Recommendation for a COUNCIL RECOMMENDATION on the 2018 National Reform Programme of Cyprus and delivering a Council opinion on the 2018 Stability Programme of Cyprus
Date: 2018-05-23
Institutions: European Commission, Secretariat-General
Subjects: Cyprus, administrative reform, budgetary equilibrium, credit policy, economic policy, economic reform, educational reform, employment policy, judicial reform, stability programme

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   EUROPEAN COMMISSION  Brussels, 23.5.2018 COM(2018) 412 final  Recommendation for a COUNCIL RECOMMENDATION on the 2018 National Reform Programme of Cyprus  and delivering a Council opinion on the 2018 Stability Programme of Cyprus  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2018 National Reform Programme of Cyprus 

and delivering a Council opinion on the 2018 Stability Programme of Cyprus 

THE COUNCIL OF THE EUROPEAN UNION, 

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

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

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

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

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

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On 22 November 2017, the Commission adopted the Annual Growth Survey, marking 
the start of the 2018 European Semester of economic policy coordination. It took due 
account  of  the  European  Pillar  of  Social  Rights,  proclaimed  by  the  European 
Parliament, the Council and the Commission on 17 November 2017. The priorities of 
the  Annual  Growth  Survey  were  endorsed  by  the  European  Council  on  22  March 
2018.  On  22  November  2017,  on  the  basis  of  Regulation  (EU)  No  1176/2011,  the 
Commission also adopted the Alert Mechanism Report, in which it identified Cyprus 
as one of the Member States for which an in-depth review would be carried out. On 
the  same  day,  the  Commission  also  adopted  a  recommendation  for  a  Council 
recommendation on the economic policy of the euro area, which was endorsed by the 

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OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
COM (2018) 412 final.  
P8_TA(2018)0077 and P8_TA(2018)0078. 

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(2) 

(3) 

(4) 

(5) 

(6) 

European  Council  on  22  March  2018.  On  14  May  2018,  the  Council  adopted  the 
recommendation  on  the  economic  policy  of  the  euro  area  (‘recommendation  for  the 
euro area’). 

As a Member State whose currency is the euro and in view of the close interlinkages 
between  the  economies  in  the  economic  and  monetary  union,  Cyprus  should  ensure 
the full and timely implementation of the recommendation on the economic policy for 
the euro area, as reflected in recommendations (1), (3) and (5) below.  
The  2018  country  report  for  Cyprus5  was  published  on  7  March  2018.  It  assessed 
Cyprus’ progress in addressing the country-specific recommendations adopted by the 
Council  on  11  July  2017,  the  follow-up  given  to  the  recommendations  adopted  in 
previous years and Cyprus' progress towards its national Europe 2020 targets. It also 
included  an  in-depth  review  under  Article  5  of  Regulation  (EU)  No  1176/2011,  the 
results  of  which  were  also  published  on  7  March  20186.  The  Commission’s  analysis 
leads it to conclude that Cyprus is experiencing excessive macroeconomic imbalances. 
In particular, it is essential that the country tackles the large stock of imbalances in the 
form  of  private,  public  and  external  debt  overhang,  and  the  high  level  of  non-
performing loans. 

Cyprus submitted its 2018 National Reform Programme on 19 April 2018 and its 2018 
Stability Programme on 30 April 2018. To take account of their interlinkages, the two 
programmes have been assessed at the same time. 

Relevant country-specific recommendations have been addressed in the programming 
of  the  European  Structural  and  Investment  Funds  for  the  2014-2020  period.  As 
foreseen in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament 
and  of  the  Council7,  where  it  is  necessary  to  support  the  implementation  of  relevant 
Council  recommendations,  the  Commission  may  request  a  Member  State  to  review 
and propose amendments to its Partnership Agreement and relevant programmes. The 
Commission has provided further details on how it would make use of that provision 
in  guidelines  on  the  application  of  the  measures  linking  the  effectiveness  of  the 
European Structural and Investment Funds to sound economic governance8.  

Cyprus is currently in the preventive arm of the Stability and Growth Pact and subject 
to  the  debt  rule.  In  its  2018  Stability  Programme,  the  government  plans  a  budgetary 
surplus in nominal terms of 1.7 % of GDP in 2018 and slightly below 2.0 % of GDP 
over the programme period. The medium-term budgetary objective, set at a balanced 
budgetary position in structural terms, is planned to be reached over 2018-2021. After 
having decreased to around 97.5 % of GDP in 2017, the general government debt-to-
GDP ratio is expected to increase to 105.6 % in 2018 and to steadily decline thereafter, 
reaching  88 %  by  2021,  according 
the  2018  Stability  Programme.  The 
to 
macroeconomic  scenario  underpinning  those  budgetary  projections  is  plausible.  The 
risks  associated  with  the  macroeconomic  assumptions  presented  in  the  Stability 

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SWD(2018) 211 final. 
COM(2018) 120 final. 
Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 
laying  down  common  provisions  on  the  European  Regional  Development  Fund,  the  European  Social 
Fund, the  Cohesion Fund, the European Agricultural Fund for Rural Development and the European 
Maritime  and  Fisheries  Fund  and  laying  down  general  provisions  on  the  European  Regional 
Development  Fund,  the  European  Social  Fund,  the  Cohesion  Fund  and  the  European  Maritime  and 
Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320). 
COM(2014) 494 final. 

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(7) 

(8) 

(9) 

Programme  are  to  the  downside,  mainly  linked  to  the  high  stock  of  non-performing 
loans in the financial sector. 

On  11  July  2017,  the  Council  recommended  Cyprus  to  remain  at  the  medium-term 
budgetary objective in 2018. This is consistent with a maximum nominal growth rate 
of  net  primary  government  expenditure9  of  1.9 %  in  2018,  corresponding  to  an 
allowed  deterioration  in  the  structural  balance  by  0.4 %  of  GDP.  Based  on  the 
Commission  2018  spring  forecast,  the  structural  balance  is  projected  to  register  a 
surplus of 0.8 % of GDP in 2018 and 0.5 % of GDP in 2019, above the medium-term 
budgetary  objective.  Cyprus  is  forecast  to  comply  with  the  transitional  debt  rule  in 
2018  and  the  debt  rule  2019.  Overall,  the  Council  is  of  the  opinion  that  Cyprus  is 
projected to comply with the provisions of the Stability and Growth Pact in 2018 and 
2019.  At  the  same  time,  expenditure  developments  should  be  monitored  carefully  in 
the  short  and  the  medium  term,  especially  in  light  of  possible  future  risks  to  the 
robustness of revenues.  

Despite recent efforts on e-government services, regulatory quality and staff mobility, 
inefficiency in the public administration remains a challenge and has an impact on the 
business  environment.  Key  legislative  proposals  aiming  to  address  the  issue  remain 
pending.  These  include  draft  laws  on  the  reform  of  the  public  administration  and  of 
local  governments.  Shortcomings  in  the  governance  framework  for  state-owned 
entities  might  facilitate  the  build-up  of  public  contingent  liabilities  and  hinder 
investment capacity in key utilities, such as telecoms and energy. The containment of 
the  public  sector  wage  bill  has  been  a  significant  factor  in  fiscal  consolidation  in 
Cyprus.  Yet,  the  current  collective  agreement  limiting  the  growth  of  public  sector 
wages expires in 2018 and a more permanent solution is still lacking.  

A  national  anti-corruption  strategy and  action  plan  were  adopted  in  December  2017. 
The existing anti-corruption body remains inadequately resourced, but the government 
is  considering  the  establishment  of  a  new  independent  agency.  Various  legislative 
initiatives,  such  as  draft  laws  on  whistle-blower  protection,  lobbying  and  asset 
declarations,  are  currently  under  parliamentary  scrutiny  and,  if  adopted,  would  also 
help to strengthen the national anti-corruption framework. 

(10)  As  indicated  in  the  2018  euro  area  recommendation,  the  fight  against  aggressive  tax 
planning  strategies  is  essential  to  impede  distortions  of  competition  between  firms, 
provide fair treatment of taxpayers and safeguard public finances. Spill-over effects of 
taxpayers'  aggressive  planning  strategies  between  Member  States  call  for  a 
coordinated action of national policies to complement EU legislation. The high levels 
of dividend and interest payments (relative to GDP) continue to suggest that Cyprus' 
tax rules are used by companies that engage in aggressive tax planning. The absence of 
withholding  taxes  on  outbound  (i.e.  from  EU  residents  to  third  country  residents) 
dividend, interest and, in many cases, royalty payments by Cyprus-based companies to 
third country residents may lead to those payments escaping tax altogether, if they are 
also not subject to tax in the recipient jurisdiction. The absence of such taxes, together 
with  the  corporate  tax  residency  rules,  may  continue  to  facilitate  aggressive  tax 
planning.  While  notional  interest  deduction  regimes  help  to  reduce  the  debt  equity 

9 

Net  primary  government  expenditure  comprises  total  government  expenditure  excluding  interest 
expenditure,  expenditure  on  Union  programmes  fully  matched  by  Union  funds  revenue  and  non-
discretionary  changes  in  unemployment  benefit  expenditure.  Nationally  financed  gross  fixed  capital 
formation  is  smoothed  over  a  4-year  period.  Discretionary  revenue  measures  or  revenue  increases 
mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted 
out. 

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bias, they can also be used for tax avoidance purposes, if there are no effective anti-
abuse rules. The Commission takes note of recent positive steps announced or adopted 
(i.e.  the  announced  review  of  corporate  tax  residency  rules,  planned  changes  on 
transfer pricing provisions). Based on recent exchanges, the Commission will continue 
its constructive dialogue to fight against taxpayers aggressive planning strategies. 

(11) 

Inefficiencies  in  the  justice  system  continue  to  affect  contract  enforcement  and  the 
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 non-performing loans. 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 for judges. 

(12)  Use of the new insolvency and foreclosure frameworks remains limited,   undermining 
efforts to reduce non-performing loans. A stakeholders' working group was set up to 
review the implementation and performance of the frameworks. Some administrative 
measures  have  been  taken  to  reduce  the  backlog  in  the  issuance  of  title  deeds. 
However, backlogs remain high and a structural solution to address the inadequacies 
of the property transaction system (i.e. the issuance and transfer of title deeds) is still 
lacking.  

(13)  The high level of non-performing loans remains the key vulnerability of the banking 
sector and affects credit supply. Banks still face impediments in enforcing their claims 
on defaulted borrowers and weak repayment discipline remains problematic.  In 2017, 
non-performing  loans  decreased,  albeit  unevenly  across  banks,  as  a  result  of  debt 
restructuring through write-offs and debt-to-asset swaps. Uncertainties remain over the 
sustainability of banks reduction plans, as loan re-defaults and re-restructuring remain 
high and banks’ direct exposure to the property market increases. These factors point 
to  the need for swift implementation of a  more comprehensive strategy to  accelerate 
the  clean-up  of  banks’  balance  sheets,  having  regard  to  social  consequences  for 
vulnerable  groups  and  carefully  designed  incentives  to  strengthen  repayment 
discipline.  As  part  of  this  strategy,  legislative  amendments  to  allow  for  the  effective 
enforcement of claims and to facilitate the sale of loans appear necessary, including on 
borrower  protection  and  the  introduction  of  electronic  auctions.  In  addition,  the 
governance and administrative capacity of insurance and pension-fund supervision remain 
weak.  The  government  intends  to  table  legislative  proposals  to  address  this  issue  in  the 
course of 2018. 

(14) 

Implementation of the action plan for growth has led to some progress in the areas of 
strategic 
investments,  entrepreneurship  and  better  regulation.  However,  some 
important reforms have stalled, notably as regards the granting of licences authorising 
investment projects. Access to finance has improved, thanks to some improvements in 
collateral requirements, but it remains a key issue, notably for small and medium-sized 
enterprises.  Financial  support  measures  are  based  mainly  on  grants.  Alternative 
sources of finance such as venture capital, equity funding and crowdfunding, remain 
marginal for Cypriot businesses. Privatisation efforts, aimed at attracting productivity-
enhancing foreign investments, are in many cases on hold and only a few privatisation 
projects are gradually advancing (e.g. the Larnaca port). 

(15)  Employment is on the rise and unemployment is falling fast, although it remains high 
among  young  people  and  the  long-term  unemployed.  Efforts  to  improve  the 
administrative  capacity  of  the  public  employment  services  continue.  However, 
providing  services  to  employers,  securing  customer  categorisation,  personalised 

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guidance  and  activation,  including  for  recipients  of  guaranteed  minimum  income, 
remain a challenge. The proportion of young people (aged 15-24) not in employment, 
education,  or  training  is  still  one  of  the  highest  in  the  EU.  Outreach  measures  and 
timely, tailor-made assistance for young people are limited, as confirmed by their low 
numbers in relevant activation schemes. 

(16)  The  modernisation  of  the  education  sector  has  advanced  but  important  challenges 
remain. Recent positive developments include a thorough revision of school curricula 
and the implementation of a new appointment system for teachers. Cyprus’ education 
spending is above the EU average, demonstrating a strong commitment to education, 
training  and  life-long  learning.  However,  educational  achievements  remain  poor  and 
early  school  leaving,  while  well  below  the  EU  average,  has  increased  significantly. 
Participation  in  vocational  education  and  training  is  low,  the  reform  of  the  teacher 
evaluation system is still pending and a high proportion of tertiary graduates continue 
to work in occupations that do not necessarily require an academic degree. 

(17)  Cyprus  has  made  substantial  progress  on  healthcare  by  adopting  legislation  to 
establish the new National Health System. The new system seeks to improve access, 
introduce universal health coverage, reduce the high level of out-of-pocket payments 
and  increase  the  efficiency  of  care  delivery  in  the  public  sector.  Before  the  system 
becomes  fully  functional  in  2020,  there  are  major  implementation  challenges  and 
investment needs. Efforts should continue towards safeguarding against possible cost 
overruns, modernising and improving the efficiency of healthcare providers, including 
primary  healthcare,  introducing  e-Health  and  setting  up  a  National  Medicines 
Organisation.  The  level  of  long-term  care  is  low  and  remains  a  challenge  given  the 
ageing population. 

(18) 

(19) 

(20) 

In  the  context  of  the  2018  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Cyprus’  economic  policy  and  published  it  in  the  2018 
country  report.  It  has  also  assessed  the  2018  Stability  Programme  and  the  2018 
National  Reform  Programme  and  the  follow-up  given  to  the  recommendations 
addressed  to  Cyprus  in  previous  years.  It  has  taken  into  account  not  only  their 
relevance  for  sustainable  fiscal  and  socioeconomic  policy  in  Cyprus  but  also  their 
compliance with Union rules and guidance, given the need to strengthen the Union’s 
overall  economic  governance  by  providing  Union-level  input  into  future  national 
decisions.  

In  the  light  of  this  assessment,  the  Council  has  examined  the  2018  Stability 
Programme and is of the opinion that Cyprus is expected to comply with the Stability 
and Growth Pact. 

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

HEREBY RECOMMENDS that Cyprus take action in 2018 and 2019 to: 

1. 

2. 

Adopt key legislative reforms to improve efficiency in the public sector, in particular 
as regards the functioning of the public administration and the governance of state-
owned entities and local governments. 

Step  up  efforts  to  improve  the  efficiency  of  the  judicial  system  by  revising  civil 
procedures, increasing the specialisation of courts and setting up a fully operational 
e-justice  system.  Take  measures  to  fully  operationalise  the  insolvency  and 

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3. 

4. 

5. 

foreclosure frameworks and ensure reliable and swift systems for the issuance of title 
deeds and the transfer of immovable property rights. 

Accelerate the reduction of non-performing loans by implementing a comprehensive 
strategy, including legislative amendments allowing for the effective enforcement of 
claims and facilitating the sale of loans. Integrate and strengthen the supervision of 
insurance companies and pension funds. 

Prioritise  the  implementation  of  key  elements  of  the  action  plan  for  growth,  in 
particular  fast-tracking  strategic  investments,  and  take  additional  measures  to 
improve  access  to  finance  for  small  and  medium-sized  enterprises.  Improve  the 
performance of state-owned enterprises including by resuming the implementation of 
privatisation projects. 

Complete  reforms  aimed  at  increasing  the  capacity  and  effectiveness  of  the  public 
employment services and reinforce outreach and activation support for young people 
who  are  not  in  employment  education  or  training.  Complete  the  reform  of  the 
education  and  training  system,  including  teacher  evaluation  and  actions  to  increase 
the capacity of vocational education and training. Take measures to  ensure that the 
National Health System becomes fully functional in 2020, as planned. 

Done at Brussels, 

For the Council 
The President 

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