from 
patent box arrangements only to the extent that it can show 
that the taxpayer incurred related expenditure. 

28 

 
                                                           
                                                           
4.2.  FINANCIAL SECTOR 

4.2.1.  ASSET QUALITY IN THE BANKING SECTOR * 

Financial developments 

economy 

The  Cypriot 
is  predominantly 
financed  by  the  banking  sector.  Loans  from 
monetary  and  financial  institutions  (MFIs)  to 
NFCs  represented  about  115 %  of  GDP  in  2016, 
about  three  times  higher  than  the  EU  average. 
Funding  via  equity  markets,  debt  issuance  and 
venture  capital  remains  very  marginal  due  to  the 
small  size  and  unsophisticated  nature  of  Cyprus’ 
In  2017,  credit  conditions 
capital  markets. 
improved  gradually  for  all 
types  of  client, 
including  SMEs,  in  terms  of  both  availability  and 
cost.  New  bank  lending  picked  up,  albeit  from  a 
low  base  (see  Section 1),  but  remains 
very 
insufficient to meet demand. Additional initiatives 
have been taken to develop access to finance (see 
Section 4.2.4).  

Poor  asset  quality  and  low  interest  margins 
continue to exert downward pressure on banks' 
profits.  Banks  had 
to  set  aside  additional 
provisioning in 2017, resulting in banks recording 
losses  in  the  first  nine  months  of  2017  (See 
Section 1). Net interest margins continue to decline 
as  a  result  of  lower  interest  income  and  still 
relatively high interest rates offered on deposits. At 
the  same  time,  the  three  largest  banks  made  good 
progress on restructuring their operations to reduce 
operating costs, but benchmark indicators point to 
them still being oversized. Banks may seek higher-
yielding  investments  to  use  their  ample  liquidity 
and this is an important risk for the future.  

in 

issuing 

face  challenges 

Banks 
funding 
instruments  with  longer  maturities.  They  are 
almost  entirely  reliant  on  short-term  deposits  to 
fund  their  lending  operations.  There  is  no  inter-
bank  market  in  Cyprus,  as  banks  currently  hold 
excess  liquidity  at  the  ECB.    Owing  to  their 
precarious  asset  quality,  banks  have  not  yet 
succeeded 
long-term 
in  raising  medium-  or 
funding  on  wholesale  capital  markets.  However, 
longer-term  funding  sources  may  be  needed  in 
future to diversify their funding structure and meet 
future  regulatory  requirements.  Indeed,  long-term 
subordinated  debt  issuance  will  be  necessary  in 
order  to  meet  requirements  on  loss-absorption 
capacity,  such  as  the  minimum  requirement  for 
own  funds  and  eligible  liabilities,  which  is  meant 
to  complement  the  bail-in  mechanism  under  the 

Bank  Recovery  and  Resolution  Directive  and  the 
total  loss  absorption  capacity  set  by  the  Financial 
Stability  Board.  As  a  consequence,  the  conditions 
raised  hinge 
funding  will  be 
under  which 
significantly  on  banks’  ability  to  improve  their 
asset quality. 

Improving asset quality 

The stock and ratio of private sector NPLs have 
declined.  Excluding  loans  to  financial  institutions 
and the government sector, (36) the ratio of private 
sector NPLs has declined to 52.7 % in June 2017, 
which is still very high. The reduction was mostly 
a result of contraction in the stock of NPLs on the 
part  of  NFCs,  which  had  fallen  by  approximately 
16 % in June 2017 on a year-on-year basis. These 
developments  came  at  a  time  when  provisioning 
coverage  ratios  increased  substantially  as  a  result 
of supervisory action, from 41.3 % of gross NPLs 
at  end-2016  to  46.2 %  in  June  2017,  above  the 
euro  area  average  of  44.7 %.  Despite 
these 
improvements, which also address the EAR 4, the 
stock  of  NPLs  in  absolute  terms  remains  higher 
than its June 2013 level of EUR 21 billion.  

Table 4.2.1: 

Financial soundness indicators for domestic 
and foreign banks" 

(1) Due to the sizeable exposures of banks to central banks 
and other financial institutions, the aggregate non-
performing loan (NPL) ratio differs substantially from the NPL 
ratio for the private sector alone, comprising only of loans to 
NFCs and households.  
(2) ECB aggregated balance sheet: loans excluding to 
government and MFIs / deposits excluding from government 
and MFIs. 
(3) For comparability, only annual values are presented. 
Source: ECB consolidated banking data 

36   The  aggregate  NPL  ratio,  which  covers  all  loan  and 
advances,  may  be  misleading  for  Cyprus  due  to  the  large 
exposures  of  domestic  and  foreign  banks  to  central  banks 
(representing  14%  of  gross  loans)  and  other  financial 
institutions  (10%  of  gross  loans).  For  this  reason,  the  text 
refers  to  the  NPL  ratio  for  the  private  sector,  comprising 
only  of  exposures  to  non-financial  corporations  and 
households. 

29 

(%)201220132014201520162017Q2Non-performing debt18,736,235,634,733,831,4Non-performing loans (1)--38,636,335,433,4   from foreign banks--17,126,626,524,8   to NFCs and households (1)--54,655,154,852,7   to NFCs--57,255,355,050,9   to households--52,155,054,754,5Coverage ratio46,731,031,737,241,346,2Loan to deposit ratio (2)119,3152,3152,1152,0120,5120,0Tier 1 ratio6,312,314,616,016,415,5Capital adequacy ratio7,313,515,316,616,816,4Return on equity (3)-100,8-37,9-7,1-7,71,7-Return on assets (3)-3,6-2,9-0,6-0,6-0,3- 
 
 
 
 
 
                                                           
4.2. Financial sector 

Over  11 %  of  all  restructured  loans  had  defaulted 
again as of September 2017. The  ratio for the first 
‘vintages’ of loan restructuring 2013-2014 is more 
than  double  this,  indicating  that  these  loans  may 
require further restructuring. Nearly a quarter of all 
restructured  NPLs  have  been  restructured  at  least 
twice,  which  may  conceal  the  true  extent  of  re-
defaults.  Granular  data  show  that  re-restructuring 
is  more  common  with  solutions  that  convert 
present or past-due liabilities into future liabilities, 
this  account  for  nearly  half  the  volume  of  all 
restructured  loans.  In  a  bid  to  improve  results, 
major  banks  have  decided  to  outsource  NPL 
resolution  activities  to  third-party  debt  servicers, 
with  experience  in  loan  restructuring  in  other 
European  markets.  Hellenic  Bank  took  first  steps 
in  this  direction  by  selling  EUR  145  million 
portfolio on NPLs to the Norwegian pan-European 
debt specialist in early 2018.   

Graph 4.2.1:  Development of restructured loans 

Source: Central Bank of Cyprus 

is  expected 

Recourse  to  debt-to-asset  swaps  is  leading 
banks  to  assume  increasing  direct  real  estate 
exposures.  Although 
to  be 
this 
contained by  exposure  limits,  the  large volume  of 
real  estate  assets  on  banks’  balance  sheets  might 
eventually  increase  the  risk  of  fire  sales  or 
oversupply in the  housing  market, which  could  in 
turn  affect  collateral  values.  More  importantly,  in 
the  absence  of  an  effective,  cost-efficient 
framework for selling properties, banks’ ability to 
manage  these  assets  effectively  in  the  long  run  is 
questionable.  This  may  exert  more  downward 

The  NPL 

The most notable improvements in asset quality 
have been in the sectors directly related to real 
estate and tourism. In the construction sector, the 
largest  sector  in  Cyprus  in  terms  of  outstanding 
loans,  the  NPL  ratio  dropped  from  72 %  in 
September  2016  to  64 %  in  September  2017  (see 
Table 4.2.2). 
the 
accommodation and food services sector was 35 % 
in September 2017, down from 53 % a year earlier 
(see  Section 4.5.4).  A  similar  improvement  was 
seen  in  the  real  estate  activities  sector,  where  the 
ratio  dropped  from  54 %  to  40 %,  reflecting 
improving sales and prices. The NPL reduction in 
these  three  sectors  alone  contributed  to  almost 
three  quarters  of  the  aggregate  reduction  in  NPLs 
over the year.  

ratio 

for 

Table 4.2.2:  NPL and coverage ratios across main sectors 

of economic activity 

Source: Central Bank of Cyprus 

Debt  restructuring  and  debt-to-asset  swaps 
remain the principal drivers of the reduction in 
NPLs.  Loan  restructuring  has  slowed  down,  even 
when  debt-to-asset  swaps (37)  are  counted  as 
restructuring  solutions  (see  Graph 4.2.1).  Banks’ 
performance  in  meeting  the  loan  restructuring 
targets set by the Central Bank of Cyprus remains 
uneven  and  deteriorated  in  the  first  quarter  of 
2017.  Nearly  half  the  reduction  in  the  stock  of 
NPLs  from  September  2016  to  September  2017 
was  due  to  successful  loan  restructuring,  cash 
repayments  or  debt-to-asset  swaps.  Another  third 
was due to loan write-offs, in particular as part of 
restructuring efforts.  

loan 

sustainability  of 

restructuring 
The 
solutions  continues  to  be  a  concern.  New  NPLs 
amounted to EUR 195 million a month on average 
between September 2016 and September 2017, and 
that  had  previously  been 
52%  were 
restructured.  Given  the  heavy  reliance  on  loan 
restructuring  as  an  NPL  resolution  strategy,  the 
sustainability  of  these  solutions  is  a  key  concern. 

loans 

(37)  In a debt-to-asset swap, part or all of the outstanding value 
of a loan is written off in exchange for an asset, usually the 
property underpinning the loan. 

30 

2016Q32017Q32016Q32017Q3Construction72%64%39%50%Wholesale & retail trade46%49%45%60%Real estate activities54%40%41%48%Accommodation & food services53%35%31%42%Manufacturing50%51%42%52%NPL (% of loans)Coverage (% of NPL)0%10%20%30%40%50%0200040006000800010000120001400016000180002000013Q213Q313Q414Q114Q214Q314Q415Q115Q215Q315Q416Q116Q216Q316Q417Q117Q217Q3% of NPLsEUR millionDebt-to-asset swaps (D2A, lhs)Restructured NPLs (lhs)Total restructured NPLs and D2A (% of NPLs, rhs) 
 
 
 
                                                           
 
4.2. Financial sector 

pressure  on 
prospects.  

their  already  weak  profitability 

deleveraging  via  actual  debt  repayment  has  been 
modest since 2014.  

Graph 4.2.2:  Private sector debt gap compared with 

prudential and fundamentals-based 
benchmarks 

4.2.2.  PRIVATE INDEBTEDNESS AND SAVINGS * 

Private  sector  indebtedness  is  far  above  the 
levels estimated by fundamental and prudential 
benchmarks (see Section 1 on actual debt levels). 
Household  debt  in  2016  was  16 %  of  GDP above 
what  fundamentals  suggest.  For  NFCs  the  gap 
reached 56 % the same year, even after subtracting 
the  debt  of  non-financial  SPEs  (Graph 4.2.2). 
Moreover, the risks attached to the current level of 
debt  can  be  highlighted  by  comparing  non-
financial  private  sector  debt  with  a  ‘prudential 
benchmark’  estimating  the  value  of  debt  above 
which a banking crisis is more likely. (38) The debt 
stock exceeded the prudential threshold by 80 % of 
GDP  in  2016  in  the  case  of  households  and  by 
75 %  in  the  case  of  NFCs,  when  subtracting  the 
debt of non-financial SPEs.  

Economic  growth  and  loan  valuation  effects 
were  major  factors  contributing  to  the  recent 
reduction in the private indebtedness ratio (see 
Graph 4.2.3).  The  stock  of  loans  from  MFIs  to 
resident NFCs and households declined by 28 pps 
of GDP in 2016 and by another 10 pps in the first 
two quarters of 2017. (39) This reduction is largely 
attributable 
to  GDP  growth,  which  explains 
roughly  a  third  of  the  decline  in  the  ‘corporate 
loans to GDP’ ratio and roughly half in the case of 
household  loans.  The  remainder  is  mostly  due  to 
debt  write-offs  and  debt-to-asset  swaps, 
i.e. 
valuation effects. Banks prefer to use debt-to-asset 
swaps  and  to  hold  real  estate  assets  on  their 
balance  sheets,  rather  than  realising  potential 
losses from selling the collateral at prices that are 
(see  Section 1).  The  difficulty  of 
still 
foreclosing  properties 
to 
resolving  NPLs  more  directly.  Private  sector 

is  another  obstacle 

low 

(38)  Fundamental-based 

are 

derived 

from 
benchmarks 
regressions  capturing  the  main  determinants  of  credit 
growth and taking into account a given initial stock of debt. 
Prudential  thresholds  represent  the  debt  threshold  beyond 
which 
is  high, 
minimising the probability of missed crisis and that of false 
alerts.  See 
(2017), 
"Benchmarks for the assessment of private debt", Note for 
the Economic Policy Committee 

the  probability  of  a  banking  crisis 

also  European  Commission 

For NFCs, the gaps to benchmarks are adjusted for the 
impact of non-financial SPEs 
Source: European Commission 

Graph 4.2.3:  MFI loans to domestic residents, annual 

changes 

Source: Central Bank of Cyprus, Eurostat and European 
Commission 

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

Leverage  is  still  high  across  most  business 
sectors. Most sectors deleveraged in 2016 and the 

31 

-200204060801001209698010305070911131517% of GDPGap to prudential threshold - HHGap to fundamental benchmark - HHGap to prudential threshold, adjusted for SPEs - NFCGap to fundamental benchmark, adjusted for SPEs - NFC-25-20-15-10-50510152011121314151617ppsTransactionsOtherReal growthInflationMFI loans to GDPratio 
                                                           
 
 
 
 
first  half  of  2017,  but  many  —  in  particular 
construction,  real  estate  activities,  trade,  transport 
and  accommodation,  and  industry  —  remain 
highly  indebted  (see  Graph 4.2.4).  The  rapid 
recovery  of  the  construction  sector  improved  the 
situation substantially in 2017 and this is expected 
to  continue,  as  construction  of  residential  and 
tourism-oriented  projects  supports  the  short-  to 
medium-term growth outlook (see Section 1).  

Graph 4.2.4:  Ratio of loans to gross value added across 
sectors of economic activity 

4.2. Financial sector 

and  8.3 %  of  gross  disposable 
Graph 4.2.5).  

income  (see 

the  new 

the  new  corporate  and  personal 
Use  of 
insolvency  processes  remains  limited.  Rules  of 
court  for  corporate  insolvency  have  not  been 
updated,  which  hampers  the  effectiveness  of  the 
insolvency framework. Banks do not make full use 
of 
tools,  which  offer  sustainable 
restructuring  solutions  to  clients  with  in sufficient 
repayment capacity. Insolvent borrowers and other 
stakeholders  appear  not  to  be  fully  aware  of  the 
insolvency  and 
possibilities  offered  by 
pre-insolvency  mechanisms.  Banks’  participation 
in  insolvency  proceedings  in  the  framework  of 
loan restructuring remains limited. 

the 

Graph 4.2.5:  Cypriot households savings gap 

(1) A: Agriculture, forestry and fishing;  
B_E:  Industry (except construction);  
F: Construction; 
G_I: Wholesale and retail trade, transport, accommodation 
and food service activities; 
J: Information and communication;  
L: Real estate activities;   
M_N: Professional, scientific and technical activities; 
administrative and support service activities. 
Source: Eurostat 

Source: European Commission 

two 

this, 

long-term 

sustainability 

in  households’ 

indicators  highlight  a 
Debt 
considerable  gap 
savings. 
Households’  negative  savings  rate  prevents  them 
from  reducing  their  debt  to  sustainable  levels.  To 
sustainability 
illustrate 
indicators  were  estimated.  Debt  sustainability 
indicators correspond to the permanent adjustment 
in  the  savings  rate  to  (i)  reach  the  fundamental 
benchmark  for  debt  within  15  years  (S1)  and  (ii) 
ensure  that  net  financial  liabilities  are  eventually 
reimbursed (S2). (40) As of 2016, the extra annual 
savings  required  to  comply  with  both  indicators 
are considerable, amounting respectively to 15.5 % 

(40)  See  also  European  Commission  (2017),  "Benchmarks  for 
the  assessment  of  private  debt",  Note  for  the  Economic 
Policy Committee. 

the 

insolvency 

Some  impediments  to  the  effective  application 
framework  have  been 
of 
identified.  A  working  group  of 
relevant 
stakeholders (Central Bank, ministries) was set up 
to  review  the  implementation  and  performance  of 
the  Insolvency  and  Foreclosure  frameworks  to 
ensure that it supports its objectives and principles. 
However,  the  group  meets  only  occasionally  and 
does  not  plan  to  release  recommendations  before 
the end of 2018. 

Use  of  the  foreclosure  framework  remains 
marginal.  Foreclosure  auctions  under  the  new 
legislation  started  in  June  2016,  but  have  proved 
rather  unsuccessful  as  the  majority  did  not  attract 

32 

0200400600800100012001400AB_EFG_IJLM_N% of GVA14Q315Q316Q317Q3051015202530200820092010201120122013201420152016% of household GDIS1: savings gap to reach debt fundamental benchmark in 15yearsS2: savings gap required to stabilise households debt to GDPratio 
 
                                                           
 
4.2. Financial sector 

the event of relatively minor breaches of planning 
conditions. The main bottleneck as regards issuing 
deeds appears to be municipalities’ uneven ability 
to  fulfil  their  obligations,  in  particular  as  regards 
issuing the requisite certificates of approval. 

4.2.3.  OTHER FINANCIAL ISSUES * 

Financial regulation 

of 
of 

compliance  with 
the  EU 

In  recent  years,  the  authorities  have  ensured  a 
the 
good  degree 
implementation 
supervisory 
framework  and  regulatory  reform.  Most 
recently,  a  regulation  on  loan  impairment  and 
provisioning  paved  the  way  for  the  upcoming 
international  financial  reporting  standard  (IFRS) 9 
rules, under which forward-looking losses can also 
be  addressed. (41)  Banks  with  sizeable  legacy 
loan 
issues  and 
restructuring  are  likely  to  face  higher  additional 
provisioning  charges.  However, 
the  relatively 
strong  underlying  economic  conditions  are  likely 
to  serve  as  an offsetting factor.  In 2017,  the  SSM 
and 
local  supervisor  required  additional 
provisioning buffers to be built, partly to offset the 
additional provisioning needs under IFRS 9.  

that  rely  heavily  on 

those 

the 

to  potential 

in  particular 

A  secondary  market  for  NPLs  has  yet  to 
emerge.  No  significant  sale  of  NPLs  has  taken 
place  since  the  sale  of  loans  law  was  adopted  in 
2015. The lack of a secondary market for NPLs is 
due 
loan  buyers’ 
requirements, 
including  data  protection  and 
establishment  conditions.  In  addition,  there  are 
doubts as to the efficiency of the tools available to 
NPL  purchasers  to  ensure  loan  repayments.  To 
date,  very  limited  use  has  been  made  of  the 
foreclosure  framework  created  in  2015,  due  to 
provisions making it easy for borrowers to stall or 
stop  the  process,  and  the  burden  of  creditors’ 
procedural  requirements,  in  particular  as  regards 
notifying the debtor. The securitisation law would 
allow  banks  to  manage  their  balance  sheet  more 
actively, but it is still awaiting adoption. Much like 
the  foreclosure  and  loan  sales  frameworks,  the 
draft law requires the originator to engage with the 

(41)  IFRS  9  will  be  the  new  accounting  standard  for  financial 
instruments, replacing IAS 39 from 1 January 2018. It will 
have  a  significant 
in 
impairment  methodology,  as  the  focus  on  expected  credit 
losses will require banks to recognise their losses earlier. 

impact  on  banks,  especially 

outstanding 

satisfactory  bids.  Most  foreclosure  notices  and 
auctions  concern  plots  of  lands,  as  these  are 
considered  less  socially  sensitive  than  primary 
residences.  Banks  have  so  far  used  foreclosure 
mainly  to  improve  repayment  discipline  via  a 
signalling  effect,  rather  than  as  a  means  of 
collecting 
key 
deficiencies  of  the  foreclosure  legislation  have 
been identified, such as a high reserve price for the 
first  auction  (currently  80 %  of  the  book  value), 
the  difficulty  of  serving  foreclosure  notices  and  a 
lack  of  clarity  as  regards  guarantors’  obligations. 
The  foreclosure  law  does  not  ensure  that  the 
framework  applies  to  cases  affected  by  a  court 
ruling based on the previous legislation.  

debts. 

Some 

The  reform  of  the  system  for  transferring  title 
deeds  is  still  pending.  A  substantial  number  of 
property buyers have yet to receive their title deed, 
despite  having  paid  the  full  purchase  price.  The 
adoption  of  a  law  on  legacy  cases  (for  property 
sales  up  to  the  end  of  2014)  created  some 
momentum. As of end September 2017, a total of 
14 628  applications  had  been  received  in  relation 
to  such  cases;  in  response,  6 683  title  deeds  were 
issued,  which  led  to  almost  3 000  transfers  of 
titles.  This  progress  is  due,  in  particular,  to 
sustained  efforts  by  the  Department  of  Land  and 
Surveys,  including  website  information,  training 
and an instruction manual sent to all relevant staff. 
Pending a final ruling as to the constitutionality of 
the  law,  the  authorities  will  continue  to  apply  it, 
although amendments are under consideration. 

A reliable new system for the transfer of future 
title  deeds  has  yet  to  be  designed.  There  is 
general  agreement  that  the  system  should  ensure 
that  buyers  who  pay  the  full  purchase  price  get 
their titles quickly and are prevented from refusing 
them (e.g. to avoid paying overdue taxes). Progress 
is slow on this issue due to its political sensitivity, 
but the  authorities  remain  committed  to  designing 
a reliable legal framework in the coming months. 

There  is  a  considerable  backlog  of  new  title 
deeds awaiting issue. At the current rate, it would 
take  about  7  years  to  address  it  (about  28 000 
deeds  were  pending  as  of  September  2017)  (see 
Section 4.4.2).  However,  the  Ministry  of  Interior 
has announced measures to streamline procedures, 
in particular through technical assistance from the 
Commission.  Measures  have  been 
to 
facilitate  the  issuing  and  transfer  of  title  deeds  in 

taken 

33 

 
                                                           
4.2. Financial sector 

of 

demand 

identified 

fraction 
(European 
Investment  Bank,  2017).  Also,  there  is  no  clear 
regulatory  framework  on  microfinance.  The  small 
size  of  the  market  does  not facilitate  participation 
in  equity  mechanisms  under  H2020/Innofin  and 
COSME.  The  EIB  continues  to  direct  funds 
through its multi-beneficiary intermediated lending 
facility.  The  Cyprus  Entrepreneurship  Fund 
(CYPEF)  has  supported  both  working  capital  and 
investment  loans  to  SMEs.  Results  in  2016  were 
promising,  thanks  to  greater  participation  by 
financing intermediaries.  

Some new financial support measures for SMEs 
were introduced in 2017, but their impact is yet 
to be seen. In May 2017, the government signed a 
cooperation agreement with the European Bank for 
Reconstruction  and  Development  (EBRD)  on  the 
implementation  of 
small 
the 
businesses’ facility, financed through the European 
Structural  and  Investment  Funds  (ESIFs).  The 
EBRD  will  provide  SMEs  with  assistance,  advice 
and  training  so  as  to  increase  the  success  rate  of 
credit  applications.  Cyprus  is  contemplating  the 
inter-ministerial  coordination 
creation  of  an 
committee to improve SMEs’ access to EU funds. 

‘advice 

for 

borrower  before  his  or  her  loan  is  put  into  the 
securitisation pool.  

Pensions and insurance 

The  merger  of  the  pension  fund  and  insurance 
supervisors is still pending. The legal framework 
for  a  common  independent  supervisory  body  is 
awaiting  parliamentary  approval.  In  particular,  it 
aims  to  ensure  that  transferred  staff  retains  their 
rights and career prospects. A working group was 
set  up  to  explore  reform  of  the  very  fragmented 
provident  pension  fund  system.  Currently,  each 
economic  sector  has  its  own  rules  concerning 
contributions and investment policy. The Ministry 
of  Finance  aims  to  create  a  universal  pillar 2 
system for both the public and private sectors, with 
harmonised 
and  private 
contribution 
management of the accumulated funds. 

rates 

4.2.4.  ACCESS TO FINANCE 

for 

(EU 

7%) 

average: 

requirements 

issue,  notably 

Access  to  finance  has  improved  but  remains  a 
small  businesses. 
key 
According to the SAFE survey, access to finance is 
the  most  important  concern  for  16%  of  Cypriot 
SMEs 
(European 
Commission/European  Central  Bank,  2017). 
Although  modest  improvements  have  been  made, 
banks’  collateral 
remain  major 
obstacles  to  SMEs’  access  to  finance.  Other 
obstacles include the lack of dedicated instruments 
to help small businesses with their costs. Although 
small  and  micro  companies  benefit  from  more 
diverse  sources  of  external  finance  than  larger 
firms, businesses’ access to, and the availability of, 
alternative  sources  of  finance  such  as  venture 
capital, equity funding and crowdfunding are quite 
poor.  A  recent  European  Investment  Bank  (EIB) 
study  has  identified  substantial  financing  gaps  for 
SMEs  and  in  the  field  of  energy  (European 
Investment  Bank,  2017). 
to  help 
implement  the  findings  of  the  study,  technical 
support  will  be  provided  by  the  Commission,  via 
its Structural Reform Support Service. 

In  order 

Financial  support  measures  are  based  mainly 
on  grants  and  access  to  alternative  financing 
remains  marginal.  A  general  lack  of  experience 
and awareness of equity financing continues to be 
a  major  obstacle  to  this  alternative  to  bank 
financing. Supply of equity financing covers only a 

34 

 
4.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

4.3.1.  LABOUR MARKET  

Labour  market  is  improving,  but  the  situation 
of young people remains precarious. The robust 
recovery  resulted  in  growing  number  of  jobs,  a 
steady increase of the employment rate (from 69 % 
in 2016Q3 to 71.5 % in 2017Q3) and a rapid drop 
in the unemployment rate (from 13.2 % in 2016Q3 
to  10.5 % 
the  youth 
in  2017Q3).  However, 
unemployment  rate  is  high  (25.1 %  in  2017Q3) 
and  many  young  people  are  not  in  employment, 
education, or training (NEET rate 16 % in 2016 for 
15-24 years old see Box 4.3.1). While decreasing, 
long-term and very long-term unemployment rates 
are also above the EU averages.    

Wage  developments  have  turned  moderately 
positive  after  several  years  of  decline.  This 
provides  grounds  for  an  improvement  of  the  real 
gross  disposable  household  income.  In  the  short 
term,  despite  a  recent  pick-up,  the  labour  market 
slack  (estimated  at  10 %  in  2017Q3)  and  the 
slowdown  in  productivity  growth  may  still  put 
downward pressure on wages.  

(42)  This  wage  gap,  clearly  correlated  with  age, 
was the highest in the EU (see Graph 4.3.1).  

Graph 4.3.1:  Adjusted wage gap between public and 

private employees by age group 

Calculations based on the microdata from the Structure of 
Earnings Survey, 2010 and 2014 
Source: European Commission 

Although union density rate is higher in Cyprus 
than  in  other  member  states,  the  share  of 
employees  covered  by  collective  bargaining  is 
lower  than  the  EU  average.  Most  of  bargaining 
takes  place  at  sector  or  company  level.  Social 
partners agreed on a new way of indexing the cost 
of  living  allowance  (COLA)  in  the  private  sector 
for the period 2018-2020. The agreement foresees 
that wages will be indexed annually corresponding 
to  half  the  level  of  inflation.  In  addition,  wages 
will  not  be  indexed  when  negative  economic 
growth  is  recorded  at  the  end  of  second  and  third 
quarters of the previous year. In the broader public 
sector,  the  same  wage  indexation  mechanism 
applies  on  a  permanent  basis.  This  mechanism 
comes 
the  existing  collective 
agreement  with  the  broader  public  sector  until 
2018,  which  caps  the  payroll  growth  to  the 
nominal GDP growth.  

in  addition 

to 

Temporary employment started to decrease but 
it  remains  fairly  high.  On  the  back  of  the 
improving  labour  market  more  workers  moved 
from  temporary  to  permanent  employment  and 
more  new  employees  received  a  permanent 
contract.  As  a  result,  the  proportion  of  temporary 
employees  fell  to  14.2 %  in  2016  from  15.8 %  in 
2015  (see  Graph  4.3.2),  which  was  still  3.1  pps 
above  the  pre-crisis  level  and  the  EU  average. 
Almost  all  temporary  employees  (93 %)  work  on 
such  contracts  because  they  could  not  find  a 
permanent  one  (the  EU  average  is  59%).  The 
prevalence  of  temporary  employment  is  linked  to 
the 
the  economy. 
tourism 
Temporary  employment  is  associated  with  lower 
wages  than  permanent  employment.  In  2014, 
permanent  employees  earned  on  average  14 % 
temporary  employees  (see  Graph 
more 
4.3.2). (43) The gap was slightly wider in 2010. 

importance  of 

than 

in 

Conditions  of  employment  differ  between 
private and public sectors. Public sector workers 
enjoy  more  stable  employment  and  higher  wages, 
on average 36% more than in the private sector. 

(42)  The  Commission's  estimations  are based  on  the  microdata 
of the Structure of Earnings Survey. The adjusted wage gap 
is  calculated  based  on  an  Ordinary  Least  Squares  (OLS) 
regression analysis using a human capital earnings equation 
(so called "Mincer" equation). The regression estimates the 
average impact on wages of being employed in the public 
sector,  while  adjusting  for  age,  gender,  educational 
attainment,  sector  of  employment,  occupation,  type  of 
contract and working hour regime.  

(43)  Ibid. 

35 

0%10%20%30%40%50%60%70%15-1920-2930-3940-4950-5960+% of the hourly earnings of private employeesEstimateMin CIMax CI 
 
 
                                                           
Box 4.3.1:  Monitoring performance in light of the European Pillar of Social Rights 

The  European  Pillar  of  Social  Rights,  proclaimed  on  17  November  2017  by  the  European  Parliament,  the 
Council and the European Commission, sets out 20 principles and rights to benefit citizens in the EU. In light 
of  the legacy  of  the crisis and  changes in  our  societies  driven  by  population  ageing,  digitalisation  and  new 
ways of working, the Pillar serves as a compass for a renewed process of convergence towards better working 
and living conditions. 

include 

the 
income, 

Cyprus  faces  challenges  with  regard  to  a 
number  of  indicators  of  the  Social  Scoreboard 
(1)  supporting  the  European  Pillar  of  Social 
level  of  gross 
Rights.  Those 
disposable  household 
the  gender 
employment  gap  and  the  coverage  of  formal 
childcare  for  children  aged  less  than  3 years.  The 
risk of poverty or social exclusion is still relatively 
high,  but  has  been  declining.  While  the  unmet 
demand for medical care is low, there are high out-
of-pocket payments for medical costs..  

in  employment,  education  nor 

Despite  a  decline  in  unemployment,  the  labour 
market  situation  of  young  people  remains 
problematic. The share of young people who are 
training 
not 
(NEETs) continues to increase. This, together with 
increasing  incidence  of  early  school  leaving  may 
weigh  on  current  and 
future  equality  of 
opportunities. 

In  2014,  Cyprus  introduced  a  Guaranteed 
Minimum  Income  (GMI)  scheme.  The  GMI 
provides targeted benefits to cover the basic needs 
to  a  minimum 
in  reference 
and 
consumption  basket  of  different  household  types. 
The  scheme  is  designed  to  incentivise  work,  as 
beneficiaries  who  are  able  to  work  must  register 
with  the  public  employment  services  and  be 
willing  to  participate  in  active  labour  market 
programmes. The introduction of the GMI scheme 
has been important in fighting poverty. It is a significant step forward towards ensuring "minimum income 
protection". 

is  defined 

(1)  The  Social  Scoreboard  is  composed  of  14  headline  indicators,  of  which  12  are  currently  used  to  compare  Member 
States' performance. The indicators "participants in active labour market policies per 100 persons wanting to work" and 
"compensation  of  employees  per  hour  worked  (in  EUR)"  are  not  used  due  to  reservations  by  Member  States.  Possible 
alternatives will be discussed in the relevant Committees.  GDHI: gross disposable household income. 

36 

 
 
 
 
 
 
 
 
 
 
 
 
4.3. Labour market, education and social policies 

initiatives include peer support projects from other 
PES in the EU and an IT platform for use by both 
employers  and  job-seekers  to  better  match  labour 
market  demand  and  supply.  Cooperation  with  the 
private  employment  services  has  also  been 
developed.  However,  the  provision  of  services  to 
both  employers  and  job-seekers  is  still  sub-
optimal. 

New  ALMPs  schemes  were  launched.  They 
target  young  people,  long-term  unemployed  and 
other vulnerable groups, including recipients of the 
guaranteed  minimum  income  (GMI),  in  line  with 
the  euro  area  recommendation  (EAR)  3.  Around 
5000  unemployed  people  benefited 
in  2017. 
However,  activation  results  were  mixed:  ALMPs 
targeting young people were more successful than 
those  targeting  vulnerable  groups.  Meanwhile, 
measures  were  taken  to  improve  the  ALMPs.  A 
monitoring  and  evaluation  tool  for  reporting  the 
the  ALMPs  became 
output  and 
operational in December 2017.   

results  of 

The  proportion  of  young  people  (15-24  years) 
not  in  employment,  education,  or  training 
(NEET) remains one of the highest in the EU. In 
2016, it grew to 16 % (from 15.3 % in 2015), still 
significantly above the EU average of 11.6 %. The 
tertiary 
NEET  rate  for  young  people  with 
education  was  4.8 %,  compared  to  EU  average  of 
0.9%  (see  Graph  4.3.3).  Contributing  factors 
include  lack  of  jobs  for  university  graduates  (two 
in  five  graduates  work  in  jobs  below  their 
qualifications), 
in  VET  and 
low  enrolment 
possibly  undeclared  work.  The  authorities  try  to 
address  the  situation  through  targeted  counselling 
in  schools  and  youth  entrepreneurship  schemes. 
Youth  Guarantee  monitoring  led  to  estimates  that 
only (23 %) of the NEET population was enrolled 
in relevant schemes in 2016. This is mainly due to 
the  limited  capacity  of  the  Public  Employment 
Services.

Participation  in  active  labour  market  policies 
(ALMPs)  is  increasing  but  remains  lower  than 
in most other EU Member States. In 2015, there 
were 9.2 participants for every 100 people willing 
to  work,  which  represents  an  increase  from  2013 
(5.6 participants) but it is significantly less than the 
EU average (23.7). 

Graph 4.3.2:  Adjusted wage gap between permanent and 

temporary employees (% of the average hourly 
earnings of temporary employees) 

Calculations based on the microdata from the Structure of 
Earnings Survey, 2010 and 2014   
Source: European Commission 

Cyprus  has  invested 
in  the  administrative 
capacity  of  the  public  employment  service  but, 
its  effectiveness  still  remains  a  challenge.  In 
October  2017,  a  call  for  30  additional  PES 
counsellors  was  published,  with  a  view  of  being 
recruited  the  first  half  of  2018,  albeit,  on  a  short-
long-term 
term  contract 
sustainability and quality of services, in particular 
in  areas  that  are  lagging  behind  (e.g.  customer 
and 
segmentation, 
to 
activation)  and 
a  challenge.  Additional 
employers, 

personalised 
the  provision  of  services 

(24  months).  The 

guidance 

remain 

37 

-5%0%5%10%15%20%25%PLLUCYPTSICZNLDEESSKFIHUITFRMTBELTUKBGEEROLVAdjusted gap 2014Adjusted gap 2010% of the average hourly earnings of temporary employees 
 
4.3. Labour market, education and social policies 

Box 4.3.2: Policy highlights: Undeclared Work 

The informal sector has been estimated to be over 25% of the Cypriot economy (OECD, 2015), one among 
the largest in the EU. Since the financial crisis, the Republic of Cyprus has intensified attempts to combat 
undeclared work by increasing deterrents (e.g. more regular inspections, more and heftier fines). 

The new legislation on Undeclared Work was enacted on 2 June 2017, introducing heavy fines and giving 
more  legislative  power  to  inspectors.  It  also  improves  processes  by  requiring  pro-rata  registration  of 
employees before recruitment. In  accordance with the transitional provisions of the Law, for three months 
from  its  entry  into  force  employers  could  register  any  undeclared  employees  without  having  to  pay  any 
overdue  contributions  or  risking  a  fine.  This  resulted  in  some  3  000  new  registrations  during  the  grace 
period.  

Furthermore, the reform unifies all inspectorates into one unit within the Ministry of Labour. It also provides 
enhanced  powers  for  the  inspectorate,  including  inspection  of  safeguards  contained  in  28  laws.  Closer 
cooperation and use of expertise of the Tax and Police departments is provided in the context of the reform 
and can be requested, when deemed necessary.   

Overall, the new approach forms multi-disciplinary cooperation at local, regional and national level in order 
to tackle undeclared work in Cyprus. According to the latest national figures, based on targeted inspections, 
the size of the informal sector is down to 16.16%. Some challenges remain however on the quality the new 
unified operations and the use of the new IT system functionality.  

Graph 4.3.3:  NEET rate (15-24 years old) by educational 

attainment, 2008-2016 

Labour Force Survey 
Source: Eurostat 

Education and skills 

Spending on education is relatively  high,  but it 
is not reflected into high educational outcomes. 
Public  expenditure  on  education  was  5.7 %  of 
GDP in 2015, as compared with the EU average of 
4.9 %.  In  primary  and  secondary  education, 
Cyprus’ spending per student is among the highest 
in  the  EU.  However,  Cypriot  15-year-olds  ranked 
second from last across the EU in the most recent 
(2015)  PISA  survey  measuring  skills  in  science, 

mathematics and reading. Low performance affects 
all  socioeconomic  groups.  In  science,  Cyprus  has 
one  of  the  EU’s  highest  proportion  of  low 
achievers  among  students 
the  bottom 
socioeconomic quartile and the highest proportion 
in 
(OECD,  2016).  Low 
performance  in  reading  skills  is  a  concern  overall 
(35.6%),  but  male  students  perform  considerably 
worse than female students, resulting in the widest 
gender gap in the EU (22 pps).  

top  quartile 

from 

the 

intended 

increase 
the 

A  new  system  for  teacher  appointments  based 
on  competitive  exams  was  launched  in  2017.  A 
time-lapse  between  graduation  and 
shorter 
the 
appointment 
to 
is 
attractiveness  and  quality  of 
teaching 
profession  and  thus  lead  to  better  educational 
outcomes  in  line  with  EAR  3.  Significant  efforts 
have  been  made  to  upscale  teachers  ongoing 
training  through  a  new  ‘professional  learning’ 
framework.  Although  participation  levels  varied 
significantly  between  primary  and  secondary 
schools  during  the  pilot  phase,  these  are  expected 
to go up with the implementation of the framework 
at  all  school  levels.  The  reform  of  the  teacher 
evaluation system, which has not changed over 40 
years, has not advanced. An action plan to improve 
student  performance  in  particular  on  science, 
technology,  engineering  and  maths  (STEM),  will 
be implemented in the next school year (2018/19). 
The entry age for primary education will be raised 
to  6  years  (from  current  5  years  and  8  months 
currently) to improve school success rates. 

38 

02468101214161820082016200820162008201620082016LowMediumHighOverallEUCY 
 
4.3. Labour market, education and social policies 

Graph 4.3.4:  Expenditure on Education (% of GDP) 

compared to PISA results, 2015 

placement schemes, and cooperation with industry 
on curriculum development. 

Tertiary  educational  attainment  remains  high 
but  its  labour  market  relevance  is  low.  At 
53.4 %,  the  overall  rate  of  tertiary  attainment  is 
one of the highest in the EU and has far surpassed 
the  national  target  of  46 %,  but  for  the  foreign-
born students the figure is only 37.3 % (all data for 
2016).  While  the  employment  level  for  recent 
tertiary graduates has risen since 2015 at 76.4 %, it 
remains  below  the  EU  average  of  82.8  %.  The 
skills mismatch in tertiary education (ISCED 5 or 
6)  remains  one  of  the  highest  in  the  EU  (41.2 %) 
(European  Commission,  2017a).  To  establish 
closer  links  to  the  labour  market  new  legislation 
has been tabled to facilitate the commercialisation 
of  public  universities'  research  results.  The  first 
graduates  of  the  University  of  Cyprus  Medical 
School  (established  in  2013)  and  of  the  Maritime 
Academy  (2015)  will  enter  the  labour  market  in 
2019.  

to 
on 

upskilling 

implement 

Adult  participation  in  learning  remains  low, 
impacting  on  the  skills  level.  In  2016,  the 
respective figure was 6.9 %, below the EU average 
of  10.8 %  and  down  from  7.5 %  in  2015.  The 
participation  of  the  low-skilled  workers  in  adult 
learning  is  among  the  lowest  in  the  EU  (1.5 %). 
the  Council 
Remedial  actions 
pathways 
Recommendation 
(European  Commission,  2016) 
the 
setting-up of a validation system for informal and 
non-formal 
the  development  of 
additional professional standards and strengthening 
the  capacity  of  post-secondary  VET  schools  and 
second  chance 
for  upskilling  and 
retraining.  The  national  qualification  framework 
was 
European 
Qualifications  Framework  in  2017.  Challenges 
remain in relation to the integration and efficiency 
of  adult  learning  governance  structures,  and  the 
systematic training of adult education trainers. 

cross-referenced 

education, 

includes 

schools 

the 

to 

The  level  of  digital  skills  is  below  the  EU 
average. 50 % of Cypriots have basic digital skills, 
as compared with the EU average of 57 %. Cyprus 
also  has  one  of  the  highest  proportions  of  people 
who  have  never  used  the  internet  (26   %),  while 
the  rate  of  people  with  advanced  ICT  skills  and 

PISA average scores are based on the average score in 
science, mathematics and reading.  
Source: OECD, Eurostat 

The rate of early school leaving (ESL)  remains 
below  the  EU  average,  but  it  rose  significantly 
in  2016  (by  2.4  pps  in  2016  to  7.6 %).  The 
problem  affects  boys:  11.4 %  of  boys  left  school 
early in 2016, compared to 4.3 % of girls. Also, the 
early  school  leaving  rate  of  18.2 %  for  students 
with  a  migrant  background  contrasts  sharply  with 
that of 4.6 %  for native-born students.  To prevent 
school  failure,  the  ‘actions  for  social  and  school 
inclusion’ 
supports 
disadvantaged  students  at  all  levels  of  education, 
has  been  extended  to  96  schools  and  now  covers 
15 %  of  the  student  population  (Pandeia  news, 
2017). 

programme, 

which 

favourable 

in  vocational  education  and 
Participation 
training  (VET)  remains  far  below  the  EU 
average,  despite 
employment 
prospects for VET graduates. The proportion of 
upper  secondary  students  (ISCED  3)  in  VET  in 
Cyprus  increased  slightly  in  2015  to  15.6 %,  but 
remains  far  below  the  EU  average  of  47.3 %. 
Participation levels are expected to increase in the 
coming  years  with  the  creation  of  new  technical 
schools.  The  employment  rate  for  VET  graduates 
has  risen  by  17.1  pps  since  2014  and  stands  at 
72 %, which is still below the EU average (75 %) 
but  slightly  above  the  total  employment  rate  for 
Cyprus (71 %). Measures to ensure skills relevance 
in  the  VET  sector  include  tracking  graduates  on 

39 

BEBGCZDESIESFRITCYLVLTLUNLATPLPTROIESKFISEUK4304404504604704804905005105205302345678Average PISA score 2015Expenditure on education in 2014 (excluding ECEC) (% of GDP) 
 
4.3. Labour market, education and social policies 

social 

spending 

assistance 

reintegration  in  the  labour  market,  while  ending 
administrative  fragmentation  and  keeping 
the 
social  budget  envelope  unchanged.  Most  of  those 
aims  have  been  reached  and  over  two-thirds  of 
public 
is  now 
channelled through GMI. By September 2017, the 
scheme  had  reached  about  28 000  households 
(approx.  48 000  people,  up  from  approx.  14 000 
covered by the previous public assistance system). 
Calculations  show  that  GMI  has  a  greater  impact 
on  extremely  poor  people  than  public  assistance 
alone.  GMI  recipients  who  are  able  to  work  are 
obliged to register with the PES. Targeted ALMPs 
launched  in  October  2017  are  aimed  at  activating 
around  2500  GMI  recipients.  A  comprehensive 
assessment of GMI remains pending. 

The  risk  of  poverty  or  social  exclusion  for 
people  with  disabilities  has  come  down  but 
remains  high.  In  2016,  it  fell  from  38.1 %  to 
35.5 %,  partly  thanks  to  additional  funding  from 
the  European  Social  Fund  for  in-house  services 
and  schemes  for  labour  market  activation.  A 
unified  system  for  the  certification  of  disabilities 
has been put in place. Changes in the legislation on 
disability benefits  aimed at boosting the benefits 
in  kind  and  improving  the  services    have  been 
delayed.  In  December  2017,  the  government 
approved the new National Disability Action Plan 
2018 – 2020. 

for 

the 

The  unemployment  protection  is  suboptimal. 
the  coverage  of 
Between  2008  and  2016, 
unemployment  benefits 
short-term 
unemployed dropped by 9 pps., down to 21 %. (45) 
This is well below the EU average. In addition, the 
unemployment  protection  is  not  available  to  the 
is  also  no  compulsory 
self-employed.  There 
insurance  for  self-employed  against  accidents  at 
work and occupational injuries.  

Increases  in  income  inequality  since  the  crisis 
are  starting  to  reverse,  but  wealth  inequality 
remains  high.  The  impact  of  the  crisis  on 
household  income  led  to  a  sharp  increase  in 
income inequality. The increase between 2008 and 
2015 can be explained by an increase in inequality 
in market income (household income before taxes 

(45)  According  to  the  benchmarking  exercise  in  the  area  of 
unemployment  benefits  and  ALMP,  conducted  within  the 
EMCO  Committee.  See  the  draft  European  Commission 
(2017i) for details. 

development  is  one  of  the  lowest  in  the  EU(44) 
(European  Commission,  2017b).  This  poses  a 
challenge  for  labour-market  needs  in  an  area  of 
growing  demand.  In response  to  those  challenges, 
since  2017 
the 
European  Computer  Driving  Licence  (ECDL) 
training  and  certification  is  being  offered  free  of 
to  all  secondary  students  and  some 
charge 
vulnerable  groups  from  2017  (Government  of 
Cyprus, 2017).  

training  and  certification 

in 

4.3.2.  SOCIAL POLICIES 

to  13.6 % 

Poverty  and  social  exclusion  are  improving. 
This could be attributed to the roll out of social and 
activation  measures  (GMI  and  labour  market 
activation  schemes  for  vulnerable  groups),  in  line 
with  EAR  3,  and  to  the  improved  economic  and 
labour  market  conditions.  More  than  one  in  four 
Cypriots (27.7 %) was at risk of poverty or social 
exclusion  (AROPE)  in  2016.  This  represents  a 
decrease  of  1.2  pps  from  the  year  before  but  the 
rate  remains  4.2  pps  above  the  EU  average. 
Absolute poverty decreased, with the incidence of 
severe material deprivation falling from 15.4 % in 
2015 
in  2016.  However,  relative 
(monetary)  poverty  remained  close  to  its  highest 
point  (16.1 %  compared  to  the  EU  average:  17.3 
%). The relative poverty of older people (aged 65+ 
and 75+) is much lower than in 2008. According to 
analysis  carried  out  for  the  upcoming  Pension 
adequacy  report,  this  can  be  attributed  to  the 
maturation  of  the  pension  system,  the  statistical 
effect  of  the  economic  crisis  pushing  down  the 
incomes  of  non-pensioners  and  the  anti-poverty 
effect of non-contributory policies supporting low-
income pensioners. However, the wide gender gap 
as  regards  pensions  (49%)  is  also  a  matter  of 
concern. This may be linked to a significant gender 
gap  of  5.7  years  in  the  duration  of  working  life 
(EU  average  of  4.9  years)  and  to  the  past 
significant  gender  pay  gap,  which  narrowed  over 
the years and now stands around the EU average.      

The  social  safety  net  has  been  strengthened  by 
the  new  guaranteed  minimum  income  (GMI) 
scheme.  The  reform  aimed  to  prevent  abuses, 
improve  targeting  and  strengthen  incentives  for 

(44)  Measured  by  the  aggregated  score  of  IT  specialists  and 
technology,  engineering,  and  math  (STEM) 

science, 
graduates. 

40 

 
                                                           
                                                           
4.3. Labour market, education and social policies 

to  enhance 

and  social  transfers),  which  resulted  from  the 
precarious labour market situation during the crisis 
(see  Graph  4.3.5).  Changes 
the 
redistributive  effect  of  the  benefits  system  have 
mitigated 
this  effect  only  partially.  Wealth 
inequality  increased  to  0.72  Gini  points  in  2014, 
one  of  the  highest  levels  in  the  euro  area.  It  is 
largely  driven  by  a  high  share  of  indebted 
households,  as  a  result  of  negative  equity  in 
housing assets.  

Graph 4.3.5:  Change in income inequality and its 
components, 2008-2015 

Enrolling  children  in  formal  childcare  remains 
a  challenge.  The  proportion  of  children  under  3 
years  of  age  in  formal  childcare  (20.8 %)  is  low 
compared  with  the  EU  average  (30.3 %).  Parental 
leave is currently unpaid. However, paid paternity 
leave of 15 days was introduced in July 2017.  

Health Care 

Health spending in Cyprus is among the lowest 
in the EU and comes mainly from out-of-pocket 
payments.  In  2015,  Cyprus  spent  EUR  1,592  per 
person on health care, well below the EU average 
of EUR 2,797. Total health spending was 6.8 % of 
GDP  in  2015,  of  which  only  42.6 %  came  from 

Graph 4.3.6:  At risk-of-poverty  or social exclusion rate, age 

groups 

(1) Countries are ranked by increasing order of the change 
in overall income inequality between 2008 and 2015, as 
measured by the Gini coefficient of the equivalised 
(corrected for household composition) disposable 
household income. (2) The contribution of the tax and 
benefit system is calculated as the difference of the change 
in inequality of the disposable household income between 
2008 and 2015 and the change in inequality of market 
income (including private pensions) between 2008 and 
2015.  
Source: Eurostat 

Cyprus  has  seen  a  strong  increase  in  child 
poverty since the crisis. The AROPE rate among 
children  rose  steadily  from  20.2 %  in  2009  to 
29.6 % in 2016. The increase has been greatest for 
the  children  of  parents  with  low  skills  (from 
14.9 % in 2010 to 46.0 % in 2015); for the children 
of high-skilled parents the risk rose from 5.3 % to 
6.1 %  over  the  same  period).  The  GMI  includes 
measures  to  combat  child  poverty  such  as  extra 
allowance  for  children  and  single  parents.  In 
addition,  the  Child  Benefit  Law  was  modified  in 
2017  to  increase  the  eligible  income  threshold  by 
EUR 5 000 for every additional child after the first 
two.  

(1) The European Union Statistics on Income and Living 
Conditions (EU-SILC)  
(2) AROPE: At-risk-of-poverty or social exclusion rate (% of 
total population). People who are at-risk-of poverty (AROP) 
and/or suffering from severe material deprivation (SMD) 
and/or living in household with zero or very low work intensity 
(LWI). 
Source: Eurostat 

public  expenditure  (7.1 %  of  the  government 
budget);  both  proportions  were  among  the  lowest 
in  the  EU  (see  Graph  4.3.7).  Meanwhile,  out-of-
pocket  healthcare  expenditure  amounted  to  EUR 
606  per  inhabitant  –  the  highest  level  for  the 
surveyed  EU  Member  States,  once  adjusted  for 
purchasing  power  standard.  This  reflects  the  lack 
of  universal  coverage  and  the  fragmentation  of 
healthcare  provision  between  the  public  and  the 
largely  unregulated  private  sector,  resulting  in 
unequal access and inefficient use of resources. 

41 

-0.08-0.06-0.04-0.020.000.020.040.060.080.10LVPTPLBEUKFINLFRATIESKMTCZBGELLUSISEROITDKESHUEELTCYContribution of the T&B systemChange in inequality of market incomeChanges in inequality of equivalised disposable income0102030405060050607080910111213141516% of populationCYChildren (<18y)Working age (18-64)Elderly (65+) 
 
 
4.3. Labour market, education and social policies 

to  financial  reasons  (4.6 %  of  surveyed  Cypriots 
reported that needs were unmet due to costs).  

The  authorities  have  made  efforts  to  improve 
the planning in the health sector and to ensure 
that  current  resources  are  adequately  used.  In 
2015,  the  number  of  nurses  per  1000  inhabitants 
(5.2) was well below the EU average and the ratio 
of  1.5  nurses  for  every  doctor  was  among  the 
lowest  in  the  EU.  The  relative  availability  of 
advanced  medical  equipment 
is  very  high 
compared  with  other  EU  countries  but  those 
resources  are  mainly  concentrated  in  the  private 
sector.  In  both  sectors,  allocative  inefficiencies 
result  from  underuse  of  these  high-cost  medical 
technologies.  

The levels of long-term care (LTC) (46) provided 
is  low.  Public  spending  on  LTC  is  among  the 
lowest in the EU (0.3 % of GDP, as compared with 
the EU average of 1.6 %). The acceleration of the 
population  ageing  poses  a  further  challenge.  At 
present,  there  are  regular  medical  visits  to  remote 
areas  offered  to  the  elderly  and  other  vulnerable 
groups. The new NHIS system will involve actions 
for  long-term  care,  including  outpatient  services, 
which  are  currently  been  provided  mostly  by 
private  enterprises.  The  ALMP  schemes  to  train 
unemployed  people  to  provide  LTC  have  been 
successful.  There  are  also  plans  to  establish 
community  centres,  co-financed  by  the  European 
Social Fund, to offer in house LTC. 

(46)  Long-term  care  includes  health,  personal,  and  support 
services,  aiming  at  helping  people  to  remain  at  home  and 
live as independently as possible. 

The legislation for establishing a universal national 
health  insurance  system  (NHIS)  was  adopted  and 
is being implemented. In June 2017, the House of 
Representatives  adopted  two  bills  establishing  a 
universal  health  insurance  system  by  2020  and 
providing  for  gradual  financial  and  administrative 
autonomy for the public hospitals. The NHIS aims 
to  reduce  out-of-pocket  costs  significantly  and 
ensure 
and 
sustainable public health care expenditure. A study 
is  being  conducted  to  assess  the  NHIS'  economic 
impact.  Implementation  of  the  reform  entails 
investment  in  public  health  providers  (human 
capital, health technologies, hardware, and new IT 
system).  Further 
in 
particular involving EU funds might be explored. 

financing  opportunities, 

healthcare 

universal 

coverage 

Graph 4.3.7:  Share of healthcare in public expenditure 

Source: OECD Health Statistics; Eurostat Database; WHO 
Global Health Expenditure Database. 

(PHC)  will  be 

is  foreseen  from  primary 

Primary  health  care 
the 
backbone  of  the  system.  Under  the  NHIS  a 
formal  referral 
to 
specialised  and  hospital  care,  for both  private  and 
government  hospitals  and  outpatient  departments. 
This  entails  restructuring  of  public  PHC  by 
clustering  small  healthcare  facilities,  extending 
opening  hours,  standardising  procedures  and 
improving coordination of care.  

Meanwhile, around a quarter of the population 
-  among  the  highest  proportion  in  the  EU  –  is 
not covered by the public system. The incidence 
of  reporting  unmet  medical  need,  though  lower 
than the EU average, was attributed almost entirely 

42 

0510152025GermanyNetherlandsIrelandSwedenUnited KingdomEUDenmarkFranceAustriaBelgiumSpainCzech RepublicMaltaItalySloveniaLithuaniaFinlandPortugalEstoniaSlovak RepublicLuxembourgCroatiaRomaniaPolandBulgariaHungaryGreeceLatviaCyprus% of government expenditure  
 
 
                                                           
4.4. INVESTMENT 

4.4.1.  INVESTMENT SITUATION* 

in  Cyprus 

is  driven  by 

Investment 
the 
expansion of construction and ship registrations 
(see  Graph 4.4.1).  The  recovery  of  the  residential 
real  estate  market 
(see  Section 1),  capacity 
constraints  in  hotels  and  the  development  of  new 
and 
such 
tourism  products, 
entertainment  (see  Section 4.5.4)  have  led  to  a 
substantial  expansion  of  construction  activities. 
Investment in equipment has also been strong, but 
partly driven by ship registration, since Cyprus has 
one of  the  largest ship  registers  in  the  world.  The 
shipping  sector’s overall  contribution  to GDP  and 
employment is small.  

as  yachting 

Graph 4.4.1:  Investment by category (2000-2016) 

Source: Cystat 

The  composition  of  investment  is  not  expected 
to  boost  productivity  in  a  durable  way.  The 
investment  trend  does  not  appear  to  markedly 
contribute  to  the  diversification  of  the  economy 
and may fall short of Cyprus’ smart specialisation 
strategy. (47)  While 
industry 
currently  exhibits  the  highest  productivity  in 
Cyprus, this may not hold in the long run. The very 
limited 
(see 
in  R&I 
that  productivity  may 
Section 4.5.1)  suggests 

the  construction 

investment 

level  of 

(47)  The  Commission’s  smart  specialisation  strategies  set  out 
ex-ante  conditions  for  each  Member  State’s  use,  in  the 
2014-2020  programming  period,  of  ESIF  resources  to 
enhance  R&I 
it  has  a  competitive 
advantage.  For  Cyprus,  these  are  energy,  tourism,  the 
structured 
industry, 
environment/construction 
transport/marine, agriculture/food industry and health. 

in  areas  where 

remain  structurally  low,  which  might  hamper 
competitiveness in the future. 

still  restrain  private 

Limited  access  to  finance  and  the  need  to 
reduce  debt 
sector 
investment.  Bank  credit  supply  remains  very 
limited,  while  alternative  modes  of  financing  are 
underdeveloped. In addition, NFCs remain heavily 
indebted  and  are  struggling  to  repay  outstanding 
loans  (see  Section 4.2).  Therefore,  private  sector 
investment has been financed mainly through FDI 
and  self-financing.  Survey  indicators  suggest  that 
credit  demand,  though  weak,  exceeds  supply  (see 
Section 4.2).  On  the  other  hand,  while  banks 
remain very selective as regards project financing, 
funding  conditions  are  gradually  improving  (see 
Graph 4.4.2). 

Graph 4.4.2:  Interest rates on loans to NFCs 

Source: Central Bank of Cyprus 

4.4.2.  BUSINESS ENVIRONMENT* 

The  quality  of  the  business  environment  is 
improving slowly, in line with the EAR 1. Cyprus 
moved  up  13  places  in  the  2017  ranking  of  the 
Doing  Business  report  (World  Bank,  2017a)  and 
improved  its  ranking  in  the  World  Economic 
Forum’s  global  competitiveness  index  (World 
Economic  Forum,  2017),  moving  up  19  places  to 
64th.  However,  it  still  lags  behind  most  EU 
countries 
rankings. 
Implementation of the action plan for growth led to 
some progress in the areas of strategic investments, 
tourism,  entrepreneurship  and  better  regulation. 

survey-based 

both 

in 

43 

0123456000102030405060708091011121314151617Q3EUR billionOther equipmentTransport equipmentHousingOther constructionOther34567808091011121314151617%New loans over 1 mn EURNew loans up to 1 mn EUR 
 
 
                                                           
 
4.4. Investment 

unit  was  dismantled  and  decrees  on 
the 
privatisation  of  the  Cyprus  Telecom  Authority 
(CyTA)  and  the  Cyprus  Stock  Exchange  were 
cancelled.  Only  minor  privatisation  projects 
remain  active,  although  a  draft  bill  was  proposed 
to re-launch CyTA privatisation. An agreement to 
sell CYTA Hellas, the Greek subsidiary of CYTA, 
was  recently  reached.  The  lack  of  major  progress 
on privatisation exposes the state to the build-up of 
contingent  liabilities  in  the  medium  term,  due  to 
the  weakening 
public 
companies (see Section 4.1.1).  

competitiveness 

of 

Action  is  being  taken  to  support  growth-
friendly  policies,  stimulate 
investment  and 
promote  the  social  economy.  To  mobilise  public 
resources  to  ensure  consistent  implementation  of 
strategic policy priorities, Cyprus intends to create 
deputy  ministries  for  growth  and  competitiveness 
and  tourism,  in  addition  to  the  one  for  shipping 
already established in 2017. Legislation on the new 
procedural  and 
legal  framework  on  strategic 
investments,  including  the  setting-up  of  a  fast-
track mechanism, is due to be put in place in 2018. 
talented 
A  ‘start-up  visa’  programme  allows 
entrepreneurs  from  non-EU  countries  to  come  to 
Cyprus  to  set  up,  operate  and  develop  start-ups 
with  high  growth  potential.  Tax  incentives  were 
adopted to boost and promote entrepreneurship, in 
particular  exempting  investments  from  investors’ 
taxable  income  (up  to  50 %  of  taxable  income). 
Furthermore,  the  government  has  approved  a  bill 
in  January  2018  in  order  to  boost  the  socio-
economic benefits from social enterprises. 

remains 

relatively 

E-Commerce 
under-
developed in Cyprus. The rates of individuals and 
NFCs  making  use  of  e-commerce  are  among  the 
lowest  in  the  EU,  with  29 %  and  12 %  of  survey 
respondents  respectively  having  purchased  online 
in  2016. (49)  According  to  a  recent  study  (Baker 
Tilly, 2016), the main obstacles to the growth of e-
commerce  are:  (i)  concerns  over  the  security  of 
transactions;  (ii)  legal  issues;  (iii)  shipping  costs; 
(iv)  taxation,  and  (v)  language  and  reliability 
issues.  Cypriot  businesses  and  consumers  appear 
to  face  significant  problems  due  to  shipping 
conditions  (high  costs  and  difficult  product 
returns). 

However, other important reforms have stalled, in 
particular  the  granting  of  licenses  authorising 
investment projects.  

On  entrepreneurship,  Cyprus  is  performing  in 
line  with 
the  EU  average.  Early-stage 
entrepreneurial  activity  in  Cyprus  was  the  third 
highest in the EU in 2016 (European Commission, 
2017f),  but 
the  proportion  of  ‘high-growth’ 
companies (48) is relatively low. Implementation of 
the  national  policy  statement  on  entrepreneurship 
identified  a  series  of  actions  in  five  broad  areas 
(entrepreneurial  culture,  business  environment, 
innovation,  access 
to 
markets),  of  which  50 %  were  completed  by 
September  2017.  This 
includes  streamlining 
company  registration  procedures,  creating  an 
online  administrative  platform  for  businesses, 
simplifying  social  security  contributions  and 
establishing a regulatory framework for university 
spin-offs.  Efforts  were  made  to  improve  digital 
entrepreneurship by setting up a working group to 
promote digital skills, innovation and creativity in 
elementary and secondary education. 

to  finance  and  access 

Heavy  regulation  in  some  professional  services 
is  restricting  competition.  This  applies 
in 
particular to lawyers, patent agents and real estate 
agents.  There  are  persistent  high  barriers  to  entry 
to those activities, such as reserve of activities and 
residency  requirements,  as  well  as  requirements 
for establishing a practice, such as legal form and, 
in  some  cases,  shareholding  requirements.  In 
addition  to  serving  consumers’  interests,  more 
competition in services would support growth and 
jobs. 

remains 

cumbersome 

The  issuing  of  building  permits  and  planning 
licences 
(see 
Section 4.2.2).  The  issuing  of  building  permits  is 
characterised  by 
formalities 
(World  Bank,  2017a).  Despite  authorisation  and 
notification  schemes  to  check  for  technical  and 
professional  capacity  in  the  construction  sector, 
there  are  no  simplified  procedures  for  permit 
issuance.  

time-consuming 

Implementation  of  the  privatisation  plan  is 
basically at a standstill. In 2017, the privatisation 

(48)  High-growth companies have average annualised growth in 
employee  numbers  of  over  10 %  a  year  over  a  three-year 
period, from a base of at least 10 employees. 

(49)  Source: Eurostat.  

44 

 
                                                           
                                                           
4.4. Investment 

(European  Commission,  2018c), (50)  leading  to  a 
persistently  big  backlog  of  pending  cases.  The 
problems stem mainly from complex and outdated 
procedural  rules.  They  are  compounded  by  a  low 
level  of  digitalisation  in  courts,  in  particular  for 
case  management,  the  under-use  of  alternative 
dispute  resolution  mechanisms  and  a  lack  of 
formal  life-long  training  for  judges.  Operational 
inefficiencies  in  the  justice  system  hamper  the 
implementation  of  the  insolvency  and  foreclosure 
frameworks, and more generally deter investments, 
as they undermine the enforcement of contracts.  

Some  reform  initiatives  are  aimed  at  making 
the  courts  more  efficient.  An  amendment  to  the 
Courts  of  Justice  Law  places  new  limits  on  the 
right  to  appeal  against  interlocutory  decisions 
during  civil  proceedings.  This  is  expected  to 
accelerate judicial procedures and reduce backlogs. 
A public tender was launched in 2017 to procure a 
information  system.  The 
court  management 
authorities aim to have a fully operational e-justice 
system  by  the  end  of  2018.  The  Supreme  Court 
intends to create a special section in charge of the 
life-long  training  for  judges,  to  become  fully 
operational in 2018. 

The planned creation of specialised courts could 
help  to  accelerate  the  resolution  of  pending 
cases. The establishment of a commercial court is 
envisaged  in  2018  and  it  will  be  responsible  for 
cases  involving  amounts  of  over  EUR 2 million. 
New rules of procedure should be drafted in 2018. 
It  is  also  expected  that  a  court  of  appeals  will  be 
created  in  2018  to  rule  on  civil,  criminal  and 
administrative cases at second instance. A bill has 
been submitted to the House of Representatives for 
the  establishment  of  an  administrative  court  of 
international  protection, 
to  deal  mainly  with 
asylum cases. This would leave the Administrative 
Court  to  deal  with  all  other  administrative  cases. 
Also,  a  study  is  expected  to  contribute  for  the 
preparation  of  legal  amendments  in  2018  to 
facilitate the use of mediation. 

Steps have been taken to improve the quality of 
regulation.  A  new  impact  assessment  mechanism 
was  put  in  place  in  2017,  ensuring  more  focused 
impact  assessments  of  new 
and 

thorough 

(50)  Disposition time for first instance administrative law cases 
was  1 582  days  in  2016,  exceeding  the  already  very  long 
disposition time in 2015.  

4.4.3.  PUBLIC ADMINISTRATION* 

Efficiency in the public administration remains 
a  challenge.  According  to  European  Commission 
and  World  Economic  Forum  surveys  (European 
Commission,  2015  and  World  Economic  Forum, 
2017), Cyprus  ranks  relatively  low  in  comparison 
with other Member States for the efficiency of its 
public administration. Also, it is among the lowest 
rated Member States as regards executive capacity 
and accountability (Bertelsmann Institute, 2017). 

The reform of the public administration has not 
been  completed  yet.  To  date,  Cyprus  has  only 
taken  measures  to  incentivise  staff  mobility  and 
improve redeployment rules.  

Local government reform has stalled. The local 
government reform bill is awaiting adoption by the 
House  of  Representatives.  The  reform  is  intended 
to  streamline  local  public  services,  notably  waste 
and water management and the issuing of building 
permits  and  certificates,  which  might  lead  to 
improvements  in  the  issuing  of  title  deeds.  It  also 
addresses  gaps  in  local  government  financial 
reporting  by  establishing  a  common  accounting 
and reporting framework. 

regards  e-government  services 

Efforts are being made to improve and broaden 
Cyprus’  digital  public  services  (e-government). 
Cyprus ranks in the bottom half of Member States 
as 
(European 
Commission,  2017j).  To  improve  the  situation,  it 
has  enhanced  its  e-government  governance  and 
updated  its  national  e-government  interoperability 
framework  (eGIF),  which  is  a  mandatory  tender 
requirement  for  the  design  and  implementation  of 
e-government  information  systems/services.  An 
awareness  campaign  was  launched  to  inform 
citizens and businesses of the benefits of using ICT 
and 
internet.  68  e-services  have  been 
developed  in  line  with  the  ‘once-only’  principle 
and 30 more are expected to be made available in 
the course of 2018. As of 2017, there were around 
38 000  users  in  the  government  gateway  portal 
‘Ariadni’,  and  over  300 000  in  TAXISnet,  the 
electronic income tax returns system. 

the 

The  justice  system  continues  to  face  serious 
challenges as regards its efficiency. In particular, 
this 
in 
administrative,  civil  and  commercial  cases 

proceedings 

concerns 

very 

long 

45 

 
                                                           
4.4. Investment 

legislation.  This  includes  an  SME  test,  to  assess 
the possible negative impact of new laws on SMEs 
and  examine  mitigating  measures.  Efforts  have 
also  been  made  to  improve  legal  drafting  and 
vetting. Civil servants undergo specialised training 
and guidelines have been issued for legal drafting 
and  harmonising  national 
legislation.  The 
authorities also aim to lower administrative hurdles 
in strategic areas such as the tourism sector. These 
measures  are  aimed  to  improve  the  institutional 
environment, which is in line with the EAR 1. 

survey 

2017  Eurobarometer 

Anti-corruption  measures  have  been  put 
forward  as  high  levels  of  perceived  corruption 
risk  undermining  the  business  environment.  In 
a 
(European 
Commission,  2017g),  all  companies  surveyed 
considered that corruption is widespread in Cyprus 
(EU  average:  67 %),  91 %  agreed  that  corruption 
hampers business competition (EU average: 74 %) 
and  72 %  pointed  to  patronage  and  nepotism  as 
problems  for  their  company  when  doing  business 
in  Cyprus  (EU  average:  38 %).  Recurrent  surveys 
also  point  to  similar  problems  in  dealing  with  the 
public  administration  (World  Bank,  2017b  and 
Transparency  International,  2017).  A  draft  law  to 
protect  whistle-blowers  was  submitted  to  the 
House  of  Representatives  in  May  2017  and  a 
national  anti-corruption  strategy  and  action  plan 
were  published  in  December.  The  government  is 
considering  establishing  a  new 
independent 
anti-corruption  agency.  In  the  meantime,  the 
Coordinating  Body  against  Corruption  remains 
without  permanent staff or budget,  and  the  House 
of Representatives is revising the asset declaration 
law  after  deeming  it  inadequate.  A  new  website 
with information on public procedures and services 
has also been developed. 

Competition  and  qualitative  assessment 
in 
public  tenders  could  be  further  enhanced  to 
strengthen  the  efficiency  and  transparency  of 
public  procurement.  In  2017,  42%  of  public 
procurement  procedures  involved  only  a  single 
bidder,  up  from  38%  in  2016.  The  proportion  of 
procedures  that  did  not  feature  a  call  for  tender 
decreased from 38% in 2016 to 30% in 2017, but it 
remains  one  of  the  highest  in  the  EU  (European 
Commission, 2018b).  Many business respondents 
(European Commission, 2017g) point to the abuse 
of  negotiated  and  fast-track  procedures,  tailor-
made specifications and conflicts of interest in the 
evaluation  of  bids.  A  recruitment  freeze  blocked 

in  addition 

plans  for  a  central  pool  of  public  procurement 
experts. Instead, the Treasury continues to provide 
guidance,  standard  templates  and  a  helpdesk  for 
to 
local  contracting  authorities, 
participating,  together  with  the  Audit  Office,  in 
selected tender boards and evaluation committees. 
Cyprus is ranked among the EU countries with the 
highest  number  of  contracts  awarded  exclusively 
on  the  basis  of  lowest  price  (93%  of  public 
contracts 
(European 
in 
Commission,  2018b),  contrary  to  best  practice 
foreseeing the use of more comprehensive criteria.  

awarded 

2017) 

and 

benchmarked, 

standards, 
and 

The  framework  for  managing  SOEs  still  poses 
certain  risks.  There  are  no  established  common 
reporting 
financial  data  are  not 
direct 
centralised 
supervision  is  scattered  among  line  ministries. 
There  are  no  common  standards  for  corporate 
governance.  The  lack  of  visibility  and  long-term 
strategy  regarding  SOEs  may  pose  risks  of 
contingent  liabilities,  as  the  state  is  their  ultimate 
guarantor. A draft law on SOEs was submitted for 
discussion in the House of Representatives, but has 
not  been  adopted.  It  aims  to  improve  SOEs’ 
corporate  governance  and  monitoring  of  their 
functioning.  The  adoption  delays  are  holding  up 
these 
the  mitigation  of 
SOE-related fiscal risks. 

improvements  and 

4.4.4.  GREEN INVESTMENT 

In  the  recent  past,  Cyprus’  spending  on 
environmental  protection (51)  has 
increased 
significantly.  Between  2004  and  2012, 
total 
environmental  expenditure  by  the  most  important 
contributing  sector,  i.e.  specialised  providers  of 
environmental protection services, grew by 139 %, 
reaching 1.7 % of GDP in 2012, (52) well above the 
EU  average  of  1.14 % 
(see  Graph 4.4.3). 
Investments  by  this  sector  accounted  for  0.5 %  of 
GDP,  three  times  the  EU  average  (0.18 %).  This 
high  level  of  investment  stems  from  the  need  to 
bring  environmental  protection  standards  into  line 
with  EU  requirements,  in  particular  as  regards 
sewerage and waste management.  

(51)  Total  spending  by  specialised  providers  of  environmental 

protection services.  

(52)  Data not available after 2012. 

46 

 
                                                           
4.4. Investment 

Graph 4.4.3:  Environmental investment 

forecast  to  reach  about  EUR 750  million  by 
2026. (European Commission, 2017d)  

relatively 

constrained.  This 

Framework  conditions  for  investment  in  the 
renewable  energy  sector  have  improved  but 
remain 
has 
prevented Cyprus  from exploiting its considerable 
potential  in  renewable  energy  generation,  notably 
as  regards  solar  power.  Some  progress  was  made 
in 2017, as Cyprus opened its electricity market to 
bilateral  long-term  contracts  between  producers 
and  suppliers,  allowing  energy  producers 
to 
negotiate the sale price of electricity directly with 
suppliers.  However,  the  Electricity  Authority  of 
Cyprus  (EAC)  remains  the  only  supplier  to  date. 
Following  a  court  order,  Cyprus  abandoned  its 
embargo  on  licensing  new  independent  power 
producers,  which  might  allow  investment  projects 
to develop. The reform of the electricity market, in 
particular the adoption of new trade and settlement 
rules,  the  gradual  unbundling  of  EAC  as  well  as 
recent  decisions  on  the  independence  of  the 
Transmission  System  Operator,  might  incentivise 
further  investment  in  the  coming  years.  Cyprus’ 
plans to import natural liquefied gas by 2020 might 
create  opportunities  for  new  power  generation 
facilities. 

(1) Data on government spending in 2005-2009 are not 
available in the dataset. 
(2) For statistical reasons the sectoral data cannot be 
aggregated. 
Source: Eurostat 

At  the  same  time,  Cyprus’  environmental 
performance  is  considerably  below  the  EU 
average.  This  indicates  the  need  for  additional 
investment.  For  instance,  investment  needs  in 
water-collecting  systems  and  treatment  plants  are 

47 

0.00.10.20.30.40.50.60.7040506070809101112% GDPSpecialised producers of environmental protection serviceIndustryGovernment 
 
4.4. Investment 

Box 4.4.1: Investment challenges and reforms in Cyprus 

Macroeconomic perspective 

Investment in Cyprus has been recovering for the third year in a row since 2014, increasing to 16 % of GDP 
in 2017Q3, though still well below Cyprus' historical average. Private investment has been mostly funded by 
foreign sources and self-financing, as domestic credit remains tight. Public investment is constrained by the 
need to reduce public debt. The composition of investment reflects the recovery of the construction sector, 
and  also  stems  from  rising  ship  registrations  and  airplane  imports.  Public  investment  increased  slightly, 
albeit remaining among the lowest in the EU in 2016. Low public investment might weaken the quality of 
basic public services, while low investment in R&D and infrastructure weighs on potential growth.  

Assessment of barriers to investment and reform priorities: 

In  addition  to  macroeconomic  constraints,  the  overall  business  environment  in  Cyprus  does  not  appear  to 
facilitate  investment,  notably  due  to  difficult  access  to  finance  and  weak  contract  enforcement.  An  action 
plan  for  growth  is  being  implemented  gradually,  which  and  mainly  aims  to  improve  the  business 
environment,  lighten  the  administrative  burden  for  companies  as  well  as  and  support  growth  and  boost 
investment. Furthermore, a wide range of reforms have been adopted or are envisaged, in particular in the 
areas of the judicial system and labour legislation, albeit. Nevertheless, some barriers remain to be addressed 
in areas such as contract enforcement and judicial procedures.  

Main barriers to investment and priority actions underway 

1. Firms’ access to finance remains wholly dependent on bank lending, which has recovered only slightly in 
2017 (see Section 4.2.4). Banking sector vulnerabilities persist and capital markets remain underdeveloped, 
while  Cypriot  banks  are  not  equipped  to  assess  early-stage  business  risks  and  innovative  projects.  This 
results  in  significant  constraints,  particularly  for  small  and  medium-sized  businesses  SMEs.  Access  to 
alternative financing sources, such as venture capital and equity funding remains limited. More intensive use 
of the new insolvency and foreclosure frameworks, material progress with reforming the system of issuing 
and transferring title deeds, and modernising the legal procedures would support the resolution of NPLs and 
the deleveraging process. 

2.  The  regulatory  and  administrative  burden  remains  high  and  hampers  business  activities  and  investment 
decisions  (see  Section 4.4.3).  Inefficiencies  in  the  public  administration  and  broad  public  sector, 
underdeveloped  digital  public  services  and  a  high  level  of  perceived  corruption  all  constitute  barriers  to 
investment.  Additionally,  low  quality  of  regulations  negatively  weighs  on  competitiveness,  although  steps 
have been taken to address this (e.g. with the introduction of an ‘"SME test"). Inadequate enforcement due 
to lengthy administrative and court proceedings weakens the effectiveness of Cyprus' legislation and overall 
legal certainty.  

48 

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 EnergyCSRLegend: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. SECTORAL POLICIES 

4.5.1.  RESEARCH AND INNOVATION 

Cyprus  remains  a  moderate  innovator  with  a 
focus  on  higher  added  value  activities.  In  2016, 
innovation  performance  declined  by  12.7 % 
compared with that of the EU in 2010. (European 
Commission,  2017e)  The  relative  strengths  of  the 
innovation system  are  the  number  of  international 
scientific  co-publications,  the  percentage  of  the 
population  with  tertiary  education  and  increasing 
trademark  applications.  Relative  weaknesses  are 
limited  public-private  collaboration,  difficulties  in 
the private co-funding of public R&D expenditure, 
low  R&D  expenditure  in  the  public  sector  and 
business  investments.  Cyprus’  services-oriented 
economy,  its  small  market  size  and  geographical 
remoteness  hinder  the  realisation  of  economies  of 
scale.  For  this  reason,  the  government  focuses  on 
higher-value niche production. (Eurostat, 2017) 

Public and private R&D expenditure levels are 
among  the  lowest  in  the  EU.  In  2016,  Cyprus 
reached  its  national  target  of  0.50 %  of  GDP  for 
R&D  expenditures,  however  both  public  and 
private  expenditure  remain  well  below  the  EU 
average. Public expenditure was 0.27 % of GDP in 
2016, as compared with the EU average of 0.70 % 
(2015)  and  the  R&D  expenditure  in  the  business 
sector  was  0.17 %  of  GDP  in  2016  (EU  average: 
1.31 %  in  2015).  The  fact  that  multinational 
companies in Cyprus are mostly present in Cyprus 
for  sales  representation  purposes  and  carry  out 
their  R&I  activities  elsewhere  (headquarters  and 
other countries) is a contributory factor (European 
Commission,  2017h).  The  government  aims  to 
improve  the  quality  of  R&I  expenditure  (rather 
than  raising  the  R&D  intensity  target)  in  its 
the  Smart  Specialisation 
implementation  of 
Strategy  (S3)  with  grants  targeting  specific  S3 
identified areas.  

Increasing  private  R&I  investment  and  the 
innovation  capacity  of  the  business  sector 
remains  a  major  challenge.  Firms’  access  to 
finance for innovative investment depends on bank 
lending,  which  has  been  significantly  reduced  in 
recent  years.  To  remedy  the  situation,  Cyprus 
provides public  grants  to  innovative  companies  to 
support 
the  development  and  marketing  of 
innovative  products  and  services,  and  to  promote 
cooperation between stakeholders. Implementation 
of the schemes has been successful so far and it is 
expected to increase enterprises’ R&I spending of 

enterprises  due  to  the  ‘own  contribution’  rule 
(usually around 30 % of a project’s budget).  

Cyprus’  R&I  governance  structure  is  being 
improved.  The  Council  of  Ministers  acts  as  the 
political decision-making body for R&I, while the 
National  Council  for  Research  and  Innovation 
inactive  since  2014.  The 
(NCRI))  has  been 
government has announced its intention to create a 
Deputy  Ministry  for  Growth,  which  will  be 
responsible  for  R&I  policy-making,  including 
coordination  of  national  stakeholders.  (European 
Commission,  2017e)  The  establishment  has  been 
approved  of  a  National  Academy  of  Sciences, 
Letters  and  Arts  (European  Commission,  2017e) 
and  a  relevant  Law  was  voted  by  the  House  of 
Representatives  in  November  2017  aiming,  inter 
alia  at  providing  policy-makers  with  scientific 
guidance.  

that 

show 

figures 

in  EU  R&I 
Cyprus  participates  actively 
programmes. To date, it has been quite successful 
in  targeting  teaming  actions  in  Horizon  2020, 
aiming  to  establish  centres  of  excellence.  The 
it 
latest  Horizon  2020 
participates  in  328  projects  with  EU  funding  of 
over  EUR  88  million.  (European  Commission, 
2017e)  The  national  2016-2020  European 
for  Cyprus 
Research  Area 
recommends even greater participation in Horizon 
2020  and  a  stronger  evaluation  framework.  This 
might provide scientific employment opportunities 
and enhance Cyprus’ potential to become a node of 
scientific  cooperation  in  the  Mediterranean  and 
to  build  on 
Middle  East.  Cyprus 
constructive 
research 
partnerships 
institutions in these regions.  

roadmap 

between 

intends 

(ERA) 

4.5.2.  ENVIRONMENTAL POLICIES 

Poor  waste  management  performance  remains 
a  major  environmental  concern.  Taking  policy 
measures  to  achieve  the  2020  targets  under  the 
Waste  Framework  Directive  and  meeting  EU 
funding  conditions  remain  a  challenge.  In  the 
meantime, waste generation is increasing.  

Recycling  rates  are  low  and  there  is  still  a 
landfilling.  Cyprus 
strong  dependence  on 
landfills  most  of  its  municipal  waste  (75 %,  as 
compared with the EU-average of 26 %). It missed 
for  diverting  biodegradable 
the  2010 

target 

49 

 
 
4.5. Sectoral policies 

municipal  waste  from  landfills.  The  minimum 
permissible quantity for disposal was exceeded by 
64 %. Recycling accounts for 17 %, including 4 % 
of  composting,  which  is  significantly  below  the 
EU average (45 %).  

Eliminating  illegal  landfilling  and  putting  in 
place  the  necessary  infrastructure  for  waste 
management  remain  a  challenge.  There  are  no 
landfill  taxes  and  limited  incentives  for  producers 
to  take  responsibility  for  their  waste.  Extended 
Producer  Responsibility  or  equivalent  schemes 
cover  only  a  few  waste  streams  and  do  not  cover 
the  full  costs  of  separate  collection  and  recycling 
of  the  main  waste  streams.  Incentive  systems  to 
favour  prevention  and  participation  in  separate 
collection  also  appear  to  be  limited.  Cyprus’ 
transition to circular economy is hampered by the 
lack  of  policies  and  investments  encouraging  a 
shift  from  landfilling  and  implementing  separate 
collection.  An  additional  challenge  is  to  avoid 
creating overcapacity for the treatment of residual 
waste.  

Cyprus’  main  water  management  problem  is 
the  over-abstraction  of  groundwater,  coupled 
with water scarcity. The use of recycled water is 
promoted  for  irrigation  and  the  recharging  of 
aquifers  a good practice that can  mitigate water 
scarcity under the right conditions. Cyprus has also 
put  in  place  a  new  water  pricing  policy.  The  new 
regulations  apply  to  all  sectors.  They  transpose 
certain  requirements  under  the  Water  Framework 
Directive, but it is still early to assess whether the 
new  framework  provides  adequate  incentives  for 
the efficient use of water. Regarding waste waters, 
Cyprus  forecasts  in  its  National  Implementation 
Programme that it will have the necessary capacity 
to  reach  full  compliance  with  the  Urban  Waste 
i.e. 
Water  Treatment  Directive  by  2026, 
significantly 
the 
in 
later 
Accession Treaty.  

than  provided  for 

environment 

rich  natural 

Incompatible  development  activities  endanger 
Cyprus’ 
and 
biodiversity.  Cyprus  is  one  of  the  countries  with 
largest  Natura  2000  network  coverage. 
the 
infrastructure  has 
However, 
developed 
the 
assessments required under European and national 
legislation. This hinders Natura 2000 projects and 
can lead to significant environmental damage, such 
as fragmentation or degradation of these areas and 

in  many  cases 
in  protected  areas  without 

threats 

significant 
species. 
to 
Safeguarding  natural  capital,  especially  under 
Natura 2000, and promoting green tourism remain 
a challenge.  

protected 

4.5.3.  ENERGY AND CLIMATE POLICIES 

sources, 

efficiency 

Cyprus appears on track to meet its greenhouse 
gas  emissions  target  in  2020.  It  adopted  a  low 
carbon  development  strategy  in  2016  and  aims  to 
fulfil 
its  commitments  on  greenhouse  gas 
emissions  by  reducing  its  dependence  on  fossil 
fuels.  This  involves  the  promotion  of  renewable 
energy 
and 
energy 
climate-friendly technologies. While Cyprus is still 
on its planned trajectory for increasing the share of 
renewables 
in  final  energy  consumption,  an 
acceleration  of  renewable  energy  supply  is  likely 
to  be  needed  to  meet  the  2020  target.  The 
economic  recovery  is  leading  to  a  sustained 
increase  in  sales  of  petroleum  products,  which 
might  translate  into  rising  energy  consumption 
and,  consequently,  greenhouse  gas  emissions,  and 
make it harder to reach the mitigation targets. 

electricity  market 

The 
remains  heavily 
dependent  on  imported  oil  products.  Electricity 
is  mostly  produced  by  the  state-owned  EAC, 
which relies on a set of plants using heavy fuel oil 
and  gas  oil.  The  production  of  electricity  from 
renewable energy sources remains below EU 2020 
targets, as capacity build-up was prevented by the 
freeze  on  new  licences  for  independent  power 
producers until early 2017. The opening-up of the 
electricity market is scheduled for mid-2019, while 
from  September  2017,  suppliers  and  generators 
may  trade  electricity  using  bilateral  contracts.  In 
December,  ministerial  decisions  were  taken  to 
ensure  that  in  the  future  the  Transmission  System 
Operator  will  have 
the 
independency  to  operate  the  electricity  market.   
The  authorities  have 
the  desired 
structure  for  introduction  of  natural  gas  into  the 
domestic  electricity  market  by  2020.  They  intend 
to  launch  tenders  for  establishing  the  necessary 
infrastructure  and  the  long-term  importing  of 
natural gas. 

the  capacity  and 

identified 

Gas  exploration  in  Cyprus’  exclusive  economic 
zone  (EEZ)  has  resumed  and  will  intensify. 
Following  the  renewal  of  exploration  licences  for 
blocks  2,  3,  9  and  11  of  the  EEZ  (ENI/KOGAS 

50 

 
4.5. Sectoral policies 

unrest  have  severely  harmed  Cyprus’  competitors 
in  North  Africa  and  the  Middle  East.  This  trend 
has intensified since 2015, diverting tourist flows, 
particularly from Europe, to safer destinations, and 
giving Cyprus a temporary competitive advantage.  

Graph 4.5.1:  Changes in number of tourist arrivals 

Source: World Tourism Organisation 

Cyprus has also made efforts to attract tourists 
by  improving air  connectivity, advertising,  and 
tourism  products.  The  2015 
diversifying 
the  national 
bankruptcy  of  Cyprus  Airways, 
carrier, 
the  air 
in 
incentivised  competition 
transport  market.  Traditional  airlines  increased 
their  participation  and  low-cost  operators  entered 
the  market.  As  part  of  the  economic  adjustment 
programme,  Cyprus  removed  several  restrictions 
on  foreign  operators,  in  particular  as  regards  the 
number  of  airlines 
to  Cyprus. 
combined  with 
access  was 
Improved 
intensified,  more  targeted  advertising.  In  parallel, 
tourism  products  diversified  from  the  traditional 
‘sun  and  beach’  to    include  nautical,  rustic  and 
sport  tourism,  ‘experiences’  such  as  cycling, 
diving,  golf,  wellness,  wine  tours,  and  conference 
hosting. This ongoing strategy has been successful, 
in particular by extending tourist arrivals during to 
the  ‘shoulder  months’  (March-May  and  October). 
Compared  with  European  peers  with  a  similar 
climate, Cyprus scores well in seasonality terms.  

that  can  fly 

air 

The  heavy  reliance  on  two  inbound  markets  is 
one of the main challenges, although efforts are 
being made to broaden the tourist base. The UK 
remains the largest inbound market, accounting for 

and  Total) until  2018,  in April  2017  new  licences 
for blocks 6, 8 and 10 were granted to well-known 
companies  (ExxonMobil,  Qatar  Petroleum,  Eni 
and  Total).  Exploration  drilling  resumed  in  June, 
indicating  that  the  geological  features  of  Cyprus’ 
EEZ are similar to that of the large gas field in the 
neighbouring,  Egyptian  EEZ.  This  can  be 
considered  an  encouraging  sign  for  oil  companies 
currently  present  in  Cyprus,  as  it  might  indicate 
that  more  gas  reserves  are  likely  to  be  found.  As 
negotiations  on  the  commercialisation  of  the 
Aphrodite gas field continue, exploratory drillings 
took place in 2017 and more are expected in 2018, 
which should bring more clarity as to the extent of 
Cyprus’ hydrocarbon reserves. 

Measures  have  not  yet  been  taken  to  ensure 
continued  compliance  with 
the  Industrial 
Emissions  Directive  once  current  derogations 
have  expired.  The  plants  using  heavy  fuel  oil  to 
the 
generate  electricity  must  comply  with 
Directive, but are covered by derogations until the 
end of 2019, and in one case, until 2023. Plans to 
start  importing  liquefied  natural  gas  by  2020, 
might facilitate compliance with the Directive. 

4.5.4.  TOURISM POLICY 

Cyprus  is  experiencing  a  tourism  boom.  In 
2016, the number of visiting tourists rose by 20 %, 
while tourism revenues increased by 13 % of GDP. 
In 2017, visits increased by another 15 % to an all-
time  record  of  3.7  million  tourists.  Tourism 
revenues  grew  by  12 %  y-o-y(53).  It  is  estimated 
that tourism accounted directly for 7 % of Cyprus' 
GDP  and  7  %  of  jobs  in  2016,  while  including 
indirect and induced effects, it accounted for over 
a fifth of GDP and 22 % of jobs (World Travel & 
Tourism Council, 2017). 

External  factors  are  playing  a  major  positive 
role in the current tourism boom. While globally 
the  tourism  industry  has  been  on  the  rise,  Cyprus 
performance  from  2000  up  to  2015  was  rather 
weak.  The  country  lost  its  competitive  advantage, 
as  rising  industry  costs  were  not  matched  by 
its 
improvements 
in  quality,  while  most  of 
competitors,  particularly  Turkey,  engaged 
in 
substantial  upgrades  of  tourism  facilities.  As  of 
2010, terrorist attacks, as well as political and civil 

(53)  Data up to October 2017. 

51 

-200204060801001995-20002001-20052006-20102011-20152015-2016%EgyptTurkeyCyprusTunisiaPortugalMalta 
                                                           
 
4.5. Sectoral policies 

about  a  third  of  all  tourists,  followed  by  Russia, 
currently  accounting  for  about  a  quarter  of  all 
tourists. The few other long-established, but much 
smaller  markets  include  Greece,  Germany  and 
Sweden (about 5% each). Efforts have been made 
to  exploit  other  markets,  resulting  in  more  short-
distance visitors, notably from Israel and Lebanon, 
with number of Israeli visitors growing particularly 
fast (76% in 2017) and becoming the third biggest 
inbound  market.  Thanks  to  new  connections  to 
European  regional  airports,  substantial  increase  in 
2017  was  recorded  in  visits  by  German  (52%), 
Swedes (19%),  Polish (33%),  Austrian  (33%)  and 
other  tourists.  Efforts  to  diversify  the  tourist  base 
are expected to continue, with some progress made 
in  providing  visas,  e.g.  for  Chinese  and  Iranian 
nationals. 

The  challenges  to further  expansion of  tourism 
stem 
from  accommodation  capacity  and 
growing  environmental  impact.  The  official 
accommodation sector reached full capacity in the 
peak  months  of  2016.  The  further  increase  in 
arrivals in 2017 suggests the active use of informal 
accommodation.  Supply is responding  to  demand, 
and  various  hotel  units  were  either  under 
construction  or  renovation  in  2017,  which  is 
expected  to  increase  official  bed  capacity  by  3%. 

of 

pose 

questions 

Further  sizable  projects  are  planned  to  start  in 
2018.  However,  the  rapid  hotel  expansion  and 
buoyant  residential  construction  in  prime  tourist 
environmental 
areas 
sustainability. This is particularly true with respect 
to air pollution, and water and waste management, 
which pose critical challenges (see Section 4.5.2). 
The  overall  sustainability  of  the  tourism  sector 
implementation  of  adequate 
depends  on 
environmental 
new 
investments.  

assessment 

impact 

the 

in 

A  new  national  tourism  strategy  is  under 
consideration.  Following  the  public  consultation 
on a study conducted by the external consultants, a 
proposal  on  National  Tourism  Strategy  was 
submitted  to  the  Council  of  Ministers,  with  the 
summary  and  the  main  elements  of  the  new 
strategy.  The  strategy  aims  at  making  Cyprus  a 
premium  tourism  destination,  while  emphasizing 
the  sustainability  aspects  of  tourism  growth.  The 
proposal was approved on 17th January 2018.  

52 

 
ANNEX A  

OVERVIEW TABLE 

Commitments 

Country – specific recommendations (CSRs)   

CSR  1:  Pursue  its  fiscal  policy  in  line  with  the 
requirements  of  the  preventive  arm  of  the  Stability 
and  Growth  Pact,  which  entails  remaining  at  its 
medium-term  budgetary  objective  in  2018.  Use 
windfall  gains  to  accelerate  the  reduction  of  the 
general  government  debt  ratio.  By  the  end  of  2017, 
adopt  key  legislative  reforms  aiming  to  improve 
efficiency  in  the  public  sector,  in  particular  on  the 
functioning  of  public  administration  governance  of 
state-owned  entities 
(MIP- 
relevant)  

local  governments. 

Summary assessment (54) 

Cyprus  has  made  limited  progress  in 
addressing  CSR  1, 
in  particular 
concerning  the  public  administration 
reform,  with  the  adoption  of  legislation 
facilitating  staff  mobility  between  the 
public  administration  and  state-owned 
entities.  No  progress  was  made 
regarding  the  reforms  of  state-owned 
entities and local governments.  

The  compliance  assessment  with  the 
Stability  and  Growth  Pact  will  be 
included  in  Spring  when  final  data  for 
2017 will be available. 

Pursue its fiscal policy in line with the requirements 
of  the  preventive  arm  of  the  Stability  and  Growth 
Pact,  which  entails  remaining  at  its  medium-term 
budgetary objective in 2018.  

The  compliance  assessment  with  the 
Stability  and  Growth  Pact  will  be 
included  in  Spring  when  final  data  for 
2017 will be available.  

Use windfall gains to accelerate the reduction of the 
general government debt ratio.  

The  compliance  assessment  with  the 
Stability  and  Growth  Pact  will  be 
included  in  Spring  when  final  data  for 

(54)  The following categories are used to assess progress in implementing the 2017 country-specific recommendations (CSRs): 

No progress: The Member State has not credibly announced nor adopted any measures to address the CSR. This category 
covers a number of typical situations, to be interpreted on a case-by-case basis taking into account country-specific conditions. 
They include the following: 

 

 
 

no legal, administrative, or budgetary measures have been announced in the national reform programme, in any 
other official communication to the national Parliament/relevant parliamentary committees or the European 
Commission, publicly (e.g. in a press statement or on the government's website);  
no non-legislative acts have been presented by the governing or legislative body;   
the Member State has taken initial steps in addressing the CSR, such as commissioning a study or setting up a study 
group to analyse possible measures to be taken (unless the CSR explicitly asks for orientations or exploratory 
actions). However, it has not proposed any clearly-specified measure(s) to address the CSR. 

Limited progress: The Member State has: 
 
 

announced certain measures but these address the CSR only to a limited extent; and/or 
presented legislative acts in the governing or legislative body but these have not been adopted yet and substantial further, 
non-legislative work is needed before the CSR is implemented;  
presented non-legislative acts, but has not followed these up with the implementation needed to address the CSR. 

 

 
 

Some progress: The Member State has adopted measures: 
that partly address the CSR; and/or  
that address the CSR, but a fair amount of work is still needed to address the CSR fully as only a few of the 
measures have been implemented. For instance, a measure or measures have been adopted by the national 
Parliament or by ministerial decision, but no implementing decisions are in place. 

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

them have been implemented. 

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

53 

 
 
                                                           
 
 
 
 
 
By  the  end  of  2017,  adopt  key  legislative  reforms 
aiming to improve efficiency in the public sector, in 
particular on the functioning of public administration,  

(…) governance of state-owned entities  

(…) and local governments  

A. Overview Table 

2017 will be available.  

the 

improvement  of 

some  progress 
There  has  been 
the 
regarding 
efficiency  of  the  public  sector  with  the 
adoption  of  legislation  facilitating  staff 
mobility between the public service and 
state-owned  entities.  Some  measures 
were  also  undertaken  promoting  e-
governance.  However,  key  legislation 
remains to be adopted.  

There has been no progress with regard 
to 
the  governance  of  state-owned 
entities.  The  draft  law  is  still  pending 
of 
adoption 
Representatives.  

House 

the 

by 

reform  of 

There  has  been  no  progress  related  to 
local  governments. 
the 
awaiting 
Relevant 
adoption 
of 
Representatives.  

legislation 
the 
by 

is 
House 

CSR 2: Increase the efficiency of the judicial system 
by  modernising  civil  procedures, 
implementing 
appropriate  information  systems  and  increasing  the 
specialisation of courts. Take additional  measures to 
eliminate  impediments  to  the  full  implementation  of 
the  insolvency  and  foreclosure  frameworks,  and  to 
ensure reliable and swift systems for the issuance of 
title  deeds  and  the  transfer  of  immovable  property 
rights.  

Cyprus  has  made  Limited  Progress  in 
addressing  CSR  2.  Regarding 
the 
efficiency  of  the  judicial  system,  some 
measures have been announced, but key 
reforms are at preliminary stage. Efforts 
are on-going on eliminating obstacles to 
fully  implement  the  insolvency  and 
no 
but 
frameworks, 
foreclosure 
recorded. 
significant  progress  was 
Administrative  steps  were 
to 
taken 
address  the  issuance  of  title  deeds  and 
transfer  of  immovable  property  rights, 
but  more  comprehensive  measures 
remain to be adopted.   

Increase  the  efficiency  of  the  judicial  system  by 
modernising 
implementing 
appropriate  information  systems  and  increasing  the 
specialisation of courts.  

procedures, 

civil 

54 

still 

Limited  Progress  in  modernising  the 
civil  procedures.  A  legislation  filtering 
appeals  on  interlocutory  decisions  is  in 
place.  However,  a  series  of  announced 
be 
measures 
implemented,  such  as  setting  up  a 
management information system for the 
courts  (e-justice  system),  establishing  a 
specialised commercial court, amending 
the civil procedure law to strengthen the 
legal framework for the enforcement of 

remain 

to 

 
A. Overview Table 

judgements, 
incentivising 
mediation  and  creating  a 
department in the Supreme Court.  

judicial 
training 

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.  

CSR  3:  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-
the 
performing 
supervision  of  insurance  companies  and  pension 
funds.  

loans.  Integrate  and  strengthen 

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.  

to 

in 
implement 

eliminating 
Limited  progress 
barriers 
the 
fully 
insolvency and foreclosure frameworks. 
Rules  of  Court  have  been  adopted  for 
personal  insolvency procedures, but the 
amendment  of  the  bankruptcy  rules  on 
legal  entities  is  still  under  preparation. 
the 
An 
insolvency and foreclosure frameworks, 
IT 
covering 
requirements, 
the 
results are reviewed by the authorities.  

and 
is  completed  and 

independent 

staffing 

review 

also 

of 

Limited  Progress  on  ensuring  reliable 
and swift systems for issuing title deeds 
and  transferring  of  immovable  property 
rights.  Administrative 
simplification 
measures  to  facilitate  the  issuance  of 
title  deeds  are  on-going  and  a  policy 
response  related  to  the  licencing  and 
under 
permitting 
procedures 
preparation  based  on 
findings  of 
external  experts.  A  draft  law  on  the 
creation of a new system for the transfer 
of property rights is under preparation.  

is 

Cyprus  has  made  Limited  Progress  in 
addressing CSR 3. Some measures were 
undertaken  such  as  setting  up  a  task 
force  on  non-performing  loan  in  the 
Central Bank. Despite the small decline 
in  non-performing  loans,  the  level  of 
stock is still very high.    

Limited  Progress  was  made.  The 
Central  Bank  of  Cyprus  in  July  2017 
set-up  an  NPL  task  force  to  develop  a 
national  strategy  to  reduce  NPLs  and 
the  authorities  are  evaluating  various 
options for a comprehensive solution to 
the  NPL  problem,  including  a  new 
targeting framework creation.  

Create  the  conditions  for  a  functional  secondary  Limited  Progress  was  made  by  banks 
joint 

the  creation  of 

announcing 

55 

 
A. Overview Table 

market for non-performing loans.  

to  manage 

ventures  with  specialised  foreign  debt 
servicers 
their  NPL 
portfolios,  which  could  facilitate  NPL 
sales  in  the  future.  Recently  Hellenic 
bank  has  sold  a  loan  package  of  145 
mln 
legal 
framework  for 
the  securitisation  of 
loans is still pending.  

euros.  However, 

the 

Integrate and strengthen the supervision of insurance 
companies and pension funds.  

Limited Progress was made as relevant 
legislation is still under preparation.  

CSR  4:  Accelerate  the  implementation  of  the  action 
plan  for  growth,  focusing  in  particular  on  fast-
tracking  strategic  investments  and  improving  access 
to  finance,  and,  by  the  end  of  2017,  resume  the 
implementation  of 
the  privatisation  plan.  Take 
decisive  steps  towards  the  ownership  unbundling  of 
the Electricity Authority of Cyprus and, in particular, 
functional  and  accounting 
proceed  with 
unbundling by the end of 2017.  

the 

Cyprus  has  made  Limited  Progress  in 
addressing  CSR  4.  Limited  progress 
was  recorded  in  the  implementation  of 
the  action  plan  for  growth  and  no 
progress  was  made  with  regard  to  the 
privatisation plan. 

Accelerate the implementation of the action plan for 
in  particular  on  fast-tracking 
growth,  focusing 
strategic 
to 
finance,  

improving  access 

investments  and 

Some  Progress  was  made 
in 
for 
the  action  plan 
implementing 
growth. A series of measures stemming 
from the action plan are gradually being 
implemented.  The  legal  framework  to 
scale 
facilitate 
attract 
investments was submitted to the House 
of  Representatives  for  adoption.  Some 
initiatives  were  undertaken  by 
the 
authorities to improve access to finance, 
but still remain at a preliminary stage.  

large 

and 

(…)  and,  by 
implementation of the privatisation plan.  

the  end  of  2017, 

resume 

the 

Limited Progress has been achieved in 
pursuing the privatisation plan. Only the 
operations of the port of Limassol were 
transferred  to  a  private  consortium, 
while  the  privatisation  of  the  port  of 
Larnaca is under way. An agreement to 
sell the Greek subsidiary of CYTA was 
reached.  A  series  of  measures  were 
announced  but  still  are  at  preliminary 
stage.  

steps 

Take  decisive 
the  ownership 
unbundling  of  the  Electricity  Authority  of  Cyprus 
and,  in  particular,  proceed  with  the  functional  and 
accounting unbundling by the end of 2017.  

towards 

Limited Progress. Some new decisions 
were taken at ministerial level to ensure 
the 
greater 
Transmission  System  Operator  Cyprus, 
but many important steps still need to be 

independence 

of 

56 

 
CSR  5:  Speed  up  reforms  aimed  at  increasing  the 
services  and 
capacity  of  public  employment 
labour  market 
improving 
the  quality  of  active 
policies  delivery.  Complete 
the 
education  system  to  improve  its  labour  market 
teachers’ 
relevance  and  performance, 
evaluation. By the end of 2017, adopt legislation for 
a hospital reform and universal healthcare coverage.  

the  reform  of 

including 

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 
and 
performance, including teachers’ evaluation.  

labour  market 

relevance 

its 

By  the  end  of  2017,  adopt  legislation  for  a  hospital 
reform and universal healthcare coverage.  

A. Overview Table 

taken.  

There  has  been  some  progress  overall 
in  addressing  CSR  5,  in  particular  with 
the adoption of legislation establishing a 
universal National Health System.  

the 

some  progress 
There  has  been 
regarding  the  capacity  of  the  public 
employment  services  with  the  initiation 
of 
additional 
recruitment  of 
counsellors,  which  will  also  facilitate 
the active labour market policies. A web 
platform  to  facilitate  recruitment  of 
personnel  by  employers  was  launched 
and  a  project  for  the  use  of  private 
employment  services  by  unemployed  is 
being implemented.  

Limited  Progress.  Some  measures  are 
being  implemented  in  relation  to  the 
vocational  education  training  system. 
The new teacher appointing system is in 
place;  however,  no  progress  has  been 
made regarding the evaluation system of 
teachers.  

Substantial  Progress.  The  legislation 
for  the  creation  of  a  national  health 
system  with  universal  coverage  and  the 
autonomisation  of  public  hospitals  was 
legislation  and 
adopted.  Secondary 
implementing steps are under way.  

Europe 2020 (national targets and progress) 

Target 

Summary assessment  

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

In  2016  the  employment  rate  (20-64 
years)  increased  to  68.7  %  below  the 
lower bound set in the national target. 
The employment rate is increasing, but 
remains  below  the  pre-crisis  period 
level,  when  Cyprus  was  already 
fulfilling its national target. 

57 

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

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

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

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

A. Overview Table 

Cyprus  has  reached  its  national  target 
with regard to R&D intensity 0.5 % of 
GDP in 2016. Cyprus does not plan to 
further increase the annual expenditure 
on 
and 
innovation  until  2020,  but  rather  to 
focus on the quality of spending. 

development 

research, 

to 

the 

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

With  a  renewable  energy  share  of  9.4 
%  in  2015  (55),  Cyprus  is  on  track  to 
reach  the  target  for  2020.  However, 
since  the  trajectory  is  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.  

inland 

primary 

Gross 
energy 
consumption  was  reduced  during  the 
recent  economic  recession,  from  2.5 
Mtoe  in  2012  to  2.2  Mtoe  in  2015. 
National  data  show  that  the  energy 
consumption  has  recently  started  to 
pick-up  in  line  with  the  sustained 
poses 
economic 
growth,  which 
the 
in 
challenges 
target 
reaching 
without 
measures. 
additional 
Furthermore,  over  90  %  of  Cyprus's 
energy  consumption  continues  to  be 
covered  by 
imported  oil  and  oil 
products.  

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

reached 

the 
Cyprus  has  already 
Europe 2020 national target as regards 
early  school  leaving  7.6  %  in  2016. 
However, in 2016 early school leaving 
rate  grew  by  2.4  pps  compared  to 
2015.  Among  students  with  migrant 
background  early  school  leaving  is 

(55)  Renewable energy shares for 2015 are approximations and not official data, reflecting the available data (04.10.2016). See Öko-

Institut (2016). 

58 

 
                                                           
A. Overview Table 

markedly higher at 18.2 %.   

Cyprus  surpassed  its  national  target 
and  it  has  one  of  the  highest  tertiary 
education  attainment  rates  in  the  EU, 
53.4  %,  in  2016  as  compared  to  39.1 
% 
However, 
average. 
unemployment  of  tertiary  education 
graduates 
skills  mismatches 
and 
continue to be a challenge. 

EU 

it 

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 
to  27.7  % 
2016 
(corresponding  to  10  000  less  people 
at-risk-of-poverty  or  social  exclusion 
than in 2015). Based on these figures, 
the  national  target  for  2020  appears 
distant. 

increased 

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

Target for reducing the population at risk of poverty or 
social  exclusion  in  number  of  persons:  Reduce  the 
number of people at risk of poverty or social inclusion 
by  27  000  persons  or  decrease  to  19.3  %  of  the 
population. (base year 2008) 

59 

 
ANNEX B  

MACROECONOMIC IMBALANCE PROCEDURE SCOREBOARD 

Table B.1: 

The MIP scoreboard for Cyprus (AMR 2018) 

Flags:b:Break in series. e:Estimated. p:Provisional.           
1) This table provides data as published under the Alert Mechanism Report 2018, which reports data as of 24 Oct 2017. Please 
note that figures reported in this table may therefore differ from more recent data elsewhere in this document. 2) Figures 
highlighted are those falling outside the threshold established in the European Commission's Alert Mechanism Report. 
Source: European Commission 2017, Statistical Annex to the Alert Mechanism Report 2018, SWD(2017) 661. 

60 

Thresholds201120122013201420152016Current account balance, % of GDP 3 year average-4%/6%-7.7 -7.1 -5.0 -5.1 -3.6 -3.6 Net international investment position% of GDP-35%-129.9 -129.1 -138.7 -147.0 -145.0 -127.8 Real effective exchange rate - 42 trading partners, HICP deflator3 year % change±5% (EA) ±11% (Non-EA)-3.0 -5.9 -0.8 -1.7 -6.1 -6.5 Export market share - % of world exports5 year % change-6%-11.4e-21.7e-14.9 -23.8 -11.9 -3.0 Nominal unit labour cost index (2010=100)3 year % change9% (EA) 12% (Non-EA)9.4 3.2 -2.1 -7.6 -10.6 -6.2pHouse price index (2015=100), deflated 1 year % change6%-4.5p-5.3p-4.1p-1.3p0.3bp1.6 Private sector credit flow, consolidated% of GDP14%13.0 16.5 -13.3 -0.3 4.1 10.2pPrivate sector debt, consolidated% of GDP133%321.6 328.1 340.1 352.5 353.5 344.6pGeneral government gross debt% of GDP60%65.7 79.7 102.6 107.5 107.5 107.1 Unemployment rate3 year average10%6.5 8.7 11.9 14.6 15.7 14.7 Total financial sector liabilities, non-consolidated1 year % change16.5%-6.1 6.3 -15.3 -3.7 11.1 0.7 Activity rate - % of total population aged 15-643 year change in pp-0.2 pp-0.1 0.5b0.0 0.8 0.4 -0.2 Long-term unemployment rate - % of active population aged 15-743 year change in pp0.5 pp1.1 3.0 4.8 6.1 3.2 -0.3 Youth unemployment rate - % of active population aged 15-243 year change in pp2 pp13.4 13.9 22.3 13.6 5.1 -9.8 External imbalances and competitivenessInternal imbalancesEmployment indicators 
 
 
 
 
 
ANNEX C  

STANDARD TABLES 

Table C.1: 

Financial market indicators 

(1) Latest data Q3 2017. Includes not only banks but all monetary financial institutions excluding central banks. 
(2) Latest data Q2 2017. 
(3) As per ECB definition of gross non-performing debt instruments. The aggregate NPL ratio, which covers all loan and 
advances, may be misleading for Cyprus due to the large exposures of domestic and foreign banks to central banks 
(representing 14% of gross loans) and other financial institutions (10% of gross loans). For Cyprus the NPL ratio for the private 
sector, comprising only exposures to non-financial corporations and households is more appropriate indicator see Section 4.2. 
(4) Quarterly values are not annualised. 
* Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators) 

61 

201220132014201520162017Total assets of the banking sector (% of GDP)(1)657.4497.7517.7513.0477.6425.1Share of assets of the five largest banks (% of total assets)62.664.163.467.565.7-Foreign ownership of banking system (% of total assets)(2)30.133.935.219.221.619.7Financial soundness indicators:2)              - non-performing loans (% of total loans)(3)18.736.235.634.733.831.4              - capital adequacy ratio (%)7.313.515.316.616.816.4              - return on equity (%)(4)-100.8-37.9-7.1-7.71.7-8.5Bank loans to the private sector (year-on-year % change)(1)4.2-9.4-4.23.6-8.33.8Lending for house purchase (year-on-year % change)(1)0.3-6.8-2.8-3.0-1.0-0.6Loan to deposit ratio(1)119.3152.3152.1152.0120.5114.1Central Bank liquidity as % of liabilities--12.46.91.31.4Private debt (% of GDP)328.1340.1352.5353.5344.6-Gross external debt (% of GDP)(2) - public------    - private------Long-term interest rate spread versus Bund (basis points)*550.5493.0483.7404.1368.3239.9Credit default swap spreads for sovereign securities (5-year)*1196.2943.9423.1330.6262.5180.0 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Headline Social Scoreboard indicators 

† The Social Scoreboard includes 14 headline indicators, of which 12 are currently used to compare Member States 
performance. The indicators "participants in active labour market policies per 100 persons wanting to work" and 
"compensation of employees per hour worked (in EUR)" are not used due to technical concerns by Member States. Possible 
alternatives will be discussed in the relevant Committees. 
(1) People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from 
severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI).       
(2) Unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within two weeks.       
(3) Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2018.       
(4) Reduction in percentage of the risk of poverty rate, due to social transfers (calculated comparing at-risk-of poverty rates 
before social transfers with those after transfers; pensions are not considered as social transfers in the calculation).       
(5) Average of first three quarters of 2017 for the employment rate and gender employment gap. 
Source: Eurostat 

62 

201220132014201520162017 5Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)11.49.16.85.27.6:Gender employment gap (pps)11.310.47.78.39.79.9Income inequality, measured as quintile share ratio (S80/S20)4.74.95.45.24.9:At-risk-of-poverty or social exclusion rate1 (AROPE)27.127.827.428.927.7:Young people neither in employment nor in education and training (% of population aged 15-24)16.018.717.015.316.0:Dynamic labour markets and fair working conditions†Employment rate (20-64 years)70.267.267.667.968.770.4Unemployment rate2 (15-74 years)11.915.916.115.013.011.3Gross disposable income of households in real terms per capita3 (Index 2008=100) ::77.076.9::Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction437.437.041.536.235.6:Children aged less than 3 years in formal childcare26.025.025.520.824.8:Self-reported unmet need for medical care3.54.44.71.50.6:Individuals who have basic or above basic overall digital skills (% of population aged 16-74):::43.043.050.0 
 
 
 
 
C. Standard Tables 

Table C.3: 

Labour market and education indicators 

* Non-scoreboard indicator       
(1) Long-term unemployed are people who have been unemployed for at least 12 months.       
(2) Difference between the average gross hourly earnings of male paid employees and of female paid employees as a 
percentage of average gross hourly earnings of male paid employees. It is defined as "unadjusted", as it does not correct for 
the distribution of individual characteristics (and thus gives an overall picture of gender inequalities in terms of pay). All 
employees working in firms with ten or more employees, without restrictions for age and hours worked, are included.       
(3) PISA (OECD) results for low achievement in mathematics for 15 year-olds.       
(4) Impact of socio-economic and cultural status on PISA (OECD) scores. Values for 2012 and 2015 refer respectively to 
mathematics and science.       
(5) Average of first three quarters of 2017, unless for the youth unemployment rate (annual figure). 
Source: Eurostat, OECD 

63 

Labour market indicators201220132014201520162017 5Activity rate (15-64)73.573.674.373.973.4:Employment in current job by durationFrom 0 to 11 months15.715.718.518.119.7:From 12 to 23 months10.18.57.69.59.7:From 24 to 59 months19.117.915.714.913.7:60 months or over55.157.958.257.556.9:Employment growth* (% change from previous year)-3.2-5.9-1.81.53.13.3Employment rate of women(% of female population aged 20-64)64.862.263.964.064.165.7Employment rate of men (% of male population aged 20-64)76.172.671.672.373.875.6Employment rate of older workers* (% of population aged 55-64)50.749.646.948.552.254.5Part-time employment* (% of total employment, aged 15-64)9.711.913.513.013.412.4Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)15.117.519.018.416.515.5Transition rate from temporary to permanent employment(3-year average)23.022.020.421.6::Long-term unemployment rate1 (% of labour force)3.66.17.76.85.84.8Youth unemployment rate (% active population aged 15-24)27.738.936.032.829.126.1Gender gap in part-time employment6.77.26.55.54.36.4Gender pay gap2 (in undadjusted form)15.614.914.214.0::Education and training indicators201220132014201520162017Adult participation in learning(% of people aged 25-64 participating in education and  training)7.77.27.17.56.9:Underachievement in education342.0::42.6::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)49.947.852.554.553.4:Variation in performance explained by students' socio-economic status4:::9.5:: 
 
 
 
 
C. Standard Tables 

Table C.4: 

Social inclusion and health indicators 

(1) At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national 
equivalised median income.  
(2) Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) 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. 
(3) Percentage of total population living in overcrowded dwellings and exhibiting housing deprivation. 
(4) People living in households with very low work intensity: proportion of people aged 0-59 living in households where the 
adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months. 
(5) Ratio of the median individual gross pensions of people aged 65-74 relative to the median individual gross earnings of 
people aged 50-59. 
(6) Fixed broadband take up (33%), mobile broadband take up (22%), speed (33%) and affordability (11%), from the Digital 
Scoreboard. 
Source: Eurostat, OECD 

64 

201220132014201520162017Expenditure on social protection benefits* (% of GDP)Sickness/healthcare4.54.54.44.7::Disability0.70.70.70.7::Old age and survivors11.112.011.811.7::Family/children1.51.41.41.3::Unemployment1.62.01.51.2::Housing0.60.40.30.4::Social exclusion n.e.c.1.21.11.11.3::Total21.222.121.321.4::of which: means-tested benefits2.92.72.62.8::General government expenditure by function (% of GDP, COFOG)Social protection12.913.413.713.613.8:Health3.03.12.62.62.6:Education6.36.86.06.06.0:Out-of-pocket expenditure on healthcare (% of total health expenditure)44.043.144.843.9::Children at risk of poverty or social exclusion (% of people aged 0-17)*27.527.724.728.929.6:At-risk-of-poverty  rate1 (% of total population)14.715.314.416.216.1:In-work at-risk-of-poverty rate (% of persons employed)7.98.97.89.18.2:Severe material deprivation rate2  (% of total population)15.016.115.315.413.6:Severe housing deprivation rate3, by tenure statusOwner, with mortgage or loan0.01.11.50.02.0:Tenant, rent at market price1.92.63.01.31.6:Proportion of people living in low work intensity households4 (% of people aged 0-59)6.57.99.710.910.6:Poverty thresholds, expressed in national currency at constant prices*89588148736370727301:Healthy life years (at the age of 65)Females7.78.78.87.3::Males8.89.510.48.4::Aggregate replacement ratio for pensions5 (at the age of 65)0.40.40.40.40.4:Connectivity dimension of the Digital Economy and Society Inedex (DESI)6::37.740.448.254.6GINI coefficient before taxes and transfers*42.943.844.847.447.1:GINI coefficient after taxes and transfers*31.032.434.833.632.1: 
 
 
 
 
 
 
C. Standard Tables 

Table C.5: 

Product market performance and policy indicators 

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

65 

Performance Indicators2010201120122013201420152016Labour productivity (real, per person employed, year-on-year % change)Labour productivity in Industry4.24-10.75-5.092.794.394.513.01Labour productivity in Construction-2.97-1.47-6.436.58-0.54-1.994.21Labour productivity in Market Services2.932.120.98-0.49-2.260.75-0.95Unit labour costs (ULC) (whole economy, year-on-year % change)ULC in Industry3.4212.5911.61-19.22-1.19-3.57-3.84ULC in Construction4.652.893.10-3.91-3.250.97-4.28ULC in Market Services1.531.470.80-2.85-0.83-1.380.42Business Environment2010201120122013201420152016Time needed to enforce contracts(1) (days)735.0735.0735.0735.01100.01100.01100.0Time needed to start a business(1) (days)8.08.08.08.08.08.06.0Outcome of applications by SMEs for bank loans(2)na0.70na1.411.341.760.76Research and innovation2010201120122013201420152016R&D intensity0.450.460.440.480.510.480.50General government expenditure on education as % of GDP6.706.506.106.505.705.70naPersons with tertiary education and/or employed in science and technology as % of total employment42454748504949Population having completed tertiary education(3)32343535363638Young people with upper secondary level education(4)86888890929491Trade balance of high technology products as % of GDP-3.03-1.40-1.00-0.23-1.24-0.25naProduct and service markets and competition200320082013OECD product market regulation (PMR)(5), overallnana1.65OECD PMR(5), retailnana1.67OECD PMR(5), professional servicesnana3.11OECD PMR(5), network industries(6)nana2.64 
 
 
 
 
 
 
C. Standard Tables 

Table C.6:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2010 prices) 
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR) 
          Carbon intensity: greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR) 
          Resource intensity: domestic material consumption (in kg) divided by GDP (in EUR) 
          Waste intensity: waste (in kg) divided by GDP (in EUR) 
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP   
Weighting of energy in HICP: the proportion of 'energy' items in the consumption basket used for the construction of the HICP 
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % 
change) 
Real unit energy cost: real energy costs as % of total value added for the economy 
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2010 EUR)  
Real unit energy costs for manufacturing industry excluding refining : real costs as % of value added for  manufacturing 
sectors 
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP 
Electricity and gas prices for medium-sized industrial users: consumption band 500–20 00MWh and 10 000–100 000 GJ; figures 
excl. VAT. 
Recycling rate of municipal waste: ratio of recycled and composted municipal 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 GHG emissions 
(excl land use, land use change and forestry) as reported by Member States to the European Environment Agency. 
Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value 
added (in 2010 EUR) 
Transport carbon intensity: GHG emissions in transport activity divided by gross value added of the transport sector 
Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of 
international bunker fuels 
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 covering natural gas, total petrol products, nuclear heat, renewable 
energies and solid fuels 
* European Commission and European Environment Agency 
Source: European Commission and European Environment Agency (Share of GHG emissions covered by ETS); European 
Commission (Environmental taxes over labour taxes and GDP); Eurostat (all other indicators) 

66 

Green growth performance201120122013201420152016MacroeconomicEnergy intensity kgoe / €0.140.130.120.130.130.13Carbon intensity kg / €0.480.470.460.480.47-Resource intensity (reciprocal of resource productivity)kg / €1.170.890.680.690.650.70Waste intensity kg / €-0.11-0.12--Energy balance of trade % GDP-6.8-7.5-6.3-5.9-4.1-3.5Weighting of energy in HICP%8.739.429.539.338.357.46Difference between energy price change and inflation %14.017.9-7.0-8.8-17.5-13.5Real unit of energy cost% of value added10.712.611.811.6--Ratio of environmental taxes to labour taxesratio0.240.230.260.280.26-Environmental taxes% GDP2.82.62.73.13.03.0Sectoral Industry energy intensity kgoe / € 0.170.160.180.220.190.19Real unit energy cost for manufacturing industry excl. refining% of value added26.728.826.726.4--Share of energy-intensive industries in the economy% GDP4.153.733.673.563.75-Electricity prices for medium-sized industrial users€ / kWh0.190.230.200.180.140.12Gas prices for medium-sized industrial users€ / kWh-----0.00Public R&D for energy % GDP0.000.000.000.000.000.00Public R&D for environmental protection% GDP0.000.000.000.000.000.00Municipal waste recycling rate%12.613.614.616.817.917.2Share of GHG emissions covered by ETS*%49.850.350.653.250.152.6Transport energy intensitykgoe / €0.810.780.680.730.770.81Transport carbon intensitykg / €1.731.671.471.581.68-Security of energy supplyEnergy import dependency%92.497.096.393.297.796.2Aggregated supplier concentration indexHHI0.00.00.00.00.0-Diversification of energy mixHHI0.910.900.880.880.870.87 
 
 
 
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