COMMISSION STAFF WORKING DOCUMENT Country Report Cyprus 2019 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 EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 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: 2019-02-27
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, 27.2.2019  SWD(2019) 1012 final  COMMISSION STAFF WORKING DOCUMENT Country Report Cyprus 2019      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 EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 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(2019) 150 final}  
 
 
CONTENTS 

Executive summary 

1.  Economic situation and outlook 

2.  Progress with country-specific recommendations 

3.  Summary of the main findings from the MIP 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.   Competitiveness Reforms and Investment 

Annex A: Overview Table 

Annex B: Commission Debt Sustainability Analysis and fiscal risks 

Annex C: Standard Tables 

3 

7 

14 

19 

25 

25 

32 

41 

48 

58 

64 

65 

Annex D: Investment Guidance on Cohesion Policy Funding 2021-2027 for Cyprus 

71 

References 

LIST OF TABLES 

Table 1.1: 

Key economic and financial indicators – Cyprus 

Table 2.1: 

Assessment of the 2018 country-specific recommendations implementation 

Table 3.1: 

Macroeconomic imbalance procedure assessment matrix - Cyprus 

Table 4.2.1: 

Financial soundness indicators for domestic and foreign banks 

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 

76 

13 

16 

23 

36 

65 

66 

67 

68 

69 

70 

1 

 
 
 
 
LIST OF GRAPHS 

Graph 1.1: 

Real GDP growth in Cyprus and the EU 

Graph 1.2: 

Residences price developments by region 

Graph 1.3: 

Labour underutilisation (% of the active population, 15-74) 

Graph 1.4: 

Real effective exchange rates 

Graph 1.5: 

Current account developments by special purpose entities status 

Graph 1.6: 

Developments of the net international investment position 

Graph 1.7:  General government budget balance and gross debt 

Graph 2.1: 

Cyprus - Level of implementation today of 2011-2018 country-specific 

recommendations 

Graph 4.1.1:  Government debt projections 

Graph 4.1.2:  Value-added tax revenue growth and its main sector contributors 

Graph 4.1.3:  Main receivers from and contributors to government redistribution by decile (average 

2005-2016) 

Graph 4.2.1:  Private sector indebtedness 

Graph 4.2.2:  Non-financial corporations debt decomposition 

Graph 4.2.3:  Bank loans to non-financial corporations by sector 

Graph 4.2.4:  Changes in private debt-to-GDP ratio 

Graph 4.3.1:  Key labour market developments 

Graph 4.3.2:  Ratio of the monthly minimum wage over the average wage (2014) 

Graph 4.3.3:  Collective bargaining coverage by sector and working hours (2014) 

Graph 4.3.4:  Active labour market policies participants (lhs) and expenditure (rhs) (2016) 

Graph 4.3.5: 

The proportion of people at risk of poverty and social exclusion 

Graph 4.3.6: 

Impact of the guaranteed minimum income scheme on the at-risk-of-poverty rate 

and the relative median at-risk-of-poverty gap in 2018 (% change) 

Graph 4.4.1:  Labour productivity 

Graph 4.4.2:  Labour productivity by sector - period averages 

Graph 4.4.3: 

Investment by category 

LIST OF BOXES 

Box 2.1: Technical support by the Structural Reform Support Service in Cyprus 

Box 2.2: EU funds and programmes contribute to addressing structural challenges and to fostering 

growth and competitiveness in Cyprus 

Box 4.2.1: The Cyprus Cooperative Bank exit from the banking sector 

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

Box 4.4.1: Investment challenges and reforms in Cyprus 

7 

8 

9 

10 

11 

11 

12 

14 

25 

29 

30 

37 

37 

38 

38 

41 

41 

42 

42 

44 

44 

48 

48 

49 

17 

18 

33 

43 

51 

2 

 
 
 
 
 
EXECUTIVE SUMMARY 

imbalances 

Cyprus’  robust  economic  recovery  has  created 
favourable  conditions 
to  correct  excessive 
macroeconomic  imbalances  and  carry  out  key 
structural reforms to sustain growth in the long 
to  have  significant 
term.  Cyprus  continues 
macroeconomic 
in  several  areas, 
namely high stocks of private, public and  external 
debt  and  non-performing  loans.  The  economy  is 
growing  rapidly,  creating  the  right  conditions  to 
repay  the  debt.  The  economic  upswing  is  also  an 
opportunity  to  reform  key  areas,  such  as  the 
business environment, the public sector, the justice 
system, education and the labour market to attract 
investments  that  increase  productivity,  diversify 
the  economy  and  help  to  sustain  robust  and 
inclusive growth in the long term.(1) 

the 

long-term 

Economic growth has continued to be solid and 
the  labour  market  has  markedly  improved. 
However, 
sustainability  of 
Cyprus’ growth model is a key challenge. Strong 
growth in 2018, projected at 3.8 %, was supported 
by  both  domestic  and  external  demand.  The 
economy  is  expected  to  continue  growing  by 
around  3.3  %  in  2019.  Employment  is  rising  and 
unemployment  rate  fell  to  8.4 %  in  the  third 
quarter of  2018, nearly half of its peak during the 
crisis.  Inflation  remains  low.  Despite  this  positive 
picture, growth remains concentrated in only a few 
sectors  of  the  economy.  This,  together  with  the 
previously  mentioned 
the 
Cypriot  economy  vulnerable,  particularly    to  the 
external environment. 

imbalances,  makes 

Cyprus’s public finances improved significantly 
in recent years. The general government headline 
balance  turned  from  a  deficit  of  5.1%  of  GDP  in 
2013  to  a  surplus  of  1.8%  in  2017,  supported  by 

(1)  This  report  assesses  Cyprus’  economy  in  light  of  the 
European Commission’s Annual Growth Survey published 
on 21 November 2018. In the survey, the Commission calls 
on  EU  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  —  delivering  high-quality  investment, 
efforts  on  productivity  growth, 
reforms 
focusing 
inclusiveness  and 
institutional  quality  and  ensuring 
macroeconomic  stability  and  sound public  finance.  At  the 
same 
the  Alert 
the  Commission  published 
Mechanism  Report  (AMR)  that  initiated  the  eighth  round 
of  the  macroeconomic  imbalance  procedure.  The  AMR 
found  that Cyprus  warranted an  in-depth  review,  which  is 
presented in this report. 

time, 

favourable  macroeconomic  conditions  and  fiscal 
consolidation. The headline balance is expected to 
remain  in  surplus  in  the  medium  term.  However, 
there are risks to the fiscal outlook.  

in 

environment, 

Investment 
energy, 
digitalisation,  workers’  skills  and  innovation  is 
crucial  for  increasing  productivity  and  making 
Cyprus’  growth  model  less  vulnerable  to  the 
external  environment.  Investment  has  recently 
recovered,  but  it  remains  concentrated  in  less 
productive  sectors.  Cyprus  needs  to  significantly 
improve  its  waste  management  system  and  the 
circular  economy.  It  can  also  make  much  better 
use of its renewable energy sources— particularly 
solar— and  address  current  energy  inefficiencies. 
Investing in the digital economy and in improving 
workers’  digital  skills  is  essential  for  bolstering 
productivity. To ensure  that growth benefits all of 
society,  more  investment  is  needed  in  vocational 
education  and  training,  adult  learning,  childcare 
and  health.  In  addition,  more 
investment  in 
research  and  development  (R&D)  would  increase 
the  currently  low  innovative  capacity  of  the 
economy.  Annex  D  identifies  key  priorities  for 
support  by  the  European  Regional  Development 
Fund,  the  European  Social  Fund  Plus  and  the 
Cohesion Fund for 2021-2027 in Cyprus, building 
on the analysis of investment needs and challenges 
outlined in this report. 

Overall,  Cyprus  has  made  some  progress  in 
country-specific 
the 
addressing 
recommendations.  

2018 

It has made substantial progress:   

  on  non-performing 

loans,  as  work  on 
strategy, 
implementing 
including 
legal 
frameworks on insolvency, foreclosure and the 
sale of loans, has advanced.  

a 
adopting 

comprehensive 

strengthened 

It has made some progress:  

  on  access  to  finance  for  small  and  medium-
sized  enterprises,  as  financial 
instruments 
supported  by  EU  funds  are  expected  to  be 
launched soon; and 

  on  health,  as  work  for  the  first  phase  of  the 
National  Health  System  implementation  have 

3 

 
 
                                                           
 
 
Executive summary 

Cyprus  has  made  some  progress  in  reaching  its 
national targets under the Europe 2020 strategy. It 
met its target for research and development (R&D) 
spending.  However,  the  energy  consumption  has 
increased alongside the economic recovery and the 
proportion of renewable energy in the total energy 
mix has only moderately improved. In the absence 
this  affects  Cyprus’ 
of  additional  measures, 
capacity to reach its greenhouse gas emissions and 
renewable  energy  targets  and  improve  its  energy 
efficiency.  Cyprus  exceeded  its  targets  on  higher 
education attainment and on reducing early school 
leaving. It also made some progress on increasing 
the employment rate. However, although there was 
some improvement in reducing poverty and social 
exclusion, the target seems to be beyond reach. 

this  group, 

the  proportion 

Cyprus faces several challenges with regard to a 
number  of  indicators  of  the  Social  Scoreboard 
supporting the European Pillar of Social Rights. 
The  proportion  of  young  people  who  are  not  in 
employment,  education  or  training  remains  high. 
Within 
that  has 
completed  post-secondary  education  (almost  one 
in three) is higher than the rest of the EU. Outreach 
measures  and  prompt  tailor-made  assistance  for 
young people are limited, as confirmed by the low 
number  of  young  people  in  relevant  employment 
and  training  schemes.  The  incidence  of  early 
school  leaving  is  rising.  The  level  of  the  gross 
domestic  household  income  is  still  low  compared 
to that of 2008. 

findings  of 

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

in-depth 

the 

  Cyprus has taken major steps to reduce non-
performing loans, but  using all  the  effective 
ensure 
tools  available  would 
further 
progress.  Non-performing 
loans  decreased 
markedly  in  2018  mainly  due  to  the  sale  and 
wind  down  of  the  Cyprus  Cooperative  Bank, 
which  moved  a  significant  portfolio  of  bad 
assets  from  the  banking  system  to  a  separate 
the  authorities 
public  entity.  In  addition, 
improved 
foreclosure 
frameworks  and  the  sale  of  loans  law,  and 
adopted  a 
law. 
securitisation  of 
Implementing  the  laws  decisively  is  therefore 
the next step. The ESTIA scheme, designed to 
address non-performing loans, collateralised by 
primary  residences,  is  to  be  implemented  in 

insolvency  and 

loans 

the 

advanced,  e.g.  the  reform  of  the  outpatient 
services has begun.  

Cyprus has made limited progress: 

 

reforming 

in 
the  public  sector,  as  key 
legislation  for  the  public  administration,  the 
local government and the governance of State-
owned enterprises has been delayed;  

  on  privatisation,  as  only  a  few  privatisation 
projects are under way and progressing slowly; 

 

 

 

in  the  justice  system,  as  the  specialisation  of 
courts  is  only  at  an  initial  stage  and,  although 
some efforts are being made to revise the civil 
procedures  and  introduce  e-justice,  progress  is 
slow;  

in  setting  up  a  reliable  system  to  issue  and 
transfer immovable property (e.g. buildings and 
land) rights, as  there  is  still a  large backlog  in 
cases of buyers who paid the full amount for a 
property  and  have  yet  to  receive  their  legal 
ownership documents. The reform of the  local 
government,  which 
the 
procedures, has not yet been adopted;  

simplify 

could 

in strengthening the effectiveness of the public 
employment  services  and  increasing  outreach 
to young people who are not in jobs, education 
or  training,  as    the  effectiveness  of  the  public 
employment  services  is  still  weak,  despite  the 
increase  in  staff,  the  evaluation  of  the  active 
labour  market  policies  is  still  pending  and  
implementation of the action plan to get young 
people  into  employment,  education  or  training 
is slow; and   

  on education, as a concrete proposal to improve 
the  evaluation  system  of  teachers  has  not  yet 
been announced.  

Cyprus has made no progress:  

 

 

in integrating and strengthening the supervision 
of  insurance  companies  and  pension  funds,  as  
relevant laws are still being prepared; and 

for 
reducing  burdensome  procedures 
in 
strategic investors, as the relevant legislation is 
still to be adopted.  

4 

 
 
2019.  The  scheme  has  raised  concerns  about 
moral  hazard  and  fairness.  The  prompt  use  of 
all  available  tools  together  with  an  efficient 
judicial  system  might  mitigate  some  of  these 
risks,  and  ultimately  strengthen  the  payment 
culture.  The  scheme’s  medium  and  long-term 
effects remain to be seen.      

loans  and 

  The banking sector returned to profitability 
in the first half of 2018, but the high stock of 
non-performing 
interest 
low 
margins  continue 
to  weigh  on  banks’ 
performance.  Banks hold large stocks of non-
performing 
significant 
loans,  even  after 
disposals.  Net  interest  margins  continue  to 
decline,  while  the  operating  cost-to-income 
ratio almost doubled in the first half of 2018.  

  Private  sector  debt  remains  very  high, 
though  it  is  decreasing.  Private  debt-to-GDP 
is    going  down,  but  it  remains  among  the 
highest  in  the  EU.  The  decrease  in  2018  was 
due  to  the  strong  GDP  expansion,  inflation, 
cash repayments,  write-offs of non-performing 
loans  and  debt-to-assets  swaps.  The  improved 
legal 
and 
for 
foreclosure and the ESTIA scheme should help 
to reduce the private sector debt.  

frameworks 

insolvency 

  Public debt  is  set to increase in 2018 due  to 
the  public  support  measures  for  the  sale  of 
to 
the  Cyprus  Cooperative  Bank,  but 
the 
to 
steadily  decline  after  that.  Due 
government’s  support  in  the  sale  and  orderly 
winding  down  of  the  Cyprus  Cooperative 
Bank, public debt is estimated to reach 105 % 
of  GDP  in  2018,  partly  reversing  the  decrease 
of  2017.  Public  debt  is  projected  to  steadily 
decline  in  2019-2020,  due  to  the  expected 
continuation  of  strong  performance  in  public 
finances.  However, 
the 
to 
sustainability 
latest 
Commission’s 
analysis, risks remain. In particular, public debt 
is among the highest in the EU, making Cyprus 
vulnerable  to  potential  financial  or  economic 
shocks. These risks are somewhat mitigated by 
the  fairly  contained  medium-term  financing 
needs,  while the country  has  recently regained 
investment grade rating for Cyprus’ debt.   

according 
fiscal 

  The  net  international  investment  position 
remains  very  negative.  It  decreased  in  2018, 

Executive summary 

but  remains  largely  negative  at  105.5  %  of 
GDP in the third quarter of 2018. Excluding the  
external  debt  of  special  purpose  entities,  the 
negative  net  international  investment  position 
is much smaller. In the third quarter it stood at -
30.4 % of GDP, compared to the benchmark of 
-35  %  of  GDP.  This  nevertheless  highlights 
Cyprus’  dependency  on  foreign  financing 
sources  and 
in 
its  vulnerability 
international  financial  market  sentiment.  The 
current  account  deficit  is  large  and  warrants 
monitoring.  

to  shifts 

  Potential  growth  is  expected  to  increase 
somewhat over the  medium term supported 
by  recovering 
investment.  The  projected 
expansion  of  the  labour  force  and  increased 
investment  are  expected 
to  raise  growth 
potential.  However,  focus  on  investment  in 
construction  and  ship  registration,  difficulty  to 
the 
access 
the  business  environment 
shortcomings 
could 
and 
long-term 
productivity.   

finance 
in 
hamper 

domestically 

growth 

and 

  Persisting inefficiencies in the justice system 
weaken  the  enforcement  of claims.  Outdated 
civil procedure rules, lengthy court proceedings 
and  weak  enforcement  of  claims  impede  the 
business  environment  and  deter  banks  from 
using  the  available  legal  tools  to  reduce  non-
performing loans and ultimately strengthen the 
country.  A 
in 
payment 
comprehensive reform of the judicial system is 
under  way.  It  focuses  on  the  most  urgent 
issues, 
and 
digitalisation  of  courts,  the  clearance  of  the 
large  backlog  and  the  lifelong  training  of 
judges. 

specialisation 

namely 

culture 

the 

the 

  The  housing  market  continues  its  recovery 
supported  by  foreign  demand.  Residential 
property prices increased for the third year in a 
row,  albeit  moderately,  and  housing  sales 
continued  to  increase  significantly,  supported 
by the residence and citizenship by investment 
schemes.  The  recovery  in  the  housing  market 
could  reduce  private  debt,  but  the  existing 
inefficiencies  in  the  system  of  issuing  and 
transferring title deeds complicates foreclosure 
procedures  and  deters 
liquidation  of 
collaterals.  

the 

5 

 
 
Executive summary 

A  number  of  other  key  economic  issues  analysed 
in  this  report  point  to  particular  challenges  to  the 
Cypriot economy, namely: 

particular  by 
internationally agreed initiatives. 

implementing  European  and 

  Inefficiencies 

in 

The 

services. 

the  public  sector  are 
harming the business environment. Although 
planned reforms to modernise and improve  the 
efficiency of the public administration have not 
yet started, efforts are being made to expand e-
government 
governance 
framework  for  State-owned  enterprises  is  still 
not  equipped  to  improve  their  performance. 
This may lead to build-up of public contingent 
liabilities and hinder investment in key utilities 
such  as  telecoms  and  energy.  Cyprus  needs  to 
significantly  simplify 
for 
obtaining  permits  for  strategic  investments. 
that  could 
The 
improve services for local residents has not yet 
started.  Corruption  is  perceived  as  a  problem 
by both businesses and citizens and the pace of 
slow.  The 
anti-corruption 
independence  of  prosecution  and  the  capacity 
of  law  enforcement  to  carry  out  corruption 
investigations remain weak.   

local  government  reform 

the  procedures 

reforms 

is 

scope 

bringing 

  Employment  is  rising  and  unemployment  is 
falling,  but  much  more  can  be  done  to 
support labour and social recovery. There is 
public 
for 
significant 
employment  services  in  line  with  best  EU 
practices.  They  could 
(i) 
strengthen  their  outreach;  (ii)  improve  their 
administrative  efficiency  and  personalised 
guidance  and  (iii)  improve  participation  in 
active  labour  market  policies,  focusing  on 
vulnerable groups in particular.   

for  example: 

  Reforms in the education and health sectors 
are  under  way,  but  challenges  remain.  In 
education,  the  relatively  high  public  spending 
is not reflected in observed outcomes. Progress 
on crucial education reforms such as improving 
is 
teachers’  appointments  and  evaluation 
uneven. 
poor 
Skills  mismatches 
educational  achievements  continue  to  restrict 
potential  growth  and  relatively  few  people 
participate  in  adult  learning  and  vocational 
education  and  training.  Putting  in  place  the 
universal national health insurance system is an 
opportunity to increase efficiency by reforming 
public  hospitals,  developing  e-health  and 
focusing more on health promotion.  

and 

  Weaknesses 

in 

remain 

enforcing 
environmental  and  climate  regulations.  The 
country’s weak environmental performance is a 
major  concern.  Waste  and  water  management 
is  inefficient  and  the  transition  towards  a 
circular  economy  has  barely  begun.  Cyprus  is 
also  lagging  behind  on  renewable  energy 
generation  and  it  is  still  heavily  dependent  on 
fossil fuels. 

  Cyprus’  tax  rules  appear  to  be  used  in 
aggressive tax planning structures, but some 
steps are being taken to limit such practices. 
Some elements that may facilitate tax planning 
include  the  absence  of  withholding  taxes  on 
interests, royalties and dividends, the corporate 
tax  residence  rules,  or  the  residence  and 
citizenship  by  investment  schemes.  However, 
Cyprus has taken steps to amend aspects of its 
tax  system  to  curb  aggressive  tax  planning,  in 

6 

 
 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

the 

of  ships 
in  Cyprus.  In  2018,  consumption 
increasingly  became  a  major  driver  for  growth. 
Upbeat  sentiment  and  rapidly  improving  situation 
encouraged  private 
in 
consumption,  which  is  expected  to  continue  to 
perform  strongly.  Public  consumption  has  also 
risen,  partly  due  to  the  increase  in  wages  and 
hiring by the government.  

labour  market 

influenced  by 

Net  exports  weigh  negatively  on  growth.  Net 
exports were a drag on economy in 2017, as rising 
exports  were nevertheless outweighed by imports. 
In  early  2018,  exports  have  markedly  risen, 
temporarily  reversing  the  trend,  but  this  strong 
performance  was  heavily 
the 
sizeable  ship  de-registration  (which  statistically 
increased  the  exports  of  goods).  Apart  from  this 
one-off improvement, the net exports are expected 
to  further  weaken.  The  tourism  sector,  which  has 
been  the  main  driver  of  rising  service  sector 
exports  in  recent  years,  now  faces  headwinds: 
stronger  competition  from  neighbouring  countries 
(where safety concerns are abating) and the  lower 
purchasing  power  of  tourists  visiting  Cyprus 
(predominantly British and Russian) as a result of 
their  currency  depreciations.  In  parallel,  imports 
are  projected  to  rise  in  line  with  the  increasing 
domestic demand.  

Growth is expected to remain strong and above 
potential  in  the  short  to  medium  term.  It  is 
projected to reach 3.8 % in 2018 and then slow to 
3.3 % in 2019 and to 2.7 % in 2020. This implies 
that  growth  is  set  to  remain  above  the  potential 
throughout  this  period,  as  the  latest  estimates 
project Cyprus’ potential growth at around 2 %.  

Cyprus’  key  challenges  mostly  relate  the  long-
term  sustainability  of  its  growth  model.  The 
country’s fast growth over recent years appears to 
have  been  largely  determined  by  the  performance 
of  tourism-linked  sectors,  the  revival  of  the 
construction  sector  and  the  sectors  linked  to  the 
setting  and  servicing  of  foreign  companies  under 
the special purpose entities’ regime. Tourism, amid 
certain  market 
increasing 

competition 

and 

For  more  information  on  SPEs  and  their  impact  on 
statistics and the real economy see European Commission, 
2018a. 

GDP growth 

the 

from 

it  rebounds 

Cyprus  continues  to  enjoy  strong  cyclical 
sharp 
growth  as 
contraction experienced during the crisis.  After 
2  years  of  remarkable  growth, 
the  Cypriot 
economy  continued  to  expand  solidly  in  2018. 
Real GDP over the  first three quarters of the  year 
grew  at  around  4 %  on  annual  terms,  one  of  the 
strongest growth rates in the euro area. In 2018, it 
is expected to have surpassed pre-crisis peak level 
(see Graph 1.1).  

Graph 1.1: 

Real GDP growth in Cyprus and the EU 

Source: European Commission 

Growth  is  increasingly  driven  by  investment 
and  private  demand.  In  2016-2017,  investment 
was  the  main  contributor  to  growth,  funded  by 
hefty  inflows  of  foreign  capital.  These  flows 
financed 
residential 
construction 
investments  by  special 
purpose  entities  (SPEs) (3),  including  registration 

infrastructure, 

(2)  and 

tourism 

(2)  The latter  was particularly supported by  the residence and 
citizenship  by  investment  schemes  with  its  mandatory 
acquisition of high value residence. 

(3)  Legal  entities  registered  and  tax  resident  in  Cyprus  with 
few employees and/or no production, which are controlled 
by  non-resident  entities.  These  are  widely  used  to  register 
ships  in  Cyprus.  As  shipping  activities  usually  take  place 
offshore,  shipping  companies  have  an 
in 
structuring these activities through special purpose entities 
in favourable tax regimes such as Cyprus. Shipping-related 
transactions  introduce  bias  in  Cyprus’  economic  statistics 
by  significantly  affecting  investment,  imports  and  exports 
statistics. They have, however, only  limited impact on the 
GDP through the leasing services provided by ship-owning 
entities  whose  economic  owners  are  residents  of  Cyprus. 

interest 

7 

-6-4-2024605060708091011121314151617181920CYEUy-o-y % change forecast 
 
 
 
                                                           
                                                                                   
saturation (4), is expected to consolidate gains and 
plateau.  The  new  tourism  strategy  is  in  place  and 
will influence the future growth of the sector. The 
construction  sector prospects are  very  good in the 
short  term,  but  its  heavy  reliance  on  foreign 
funding increases vulnerabilities. Potential changes 
in the international corporate tax framework could 
challenge Cyprus’ role as a business service hub.  

Inflation 

Inflation  remains  very  low.    Following  a  0.7 % 
rise in the Harmonised Indices of Consumer Prices 
(HICP)  indicator  in  2017,  inflation  stayed  equally 
low  in  2018  at  0.8 %,  although  there  was  a 
substantial  variation  throughout  the  year,  ranging 
from  deflation  in  the  first  quarter  to  nearly  2 % 
inflation in the last quarter. Oil prices, transmitted 
with  a  lag  to  energy  prices,  and  the  unprocessed 
food  prices  accounted  for  this  volatility.  Core 
inflation  in  Cyprus  continued  to  fluctuate  around 
zero,  as  falling  prices  in  non-energy  industrial 
goods were partly offset by the modest increase in 
the  price  of  services.  Inflation  is  expected  to 
remain  very  low  in  2019,  at  0.7 %,  due  to  the 
dampening  effect  of  oil  prices  but 
increase 
moderately  in  2020  on  the  back  of  households’ 
higher disposable incomes.  

Housing market  

The  residential  real  estate  market  continues  to 
recover.  Residential  property  prices  moderately 
increased  for  the  third  year  in  a  row  (see  Graph 
1.2).  In  2018,  they  rose  by  1.6 %  annually, 
according to the latest available data of the Central 
Bank  (2018Q2).  In  terms  of  valuation,  European 
Commission house-price valuation methods do not 
point  to  significant  undervaluation  (the  overall 
valuation  gap  is  estimated  at  -4.6  percentage 
points).(5)  Housing  sales  continued  to  expand  at 
double-digit growth rates.  

(4)  Tourist  inflows  hit  accommodation  capacity  ceilings  in 
peak months, while heavy competition of airlines led to the 
bankruptcy of Cobalt Air in 2018. 

(5)  The analysis of price valuations is based on an average of 
three  metrics:  (i)  affordability  gap  (price-to-income 
deviation  with  respect  to  its  long-term  average);  (ii) 
dividend  gap  (price-to-rent  deviation  from  its  long-term 
average);  and  (iii)  estimates  of  deviations  of  house  prices 
from  equilibrium  values  justified  by  housing  demand  and 
supply  fundamentals.  See  Philiponnet  and  Turrini  (2017). 
In  the  case  of  Cyprus,  besides  the  short  sample,  the 

1. Economic situation and outlook 

The  housing  market  recovery  is  largely  driven 
by  the  inflow  of  foreign  funds.  An  increasing 
number of acquisitions is made by foreigners: they 
bought  nearly  half  (48 %)  of  all  property  sold  in 
2018.  The  mandatory  acquisition  of  personal 
immovable  property  under  the  residence  and 
citizenship by investment schemes has been one of 
the key drivers of the real estate  market recovery, 
adding  to  the  traditional  foreign  demand  for 
second  homes  in  a  holiday  destination.  It  also 
contributed  to  the  regional  differences  in  price 
trends:  real  estate  prices  in  Limassol,  where  the 
foreign,  predominantly  Russian,  community  is 
concentrated,  rose  much  more  strongly 
than 
elsewhere.  Meanwhile,  house  purchases  by 
Cypriots continue  to be restricted by  limited bank 
improving 
lending.  Therefore,  despite 
economic  situation  for  Cypriot  households,  locals 
bought fewer properties than in the previous year. 

the 

Graph 1.2: 

Residences price developments by region 

Source: Central Bank of Cyprus 

The supply of real estate is accommodating the 
steadily 
higher  demand.  Construction  has 
increased  since  mid-2016  as  evidenced  by  the 
number  of  new  properties.  Construction 
is 
reportedly  shifting  towards  the  luxury  segment  to 
adapt  to  the  changing  demand  and  to  enable 
construction  companies  to  benefit  from  funding 
from  pre-sales.  This  pre-sale  funding  is  still  the 
major  source  of  funding,  as  bank  credit  continues 
to be extremely limited. The real estate supply may 
also  increase  if  properties  acquired  to  obtain 

analysis  has  the  caveat  that  it  does  not  take  into  account 
foreign demand. 

8 

8010012014016018020006Q106Q407Q308Q209Q109Q410Q311Q212Q112Q413Q314Q215Q115Q416Q317Q218Q1NicosiaLimassolLarnacaPaphosFamagustaIndex, 2006Q1=100 
                                                           
 
                                                                                   
1. Economic situation and outlook 

citizenships  are  put  up  for  sale.  (6)  Furthermore, 
the sale of non-performing loans by Cypriot banks 
to  specialised  managers  (see  Section  4.2.1)  may 
result  in  the  more  rapid  sale  of  the  underlying 
collateral,  releasing  a  large  stock  of  real  estate  to 
the market.  

in  the  near  future  limiting  the  increase  in  real 
disposable  household  income,  which  in  2017  was 
at 84.6 % of the pre-crisis level. On the upcoming 
increases in social contributions see Section 4.1. 

Graph 1.3: 

Labour underutilisation (% of the active 
population, 15-74) 

Labour market  

The 
labour  market  conditions  continue  to 
improve  thanks  to  robust  economic  growth. 
Employment  is  expected  to  grow  by  3.8  %  in 
2018, almost among all sectors, following a similar 
strong increase 3.9 % in 2017. Unemployment rate 
continued to fall, reaching 8.4 % in 2018Q3, but it 
is  still  slightly  above  the  EU  average  (6.8  %). 
Youth unemployment also remains higher than the 
EU  average.  In  addition,  the  proportion  of  young 
people not in education, employment or training is 
among  the  highest  in  the  EU.  The  proportion  of 
remains 
underemployed 
relatively high, which points to a persisting labour 
market slack (see Graph 1.3). (7) On labour market 
developments see Section 4.3.  

part-time  workers 

Despite of improving labour market conditions, 
disposable household income remains below the 
pre-crisis level. The long period of wage restraint, 
which  has  supported  employment  growth  and 
competitiveness  gains  since  2013,  is  expected  to 
ease  as  renegotiated  collective  agreements  in  key 
sectors,  including  the  public  sector,  provide  for  a 
gradual increase in wages and a partial adjustment 
to  the  price  indexation.  However,  these  increases 
are expected to be only moderate as labour market 
is  mainly 
slack  continues  and 
concentrated 
low-paying 
sectors such as construction and tourism. In 2018, 
nominal  compensation  per  employees  is  expected 
to  have  increased  by  around  1.5  %  remaining 
below 
economic 
fundamentals. (8) Real wage growth is expected to 
remain broadly stable and below real GDP growth 

job  creation 
intensive, 

consistent  with 

labour 

rate 

the 

in 

(6)  The scheme requires holding the acquired residence for at 

least three years. 
(7)  Labour  market 

slack 

labour 
is 
underutilisation.  It includes persons available to work but 
not seeking work; those seeking work but not immediately 
available; and all involuntary part-time employed 

a  measure  of 

(1) The level of labour underutilisation includes persons 
available to work but not seeking work; those seeking work 
but not immediately available; and all involuntary part-time 
employed 
Source: Eurostat 

Social developments 

Poverty  and  inequality  continues  to  decrease 
according  to  indicators,  almost  reaching  the 
pre-crisis levels. The percentage of people at risk-
of-poverty  or  social  exclusion  declined  further  to 
25.2 % in 2017 (though this is somewhat above the 
EU average), compared to 27.7 % in 2016.  It was 
mainly  due  to  a  steep  decline  in  severe  material 
deprivation  and  in  the  proportion  of  individuals 
living  in  very  low  work  intensity  households.  In 
2017,  the  richest  20 %  of  the  population  had  an 
income  4.6  times  higher  than  that  of  the  poorest 
20 %,  which  was  below  the  EU  average  gap.  The 
guaranteed  minimum 
has 
contributed to the observed decline in poverty and 
income  inequality  (see  also  Sections  4.1.3  and 
4.3.2).  However,  according  to  the  latest  available 
data (2014), overall wealth inequality in Cyprus is 
still  among  the  highest  in  the  euro  area  (9)  and 

scheme 

income 

(8)  This  is  a  benchmark  for  wage  growth  consistent  with 
internal  labour  market  conditions.  It  is  calculated  as  the 
wage  growth  predicted  on  the  basis  of  changes  in  labour 
productivity, prices and the unemployment rate (see Arpaia 
and Kiss, 2015). 

(9)  As  measured  by  Gini  coefficient of  net  wealth,  i.e.  assets 
minus liabilities. 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 

9 

05101520253035% of act. populationUnemploymentPersons available to work but not seekingPersons seeking work but not immediately availableUnderemployed part-time workers 
                                                           
 
                                                           
1. Economic situation and outlook 

between the last quarter of 2017 and the  first  half 
of  2018  (see  Section  4.4.1).  Unit  labour  costs 
started to increase from mid-2017, but the increase 
long 
was  relatively  modest  and  followed  a 
downward  adjustment.  In  2019,  an  increase  in 
social  security  contributions  may  increase  unit 
labour costs. 

External position 

is 

Cyprus’  current  account  deficit 
large, 
although a large part of it is associated with the 
activities  of  the  special  purpose  entities.  The 
current  account  deficit  widened  to  8.4 %  of  GDP 
in  2017.  Activities  of  special  purpose  entities 
accounted for -5.2 % of GDP (11) (see Graph 1.5). 
In  the  first  half  of  2018,  the  headline  current 
account  deficit  contracted  for  the  special  purpose 
entities’  component  (de-registration  of  ships), 
while  the  part  not  related  to  the  special  purpose 
entities  recorded  a  deficit  of  slightly  more  than 
3 % of GDP. The combination of robust domestic 
demand  and  the  government's  efforts  to  attract 
shipping activity  suggests that the current account 
deficit  is  set  to  widen  further.  The  overall  current 
account  deficit  is  larger  than  the  one  required  to 
stabilise  the  net  international  investment  position 
over  10  years  (estimated    at  -4.5 %  of  GDP),  and 
‘norm’ (12) 
the  current  account 
larger 
explained by fundamentals (estimated at -1.6 % of 
GDP),  whilst  noting  that  the  current  account 
balance  in  Cyprus  has  never  been  in  positive 
territory. 

than 

international 

The  net 
investment  position 
remains  very  negative  but  is  slowly  narrowing. 
Nearly two thirds of the negative net international 
investment  position  is  attributable  to  the  presence 
of  special  purpose  entities  (see  Graph  1.6).  As  of 
2018Q3,  the  special  purpose  entities’  share  was  -
75.1 %  of  GDP,  compared 
total  net 
international  investment  position  of  -105.5 %  of 
GDP.  This  slightly  mitigates  the  risks  of  the  very 
investment 
negative  overall  net 

international 

the 

to 

recovery 

wealth  is  disproportionately  concentrated  in  the 
wealthiest  10 %  of  households 
(European 
Commission,  2018a,  Sections  1  and  4.1.3).  The 
economic  growth  has 
recent 
nonetheless  been  relatively  non-inclusive,  as  the 
real  gross  disposable  income  of  households  per 
capita is still well below 2008 levels. Inequality of 
opportunity also remains relatively high in Cyprus 
compared to the EU average (see Section 4.3). 

in 

Competitiveness  

The  real  effective  exchange  rate  started  to 
appreciate, reducing cost competitiveness. After 
strong  depreciation  during  the  crisis  years  (see 
Graph 1.4), the rate is on an upswing. As the euro 
appreciated  against  major  currencies  in  2017,  its 
adjustment  has come  to a  halt and  it increased by 
1.6 % in 2018. Cyprus is particularly vulnerable to 
the exchange fluctuations of the UK pound and the 
Russian rouble, due to trade and investment links. 
Turkey,  which  competes  with  Cyprus  for  tourists, 
experienced  sharp 
in  2018, 
gaining  substantial  advantage  over  Cyprus  from  a 
cost perspective.  

lira  depreciation 

Graph 1.4: 

Real effective exchange rates 

Source: European Commission 

Labour  productivity (10)  and  unit  labour  cost 
have recovered only moderately since the crisis. 
As  from  2014,  labour  productivity  began  to 
moderately  increase.  However,  it  has  decreased 

national  income  or  wealth  is  earned  by  one  person  alone, 
the Gini coefficient is equal to 1. 

(10)  Measured as real GDP per occupied person.  

(11)  It must be noted that here and in subsequent references to 
ratios  related  to  special  purpose  entities  throughout  the 
report  only  the  numerator  has  been  adjusted,  while  the 
GDP  has  not  been  adjusted  for  the  presence  of  special 
purpose entities. 

(12)  The  current  account  ‘norm’  benchmark  is  derived  from 
regressions  capturing  the  main  fundamental  determinants 
of  the  saving-investment  balance  (e.g.  demographics, 
resources),  as  well  as  policy  factors  and  global  financial 
conditions. See also European Commission, 2017a.  

10 

7080901001101201301401500001020304050607080910111213141516172000=100IEELESCYPTTR 
 
                                                                                   
                                                           
1. Economic situation and outlook 

Following  losses  in  2017,  profitability  turned 
positive  in  the  first  half  of  2018.  However,  poor 
quality assets and low interest margins continue to 
weaken  banks’  performance.  The  non-performing 
loans stock and ratio declined significantly in 2018 
compared to the past, but Cyprus continues to have 
one  of  the  highest  non-performing  loans  ratio  in 
the  euro  area.  Cyprus  Cooperative  Bank’s  exit 
from  the  banking  market  was  the  sector’s  key 
development in 2018 (see Section 4.2). 

loans 

New lending from the domestic financial sector 
to  the  real  economy  remains  very  limited  in 
light of still very high debt stocks. Therefore, the 
private  sector  has  to  rely  more  on  internal 
resources and external  funding.  According to data 
from the Central Bank of Cyprus, the gross volume 
of  new 
to  domestic  residents  reached 
EUR1.4 billion in the first half of 2018, similar to 
the amount provided in the first 6 months of 2017. 
The  new  loans  were  mostly  channelled  towards 
non-financial  corporations,  in  sectors  where  debt 
stocks  and  non-performing  loans  are  still  very 
high. Household indebtedness continues to be high 
despite  ongoing  deleveraging,  while  net  credit 
flows to the household sector remain negative.  

Public finances 

improved  markedly 

Public  finances  improved  significantly  over  the 
last  years, 
favourable 
supported  by  a 
macroeconomic  outlook  and  consolidation  of 
government  spending.  Since  the  start  of  the 
economic adjustment programme in 2013, Cyprus’ 
fiscal  position  has 
(see 
Graph 1.7).  The  general  government  headline 
balance moved from a deficit of 5.1 % of GDP in 
2013  to  a  surplus  of  1.8 %  of  GDP  in  2017.  This 
improvement  was  the  result  of  both  budgetary 
consolidation  implemented  during  the  programme 
years  and  favourable  macroeconomic  conditions. 
The  sizeable  improvement  in  the  government 
headline  balance  was  the  main  reason  behind 
Cyprus reducing public debt by 2017.  

The  budget  balance  is  expected  to  remain  in 
surplus  in  the  medium  term.  The  Commission 
2018  autumn  forecast  projects  that  the  general 
government  surplus  will  increase  to  2.5-3.0  %  of 
GDP  in  2018-2020.  Buoyant  tax  revenue  growth 
underpinned  by  strong  underlying  economic 
growth and an improved labour market is expected 
to  continue  to  outpace  expenditure  growth.  This 

the  correction  of 

position, as links of the special purpose entities to 
the real economy are perceived to be limited. Since 
2014, sectors not related to special purpose entities 
international 
led 
investment  position,  which  is  a  positive  sign.  In 
the  first  three  quarters  of  2018,  the  negative  net 
international 
contracted 
position 
significantly, by 16 percentage points. 

investment 

the  net 

Graph 1.5:  Current account developments by special 

purpose entities status 

Source: Central Bank of Cyprus 

Graph 1.6:  Developments of the net international 

investment position 

Source: Central Bank of Cyprus 

Financial sector 

Although banks have ample liquidity, they face 
profitability  and  asset  quality  challenges. 

11 

-10-8-6-4-20214Q415Q115Q215Q315Q416Q116Q216Q316Q417Q117Q217Q317Q418Q118Q218Q3% GDPCA, excluding SPEsCA, SPEsCurrent account balance-160-140-120-100-80-60-40-20014Q415Q115Q215Q315Q416Q116Q216Q316Q417Q117Q217Q317Q418Q118Q218Q3% GDPNIIP, excluding SPEsNIIP, SPEs 
 
 
 
1. Economic situation and outlook 

asset-management  company 
legacy  (see  Box 
4.2.1).  The  transaction  represents  a  level-shift 
upwards  in  Cyprus’  public  debt.  However,  public 
debt is projected to significantly decrease again to 
98.4 % in 2019 and to 91 % in 2020 (the latter is 
about 13 percentage points above the projected EU 
average).  The  decrease  reflects  the  projected 
fiscal  performance  and  a 
continued  strong 
favourable contribution of the interest rate-growth 
rate differential (see Section 4.1.1 and Annex B for 
an analysis of debt sustainability).  

impact  on 
in  2018  from 

forecast  excludes  the  potential  deficit-increasing 
the  general  government 
(one-off) 
balance 
the  banking  support 
measures  related  to  the  Cyprus  Cooperative  Bank 
(see  Section  4.1.2).  The  structural  balance  is 
expected  to  maintain  a  surplus  of  above  1  %  of 
GDP 
the  medium-term 
budgetary objective of 0 % of GDP), although it is 
expected  to  decrease  from  2019  onwards  as  the 
positive output gap widens.  

in  2018-2020  (above 

Graph 1.7:  General government budget balance and 

gross debt 

Source: European Commission 

There are risks to the fiscal outlook. Fiscal risks 
are  mainly  due  to:  (i)  the  potential  realisation  of 
liabilities 
contingent 
explicit 
the 
the  Cyprus 
the  sale  of 
measures  related 
to 
Cooperative  Bank; 
spending 
(ii) 
pressures;  and  (iii)  the  sustainability  of  the  strong 
tax  revenue  performance  as  presented  in  Section 
4.1. 

increasing 

regarding 

Due to the government’s support in the Cyprus 
Cooperative Bank sale, public debt is projected 
to  increase  from  96.1  %  of  GDP  in  2017  to 
105 % in 2018, but to steadily decline after that. 
The increase in 2018 is mainly due to the issuance 
of a series of government bonds in April and July 
2018,  to  facilitate  the  sale  of  the  State-owned 
Cyprus Cooperative Bank (see Section 4.2.1). The 
net  proceeds  from  the  bond  issuances,  which 
totalled  EUR 3.5  billion  (17 %  of  GDP)  after  the 
addition  of  some  cash,  were  deposited  with  the 
Cyprus Cooperative Bank and have been kept in its 

12 

50556065707580859095100105110115-10-9-8-7-6-5-4-3-2-10123411121314151617181920% of GDPGross debt (rhs)Budget balance (lhs)forecast% of GDP 
 
 
1. Economic situation and outlook 

Table 1.1: 

Key economic and financial indicators – Cyprus 

(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. 
(3) The tax-to-GDP indicator includes imputed social contributions and hence differs from the tax-to-GDP indicator used in the 
section on taxation 
Source: Eurostat and ECB as of 31-1-2019, where available; European Commission for forecast figures (Winter forecast 2019 for 
real GDP and HICP, Autumn forecast 2018 otherwise) 

13 

2004-072008-122013-1520162017201820192020Real GDP (y-o-y)4.90.1-1.84.84.23.83.32.7Potential growth (y-o-y)3.82.2-1.50.81.82.12.22.2Private consumption (y-o-y)6.20.5-0.84.54.1...Public consumption (y-o-y)2.72.2-4.3-0.83.1...Gross fixed capital formation (y-o-y)10.0-8.6-8.441.826.8...Exports of goods and services (y-o-y)3.50.43.84.66.0...Imports of goods and services (y-o-y) 5.9-1.02.56.612.2...Contribution to GDP growth:Domestic demand (y-o-y)6.5-1.2-2.58.48.0...Inventories (y-o-y)-0.20.40.1-2.30.3...Net exports (y-o-y)-1.40.50.6-1.3-4.1...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)1.40.9-1.00.60.90.90.70.6Capital accumulation (y-o-y)2.11.50.00.61.21.31.41.5Total factor productivity (y-o-y)0.3-0.2-0.4-0.4-0.2-0.10.00.1Output gap4.6-0.2-7.6-1.80.52.33.54.3Unemployment rate4.67.015.713.011.18.26.34.8GDP deflator (y-o-y)3.02.1-1.3-0.61.52.11.31.7Harmonised index of consumer prices (HICP, y-o-y)2.12.7-0.5-1.20.70.80.71.2Nominal compensation per employee (y-o-y)3.72.7-3.4-1.10.71.52.22.2Labour productivity (real, person employed, y-o-y)1.4-0.10.40.20.4...Unit labour costs (ULC, whole economy, y-o-y)2.32.8-3.8-1.40.41.51.51.6Real unit labour costs (y-o-y)-0.70.7-2.5-0.8-1.2-0.60.2-0.1Real effective exchange rate (ULC, y-o-y)0.70.7-4.1-1.81.01.8-1.2-0.4Real effective exchange rate (HICP, y-o-y)-0.1-0.4-2.1-0.10.21.5-1.8-0.9Savings rate of households (net saving as percentage of net disposable income)4.50.3-11.8-10.6-10.2...Private credit flow, consolidated (% of GDP)23.717.5-3.29.78.7...Private sector debt, consolidated (% of GDP)259.7311.3348.6337.8316.3...of which household debt, consolidated (% of GDP)87.2116.3128.5118.8107.5...of which non-financial corporate debt, consolidated (% of GDP)172.5195.0220.2218.9208.8...Gross non-performing debt (% of total debt instruments and total loans and advances) (2).8.935.833.828.9...Corporations, net lending (+) or net borrowing (-) (% of GDP)-11.70.510.12.5-1.10.20.10.7Corporations, gross operating surplus (% of GDP)23.820.321.921.320.720.420.120.5Households, net lending (+) or net borrowing (-) (% of GDP)-5.6-5.0-7.6-7.7-8.5-11.2-12.4-13.1Deflated house price index (y-o-y)6.8-4.7-1.61.71.3...Residential investment (% of GDP)10.98.24.14.95.7...Current account balance (% of GDP), balance of payments0.0*-8.9-3.6-5.1-8.4-8.2-9.3-9.5Trade balance (% of GDP), balance of payments0.0*-6.01.6-0.6-3.5...Terms of trade of goods and services (y-o-y)-0.5-0.1-0.40.71.41.60.00.3Capital account balance (% of GDP).0.30.80.20.5...Net international investment position (% of GDP)0.0*-109.9-143.6-123.0-121.5...NIIP excluding non-defaultable instruments (% of GDP) (1).-84.2-118.2-110.8-95.1...IIP liabilities excluding non-defaultable instruments (% of GDP) (1).578.3508.3476.2431.2...Export performance vs. advanced countries (% change over 5 years)-13.5-8.7-13.2-5.72.1...Export market share, goods and services (y-o-y)..0.66.0-0.8...Net FDI flows (% of GDP)0.0*1.712.6-9.8-23.2...General government balance (% of GDP)-0.9-4.1-5.10.31.82.83.02.9Structural budget balance (% of GDP)..1.91.31.51.71.30.8General government gross debt (% of GDP)60.460.6106.4105.596.1105.098.491.0Tax-to-GDP ratio (%) (3)32.232.432.732.833.934.935.235.0Tax rate for a single person earning the average wage (%)........Tax rate for a single person earning 50% of the average wage (%)........forecast 
 
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

of 

all 

63 % 

Since  the  start  of  the  European  Semester  in 
2011, 
country-specific 
recommendations  addressed  to  Cyprus  have 
recorded  at  least  ‘some  progressʼ.  (13)  37 %  of 
these  country-specific  recommendations  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  European  Union-International  Monetary 
Fund  economic  adjustment  programme.  These 
the  country-specific 
reforms  address  most  of 
recommendations  made  in  2011  and  2012.  As 
regards 
recommendations 
made  after  the  programme’s  completion,  these 
mostly cover persisting challenges, which are also 
reflected 
country-specific 
recommendations. 

the  country-specific 

2018 

the 

in 

Graph 2.1:  Cyprus - Level of implementation today of 

2011-2018 country-specific recommendations 

* The overall assessment of the country-specific 
recommendations related to fiscal policy excludes 
compliance with the Stability and Growth Pact 
** 2011-2012 annual assessment: Different CSR assessment 
categories 
*** The multiannual CSR assessment looks at the 
implementation until 2019 Country Report since the CSRs 
were first adopted.  
Source: European Commission 

Public financial management and the budgetary 
framework  were  significantly  strengthened  with 
the  adoption  and  implementation  of  the  Financial 
Responsibility and Budget Framework Law, which 
have  helped 
transparency  and 
sustainability  of  the  public  finances.  The  pension 

in  ensuring 

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

past, see Section 4. 

system  was  reformed  to  ensure  its  long-term 
sustainability.  

The  country-specific  recommendations  on  social 
benefits  and  the  high  ‘at-  risk-  of-  poverty’  rate 
among  the  elderly  were  addressed  by  introducing 
the guaranteed minimum income, which allows for 
more efficient and targeted social benefits.                                                            

financial 

sector  underwent 

The 
significant 
reforms,  notably  through  the  harmonisation  and 
the  supervision  of  banks  and 
integration  of 
cooperative credit institutions. New insolvency and 
foreclosure frameworks were adopted, which were 
further strengthened in 2018.  

Sector-specific  obstacles  to  the  establishment  and 
free  provision  of  services  have  been  mostly 
removed.  

introduced 

Some  measures  were 
to  promote 
renewable  energy  production  and  diversify  the 
energy  mix  as  recommended.  However,  energy 
production  is  still  heavily  dependent  on  fossil 
fuels.  

Measures to improve the  labour market situation 
have  been  put  in  place  through  a  reform  of  wage 
indexation, active labour market policies to reduce 
unemployment,  notably  among  young  people, 
long-term unemployed and receivers of guaranteed 
minimum income and policies to upgrade worker’s 
skills.  Some  measures  were  also  undertaken  to 
improve 
the  vocational 
education system.   

the  attractiveness  of 

The  longstanding  recommendation  regarding  the 
reform  of  the  national  healthcare  system  has 
made  progress  in  2017  with  the  adoption  of  the 
necessary 
framework.  However, 
implementation is still pending.  

legislative 

Cyprus  has  made  so  far  some (14)  progress  in 
addressing 
country-specific 
2018 
the 
(see  Table  2.1).  Reforms 
recommendations 
related 
the  public 
efficiency  of 
the 
administration, the local government and the State-

to 

(14)  Information  on  progress  and  action  taken  to  address  the 
policy  advice  in  each  subpart  of  a  country-specific 
recommendation  is  presented  in  the  overview  table  (see 
Annex A).  

14 

No Progress11%Limited Progress26%Some Progress40%Substantial Progress20%Full Implementation3% 
 
 
                                                           
                                                           
 
2. Progress with country-specific recommendations 

is 

of 

the 

the 

and 

pending 

progress 

including 

for  growth 

strengthening  of 

owned  enterprises  have  begun,  but  very  slowly. 
Although some measures to improve the efficiency 
judicial  system  were  announced  or 
of 
the 
the 
implementation 
introduced, 
comprehensive reform needs to be stepped up and 
in  particular  measures  related  to  the  handling  of 
financial  disputes.  A  reliable  and  efficient  system 
to issue and transfer immovable property rights  is 
still 
slow.  A 
comprehensive  strategy  is  being  implemented  to 
help  accelerate  the  reduction  of  non-performing 
loans, 
the 
insolvency  and  foreclosure  frameworks,  but  its 
overall  effect  will  be  assessed  over  time.  The 
is  gradually  being 
action  plan 
implementing, 
the 
improving 
focussing  on 
business  environment,  in  line  with  the  euro  area 
recommendation 1, and access to finance for small 
and  medium-sized  enterprises.  Improving 
the 
performance  of  the  State-owned  enterprises  and 
implementing  the  planned  privatisation  projects 
has  proved  challenging  to  progress.  The  capacity 
of 
services  was 
strengthened, but with regards to its effectiveness, 
announced  measures  are  still  pending.  The 
outreach  efforts 
in 
employment,  education  or  training  have  recorded 
only  limited  progress.  The  education  reform  is 
progressing unevenly and  without concrete results 
on  the  evaluation  of  teachers.  Finally,  some 
measures  were  adopted  and  implemented  for  the 
first phase of the healthcare reform and in an effort 
to  prepare  the  ground  for  full  implementation  of 
the National Health System in 2020, as planned. 

for  young  people  not 

employment 

public 

the 

15 

 
 
 
 
 
 
 
2. Progress with country-specific recommendations 

Table 2.1: 

Assessment of the 2018 country-specific recommendations implementation 

Source: European Commission 

16 

2018 CSRs to Cyprus Overall assessment of progress with the 2018 CSRs: Some progress CSR1: 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. (MIP Relevant) Limited progress:   Limited progress regarding the laws to modernise the functioning of the public administration.   Limited progress on the law for the improvement of the governance of the State-owned enterprises.  Limited progress on the reform of the local governments.  CSR2: 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 foreclosure frameworks and ensure reliable and swift systems for the issuance of title deeds and the transfer of immovable property rights. (MIP Relevant) Some progress:  Limited progress on the revision of the civil procedures, on increasing the specialisation of courts and on introducing e-justice.   Substantial progress on improving the operationalisation of the insolvency and foreclosure frameworks.   Limited progress on ensuring reliable and swift systems for issuing and transferring of title deeds. CSR3: 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. (MIP Relevant) Substantial progress:  Substantial progress on implementing a comprehensive strategy, including legislative amendments for more effective enforcement of claims and facilitating the sale of loans.   No progress on the integration and strengthening of the supervision of insurance companies and pension funds. CSR4: 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.(MIP Relevant) Limited progress:  No progress regarding the fast-track strategic investments.  Some progress on access to finance for small and medium-sized enterprises.   Limited progress on improving the performance of State-owned enterprises and the implementation of privatisation projects.  CSR5: 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. (MIP Relevant) Limited progress:  Limited progress on completing the reforms on the effectiveness of the public employment services and on reinforcing the outreach and activation support for young people not in employment, education or training.  Limited progress on completing the reform of the education and training system, including teachers’ evaluation and actions to increase the capacity of vocational education and training.  Some progress on taking measures to ensure that the National Health System becomes fully functional in 2020, as planned.   
 
 
 
2. Progress with country-specific recommendations 

Box 2.1: Technical support by the Structural Reform Support Service in Cyprus 

The Commission can provide tailor-made technical support upon a Member State's request via the Structural 
Reform  Support  Programme  to  help  Member  States  implement  growth-sustaining  reforms  to  address 
challenges identified in the European Semester process or other national reforms. 

The Cypriot authorities  have benefitted from support from the Commission in the area of judiciary 
reform, in particular to review the functioning of the Court system and the Attorney General's Office, and to 
prepare  for  the  introduction  of  an  electronic  system  in  Courts.  The  Commission  is  also  supporting  the 
Supreme Court in modernising the rules of civil procedures, designing training programmes and establishing 
criteria for the selection and promotion of judges, and assessing the feasibility of introducing a digital audio 
recording system in Courts. 

Cyprus is also drawing on technical support for its reform of the public administration. This includes 
the design of a workforce planning system to align the government’s human resources management with the 
country’s  strategic  priorities,  as  well  as  a  functional  review  of  the  operations  in  the  Cypriot  public 
administration. Support is also provided to the authorities to improve web presence of the government and to 
consolidate the information technology infrastructure in the Ministry of Labour.  

The Cypriot authorities are working with the Commission to improve the regulatory framework for 
insolvency  and  restructuring  practitioners  in  the  areas  of  licensing,  remuneration,  training,  monitoring, 
supervision and discipline. A project was also launched to improve the efficiency and effectiveness of the 
operations  of  the  Insolvency  Service.  In  the  area  of  access  to  finance,  support  is  provided  to improve  the 
management of financial instruments 

In  the  area  of  growth  and  business  environment,  the  Commission  has  assisted  the  authorities  in 
strengthening  the  administrative  capacity  for  public  investment  management  and  public  private 
partnerships. Technical support was also provided to increase participation to EU competitive programmes, 
and  to  produce  the  first  annual  Competitiveness  Report  for  Cyprus.  In  the  area  of  energy,  the  authorities 
have received support to help develop renewable energy and energy efficiency, draft the integrated National 
Energy and Climate Plan, as well as training and expertise on a range of topics related to the internal energy 
market.   

In  the  area  of  health,  Cyprus  has  benefitted  from  technical  support  for  the  design,  financing  and 
management of the National Health Insurance System, business continuity and disaster recovery in the 
Health Insurance Organisation, implementation of the EU General Data Protection Regulation, identification 
of a negotiation strategy with healthcare providers, and capacity planning in the healthcare sector.  

In  the  area  of  education,  the  Commission  provided  technical  support  to  assess  the  feasibility  of 
introducing a student loan scheme in Cyprus, as well as for the reorganisation of school boards, and the 
development of a reform of the special education system with the aim of making it more inclusive. 

In  the  area  of  public  finances,  Cyprus  received  technical  support  to  finalise  a  capacity-building 
exercise of a value-for-money review, and for the preparation of reviews of State-owned enterprises. The 
Commission  also  assisted  the  authorities  for  the  implementation  of  international  public  sector  accounting 
standards.  In  addition,  the  Cyprus  Tax  Department  received  support  to  prepare  the  procurement  of  a  new 
integrated tax administration system. A new project has recently started to support change management for 
the implementation phase of this new system.  

17 

 
 
 
 
  
 
 
2. Progress with country-specific recommendations 

Box 2.2: EU funds and programmes contribute to addressing structural challenges and to 
fostering growth and competitiveness in Cyprus 

Cyprus is a beneficiary of European Structural and Investment Funds (ESI Funds). Cyprus achieved 
the best execution rate of European Regional Development Fund funds (46 %) and European Social Funds 
funds (50 %) for 2018. In addition, Cyprus improved in the execution of the Cohesion Fund, and achieved 
the second highest rate in the EU (33.3 %). Financial allocation from European Structural and Investment 
Funds  aimed  to  support  Cyprus  in  facing  development  and  social  challenges,  amounts  to  approximately 
EUR  917  million  in  the  current  Multiannual  Financial  Framework  for  2014-2020,  equivalent  to  around 
0.7  % of GDP annually and 26 % of all public investment per year on average. As of the end of 2018, an 
estimated  EUR  730  million  (around  80 %  of  the  total)  was  already  allocated  to  specific  projects,  among 
which  EUR  36.3  million  to  critical  interventions  for  youth  through  the  Youth  Employment  Initiative.  In 
addition, EUR 54.8 million was allocated to strategic EU TEN-Transport projects through the dedicated EU 
funding  instrument,  the  Connecting  Europe  Facility.  Furthermore,  numerous  Cypriot  research  institutions, 
innovative firms and individual researchers benefited from other EU funding instruments, notably Horizon 
2020 which provided EUR 134.2 million. 

EU  funding  has  helped  address  policy  challenges  and  implement  country-specific  recommendations. 
The  European  funding  has  paved  the  way  for  some  1  700  enterprises  to  be  supported,  achieving  so  the 
creation of some 1 320 full time equivalent new direct jobs. 80 innovative enterprises are also supported in 
introducing new products to the market and 2  800 people are trained to meet labour market needs. By the 
end of the period, it is expected that public support in research and innovation will leverage some additional 
EUR  12  million  of  private  investments  and.  Investments  are  also  scheduled  for  additional  13  600  people 
equivalent to benefit from  modern waste  water treatment. Thanks to the European Social Fund, additional 
4 800 people, including unemployed, long-term unemployed, and 1 800 people below 29 years of age will 
have been  supported in their  integration to the labour market. With the support from the EU funds, some 
2 100 households will be able to improve their energy performance and the energy consumption of public 
buildings will annually reduce by 3 million  kWh and some 1 100 people from jobless households will be 
integrated to the labour market or will be better skilled to do so. Over 100 000 sqm of open spaces will be 
created or rehabilitated for the improvement of urban mobility as well as 32 000 sqm of open spaces will be 
created or rehabilitated in urban areas and 1 300 people from disadvantaged groups will be supported with a 
view to promoting equal opportunities and active participation. 

Out of the EU financing, EUR 40 million is to be delivered via financial instruments to support  small and 
medium-sized enterprises and projects in the fields of energy efficiency and renewable energy sources both 
for the public and private sector (households and enterprises) i.e. twice the amount delivered in the 2007-
2013 period.  

Cyprus’  total  financing  under  the  European  Fund  for  Strategic  Investments  (EFSI)  amounts  to  EUR  45 
million and is set to trigger EUR 81 million in additional private and public investments. The country ranks 
27th  as to the overall volume of approved operations as a share of GDP. In the Infrastructure and Innovation 
window, 1 project was approved and financed by the European Investment Bank with the European Fund for 
Strategic  Investments  backing  for  approximately  EUR  35  million,  set  to  trigger  EUR  53  million  in  total 
investment. The small and medium-sized enterprises component, instead, saw 2 approved agreements with 
intermediary  banks  financed  by  the  European  Investment  Fund  with  the  European  Funds  for  Strategic 
Investments backing of EUR 10 million, set to trigger around EUR 28 million in investments with some 125 
small  and  medium-sized  enterprises  and  mid-cap  companies  expected  to  benefit  from  improved  access  to 
finance. 

More information at: https://cohesiondata.ec.europa.eu/countries/CY  

18 

 
3.  SUMMARY OF THE MAIN FINDINGS FROM THE MIP IN-

DEPTH REVIEW 

Introduction 

in-depth  review 

The  2019  Alert  Mechanism  Report  concluded 
that  a  new 
should  be 
undertaken for Cyprus to assess the persistence 
or  unwinding  of  the  imbalances  (European 
Commission, 2018c). In winter 2018, Cyprus was 
identified  as  having  excessive  macroeconomic 
imbalances.  The  imbalances  identified  related  in 
particular  to  the  high  share  of  non-performing 
loans  (NPLs)  in  total  loans  and  the  significant 
stock of private, public, and external debt.  This is 
in  a  context  of  high,  even  though  declining, 
unemployment  and  weak  potential  growth.  This 
section summarises the findings of the analyses in 
the  context  of  the  macroeconomic  imbalance 
procedure  in-depth  review  that  is  contained  in 
various parts of this report. (15) 

Imbalances and their gravity 

The  non-performing  loans  (NPL)  ratio  in  the 
banking  sector  declined  significantly  in  2018 
but it remains one of the highest in the EU. The 
NPL  ratio  dropped  to  45 %  of  total  loans  in  mid-
2018, and it is expected to fall significantly further 
by the end of 2018 to approximately 37 % of total 
loans.  The  large  decrease  was  due  to  the  removal 
of  the  Cyprus  Cooperative  Bank’s  sizeable  NPLs 
portfolio  from  the  banking  system  in  September 
2018,  when  the  bank  surrendered  its  banking 
licence. Another key development that contributed 
to  the  downward  trend  was  the  Bank  of  Cyprus’ 
sale  of  a  large  volume  of  NPLs  (EUR 2.7  billion) 
to  an  international  private  equity  firm,  Apollo 
is  pending 
Global,  although 
approval  from  the  Single  Supervisory  Mechanism 
(see Section 4.2.1). 

transaction 

this 

Private  sector  debt  is  on  a  downward  path, 
though  it  remains  well  above  the  fundamental 
and prudential benchmarks. The private debt-to-
GDP  ratio  decreased  from  337.8 %  in  2016  to 
316.3 % in 2017 and then to below 300 % in mid-
2018. This reduction is mainly driven by the strong 
inflation,  cash 
GDP  expansion,  pick-up 

in 

(15)  Analyses  relevant  for  the  in-depth  review  of  excessive 
government debt can be found in Section 4.1.1 and Annex 
B; financial sector imbalances and private indebtedness are 
discussed in Section 4.2. 

repayments,  NPL  write-offs  and  debt-to-assets 
swaps.  Non-financial  corporations  debt  is  inflated 
by  the  foreign  debt  of  special  purpose  entities. 
However,  even  when  excluding 
the  special 
purpose  entities,  the  corporate  debt  is  very  high.  
In 2017, the overall stock of debt of non-financial 
corporations  remained  stable  compared  to  the 
previous year, whereas the household sector stock 
of  debt  declined  more  significantly.  New  lending, 
while  limited,  is  largely  channelled  towards  non-
financial  corporations,  to  business  sectors  such  as 
wholesale  and  retail  trade,  accommodation  and 
food service activities, construction and real estate 
activities. These sectors already account for a large 
share of the banks’ loan portfolio, and have a high 
incidence of non-performing loans. The household 
sector  does  not  have  positive  net  credit  flows.  
Both  the  corporate  and  household  sector  remain 
overly  indebted  and  thus,  vulnerable  to  economic 
shocks. Everything else constant, the deleveraging 
process is bound to slow down once growth starts 
to converge towards potential (see Section 4.2.2). 

Following  an  increase  in  2018,  public  debt 
exceeds  now  100 %  of  GDP,  making  Cyprus 
vulnerable  to  economic  shocks.  Due  to  the 
government’s  support  in  the  sale  of  the  Cyprus 
Cooperative  Bank  (see  Section 4.2.1),  public  debt 
is projected to increase to 105 % of GDP in 2018, 
partly  reversing  the  sharp  decrease  in  2017.  High 
public  debt  makes  Cyprus  vulnerable  to  financial 
or  economic  shocks,  namely  a  potential  sharp 
increase  in  interest  rates.  However,  the  recently 
regained investment  grade rating for Cyprus’ debt 
and  relatively  contained  —  despite  the  one-off 
increase due to the sale of the Cyprus Cooperative 
Bank  —  medium-term  financing  needs  mitigate 
refinancing risks. Given also the fact that the large 
proportion  of  long-term  low-interest  debt  was 
provided by external creditors during the economic 
adjustment  programme,  Cyprus’  debt  servicing 
costs  are  relatively  low  for  its  level  of  debt  (see 
Section 4.1.1).  

international 

The  country’s  net 
investment 
position  remains  a  source  of  vulnerability,  as 
at  -105.5 %  of  GDP  in  2018Q3  it  was  one  of  the 
most  negative  in  the  EU  and  well  beyond  the 
estimated  prudential  and  fundamental  thresholds, 

19 

 
 
                                                           
of  -54 %  and  -43 %,  respectively (16).  The  risk  is 
moderated  thanks  to  the  larger  part  (75.1 %  of 
GDP) of the negative position being accounted for 
the  non-financial  special  purpose  entities 
by 
registered in Cyprus, which appear to have limited 
links  to  the  real  economy.  The  net  international 
investment  position  excluding  the  share  of  the 
special purpose entities was much smaller (-30.4 % 
of GDP) and within the benchmark.  

the  net 

The  current-account  deficit 
is  high,  while 
current  account 
sustained 
surpluses  are 
international 
to  bring 
necessary 
investment  position  to  safer  levels.  Amid  strong 
cyclical  upswing,  the  current  account  remains 
deeply  negative. In 2017, the current account  was  
-8.4 %  of  GDP,  and  it  remained  in  high  deficit  in 
2018, at -7.5 % of GDP as of Q3. Activities of the 
special  purpose  entities,  notably  ship  registration 
and de-registration, have a major impact on current 
account.  Excluding  special  purpose  entities,  the 
current account in 2017 and 2018 (as of Q3) was at 
around  -3 % of GDP. However, this is  still below 
the  current  account  ‘norm’  (17) 
implied  by 
fundamentals  (-1.6 %).  Moreover,  Cyprus  would 
need a current account balance of close to zero and 
a  trade  balance  of  close  to  5 %  to  reduce  its  net 
international investment position to its threshold of 
-35 %  of  GDP  over  the  next  20  years  (without 
accounting  for  the  presence  of  special  purpose 
entities). 

increase 

in  job  creation  has 
The  strong 
substantially  improved  the  country’s  labour 
market  conditions.  Most  indicators  improved 
considerably as unemployment is expected to drop 
to  8.2 % 
in  2018.  Long-term  and  youth 
significantly, 
unemployment 
reducing the gravity of the problem (see Sections 1 
and 4.3.1). 

decreased 

also 

(16)  The country-specific NIIP level explained by fundamentals 
represents  the  NIIP  that  would  result  if  a  country  had  run 
its  current  account  'norm'  since  1995.  It  derives  from 
cumulated current account 'norms', which in turn represent 
the  impact  of  fundamentals  on  the  current  account.  See 
Turrini and Zeugner, 2018. 

(17)  The  current  account  ‘norm’  benchmark  is  derived  from 
regressions  capturing  the  main  fundamental  determinants 
of  the  saving-investment  balance  (e.g.  demographics, 
resources),  as  well  as  policy  factors  and  global  financial 
conditions. See also Coutinho et al., 2018.  

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

to 

the 

unwind 

is  expected 

accumulated 

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 lower 
unemployment  are  expected  to  increase  growth 
potential.  Potential  growth  is  estimated  at  around 
2 %  in  2017-2021  but  is  expected  to  decline 
thereafter.  The  concentration  of  investment  into 
construction  and  ship  registration  does  not  favour 
long-term growth and productivity (see Sections 1 
and 4.4).  

Evolution, prospects and policy responses 

loans 

The  Cypriot  authorities  devised  and  started 
implementing  a  three-pillar  policy  strategy  to 
reduce  non-performing 
(NPLs).  The 
strategy  comprised  of:  (i)  a  legislative  package, 
including  amendments  to  the  foreclosure  and 
insolvency  frameworks  and  to  the  sale  of  loans 
law,  and  the  adoption  of  a  securitisation  law;  (ii) 
the  sale  of  the  Cyprus  Cooperative  Bank,  which 
struggled with a high volume of NPLs, putting its 
residual  entity  into  a  wind  down  mode;  and  (iii) 
the setting-up of a temporary State support scheme 
(ESTIA) for addressing the NPLs collateralised by 
primary  residences,  the  most  challenging  part  of 
NPLs. Under the first pillar — strengthening of the 
legal  and  regulatory  framework  —  the  legal 
amendments  aim  to  remove  some  impediments  to 
NPLs 
second  pillar  was 
implemented in September 2018, when the Cyprus 
Cooperative Bank surrendered its banking licence. 
Therefore, 
impact  on  NPLs  materialized 
already,  with  a  big  portion  of  bad  loans  having 
been  carved  out  of  the  banking  sector.  Under  the 
last  pillar,  the  design  of  the  ESTIA  scheme  was 
finalised in early November  2018 and is expected 
to  be  implemented  in  the  first  part  of  2019  (see 
Section 4.2.1). The planned reform of  the judicial 
system  aims  to  strengthen  contract  enforcement 
and  ultimately  improve  the  country’s  payment 
culture  (see  Section  4.4.3).  In  addition, 
the 
performance of the ESTIA scheme greatly depends 
on  the  judicial  system’s  efficiency  in  enforcing 
foreclosure  procedures  to  re-defaulters  and  non-
eligible borrowers.  

resolution.  The 

its 

Private  sector  deleveraging  may  accelerate  in 
the light  of the legal changes to the foreclosure 
and  insolvency  frameworks  and  due  to  the 
ESTIA  scheme.  Both  households  and  non-

20 

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

financial  corporations'  debt  ratios  are  on  a 
declining path. Valuation effects and GDP growth 
contributed  greatly  to  the  deleveraging  of  both 
sectors in the first part of 2018 (see Section 4.2.2). 
The  strengthened  foreclosure  framework  could 
further  facilitate  the  reduction  of  private  debt  by 
foreclosing  on  assets  pledged  as  collateral,  while 
the amended insolvency framework could increase 
debt-workouts.  In  addition,  the  ESTIA  scheme, 
which  provides  very  attractive  terms  (including 
debt  reductions)  to  defaulted  borrowers,  may  also 
decrease  private  indebtedness,  provided  that  the 
foreclosure  procedure  is  implemented  effectively 
upon re-default to contain moral hazard. Currently, 
the  slow  progress  in  setting  up  a  reliable  system 
for 
rights 
complicates  foreclosure  procedures  and  deters  the 
liquidation of collateral. 

issuing  property 

transferring  and 

Public debt is projected to fall steadily in 2019-
2020, underpinned by the expected continuation 
of  strong  fiscal  performance.  Based  on  a 
‘no-policy-change’  assumption,  Cyprus’  public 
debt  is  projected  to  drop  by  an  average  of 
7 percentage  points  in  2019  and  2020.  This  is 
mainly  due  to  projected  high  structural  primary 
surpluses, at an average of 3.3 % of GDP, although 
lower  than  achieved  in  2016-2018.  However, 
sustainability  are 
fiscal 
downside 
significant (see Section 4.1.1 and Annex B). 

risks 

to 

Cyprus’  net  international  investment  position 
narrowed but still remains deeply negative.  The 
net international position improved from -121.5 % 
of GDP at the end of 2017 to -105.5 % in Q3 2018. 
The  more  pronounced  contraction  in  2018  was 
mainly  due  to  the  reduction  of  liabilities  in  two 
categories:  currency  and  deposits,  and  debt 
instruments.  Meanwhile,  increasing  equity  and 
investment fund shares contributed to widening of 
the  net  international  investment  position.  The 
further adjustment is expected to be limited, as the 
current account is forecast to remain in substantial 
deficit  in  2018  and  2019.  This  is  against  an 
estimated  annual  surplus  of  3.1 %  of  GDP 
necessary to bring the net international investment 
position  to  its  estimated  prudential  level  of  -54 % 
over  a  10-year  period.  The  structure  of  external 
liabilities  over  recent  years  shows  a  shift  from 
loans  and  other  investments  to  foreign  direct 
investment.  The  foreign  direct  investment  in 
Cyprus,  however,  mostly  involves  the  financial 
transactions  of  holding  companies  and  ship 

to 

as 

opposed 

field 
registrations, 
investments.  The  net  external  debt 
to  GDP 
meanwhile  contracted  from  144.3 %  at  the  end  of 
2017  to  103.0 %  in  Q3  of  2018,  according  to  the 
Cyprus Central Bank's data. 

green 

Recent policy measures aimed at improving the 
business  environment  should  contribute  to 
improving  competitiveness.  This  was  mainly  in 
the  area  of  administrative  simplification,  e-
governance  and  entrepreneurship.  Measures  have 
also  been  taken  to  attract  foreign  investors  and 
improve  competitiveness  by  addressing  issues 
internationalisation  of  small  and 
related 
medium-sized  enterprises, 
improving  workers’ 
skills  and  strengthening  innovation.  The  planned 
measures to reform the justice system and improve 
the  efficiency  of  courts  are  expected  to  further 
improve  the  business  environment  in  the  long-
term.     

to 

Labour productivity decreased slightly in 2016-
2017 but is set to improve as of 2018. The weak 
performance  in  2016  and  2017  is  mostly  cyclical, 
due  to  the  high  rate  of  job  creation  in  labour 
intensive  sectors  such  as  tourism-related  services 
and  construction.  The  forecasted  recovery  as  of 
2018 is based on expectations for a less strong and 
more  broad-based  increase  in  employment.  Weak 
total factor productivity over a prolonged period of 
time  has  also  driven  labour  productivity  down. 
Strong investment in productivity-enhancing areas 
and  continued  upskilling  of  the  labour  force  are 
essential to raise productivity in the long-term (see 
Section 1 and 4.4).  

Labour  market  outcomes  continue  to  improve 
rapidly with unemployment  forecast to drop to 
6.3 %  by  2019.  Unemployment  dropped  from 
11.1 % in 2017 to a provisionally estimated 8.2 % 
in 2018, supported by strong employment growth. 
This positive trend is expected to continue though 
at  a  slower  pace.  The  activity  rate  also  improved 
and 
decreased 
substantially. As labour market indicators improve, 
there is no evidence yet of wage overheating, as a 
large part of the employment growth is skewed to 
low-wage sectors and labour market slack is still in 
place. 

unemployment 

long-term 

Action is being taken to improve the efficiency of 
the  public  employment  services  and  promote 
active labour market policies (see Section 4.3.1) 

21 

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

fiscal  discipline  is  also  crucial  for  public  debt 
reduction.          

Overall assessment 

Stock imbalances remain high, mainly in terms 
of  non-performing  loans,  private,  public  and 
external  debt.  Despite  the  recent  improvement, 
Cyprus’  vulnerabilities,  which  are  mostly  because 
of  long-lasting  stock-imbalances,  continue  to  be 
significant.  The  government,  private  and  external 
large,  albeit 
debt  ratios  are  still  high.  The 
decreasing,  level  of  non-performing  loans  (NPLs) 
and  weak  profitability  highlight  vulnerabilities  in 
the banking sector. Adjustment issues in the labour 
market have largely been resolved, as reflected by 
the  strong  employment  growth  and  the  fall  in 
unemployment.  Remaining  risks  in  this  area  are 
mostly  linked  to  the  low  labour  productivity, 
which  remains  a  major  weakness  of  the  Cypriot 
economy. 

The  composition  of  risks  has  shifted  over  the 
past  year  and  some  imbalances  have  been 
reduced while others have increased. In terms of 
flows, many imbalances are decreasing, helped by 
the  cyclical  upswing.  This  is  particularly  the  case 
for  employment  conditions,  which  have  improved 
significantly,  with  unemployment  rate  now  at  an 
eight  year  low.  The  deleveraging  in  the  private 
sector is also progressing, mostly because of strong 
GDP  growth,  non-performing  loans  write-offs, 
cash  repayments  and  debt-to-assets  swaps.  Non-
performing loans  have been reduced significantly, 
as  a  large  volume  was  carved  out  of  the  banking 
sector upon market exit of the Cyprus Cooperative 
Bank.  However,  this  also  led  to  a  substantial 
increase  in  public  debt  in  2018,  though  this  is 
expected to start decreasing again in 2019.    

that 

any 

and 

addressing 

Implementing effectively the policy measures in 
place 
remaining 
inefficiencies  are  essential  for  further  reducing 
the imbalances. Some progress has been made on 
address 
the  measures 
implementing 
macroeconomic  imbalances,  particularly  the  high 
stock of non-performing loans (see also Sections 2, 
4.1  and  4.2  and  Annex  A).  However,  reform 
commitments are still pending in several areas, for 
example  the  justice  system  reform  (notably  the 
handling of non-performing loans in the courts and 
the  improvement  of  contract  enforcement)  and 
issuing  and 
setting-up  a  reliable  system  for 
the 
transferring 
Insolvency  Service  and 
information  on 
borrowers  still  need  to  be  improved.  Continued 

title  deeds.  The  running  of 
the 

22 

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

Table 3.1: 

Macroeconomic imbalance procedure assessment matrix - Cyprus 

(Continued on the next page) 

23 

 Gravity of the challenge Evolution and prospects Policy response Imbalances (unsustainable trends, vulnerabilities and associated  risks) Financial Sector At 45 % of the total loan stock in June 2018**, non-performing loans (NPLs) in the Cypriot banking sector remain among the highest in the EU. Banks are not yet able to generate profits in a sustainable manner to ensure adequate capitalisation. There is a large proportion of collateralised loans, a large share of which is not performing (and around half of NPLs are in terminated accounts, for which banks deem no viable restructuring solution).  The NPL ratio decline has been steeper in 2018 than in the last years. The sales of loans that started in 2018, together with the Cyprus Cooperative Bank sale and wind down, were the key factors behind the decline. However, both households and non-financial corporations sectors remain with very high NPL ratios (at around 50 % and 38 % respectively, in mid-2018). 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. The high level of collateralised lending poses challenges regarding the perception of credit risk. However, the provisioning levels improved significantly. Provisioning requirements have been enhanced, so that provisions caught up with the euro area average in 2017. A three pillar policy strategy is being implanted to reduce NPLs (legal package Cyprus Cooperative bank’s sale and ESTIA)  The revision of the rules of civil procedure and the law of civil procedures, as well as measures to improve the court administration and functioning, are expected to increase the efficiency in handling of NPL cases and improve contract enforcement and ultimately the payment culture. Private debt Private debt in Cyprus stood at 292 % of GDP in Q3 2018, still among the highest level in the EU.  For non-financial corporations, debt remains high even when excluding the debt of special purpose entities. Household sector debt-overhang reflects high stocks of mortgage and consumption loans. Both households and non-financial corporations are vulnerable to shocks due to their still high debt exposures. A large proportion of debt stocks is non-performing mainly due to poor contract enforcement. This harms financial stability and increases vulnerability of the overall economy. Deleveraging of the private sector continues at a slow pace. The household debt-to-GDP ratio declined from 119 % in 2016 to 108 % in 2017, and further to 97 % in Q3 2018, while in the case of non-financial corporations the ratio has declined from 219 % in 2016 to 209 % in 2017 and further to 195 % in Q3 2018.  GDP growth is a key contributor to reducing the debt-to-GDP ratio (denominator effect), thus a deteriorated growth environment will slow down the decline in private indebtedness. Loans write-offs, repayments and debt-to-asset swaps contributed to lowering the debt stock of both households and non-financial corporations. New lending, albeit limited, is largely channelled towards non-financial corporations, in sectors where debt stocks and NPLs are still very high. The net credit flows to the household sector remain negative. Debt-to-asset swaps may not be a sustainable strategy in the long term as banks become vulnerable to real estate assets. The use of the insolvency tools continued to be limited, partly due to deficiencies in the Insolvency Service. The revisions to insolvency and foreclosure frameworks may accelerate private debt reduction.  Furthermore, the ESTIA scheme may also reduce private indebtedness if borrowers re-start servicing their loans. Prompt use of the foreclosure tools upon redefault under the scheme may help deter strategic default.  Progress in improving the protection of property rights and enabling liquidation of collaterals is limited. A comprehensive reform of the current system of transferring and issuing property rights is still lacking.  Public debt The Government debt-to-GDP ratio was very high at 109.2 % at the end of October 2018, exposing the country to changes in financial or economic conditions. After declining significantly in 2017, the debt-to-GDP ratio has increased again in 2018 (due to one-off transactions with the Cyprus Cooperative Bank). It is projected to continue strongly declining again starting from 2019. After 6 years, in autumn 2018, Cyprus’ government bond rating returned to investment grade (by three of the four major rating agencies). The policy measures to reduce NPLs have a temporary negative impact on public debt, notably in 2018. Explicit contingent liabilities have also increased significantly (stemming from government counter-guarantees to the Cyprus Cooperative Bank buyer, Hellenic Bank, in the form of the asset protection schemes). However, they have reduced risks from the banking sector, boosted investor confidence and helped to upgrade the sovereign rating of Cyprus to investment grade, in turn reducing the cost of refinancing for the government.   
 
 
 
 
3. Summary of the main findings from the MIP in-depth review 

Table (continued) 

* 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. 
** Per European Central Bank data; it includes only exposures to non-financial corporations and households. 
Source: European Commission 

24 

External position Cyprus net international investment position remained still very high, at -105.5 % of GDP in Q32018, exposing it to adverse shocks or shifts in market sentiment. The net external debt to GDP remained  also large, at 103.0 % in Q3 of 2018. Current account deficit was very large, at 8.4 % of GDP in 2017 and 7.5 % of GDP in Q3 2018 (based on 4 quarter rolling sum). Considerable share of these external liabilities was incurred by the special purpose entities, thus external risks could be less pronounced than what headline figures suggest. The real effective exchange rate depreciated by 5.9 % over three years, beyond the macroeconomic imbalance procedure threshold of -5 %, reflecting subdued domestic inflation. The net international investment position and the net external debt to GDP have substantially contracted over the three quarters of 2018, also helped by high nominal growth.  Domestic savings are low due to negative savings of households. This is driving a wedge between savings and investment, in favour of foreign investment. Amid strong economic rebound, current account deficit widened sharply in recent years. Strong domestic demand that drives imports up and intensifying competition in tourism exports are factors that are set to lead to persistently large current account deficits in the near future. Inflation has turned positive since 2017 and is reverting the trend for depreciation in the real effective exchange rate. Exports of tourism services have been stimulated by structural reforms aimed at further extending the season and improving tourism quality. Less has been done in other areas. With cost competitiveness fading away, stronger productivity gains and contained wage inflation become of key importance.  Adjustment issues Potential growth Potential growth remains low, estimated at around 2% in 2017-2021, while inflation is also low.  Potential growth in the past was constrained by low investment and stagnant productivity growth.  Investment has increased over the last two years but due to its nature, no major impact on potential growth is expected. Productivity growth remains stagnant.  An action plan for growth is gradually being implemented aiming to improve the business environment and help develop key sectors of the economy. Though, progress in implementation of key elements is lacking.  Progress in implementing privatisation projects to attract investment, increase competition and reduce prices in network industries is slow.  Unemploy-ment Unemployment was still high in 2017, at 11.1%. The 3-year average was 13.0%, above the macroeconomic imbalance procedure threshold.  Youth and long-term unemployment were also high but no longer exceeding the threshold. The activity rate, which has fallen by 0.4 percentage points over 3 year period, has breached the macroeconomic imbalance procedure threshold. Unemployment continued to markedly fall in 2018 (8.4 % in 2018Q3). This trend is expected to continue in the coming years supported by strong growth. Youth unemployment keeps falling (18.7 % in 2018Q3) and long-term unemployment is now below the EU average. Activity rate also improved. The level of young people not in employment, education or training is still high. While participation in vocational and education training remains low.  The capacity of the public employment services was strengthened, however in term of effectiveness, more efforts are needed. The impact of the active labour market policies is still to be evaluated.  An action plan to outreach young people not in employment, education or training is still at initial stage.  Measures are being taken to enhance vocational education and training and the quality of higher education, but the implementation is slow. Conclusions from IDR analysis  Cyprus is characterised by large stock imbalances, in the form of the high external and internal debt, both private and public, in combination with very high level of NPLs in the banking system. This exposes a country to adverse shocks and shifts in market sentiment, which would have harmful implications for the real economy.    Some stock imbalances – notably the very large stock of household and corporate debt, NPLs and net international investment position - are declining, but fairly slowly, on the back of strong economic growth and in the case of NPLs facilitated by policy measures. Current account deficit has widened and is expected to remain large driven by solid domestic demand, not helping to reduce imbalances. Unemployment keeps falling and is expected to continue contracting amid strong economic growth.  An NPL reduction strategy was prepared and started to be implemented in 2018. Some effects materialised already in 2018, as a large volume of NPLs was carved out of the banking sector upon Cyprus Cooperative Bank’s market exit. However, the strategy’s overall impact is to be seen over time. Furthermore, extra efforts are needed in order to improve the following: (i) available information on borrowers, (ii) the efficiency of the Insolvency Service, (iii) the handling of NPLs in Courts and contract enforcement, and (vi) the system of issuing and transfer of title deeds. Ensuring fiscal discipline is also crucial for public debt reduction. Measures are still needed to foster efficiency and competition in network industries and to further improve labour market conditions.    
 
 
 
4.  REFORM PRIORITIES 

4.1.  PUBLIC FINANCES AND TAXATION 

4.1.1.  DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS* (18) 

spread  in  relation  to  the  German  10-year  ‘bund’ 
was contained recently, at 2.0 % in January 2019. 

Graph 4.1.1:  Government debt projections 

The 

debt. 

The  short-term  fiscal  sustainability  is  a  cause 
for  concern  due  to  potential  spill-overs  from 
macroeconomic,  financial  and  competitiveness 
imbalances,  recently  exacerbated  by  increased 
government 
indicator-based 
analysis (19)  signals  risks  of  fiscal  stress  in  the 
short  term  (within  1  year),  based  on  the  most 
recent  data  and  the  Commission’s  autumn  2018 
forecast  (see  Annex  B).  As  in  the  past,  the  high 
value of the indicator is driven by short-term risks 
on  the  financial-competitiveness  side,  this  time  in 
the context of a sharp increase in government debt 
in 2018 due to one-off banking  support  measures. 
In  particular,  the  financial-competitiveness  sub-
index  points  to  short-term  vulnerabilities  notably 
due to the negative net savings of households, the 
large negative net international investment position 
and  the  high  private  sector  debt,  a  significant 
fraction  of  which  is  short-term.  However,  the  S0 
indicator  value  for  Cyprus  has  just  reached  its 
critical threshold, as some other fiscal variables are 
positively  oriented 
is 
particularly the case for the large primary surplus, 
which  should  enable  a  significant  reduction  of 
government debt in 2019. 

the  country.  This 

in 

However,  financial  markets’  perceptions  of 
Cyprus’ sovereign risk have improved recently. 
The  short-term  risks  to  fiscal  sustainability  are 
somewhat  mitigated  by  the  recent  upgrade  of  the 
rating  of  Cyprus  bonds  to  ‘investment  grade’  by 
three  major  rating  agencies  and  a  significant 
increase  in the cash buffer (covering all  financing 
needs  until  the  third  quarter  of  2019).  Despite 
fluctuations  in  the  sovereign  yield  spread  in  2018 
mainly  due  to  the  sale  of  the  Cyprus  Cooperative 
Bank and external events, 10-year sovereign yield 

(18)  An  asterisk  indicates  that  the  analysis  in  the  section 
the 
in-depth 
contributes 
macroeconomic imbalances procedure (see Section 3 for a 
summary of main findings). 

review 

under 

the 

to 

(19)  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  fiscal  risks  stemming  from 
the  financial-competitiveness  or  the  fiscal  side  of  the 
economy (European Commission, 2019a).  

Source: European Commission (Fiscal Sustainability Report 
2018) 

Given  its  initial  high  government  debt  stock, 
Cyprus  faces  medium  fiscal  sustainability  risks 
in the  medium term. 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  62  %  by  2029,  still  slightly  above 
the  critical  60 %  threshold  (see  Graph  4.1.1). The 
projected  significant  decrease  of  29.5  percentage 
points between 2020 and 2029 would be driven by 
the  continued  strong  fiscal  performance  assumed 
under the no fiscal policy change scenario (with a 
structural  primary  balance  unchanged  at  2.9  %  of 
GDP (20))  and  be  supported  by  favourable  snow-
ball  effects  (interest  rate-growth  rate  differential) 
and decreasing ageing costs over most of the  next 
decade. The medium risk assessment is confirmed 
by  alternative  and  stress  test  scenarios,  including 
stochastic  projections (21).  The  S1  sustainability 
indicator, which measures sustainability risks until 

(20)  This implies a relatively high structural primary balance by 
European  standards.  Over  1980-2018,  in  only  17%  of  the 
cases,  EU  countries  were  able  to  reach  an  structural 
primary balance value greater than 2.9% of GDP. 

(21)  Stochastic projections  account  for  uncertainty  surrounding 
the  baseline  projections  in  a  more  detailed  manner  than 
deterministic projections. 

25 

607080901001101314151617181920212223242526272829% of GDPBaseline no-policy change scenarioStandardised (permanent) negative shock (-0.5 pps) onGDP growthHistorical SPB scenario 
 
                                                           
 
                                                           
2033, indicates a low medium-term risk (European 
Commission, 2019a). 

(see  Annex  B).  With  a  value  of 

Cyprus’  long-term  fiscal  sustainability  risk  is 
also  assessed  as  medium.  The  analysis  of  the 
sustainability  gap  indicator  S2  points  to  limited 
risk 
-
0.9 percentage  points  of  GDP,  it  indicates  that 
under  the  baseline  scenario  the  debt-to-GDP  ratio 
would  stabilise  over  the  long  term  given  an 
assumed  continuation  of  the  structural  primary 
surplus. This result is due to the favourable initial 
budgetary  position,  which  more  than  offsets  the 
projected  rise  in  ageing  costs  in  the  long  run, 
mainly  driven  by  pension  expenditure (22).  The 
debt sustainability analysis discussed above, points 
to 
the 
to  medium  risk 
vulnerabilities linked to the high debt burden. 

term,  due 

long 

in 

is 

losses  (SYMBOL),  Cyprus 

Contingent  risks  remain  in  the  banking  sector, 
notably in the short term, mainly due to a high 
ratio  of  non-performing  loans.  According  to  the 
systemic  model  of  banking 
Commission’s 
originated 
the 
Member  State  most  exposed  to  short-term  fiscal 
risks  in  a  severe  stress  scenario  of  a  repeat of  the 
recent  financial  crisis.  On  the  basis  of  the  current 
level  of  non-performing  loans  and  conservative 
loss  assumptions,  a  recapitalisation  of  Cyprusʼ 
banks  by  public  funds  to  10.5 %  of  their  risk-
weighted  assets  could  increase  sovereign  debt  by 
3.1 %  to  17.5 %  of  GDP  depending  on  the 
scenario (23) 
(2019  Q1). 
Contingent risks are considered more significant in 
the  short  term,  since  safety  nets  in  the  form  of 
increasing  capital 
requirements,  bail-in  and 
national and supranational resolution funds are still 
the  country’s 
being  put 
exposure to implicit contingent liability risks from 
the banking sector is expected to decrease to below 
0.5 % of GDP by 2029, given that the safety  nets 

in  place.  However, 

the  short 

term 

in 

(22)  According  to  the  2018  Ageing  Report,  public  pension 
expenditure  would  rise  from  10.2%  of  GDP  in  2016  to 
12.4%  in  2070.  Total  age-related  spending  is  projected  to 
increase  by  1 percentage  points  of  GDP  over  the  same 
period. 

(23)  The  lowest  exposure  results  from  the  reference  scenario, 
whereby only the subset of banks considered to be systemic 
will  go  into  resolution  and  be  recapitalised.  As  a  novelty 
compared  to  the  Country  Report  Cyprus  2018,  two 
additional  alternative  scenarios  considering  all  banks  go 
into  resolution  are  performed.  Under  the  worst-case 
scenario, all banks are assumed to go into resolution and be 
recapitalised  and  recovery  rates  for  non-performing  loans 
are set at 20% of World Bank reported levels. 

4.1. Public finances and taxation 

will  have  been  fully  phased  in  and  assuming  that 
the  effect  of  non-performing  loans  will  become 
negligible 
(European 
long 
Commission, 2019a). 

term (24) 

the 

in 

The  nature  of  contingent  risks  from  the 
banking  sector  changed  after  the  sale  of  the 
publicly-owned  Cyprus  Cooperative  Bank.  On 
the  one  hand,  the  sale  and  wind-down  of  the 
Cyprus  Cooperative  Bank  —  the  second  largest 
bank  in  the  country  and  burdened  by  a  high 
portfolio  of  non-performing  loans  —  reduced  the 
implicit  contingent  liabilities  in  relation  to  the 
banking sector. On the other hand, to facilitate the 
sale  of  the  bank,  the  State  adopted  public  support 
measures  at  a  high  cost  to  public  finances  (see 
Section 1 and Section 4.1.2). Amongst others,  the 
State’s  exposure  to  explicit  contingent  liabilities, 
in  the  form  of  government  guarantees,  increased. 
This  was  mainly  due  to  the  creation  of  asset 
protection schemes agreed as part of the sale of the 
Cyprus Cooperative Bank.  

The  sovereign  wealth  fund  could  improve  the 
long-term  sustainability  of  public  finances,  but 
the legislative proposal is still pending adoption 
by  the  House  of  Representatives.  The  draft 
sovereign  wealth  fund  law  sets  out  the  conditions 
future 
for  collecting,  managing  and  using 
resources  from  hydrocarbon  exploitation  and 
stipulates  that  the  government  will  be  able  to  use 
part of the revenue to reduce government debt. The 
House  of  Representatives  is  still  discussing  some 
proposed amendments to the  bill. Adoption of the 
legislation  would  contribute 
the 
sustainable use of revenue from the exploitation of 
hydrocarbon reserves and in turn to improving the 
outlook for public debt sustainability.  

to  ensuring 

4.1.2.  FISCAL FRAMEWORK AND POLICY 

CHALLENGES* 

Fiscal framework 

A  rigorous  implementation  of  the  budgetary 
framework is essential to contain risks of fiscal 
relaxation.  Currently, 
on 
implementing  the  secondary  legislation  of  the 

focus 

the 

is 

(24)  The  SYMBOL  long-term  scenario  does  not  attempt  to 
include the effects of the November 2016 banking package, 
which is still under negotiation (final stages of trilogues).  

26 

 
                                                           
                                                           
4.1. Public finances and taxation 

a 

approved 

government 

in  particular  not  exceeding 
in 

Fiscal  Responsibility  and  Budget  System  Law 
rigorously, 
the 
expenditure  ceilings  set 
the  medium-term 
budget  framework.  Furthermore,  in  March  2018, 
the 
decision 
accompanying 
the  Fiscal  Responsibility  and 
Budgetary  Framework  Law  to  fully  transpose  the 
Budgetary  Frameworks  Directive  (EU  2011/85). 
The  adopted  changes  clarified  the  responsibilities 
for  assessing  the  macroeconomic  and  budgetary 
forecasts  so  as  to  improve  the  transparency  of 
public  finances.  In  particular,  in  its  semi-annual 
reports the Fiscal Council is requested to compare 
the  official  macro-fiscal  projections  with 
the 
Commission’s  most  recent  forecasts,  while  the 
Ministry  of  Finance  is  responsible  for  explaining 
these 
differences 
any 
projections.  The  Fiscal  Council’s  mandate  on  the 
ex-post  evaluation  of 
the 
government’s macro-fiscal forecasts is set to cover 
at least four consecutive years. 

the  accuracy  of 

significant 

between 

Policy challenges 

expenditure 

Public  expenditure  has  accelerated  since  2017. 
At  37.5 %  of  GDP  in  2017,  total  public  spending 
in  Cyprus  is  below  the  EU  average  of  46.6 %. 
However,  public  primary 
(i.e. 
excluding  interest)  growth  in  Cyprus  was  higher 
than  the  nominal  potential  growth  in  2017  (at 
around 4.9 % vs 3.3 %). This growth rate in public 
spending  was  due  to  both  increased  current 
expenditure and public investment. While the pace 
of  public  expenditure  has  accelerated  recently,  it 
has been outpaced by buoyant tax revenue growth 
underpinned  by  strong  underlying  economic 
growth.  A prudent  fiscal policy  would avoid risks 
associated  with  using  the  additional  temporary 
revenue  generated  by  tax  buoyancy  effects  to 
finance increases in long-term expenditure. 

With  the  positive  macroeconomic  outlook, 
deficit-increasing  measures  have  been  adopted 
recently. Public employees’  salaries are projected 
to  gradually  increase  further  in  2018-2023  thanks 
to the government’s measure to reverse wage cuts 
implemented  since  the  crisis.  This  measure  is 
expected  to  increase  the  overall  public  wage  bill, 
but  to  remain  below  nominal  GDP  growth,  as  set 
by  the  collective  agreement  on  public  wage 
indexation  between 
the 
unions. The collective agreement, which was set to 
expire  at  the  end  of  2018,  will  continue  to  be  in 

the  government  and 

in 

of 

the 

absence 

effect 
any 
amendments. Furthermore, a recent Court decision 
deeming  the  pensions  cuts  in  the  public  sector 
implemented since the crisis to be unconstitutional 
is  likely  to  have  an  additional  fiscal  impact. (25) 
The  government’s  support  measure  for 
low-
income pensioners as part of a social dividend pay-
out  and  a  voluntary  retirement  scheme  for 
employees of the Cyprus Tourism Organisation as 
of  January  2019 (26)  are  also  expected  to  increase 
public  expenditure.  Capital  transfers  are  expected 
to rise as a result of the introduction of the ESTIA 
scheme,  which  involves  State  support  for  loan 
repayment  of  eligible  borrowers  with  non-
performing  loans  backed  by  primary  residences 
(see Section 4.2.1).  

Despite  the  measures  adopted,  pressure  to 
further  increase  public  spending  is  mounting. 
The  ongoing  discussions  between  the  government 
and the unions to create a provident fund for public 
sector employees recruited after October 2011 and 
on  contracts  of  indefinite  duration  might  create 
additional  incremental  fiscal  costs.  Furthermore, 
the agreement in principle between the government 
and  other  political  parties  on  introducing  a  State 
support  scheme  for  borrowers  who  have  their 
primary  residence  as  collateral  and  are  servicing 
their  loans,  with  criteria  similar  to  the  ESTIA 
scheme,  would  also  weigh  negatively  on  the 
budget balance. 

The  potential  fiscal  impact  of  the  healthcare 
reform  remains  uncertain,  in  particular  the 
public hospitals reform  might create additional 
budgetary  pressures.  The  national  health 
insurance  system  has  been  designed  to  have  a 
balanced  budget  in  the  long  term,  thanks  to  the 
legislated  contributions  to  the  system  and  the 
expected improved efficiency of public healthcare 
providers. (27)  However,  as  mentioned  in  Section 

(25)  The decision implies that the pension cuts will have to be 
fully reinstated in 2019, instead of gradually reversed over 
several  years  as  envisaged  in  the  government’s  measure 
mentioned above. The fiscal impact is estimated at around 
0.1% of GDP in 2019. 

(26)  In January 2019, the Cyprus Tourism Organisation became 

the Deputy Ministry of Tourism. 

(27)  The  national  health  insurance  system  will  be  mainly 
financed  by  contributions  to  the  system  and  co-payments 
on  certain  services.  Contributions  will  be  collected  as  of 
March  2019  for  the  first  phase  of  the  system  (outpatient 
care)  at  the  following  rates:  1.70  %  for  employees  and 
pensioners, 1.85 % for employers, 1.65 % for the State and 
2.55  %  for  the  self-employed.  As  of  March  2020 

27 

 
                                                           
4.1. Public finances and taxation 

4.3.2,  the  law  on  the  new  Organisation  of  public 
hospitals stipulates that the State will subsidise any 
potential  deficit  of  public  healthcare  providers  in 
the first 5 years of the operation of the system (as 
of June  2019). In the  meantime, public  healthcare 
providers  are  expected  to  gradually  adjust  their 
labour and cost structure to raise their productivity, 
improve  the  quality  of  services  and  maintain  a 
certain  amount  of  demand  for  public  healthcare 
service.  The  governance  capacity  of  public 
hospitals needs to be carefully monitored to ensure 
the future sustainability of the system.  

2019  Excessive  Deficit 

Some  uncertainty  remains  on  the  overall  fiscal 
impact of the banking support measures related 
to the sale of the Cyprus Cooperative Bank. The 
the  general 
these  measures  on 
impact  of 
government balance in 2018 will be reported in the 
April 
Procedure 
notification  and  subject  to  further  verification  by 
Eurostat. The general government accounts for the 
third  quarter  of  2018  were  recently  published, 
including  the  fiscal  impact  of  these  measures,  in 
agreement  with  Eurostat.(28)  The  potential 
liabilities 
realisation  of 
regarding  the  measures  related  to  the  sale  of  the 
Cyprus  Cooperative  Bank  is  a  risk  to  the  fiscal 
outlook.  

contingent 

explicit 

The  State’s  exposure  to  explicit  contingent 
liabilities  has  increased,  mainly  due  to  the 
measures  related  to  the  sale  of  the  Cyprus 
Cooperative  Bank.  Unlike  implicit  contingent 
liabilities (29) 
explicit 
contingent liabilities are government obligations as 
recognised  by  a  law  or  a  contract.  According  to 
Eurostat, 
2017 
amounted  to  around  8.7  %  of  GDP  (EUR  1.7 

(see  Section 

government 

guarantees 

4.1.1), 

in 

contributions  will  be  adjusted  upward  for 
the  full 
implementation  of  the  system  (outpatient  and  inpatient 
care)  to  the  following  rates:  2.65  %,  2.90  %,  4.70  %  and 
4.00 %, respectively. 

(28)  On  21  January  2019,  the  Statistical  Service  of  Cyprus 
published  a  press  release  with  the  revised  figures  for  the 
general government quarterly accounts for the third quarter 
of  2018.  It  announced  that  the  two  new  entities  which 
resulted  from  the  sale  process  of  parts  of  the  assets  and 
liabilities  of  the  Cyprus  Cooperative  Bank  have  been 
classified within the general government sector. The fiscal 
impact of the banking support measures related to the sale 
of  the  Cyprus  Cooperative  Bank  in  the  revised  fiscal 
accounts for the third quarter of 2018 is estimated at EUR 
1.5 billion. 

(29)  Implicit contingent liabilities represent moral obligations of 
governments,  although  not  legally  binding,  reflecting 
public and interest group pressures. 

the 

retail 

including 

enterprises, 

billion).  Most  of  these  liabilities  concerned  State-
owned 
sewerage 
boards (30),  private  corporations,  local  authorities 
exposures.  Cyprus’  government 
and 
guarantees  further  increased  in  2018  due  to  the 
government’s  contingent  obligations  in  relation  to 
financial institutions, particularly the establishment 
of  asset  protection  schemes  related  to  the  sale  of 
the  Cyprus  Cooperative  Bank  (see  Box  4.2.1). 
According  to  the  authorities  (Ministry  of  Finance 
of  Cyprus,  2018,  p.  36),  government  guarantees 
are  projected  to  increase  to  22.5 %  of  GDP  in 
2018, of which 13.4 % are related to the financial 
sector. 

An  improved  corporate  governance  of  State-
owned  enterprises  and  further  progress  on 
privatisation  projects  would  reduce  the  State’s 
exposure  to  contingent  liabilities  from  public 
companies.  The  draft  law  on  the  governance  of 
State-owned  enterprises  is  at  standstill  since  its 
submission  to  the  House  of  Representatives  in 
2015.  This  law  would  improve  the  corporate 
governance of State-owned enterprises and ensure 
that they are monitored more effectively. Progress 
on 
individual  privatisation  projects  has  been 
limited (see Section 4.4.3). Further progress on the 
privatisation  projects  could  reduce  the  State’s 
exposure  to  contingent  liabilities  from  public 
companies  (including  implicit  ones,  which  are 
difficult  to  quantify)  and  attract  further  foreign 
investment in Cyprus.  

4.1.3.  TAXATION* 

Tax  revenues  increased  significantly  in  2017, 
although  uncertainties  remain  about  whether 
the  increase  can  be  sustained.  In  terms  of  GDP, 
indirect tax revenue in Cyprus was well above the 
EU  average  in  2017  (15.9  %  vs  13.5  %),  while 
revenue  from direct taxes and social contributions 
(9.4 % and 8.7 %, respectively) continue to remain 
below  the  EU  average  (13.4  %  and  12.2  %, 
respectively). Total tax revenues stood at  34 % of 
GDP  in  2017,  below  the  EU  average  of  39  %.  In 
nominal terms, tax revenues increased by 9.3 % in 
2017  compared  to  the  year  before.  This  was  the 

(30)  The  Excessive  Deficit  Procedure  notification  of  October 
2018  refers  to  the  capital  transfers  to  sewerage  boards  for 
an  approximate  amount  of  EUR  15  million  both  in  2015 
and 2017. 

28 

 
                                                                                   
                                                           
4.1. Public finances and taxation 

result  of  sizeable  increases  in  all  tax  revenue 
categories and in particular thanks to an increase in 
value-added tax revenues (by 11.3 %) and a strong 
increase  in  corporate  tax  revenues  (by  6.1 %). 
However,  it  is  unclear  whether  the  strong  tax 
revenue  performance  from  value-added  tax  and 
corporate income tax can be sustained.  

sector  significantly  increased  its  value-added  tax 
collection  for  the  second  consecutive  year,  as  a 
result  of  the  strong  construction  activity.  Tax 
revenue might not continue to increase at the same 
rate  in  the  future  due  to  changes  in  the  economic 
cycle  and  a  projected  slowdown  in  construction 
activity. 

Corporate  tax  revenue  may  pose  sustainability 
risks, since it is prone to volatility. In particular, 
this  volatility  might stem from possible relocation 
decisions  by  (large)  companies  benefiting  from 
Cyprus’ tax jurisdiction, for instance if changes in 
the  international  corporate  tax  framework  would 
cut  out  incentives  for  aggressive  tax  planning.  To 
safeguard  fiscal  sustainability,  it  is  important  that 
temporary or volatile revenues are not used to fund 
additional current spending.  

Graph 4.1.2:  Value-added tax revenue growth and its main 

sector contributors 

(1) The sectors presented in the graph do not include all 
economic categories. Therefore, value-added tax revenue 
from these sectors does not add up to the value-added tax 
total (gross) revenue. 
Source: Ministry of Finance 

Section 

environmental 

Cyprus’  tax  structure  remains  more  growth- 
and  environment-friendly  than  that  of  the  EU 
on  average.  As  mentioned  in  the  2018  Country 
Report for Cyprus (European Commission, 2018a, 
Section  4.1.3),  the  tax  burden  on  labour  is  low, 
while 
tax 
and 
consumption 
revenues  are  high, 
line  with  euro  area 
in 
recommendation  3.  In  the  medium  term,  the  tax 
burden on labour is expected to remain below the 
EU  average,  despite  the  legislated  rises  in  social 
contributions  in  relation  to  the  pension  system  in 
2019  (European  Commission,  2017a)  and  the 
insurance 
introduction  of  compulsory  health 
contributions  to  finance  the  recently  adopted 
national health insurance system in 2019 and 2020 
(see 
and 
environmental  tax  revenues  in  terms  of  GDP  are 
also  expected  to  remain  above  the  EU  averages 
(31), in spite of some policy measures envisaged on 
environment-related  taxation.  Moreover,  as  in 
other  EU  countries,  Cyprus’  corporate  tax  system 
favours  debt  over  equity  financing  (i.e.  is  subject 
to  the  ‘debt  bias’).  This  debt  bias  may  lead  to 
excessive  leverage  and  make  companies  more 
vulnerable  to  economic  shocks.  However,  such 
bias  is  lower  in  Cyprus  compared  to  the  EU 
average (32).  Although 
the  effective  corporate 
income tax rate is below the EU average (13 % vs 
20 %  in  2017),  the  tax  on  capital  revenue  in 
Cyprus is similar to the EU average (8.6 % of GDP 
in  2016)  mainly  due  to  relatively  high  corporate 
income tax revenue (33). 

Consumption 

4.1.2). 

The  recent  significant  increase  of  value-added 
tax revenues might weaken in the future, as it is 
largely  due  to  the  current  positive  economic 
cycle and the strong construction activity. While 
most sectors increased their contributions to value-
added  tax  revenues  in  2017,  a  few  sectors  stood 
out (see Graph 4.1.2). Half of the total value-added 
tax revenues in 2017 stem from the following four 
(ii) 
sectors: 
construction;  (iii)  professional  activities;  and  (iv) 
information  and  communication.  The  construction 

(i)  wholesale  and 

trade; 

retail 

(31)  The  environmental  tax  revenues  in  terms  of  GDP  data 
needs to be interpreted with caution. E.g. an increase in tax 
revenue may arise when the underlying tax base increases, 
but the corresponding tax rates remain constant.  

(32)  Following  the  introduction  of  notional  interest  deduction 
on  equity,  in  2015,  Cyprus’  cost  of  capital    at  corporate 
level stood at 6.3 % for new equity (below the EU average) 
and 4.9 % for debt (above the EU average). The difference 
between  the  cost  of  capital  between  equity  financed  (new 
equity)  and  debt-financed  investments  amounted  to  1.4 % 
in Cyprus (0.7 percentage points below the EU average). 
(33)  All  other  capital  tax  revenue  components,  i.e.  capital  tax 
revenue    from  income  of  households,  self-employed  and 
capital stock are significantly lower in Cyprus compared to 

29 

-10-50510152011121314151617%, y-o-y %changeOtherProfessional and technical act.Information and CommunicationWholesale and retail tradeConstructionManufacturingTotal (y-o-y % change) 
 
                                                           
4.1. Public finances and taxation 

introduction  of  guaranteed  minimum  income (35) 
(see Section 4.3.2).  

Graph 4.1.3:  Main receivers from and contributors to 

government redistribution by decile (average 
2005-2016) 

Source: European Commission Joint Research Centre, based 
on EU-SILC data 

The large progressivity of taxes and the current 
social  pension  scheme  have  helped  to  reduce 
income  inequality  in  Cyprus.  Public  pensions 
contribute to reducing income inequality in Cyprus 
thanks to its social pension scheme. (36) However, 
public pensions in general are not primarily aimed 
at  income  redistribution,  but  to  lifetime  social 
contributions.  Aside  from  public  pensions,  both 
social transfers and taxes play a significant role in 
reducing income inequality in Cyprus. In 2016, the 
tax  effect  on  income  inequality  stood  at  8 % 
(above  the  EU  average  of  7.4 %)  and  the  benefit 
effect  stood  at  12.1 %  (below  the  EU  average  of 
15 %) as measured by Gini. The relatively high tax 
effect  is  due  to  the  progressivity  of  taxes,  in 
particular  for  the  personal  income  tax  (European 
Commission,  2018a,  Section  4.1.3).  As  shown  in 
Graph 4.1.3, the tax and benefit system in Cyprus 
supports  income  redistribution  to  the  low-income 
households,  as  net  transfers (37)  are  positive  for 
they  are  net 
low-  and  middle-income 

(i.e. 

the 

structure 

fair  manner 

in  Cyprus.  This 

There  is  further  scope  for  redesigning  in  a 
socially 
of 
environmental taxation to improve climate and 
is 
environmental  policy 
particularly  true  in  view  of  the  challenges  Cyprus 
is  likely  to  face  in  meeting  its  greenhouse  gas 
emissions  targets  in  2020  and  2030  (see  Section 
4.4.1).  The  recently  approved  measure  to  reduce 
the excise duties on fuel as of mid-December 2018 
as  part  of  a  social  dividend  pay-out  will  make 
meeting the greenhouse gas emissions targets even 
more  difficult.  Yet,  its  impact  is  estimated  by  the 
authorities  to  be  relatively  limited  (at  0.2 %  of 
GDP).  Alternative  tax  measures  could  further 
improve 
and 
environmental  policy  in  Cyprus.  To  that  end,  the 
government plans a revision of the vehicle taxation 
through  changes  to  road  tax  and  abolition  of 
vehicle  excise  duties,  which  are  based  on  CO2 
emissions  (Ministry  of  Finance  of  Cyprus,  2018, 
pp.  10-11).  While  the  overall  fiscal  impact  of  the 
reform  is  expected  to  be  very  limited,  with 
potential  revenue  losses  of  0.03 %  of  GDP,  it  is 
aimed 
of 
promoting 
low-emission) 
environmentally-friendly 
vehicles.  Removing  environmentally  harmful  tax 
expenditures  such  as  the  exemption  of  excise 
duties  on  fossil  fuels  for  power  generation  could 
also facilitate meeting the relevant targets, notably 
for primary energy consumption. 

cost-efficiency 

introduction 

climate 

(i.e. 

the 

of 

at 

The redistributive power of the Cypriot tax and 
benefit  system  has  more  than  offset  the  post-
crisis rise in income inequality in 2015-2016. In 
2004-2012,  Cyprus’  income  inequality  after  taxes 
and  benefits  was  at  around  the  EU  average  level, 
even though the redistributive power of the tax and 
benefit  system  was  among  the  lowest  in  the 
EU.(34)  Since 
income 
inequality  has  increased  somewhat  in  Cyprus.  In 
2015-2016,  income  inequality  after  taxes  and 
benefits  decreased  significantly  thanks  to  the 
higher 
improved 
government  redistribution  policy  with  respect  to 
social  benefits.  The  latter  could  be  related  to  the 

the  2012-2013  crisis, 

impact  of 

taxes  and 

the 

the EU average. Tax on property  revenue is very  low and 
well  below  the  EU  average  (1.1  %  of  GDP  vs  2.6  %  in 
2017). 

(34)  In 2004-2012, Cyprus’ income inequality before taxes and 
benefits (i.e. market income) was among the lowest in the 
EU, as measured by Gini coefficient. 

(35)  According 

to 

the 

latest  data  available  (2016), 

the 
government  distribution  effect  on  income  inequality  as 
measured by Gini coefficient increased by around 44 % as 
compared to 2014. 

(36)  The  social  pension  scheme  provides  social  benefits  for 

residents with no or low old age pension income. 

(37)  Net  transfers  are  the  sum  of  social  transfers  net  of  direct 
taxes per disposable income of a given income decile. 

30 

-30-20-10010203040506012345678910percentagedecileSocial transfersDirect taxesPensionsNet transfers 
                                                                                   
 
                                                           
4.1. Public finances and taxation 

receivers)  and  close  to  zero  for  high-income 
households. 

taxes, 

that  engage 

in  aggressive 

The  high  levels  of  inward  and  outward  foreign 
direct investment, in addition to the high levels 
interest  payments  as  a 
of  dividend  and 
percentage  of  GDP, (38)  may 
indicate  that 
Cyprus’  tax  rules  are  used  by  companies  and 
individuals 
tax 
planning. Possible risk areas involving aggressive 
tax  planning  include  the  absence  of  withholding 
taxes, (39)  the  design  of  the  Cyprus  tax  residence 
the  residence  and  citizenship  by 
rules  and 
investment  schemes.  Due 
the  absence  of 
to 
withholding 
the  outbound  payment  of 
dividends,  interest,  and  royalties  from  Cyprus-
based companies to non-EU jurisdictions may lead 
to  double  non-taxation  if  these  payments  are  not 
taxed  in  the  recipient  jurisdiction.  Another  risk  is 
that  the  proceeds  of  contributions  to  foreign 
companies  are  recognised  as  capital,  despite  no 
shares being issued in return (a practice known as 
‘non-returnable  capital  contributions’).  In  2018, 
Cyprus tightened the conditions  to recognise  non-
returnable  capital  contributions,  but  the  effects  of 
this  on  aggressive  tax  planning  remain  to  be 
seen (40).  Furthermore,  the  Cyprus  tax  residence 
rules  are  based  on  the  management  and  control 
test,  so  that  a  company  may  be  incorporated  in 
Cyprus  but  not  be  tax-resident  there.  This  has  the 
potential  to  create  a  mismatch  that  could  also  be 
exploited  for  tax  planning  purposes.  Aggressive 
tax  planning  can  also  occur  in  combination  with 
the  avoidance  of  social  security  contributions  and 
the 
through 
artificial 
in  Cyprus  (European 
Platform  Undeclared  Work,  2017).  Also,  in  2015 
Cyprus  introduced  a  Notional  Interest  Deduction 
scheme,  which  needs  to  be  closely  monitored  to 
ensure  that  it  is  not  misused  for  aggressive  tax 
planning and harmful tax competition. Finally, the 
investment’ 
‘Citizenship’  and 
schemes  operated  by  Cyprus  (Citizenship  by 
Investment: Scheme for Naturalisation of Investors 
in  Cyprus  by  Exception  and  Residence  by 
Investment Scheme, also known as ‘golden visas’) 
give  access  to  a  low  personal  tax  rate  on  income 
from foreign financial assets and do not require an 

facilitation  of  undeclared  work 

‘Residence  by 

intermediaries 

individual to spend a significant amount of time in 
the  jurisdiction  offering  the  scheme.  Although 
individuals are subject to tax on a worldwide basis, 
non-domiciled  taxpayers  are  exempt  from  tax  on 
dividends  and  interest.  These  measures  can  create 
the potential for misuse when used as tools to hide 
assets  held  abroad  from  reporting  and  have  been 
listed  by  the  OECD  as  having  a  potentially  high 
risk for being misused to circumvent the automatic 
exchange  of  financial  account  information  by 
facilitating 
real 
concealment 
jurisdictions  of  residence,  effectively  avoiding 
taxation.  

the 

the 

of 

Cyprus is acting to curb aggressive tax planning 
through  the  implementation  of  European  and 
internationally agreed initiatives. In line with the 
rest  of  the  EU,  Cyprus  has  to  transpose  into 
national  law  the  two  EU  Directives  on  Anti-Tax 
Avoidance.  Member  States  are  expected 
to 
complete this transposition by the end of 2018 and 
2019. (41) The Notional Interest Deduction scheme 
is  currently  under  examination  by  the  Code  of 
Conduct  on  Business  Taxation  of  the  Council. 
Furthermore,  Cyprus  has  signed  the  Multilateral 
Convention  to  Implement  Tax  Treaty  Related 
Measures  to  Prevent  Base  Erosion  and  Profit 
Shifting, and expects to complete its ratification by 
the  second  half  of  2019.  Cyprus  has  chosen  to 
apply  it  to  the  vast  majority  of  its  treaty  partners, 
but  has  put  numerous  reservations,  not  forming 
latter 
part  of 
of 
significantly 
implementation  of  the  multilateral  convention  in 
Cyprus.  A  circular  issued  by  the  Cyprus  Tax 
Authority 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.  The  Cyprus  Tax  Authority  is  also 
reviewing 
legal 
framework with a view to updating it in mid-2019. 
The  effectiveness  of  these  new  measures  in 
limiting the scope for aggressive tax planning and 
their  impact  on  the  corporate  income  tax  revenue 
in the medium term deserves to be assessed. 

the  minimum  standard.  The 
the 

transfer  pricing 

requirements 

effectiveness 

the  wider 

limits 

(38)  See European Commission, 2018a, pp. 27-28. 
(39)  There  is  a  withholding  tax  on  royalties  if  the  intellectual 

property rights are used locally. See ZEW, 2016. 

(40)  Interpretative Circular EE 25- Income Tax of 3 September 

2018. 

(41)  These entail rules for interest limitation, controlled foreign 
companies, and general anti-tax avoidance (to take effect as 
from  2019);  exit  taxation  (from  2020);  and  hybrid 
mismatch  (from  2020-2022).  See  European  Commission, 
2016a and 2017b. 

31 

 
                                                           
                                                           
4.2.  FINANCIAL SECTOR* 

4.2.1.  BANKING SECTOR DEVELOPMENTS * 

One  of  the  key  developments  in  the  Cypriot 
banking  sector  in  2018  was  the  market  exit  of 
the  Cyprus  Cooperative  Bank.  After  struggling 
with  reducing  a  significant  non-performing  loans 
(NPL)  portfolio  and  very  weak  governance,  the 
second  largest  bank  in  the  country  was  ultimately 
sold  to  Hellenic  Bank.  It  took  over  almost  the 
entire  performing  loan  portfolio,  all  government 
bonds  and  all  customer  deposits.  The  Cyprus 
Cooperative  Bank  surrendered  its  banking  licence 
on  3  September  2018  and  left  behind  an  asset-
management  company  —  which  took  over  the 
bank’s  NPL  portfolio  (EUR 5.7  billion).  The 
Cyprus  Cooperative  Bank  sale  and  wind-down 
resulted in a consolidation of the banking sector. It 
reduced  uncertainty  in  the  market,  helped  stop 
deposit outflows, and reduced the stock of NPLs in 
the  banking  sector  (by  shifting  it  to  the  publicly 
owned  asset  management  company).  More  details 
on  the  bank  sale  and  its  timeline,  its  asset-
management  company  legacy  and  the  impact  on 
the public finances are presented in Box 4.2.1.  

its  NPL  ratio 

the  acquisition  of 

its  NPL  coverage  ratio 

Following 
the  Cyprus 
Cooperative Bank, Hellenic Bank is expected to 
improve its performance. Hellenic Bank became 
the  second  largest  bank  in  Cyprus  after  the 
transaction. As a result of the better portfolio mix, 
to  decline 
the  bank  expects 
significantly  and 
to 
increase.  The  bank’s  profitability  is  also  expected 
to increase significantly, driven by the high interest 
income  from  the  government  bonds.  However, 
integrating  a  bank  that  is  approximately  twice  as 
large  in  terms  of  gross  loans  and  deposits,  also 
poses  challenges.  The  integration  involves  major 
organisational  and  managerial  challenges  and 
restructuring  costs.  In  addition,  in  January  2019, 
Hellenic  Bank  announced 
the  share  capital 
increase through (i) rights issue of up to EUR 100 
million  and  (ii)  a  private  placement  of  EUR 50 
million  and  the  listing  on  the  Cyprus  Stock 
Exchange of the rights issued.  

The  banking  sector  returned  to  profitability  in 
the first half of 2018, but poor asset quality and 
low  interest  margins  continue  to  push  banks’ 
performance  down.  The  sector’s  aggregate  pre-
tax  profit  was  EUR 196  million  as  of  September 
2018, up from a net loss of EUR 535 million a year 
ago,  but  the  high  stock  of  NPLs  still  weighs 
heavily  on  bank  profitability  and  the  overall 
stability  of  the  banking  sector,  even  after  the 
disposals  of  bad  assets.  Net  interest  margins 
continue  to  decline,  while  the  operating  cost-to-
income  ratio  almost  doubled  in  the  first  half  of 
2018,  partly  due  to  the  servicing  arrangements 
with specialised NPL management companies that 
several banks have entered into to accelerate their 
NPL  reduction.  Provisioning  costs  (excluding 
adjustments  related  to  the  International  Financial 
Reporting  Standards  9  (IFRS  9-related))  declined 
in  the  first  half  of  2018,  bringing  the  banking 
sector  back  into  profitability,  with  a  return-to-
equity of 8.6 % as of September 2018.   

Capital  levels  have  declined  slightly,  driven 
largely  by  the  IFRS  9  related  adjustments.  (42)  In 
particular,  despite  transitional  IFRS  9  application, 
the Common Equity Tier 1 ratio dropped to 14.1 % 
in September 2018, down from 15.0 % a year ago. 
Although the capital ratios are higher than the EU 
averages,  Cypriot  banks  have  to  maintain  higher 
capital ratios than the minimum levels, as required 
by  their  supervisors,  to  absorb  potential  shocks 
associated with a weak asset quality.  

to 

Risk  provisioning  continued 
improve. 
Following  supervisory  actions  in  2017  and  the 
entry into force of the IFRS 9 standards in January 
2018, provisioning coverage ratios increased from 
46.7 %  of  gross  non-performing  loans  in  June 
2017 to 52.3 % in September 2018, staying above 
the EU average of 45.7 %.  

(42)  All major Cypriot banks have elected to apply the IFRS 9 
transitional arrangements for regulatory capital purposes in 
line  with  Commission  Regulation 
(EU)  2016/2067, 
resulting in increases of 5 % in 2018, 15 % in 2019, 30 % 
in  2020, 50 % in 2021, 75 %  in  2022  and  full  recognition 
thereon.  

32 

 
 
                                                           
4.2. Financial sector* 

Box 4.2.1: The Cyprus Cooperative Bank exit from the banking sector 

The sale of the State-owned Cyprus Cooperative Bank to Hellenic Bank allowed the bank to make an 
orderly  market  exit.    The  Cypriot  authorities  initiated  a  restructuring  process  of  the  Cyprus  Cooperative 
Bank in February 2014. Over the following years the bank struggled with large volumes of non-performing 
exposures (i.e. a non-performing loan (NPL) ratio close to 60 % in the beginning of 2018) and ultimately it 
was not able to return to viability. In early 2018, the bank faced sizeable deposit outflows linked to souring 
public  opinion  and  doubts over  a  successful  restructuring.  To  ease  these  pressures,  on  19 March 2018  the 
Cypriot authorities initiated the bank’s sale by launching a formal bidding process for a full or partial sale of 
the bank. To strengthen its balance sheet and thus support the sale, on 3 April 2018 the government made a 
deposit injection of around EUR 2.5 billion, funded by newly issued government bonds (EUR 2.35 billion) 
and a small cash addition from the cash buffers (EUR 0.15 billion). The bidding process ended in June with 
Hellenic  Bank  emerging  as  the  winning  bidder.  The  European  Commission,  under  the  State  Aid  rules, 
endorsed  the  sale  agreement  on  19 June,  approving  the  public  support  measures  to  facilitate  the  orderly 
liquidation of the Cyprus Cooperative Bank under the national law. A business transfer agreement between 
Hellenic  Bank  and  the  Cyprus  Cooperative  Bank  was  signed  on 25 June.  As  part  of  the  deal,  the  Cypriot 
government  increased  its  deposit  injection  in  Cyprus  Cooperative  Bank  from  EUR 2.5  billion  to EUR 3.5 
billion in July 2018. To fund this cash infusion, the government issued a new round of bonds worth EUR 3.2 
billion (the proceeds of which redeemed the bonds of 3 April 2018), and provided an additional cash amount 
of EUR 0.3 billion. The new bonds were placed on the asset side of the balance sheet to match the deposit. 
In  addition  to  the deposit injection,  the  Cypriot  Republic  counter-guaranteed  the  asset  protection schemes 
provided by the Cyprus Cooperative Bank to  Hellenic Bank as part of the sale (1). The closing of the sale 
transaction took place on 3 September 2018, when the bank surrendered its banking licence. Under the terms 
of the deal, Hellenic Bank took over the sound part of the Cyprus Cooperative Bank (2). 

Cyprus Asset Management Company is Cyprus Cooperative Bank’s legacy. The bank’s residual entity 
is a State-owned asset management company which has under its perimeter the bulk of Cyprus Cooperative 
Bank’s NPLs (EUR 5.7 billion) together with the State deposit (3). According to the Commission’s State Aid 
decision,  the  Cyprus  Asset  Management  Company’s  sole  activity  is  to  manage  its  assets  such  that  it 
maximises  recovery  and  repays  the  State.  Its  organisation  and  its  governance  still  need  to  be  defined (4). 
Furthermore,  it  is  not  clear  whether  Altamira,  which  was  Cyprus  Cooperative  Bank’s  debt  servicer  since 
2017, will continue to service the asset management company. 

The state support measures for the Cyprus Cooperative Bank sale and wind-down were costly for the 
public  purse.  The aid  measures  undertaken by the Cypriot authorities  increased the country’s public debt 
(projected  at  105 %  of  GDP  for  the  end  of  2018)  and  increased  the  government’s  exposure  to  explicit 
contingent liabilities (namely asset protection schemes). The support measures are also expected to weigh on 
the budget balance in 2018, depending on the statistical treatment by Cystat and Eurostat, which is still to be 
determined.    

(1)  The assets under the asset protection schemes amount to approximately EUR 2.8 billion gross book value. In particular, 
in gross book value terms, they cover around EUR 2.1 billion of the performing loans transferred to Hellenic Bank and 
the entire NPL portfolio  worth approximately EUR 0.7 billion. Under the set-up of the asset protection schemes, the 
Cypriot  government  would  provide  compensation  for  90 %  of  the  approved  credit  risk  losses  while  Hellenic  Bank 
would be exposed to 10 %. The duration of the asset protection schemes will be 10 to 12 years, depending on the loans. 
For more details on the schemes, see European Commission, 2018d.  

(2)  Hellenic Bank took over most of Cyprus Cooperative Bank’s performing assets, all government bonds and all customer 

deposits. For more details on figures see European Commission, 2018b. 

(3)  The NPL portfolio is subject to revaluation. 
(4)  The  Post-Programme  Surveillance  Report  Cyprus,  Autumn  2018  (European  Commission,  2018b)  presents  a 

comparison of the Cyprus Asset Management Company with selected asset management companies. 

33 

 
 
 
 
 
 
 
 
4.2. Financial sector* 

licence 

surrendering 

its  banking 

In  the  second  half  of  2018  around  one  third  of 
non-performing  loans  (NPLs)  were  carved  out 
of  the  banking  sector.  With  Cyprus  Cooperative 
in 
Bank 
September  2018,  EUR 5.7  billion  NPLs  were 
transferred  to  the  publicly  owned  wind-down 
entity  of  the  bank  (i.e.  a  State-owned  asset 
management  company).  Even  though  they  are  out 
of  the  banking  system,  the  NPLs  from  the  asset-
management  company  will  continue  to  weigh  on 
the economy as the private  sector remains heavily 
indebted.  To  maximise  recoveries  from  the  bad 
assets,  recuperate  the  public  funds  placed  in  this 
entity,  and  ultimately  help 
reduce  private 
indebtedness,  it  is  essential  that  the  Cypriot  asset 
management  company  is  managed  successfully. 
independent  governance  structure,  proper 
An 
management,  full  transparency  and  appropriate 
supervision,  as  outlined 
the  Commission 
Decision  of  19.  06.  2018  (European  Commission, 
2018e),  are  essential  ingredients  for  an  effective 
State-owned  asset-management  company.  The 
organisation  of  the  Cypriot  asset  management 
company and its governance should be fully set out 
during 2019.    

in 

The House of Representatives approved a series 
of  legal  proposals  to  remove  impediments  to 
non-performing loans’ (NPLs) resolution. At the 
beginning  of  July  2018,  the  Cypriot  authorities 
adopted a legislative package that included, among 
others,  amendments  to  the  following  acts:  the 
Personal Insolvency Law, the Companies Law, the 
Insolvency 
the 
Bankruptcy  Law,  the  Sale  of  Loans  Law  and  the 
Immovable  Property  (Transfer  and  Mortgage) 
Law. The Securitisation Law was also approved by 
the country’s parliament as part of the package. 

Practitioners’  Regulations, 

The changes to both insolvency and foreclosure 
legislation include clarifications on the scope of 
application.  In  particular,  for  various  insolvency 
mechanisms (such as debt relief orders or personal 
repayment  plans),  the  eligibility  criteria  were 
broadened and the general government’s liabilities 
were  also  included,  abolishing  its  preferential 
treatment.  The  maximum  protection  period  for 
non-viable  debtors  was  limited  to  12  months. 
Furthermore, 
the 
rules 
remunerations  of  insolvency  practitioners  within 
the  Insolvency  Practitioners’  Regulations  have 
been  amended  to  provide  more  incentives.  The 
foreclosure legislation was amended to allow for a 

to  determine 

the 

The  stock  and  ratio  of  non-performing  loans 
(NPL) declined significantly in 2018 but remain 
high. The NPL ratio went down to 44.7 % in June 
2018  (43)  and  is  estimated  to  decline  further  to 
approximately  37 %  by  the  end  of  the  year. 
Although  lower  compared  to  previous  years,  the 
ratio is still very high (see Table 4.2.1). The stock 
for  non-financial 
loans 
of  non-performing 
corporations contracted the most, having fallen by 
almost  one  third  in  the  first  half  of  2018.  In 
particular,  by  end  of  September  2018  the  NPL 
ratio of non-financial corporations stood at 36.8 %, 
whereas  for  households  it  was  38 %.    The  NPL 
ratio therefore remains well above the EU average 
of around 4.0 %. 

The  sale  of  loans  made  by  Hellenic  Bank  and 
Bank  of  Cyprus  were  the  key  contributors  of 
the  steady  decrease  in  non-performing  loans 
(NPLs)  in  the  first  half  of  the  year.  Hellenic 
Bank’s  sale  of  NPLs,  a  portfolio  worth  EUR 140 
million, to  Norway’s B2Kapital  was the  first loan 
sale  in  Cyprus (44). The  offload  of  NPLs  by  Bank 
of  Cyprus  was  much  more  significant.  The  bank 
agreed  with  Apollo  Global  Management  on  a 
portfolio  worth  EUR 2.7  billion  of  NPLs  (Helix 
portfolio).  The  completion  of  the  transaction 
remains  subject  to  regulatory  approval,  most 
notably on the significant risk transfer recognition 
by 
Supervisory  Mechanism. 
Nevertheless,  the  sale  has  already  been  accounted 
the  NPL  metrics  pro-forma (45).  The 
for 
loans 
portfolio  mainly  comprised 
(loans,  which  the  bank  considers  to  have  no 
negotiation  possibilities).  It  remains  to  be  seen 
how  the  credit  acquiring  company  manages  these 
loans. In particular, whether it will offer additional 
restructuring and to what extent it will make use of 
the newly revamped foreclosure framework. These 
issues will likely determine whether Cypriot NPLs, 
particularly  terminated  loans,  will  continue  to  be 
targeted by investors in the future. 

terminated 

Single 

the 

in 

(43)  This  figure  is  the  private  sector  NPL  ratio  which  consists 
only  of  exposures  to  non-financial  corporations  and 
households,  excluding  loans  to  financial  institutions  and 
the government sector. It is computed based on ECB data.   
(44)  The  NPLs  portfolio  sale  was  agreed  in  January  2018  and 

took place in June 2018. 

(45)  Should  Bank  of  Cyprus  fail 

the  Single 
Supervisory  Mechanism’s  approval  on  this  portfolio  the 
published NPLs figures would need to be revised upwards. 

to  obtain 

34 

 
 
                                                           
4.2. Financial sector* 

to  allow 

broader and smoother application of foreclosure of 
collateral.  The  scope  of  application  of  the  new 
procedure  was  clarified,  ensuring  that  old  Court 
decisions  are  covered  as  well.  The  notification 
requirements  were  amended 
for 
alternative  means  of  delivery,  if  delivery  by 
registered post is not feasible. The law also allows 
for  electronic  auctioning  of  properties,  while  the 
system for e-auctions is being set up. Importantly, 
under the amended framework the time needed for 
foreclosure  is  shortened  as  the  bank  may  buy  the 
property  6  months  after  the  first  unsuccessful 
auction  (within  a  period  of  4  months),  whereas 
before  it  was  1  year.  Furthermore,  the  right  of 
borrowers  to  seek  a  suspension  of  enforcement, 
foreclosure or bankruptcy has been limited in time 
and  scope.  The  impact  of  the  legal  changes 
remains to be seen over time. 

Making  use  of  the  amended  insolvency  and 
increasing  the 
foreclosure  frameworks  and 
efficiency of the judicial  processes are essential 
for  strengthening  the  payment  discipline.  Now 
is the time to fully make use of these frameworks 
in order to serve their function as credible tools to 
enhance  payment  discipline  and  resolve  unviable 
debts. To this end, improving the efficiency of the 
judicial  proceedings,  especially  as  regards  the 
resolution of NPLs remain essential. Therefore, the 
ongoing  judicial  reform  is  of  critical  importance 
and needs to be stepped up (see Section 4.4.3).  

loans 

the  non-performing 

The  authorities  also  announced  a  temporary 
subsidy  scheme  (ESTIA),  which  aims  to  deal 
with 
(NPLs) 
collateralised by primary residences. During the 
second  half  of  2018,  the  authorities  made  public 
their  plans  regarding  ESTIA  —  a  burden-sharing 
scheme  between  the  banking  institutions  and  the 
State.  Under  this  scheme,  the  banks  offer  debt 
relief,  while the government  provides subsidies to 
eligible  borrowers  with  NPLs  backed  by  primary 
residences,  which  has  proven  to  be  the  most 
difficult  portfolio  to  recover  value  from.  The 
borrower’s  outstanding  loan  is  restructured  to 
ensure  that  the  repayment  obligation  does  not 
exceed  the  market  value  of  the  main  residence. 
Furthermore, the State pays subsidies to lower the 
debt  servicing  costs,  including  both  principal 
payment and interest charges, by one third. In case 
of  a  re-default  of  the  borrower,  the  foreclosure 
process  is  to  be  commenced  and  the  liquidation 
proceeds  will  be  shared  on  equal  footing  between 
the  bank  and  the  government,  to  ensure  that  past 
subsidies  are  retrieved.  The  original  ESTIA 
proposal,  which  was  approved  by  the  Council  of 
Ministers  in  July  2018,  raised  a  number  of 
concerns  (mainly  related  to  its  broad  eligibility 
criteria) from different  stakeholders, including the 
European  Commission.  The  authorities  therefore 
revised  the  terms  of  the  ESTIA  scheme  in 
the 
November  2018,  notably  by 
eligibility  criteria.  (46) Narrowing 
the  criteria 
helped  to  some  extent  to  address  fairness  and 
moral  hazard  issues,  however  some  concerns 
remain.  Therefore,  the  scheme’s  implementation 

tightening 

(46)  For  more  details  on  ESTIA  and  key  concerns  raised  see 

European Commission, 2018b. 

35 

 
 
 
                                                           
4.2. Financial sector* 

Table 4.2.1: 

Financial soundness indicators for domestic and foreign banks 

(1) The aggregate NPL ratio covers all loans and advances.   For Cyprus, this ratio may be misleading due to the large 
exposures (nearly a quarter of gross loans) of domestic and foreign banks to central banks and other financial institutions. 
More representative is the private sector NPL ratio below.      
(2) This is the private sector NPL ratio comprising only of exposures to non-financial corporations and households. 
(3) Loans and deposits exclude government and monetary financial institutions as counterparties. 
(4) For comparability annualized values are presented. 
Source: ECB 

will need to be closely monitored. ESTIA is to be 
implemented from March 2019.  

the  end  of  2017,  exceeding  the  fundamental  and 
prudential thresholds of 169 % and 69 % of GDP, 
respectively.   

4.2.2.  PRIVATE INDEBTEDNESS *  

The  private  sector  is  still  highly  indebted, 
despite ongoing deleveraging. After reaching the 
peak in 2015, the private debt-to-GDP ratio is on a 
declining path (see Graph 4.2.1). (47) In September 
2018,  private  debt  was  291.3 %  of  GDP,  down 
from  316.3 %  of  GDP  at  end  of  2017. (48)  While 
falling  below  the  300 %  threshold  is  a  positive 
development,  much  more  deleveraging  is  needed 
as the debt-to-GDP ratios for both households and 
non-financial  corporations  are  well  above  the 
fundamental  and  prudential  benchmarks  (49).  At 
the end of 2017, the household debt ratio stood at 
107.5 %  of  GDP,  above  the  fundamental  and 
prudential  benchmarks  estimated  at  100 %  and 
41 % of GDP, respectively. In the corporate sector, 
the consolidated debt ratio was 208.8 % of GDP at 

(47)  Private  sector  debt  refers  to  the  non-financial  private 
including,  households  and  non-financial 

sector, 
thus 
corporations.  

(48)  The September 2018 debt figure refers to non-consolidated 

data.  

(49)  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 the probability of a banking crisis is relatively high, 
minimising the probability of missed crisis and that of false 
in  European 
alerts.  Methodologies 
Commission (2017c) and updates to the methodology have 
been  subsequently  proposed  in  European  Commission 
(2018f).   

are  described 

of 

Excluding  the  debt  of  the  special  purpose 
entities  from  the  debt  metrics  reduces  the  debt 
corporations, 
non-financial 
overhang 
however Cypriot indebtedness still remains well 
above  sound  levels.  The  debt-to-GDP  ratio  of 
non-financial corporations is heavily influenced by 
non-financial  special  purpose  entities,  which  are 
mainly  ship-owning  entities.  The  special  purpose 
entities  are  perceived  to  have  limited  links  to  the 
real  economy,  they  own  real  assets  (ships)  and 
their  debt  is  overwhelmingly  funded  by  foreign 
banks  or  other  non-resident  entities.  (50)  While 
such set-up of special purpose entities reduces the 
risks  to  the  domestic  economy,  their  debt  inflates 
the  corporate  sector  indebtedness  overall  (see 
Graph 4.2.2). At the end of 2017,  the foreign debt 
of  special  purpose  entities  was  76.5 %  of  GDP. 
When  excluding 
the  special  purpose  entities 
foreign  debt,  the  non-financial  corporations  debt 
ratio is reduced from 208.8 % to 132.3 % of GDP 
for  the  end  of  2017.  This  debt  ratio  is  still  above 
the  prudential  benchmark  and  also  above  the 
fundamental  benchmark  adjusted 
for  special 
purpose entities (90.8 % of GDP).  

(50)  References  to  special  purpose  entities  in  this  section  refer 
to non-financial ones. For more details on special purpose 
entities, see European Commission, 2018a. 

36 

(%)201020112012201320142015201620172018q12018q2Non-performing loan ratio (1)----38.636.335.430.730.828.1of NFCs and households (2)----54.655.154.850.449.344.7of NFCs----57.255.355.048.346.437.5of households----52.155.054.752.452.050.7Coverage ratio48.152.646.731.031.737.241.346.347.947.0Loan to deposit ratio (3)103.9112.6119.3152.3152.1152.0120.5110.4106.4100.8Tier 1 ratio10.97.46.312.314.616.016.415.414.714.7CET 1 ratio----14.215.615.914.914.114.2Return on equity (4)8.2-75.6-100.8-37.9-7.1-7.71.7-11.59.83.9Return on assets (4)0.6-3.6-3.6-2.9-0.6-0.6-0.3-1.00.90.3 
                                                           
                                                           
 
 
 
4.2. Financial sector* 

almost  equal  split  between  foreign  and  domestic 
liabilities 
is  mostly 
in  2017.  Foreign  debt 
associated  with  special  purpose  entities,  while 
domestic debt is mostly in the form of bank loans. 
Central  Bank  of  Cyprus  data  on  bank  loans  by 
business  sectors  shows 
loans  are 
concentrated  in  few  sectors.  In  particular,  in  June 
2018, a large proportion of the stock of bank loans 
made  to the  non-financial corporations sector  was 
reported to be in construction (20 % of total loans), 
real  estate  activities  (20 %  of 
loans), 
wholesale  and  retail  trade  (21 %  of  total  loans), 
and  accommodation  and  food  services  (12 %  of 
total loans) (see Graph 4.2.3). (52)  

that  bank 

total 

Graph 4.2.2:  Non-financial corporations debt 

decomposition 

Source: Eurostat, ECB, Central Bank of Cyprus 

Reducing private indebtedness is challenging in 
the  context  of  high  volumes  of  non-performing 
loans  (NPLs)  and  negative  savings  rates.  In  the 
corporate  sector  almost  40 %  of  the  total  bank 
loans  were  non-performing  in    June  2018.  In 
particular, 
the  over-indebted  business  sectors 
mentioned  above  struggled  with  high  NPL  ratios: 
construction  (54 %),  real  estate  activities  (25 %), 
wholesale 
and 
accommodation  and  food  services  (19 %).  (53)  In 
the  household  sector,  the  debt-overhang  is  due  to 
the  high  stock  levels  of  mortgage  loans  and 
consumption  loans.  For  households,  issues  related 

(46 %), 

retail 

trade 

and 

(52)  The  figures  are  computed  using  Central  Bank  of  Cyprus 
data on all banks on a consolidated basis. Total loans refer 
to  total  bank  loans  and  advances  excluding  loans  and 
advances to central banks and credit institutions.  
(53)  Based on Central Bank of Cyprus June 2018 data.  

Graph 4.2.1:  Private sector indebtedness 

Source: European Commission 

of 

Excluding  the  debt  of  the  special  purpose 
entities  from  the  debt  metrics  reduces  the  debt 
overhang 
corporations, 
non-financial 
however Cypriot indebtedness still remains well 
above  sound  levels.  The  debt-to-GDP  ratio  of 
non-financial corporations is heavily influenced by 
non-financial  special  purpose  entities,  which  are 
mainly  ship-owning  entities.  The  special  purpose 
entities  are  perceived  to  have  limited  links  to  the 
real  economy,  they  own  real  assets  (ships)  and 
their  debt  is  overwhelmingly  funded  by  foreign 
banks  or  other  non-resident  entities.  (51)  While 
such set-up of special purpose entities reduces the 
risks  to  the  domestic  economy,  their  debt  inflates 
the  corporate  sector  indebtedness  overall  (see 
Graph 4.2.2). At the end of 2017,  the foreign debt 
of  special  purpose  entities  was  76.5 %  of  GDP. 
the  special  purpose  entities 
When  excluding 
foreign  debt,  the  non-financial  corporations  debt 
ratio is reduced from 208.8 % to 132.3 % of GDP 
for  the  end  of  2017.  This  debt  ratio  is  still  above 
the  prudential  benchmark  and  also  above  the 
fundamental  benchmark  adjusted 
for  special 
purpose entities (90.8 % of GDP).  

The  corporate  sector’s  stock  of 
liabilities 
(excluding  special  purpose  entities)  comprises 
mainly  domestic  bank  loans  channelled  to  few 
business  sectors.  The  non-financial  corporations 
debt  decomposition  (see  Graph  4.2.2)  shows  an 

(51)  References  to  special  purpose  entities  in  this  section  refer 
to non-financial ones. For more details on special purpose 
entities, see European Commission, 2018a. 

37 

0501001502002503003504000102030405060708091011121314151617% of GDPHouseholds, debt-to-GDP ratioNon - financial corporations, debt-to-GDP ratioPrivate sector, debt-to-GDP ratio0501001502002500405060708091011121314151617% of GDPForeign loansLoans from domestic banksLoans from domestic gov't & HHLoans from domestic other fin.Debt security liabilities:Non - financial corporations debtNon - financial corporations debt excluding SPE debt 
 
                                                           
 
                                                           
4.2. Financial sector* 

Graph 4.2.4:  Changes in private debt-to-GDP ratio 

are 

to  non-performing 
even  more 
loans 
pronounced than for  non-financial corporations as 
the  NPL  ratio  was  above  50 %  in  June  2018. 
Furthermore,  difficulties  in  reducing  debt  are 
compounded  by  negative  savings  rates  (-3.1 %  in 
2017).  To  cover  their  debt  service,  households 
need to increase their savings, as also indicated by 
debt sustainability indicators.  

Graph 4.2.3:  Bank loans to non-financial corporations by 

sector 

Source: ECB, Eurostat 

in 

facilitating 

Some  acceleration  in  the  debt  reductions  may 
be  expected 
light  of  the  strengthened 
insolvency  and  foreclosure  frameworks,  and 
ESTIA. The amended insolvency framework may 
increase borrowers’ participation in the insolvency 
processes  and  thus,  facilitate  debt-workouts.  The 
strengthened  foreclosure  framework  could  make 
the 
the  process  more  efficient, 
reduction  of  private  debt  by  foreclosing  on  assets 
pledged  as  collateral.  In  addition,  the  ESTIA 
scheme provides very attractive terms to defaulted 
borrowers,  incentivising  them  to  restart  servicing 
their debts. This will also help contain the increase 
in debt stocks resulting from capitalised interest on 
non-performing 
the  debt 
reduction component of the scheme is expected to 
translate  into  negative  valuation  effects  upon 
implementation, reducing the debt stock.   Making 
use  of  the  foreclosure  tools  upon  re-default  under 
the  scheme  will  help  mitigate  strategic  default. 
Nevertheless,  the  scheme’s  long-term  impact  and 
adverse effects remain uncertain.  

loans.  Furthermore, 

transferring 

title  deeds hinder 

Shortcomings  of  the  current  system  for  issuing 
and 
the 
liquidation  of  collaterals.  The  liquidation  of 
collateralised  immovable  properties  by  debtors  or 
banks is deterred in cases where property rights are 
not  defined.  This  relatively  frequent  phenomenon 
in  Cyprus  complicates  foreclosure  procedures, 
prevents  deleveraging  and  poses  difficulties  with 
the  valuation  of  collaterals.  The  backlog  of  cases 
pending  for  issuance  or  transfer  of  title  deeds 
remains  high  and  progress  is  slow.  To  prevent  a 
build-up  of  future  cases,  a  bill  is  being  drafted 

Source: Central Bank of Cyprus  

Despite challenges, the private sector continued 
deleveraging in 2018 helped by the strong GDP 
growth,  write-offs  of  non-performing  loans, 
cash  repayments  and  debt-to-asset  swaps.  Both 
households  and  non-financial  corporations  debt 
ratios are on a declining path since the 2015 peak. 
Overall,  total  private  debt-to-GDP  ratio  declined 
by  32  percentage  points  of  GDP  in  the  second 
quarter  of  2018  (y-o-y  change).  This  reduction  is 
attributed to the real GDP growth – which explains 
40 % of the drop, to the pick-up in inflation and to 
valuation effects – which explain the remainder of 
the decline (see Graph 4.2.4). The valuation effects 
include  loans  write-offs,  cash  repayments  and 
debt-to-asset  swaps,  which  drive 
the  actual 
reductions  in  debt  volumes.  For  non-financial 
corporations, progress in reducing the debt stock is 
slower  as  new  lending,  albeit  limited  is  mostly 
channelled  towards  them  (more  than  60 %  of  the 
total  gross  new  loans  made  in  the  first  half  of 
2018). The net credit flows to the household sector 
remain negative. 

38 

7,63%19,62%20,88%5,58%11,63%20,31%14,34%     Manufacturing     Construction     Wholesale and retail trade     Transport and storage     Accommodation and food service activities     Real estate activities     Others-50-40-30-20-10010203040506007Q408Q409Q410Q411Q412Q413Q414Q415Q416Q417Q4y-o-y changeCredit flowReal growthInflationOther changesD/GDP, change 
 
 
4.2. Financial sector* 

insurer  had  an  estimated  9 %  market  share  in  the 
motor  third  party  liability  insurance  segment  in 
Bulgaria,  with  up  to  200 000  policyholders.  As  it 
operated  through  a  branch,  Olympic  Insurance’s 
unpaid claims in Bulgaria are outside the scope of 
the  insurance  guarantee  scheme  in  Bulgaria  (and 
Cyprus).  Unless 
the  Bulgarian  or  Cypriot 
authorities  reach  an  alternative  burden-sharing 
arrangement, these claims will be paid through the 
receipts from the liquidation of the insurer’s assets, 
which  would 
the 
liabilities. 

likely  cover  only  part  of 

Access to finance for small and medium-sized 
enterprises  

Access  to  finance  for  small  and  medium-sized 
enterprises  remains  challenging.  In  the  context 
of  limited  bank  credit  supply,  which  is  the  most 
relevant form of financing for small and medium-
few  alternative 
sized  enterprises  and  very 
financing sources, access to finance remains a key 
concern (according to the SAFE survey, European 
Commission,  2018g).  The  absence  of  alternative 
sources  of  finance,  such  as  venture  capital,  local 
equity  finance  and  the  presence  of  only  one 
business  angel  (CyBAN)  in  the  country  hinders 
small  and  medium-sized  enterprises  to  scale-up 
(55). Start-ups in particular suffer from the lack of 
seed  capital.  The 
for 
alternative  investment  funds  is  being  revised  to 
allow for more flexibility.  

framework 

regulatory 

loans 

rather 

Cypriot  businesses  rely  mostly  on  grant 
than  on  market  based 
schemes 
instruments.  EU  and  national 
funds  have 
somewhat  improved  access  to  finance  for  small-
medium  sized  enterprises,  but,  until  now,  mainly 
through  grant  schemes.  A  financial  instrument 
providing 
for  energy  efficiency  and 
renewable  energy  sources  for  both  small  and 
medium-sized  enterprises  and  public  and  private 
buildings  is  set  to  be  launched  in  the  coming 
months.  Furthermore, 
scheme 
providing 
to  small  and  medium-sized 
enterprises  and  companies  with  medium-size 
market  capitalisation  (MidCaps)  with  favourable 
terms financed by the European Investment Bank, 
it  has  been  so  far  well  received.  The  Advice  for 
Small  Business  facility  is  also  very  well  received 

an  on-going 

loans 

prohibiting  the  submission  of  a  property  sale 
contract  to  the  Land  Registry  if  the  property  has 
encumbrances. (54)  Setting  up  a  sustainable  and 
transferring 
reliable  system 
property  rights,  which  ensures  that  buyers  who 
paid  the  full  price  of  the  property  get  their  titles 
quickly 
remains 
essential (European Commission, 2018b).  

and  without 

issuing  and 

impediments 

for 

4.2.3.  OTHER FINANCIAL ISSUES * 

the 

financial 
The  scope  and  quality  of 
information available for credit risk assessment 
has  been  relatively  weak.  The  authorities  are 
improving  the  Credit  Registry  by  broadening  the 
information that is collected and made available, as 
well 
reporting 
counterparties.  The  credit  registry  needs  further 
improvements to be in line  with international best 
practices.  The  creation  of  a  credit  scoring  system 
for individuals is still pending.  

expanding 

set  of 

the 

as 

Supervision of non-bank financial sectors 

is 

supervisors 

The authorities should finalise steps to move to 
a  more risk-based and effective supervision for 
the non-bank financial system. Drafting the legal 
framework  on  integrating  the  pension  funds  and 
insurance 
still  ongoing.  An 
independent supervisory body is planned to be set 
up  as  a  separate  organisation  outside  of  the 
government. The first draft of the legislation is still 
being  prepared  by  the  Ministry  of  Finance.  At 
present, there are delays in project completion due 
to  issues  related  to  the  status  of  the  staff  in  the 
planned new organisation. More generally, there is 
a need to strengthen the supervisory framework for 
the  capital  markets,  in  view  of  the  relatively 
sizeable  cross-border  activities  of  the  non-bank 
financial  services  companies  and  the  exponential 
growth of licensed firms in recent years. 

The  failure  of  Olympic  Insurance  generated  a 
number  of  uncertainties.  The  Cypriot  insurance 
supervisor suspended Olympic Insurance’s licence 
in  May  2018,  following  the  insurer’s  failure  to 
meet  its  solvency  requirements.  A  liquidation 
procedure  was  initiated  in  early  August  2018. 
While its presence in Cyprus has been modest, the 

(54)  Encumbrances  refer  to  mortgages  or  other  claims  on  a 

(55)  Cyprus  ranks  47th  out  of  54  for  Entrepreneurial  finance 

property or assets. 

(GEM, 2018a). 

39 

 
                                                           
                                                           
4.2. Financial sector* 

and  is  expected  to  positively  contribute  to  the 
competitiveness and the internationalization of the 
SMEs in the country. By contrast, schemes like the 
Visa Start-up Programme (56) and the tax relief for 
investments  in  innovative  companies  are  not  yet 
fully delivering in terms of take-up. In the medium 
and  longer  term,  businesses  would  benefit  more 
from  financial  engineering  products  i.e.  loans, 
guarantees  and  equity,  or  other  instruments  with 
higher private leverage, rather than grants.  

(56)  The  Cyprus  Visa  Start-up  Scheme  enables  non-EU 
entrepreneurs  to  establish  and/or  operate  companies  with 
high-growth potential by granting them residence permits. 

40 

 
                                                           
4.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

4.3.1.  LABOUR MARKET * 

the 

labour  market 

The  robust  economic  performance  helped 
conditions. 
improve 
Employment  increased  strongly  in  2018,  a  trend 
that is expected to continue in the next few years. 
The drop in the job separation rate combined with 
an increase  in the job finding rate  led to a  further 
decline in  unemployment. (57) Unemployment  fell 
faster  than  estimated  on  the  basis  of  economic 
fundamentals  (European  Commission,  2018b)  to 
8.4 %  in  2018Q3  from  10.4 %  in  2017Q3,  but 
above  the  EU  average  6.8 %  and  the  pre-crisis 
level,  around  4  %.  Long-term  unemployment  fell 
at  2.5 %  in  2018Q3.  Youth  unemployment  fell  to 
18.7 %  in  2018Q3  from  25.2 %  in  2017Q3,  but 
remains  above  the  EU  average  (15.2 %)  (see 
Graph 4.3.1). 

Graph 4.3.1:  Key labour market developments 

The minimum wage is in force only for selected 
sectors. The minimum wages for nine occupations 
with  low  union  representation  are  fixed  each  year 
by a governmental decree. Following the economic 
crisis,  the  levels  of  minimum  wages  have  not 
changed since 2012: EUR 870 per month for shop 
assistants, clerks, child and personal care workers, 
EUR  4.90  per  hour  for  guards  and  EUR  4.55  per 
hour  for  cleaners.  In  2014,  the  ratio  of  the 
minimum  wage  over  the  average  wage  ranged 
between  45  %  and  52  %,  which  is  relatively  high 
when  compared  to  other  EU  Member  States  (see 
Graph  4.3.2).  The  percentage  of  employees 
earning less than the  minimum  wage ranged  from 
7.6  %  to  16  %.  The  possible  introduction  of  a 
statutory  minimum  wage  warrants 
careful 
assessment  given  the  potential  impact  on  work 
incentives,  level  of  employment  and  undeclared 
work. 

Graph 4.3.2:  Ratio of the monthly minimum wage over the 

average wage (2014) 

Source: Eurostat 

High  youth  unemployment  rate  combined  with 
a  high  proportion  of  young  people  not  in 
education,  employment  or  training  indicate  a 
precarious  situation  for  many  young  people. 
The  proportion  of  young  people  not  in  education, 
employment  or  training  was  11.1 %  in  2018Q3, 
among the highest in the EU. This is probably due 
to  the  lack  of  job  opportunities  for  tertiary 
graduates,  low  enrolment  in  vocational  education 
and  training  and  difficulties  and  delays  in  school-
to-work 
transition.  Another  factor  could  be 
undeclared work (see also Box 4.3.1).     

(57)  Respectively,  probabilities  of  losing  and  finding  –  if 

unemployed – employment within a month.  

(1) The minimum wage is represented by CY(1) for cleaners, 
by CY(2) for guards and by C(3) for shops assistants, clerks, 
child care and personal care workers. The monthly minimum 
wage for guards and cleaners is calculated based on an 
average working week of 38 hours. 
Source: European Commission 

Social  dialogue  is  performing  overall  well,  but 
trade  union  density  and  collective  bargaining 
coverage are declining. Between 2005 and 2014, 
the  collective  bargaining  coverage  rate  declined 
from  62.7  %  to  47.7  %.  Moreover,  collective 
bargaining  coverage  differs  between  different 
types  of  workers.  For  example,  in  2014,  41  %  of 
full-time  employees  were  covered  by  a  collective 
agreement (industry or company-level),  while this 

41 

4045505560657075800510152025303540450102030405060708091011121314151617% %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)0102030405060CZSKEEESROHRUKBGNLHULVPTIECY (1)BEPLFRLTMTCY (2)LUCY (3)SI 
 
 
                                                           
 
was the case for only 12 % of part-time employees. 
(see Graph 4.3.3).  

the 

and 

limited 

roll-out 

The  low  efficiency  of  the  public  employment 
services 
and 
participation  in  activation  remain  a  challenge. 
In  2016,  only  7  %  of  people  wanting  to  work 
participated in active labour market policies, which 
is  well  below  the  EU  average.  (see  Graph  4.3.4). 
Moreover,  investment  in  activation  measures  is 
among the lowest in the EU (0.11 % of GDP). To 
improve  the  capacity  and  efficiency  of  the  public 
employment  services,  30  additional  counsellors 
were  recruited  for  2  years  to  provide,  among 
others, 
to  priority 
groups  such  young  people  not  in  education, 
the 
training, 
employment  or 
guaranteed minimum income and the disabled. 

individualised  counselling 

recipients  of 

Graph 4.3.3:  Collective bargaining coverage by sector and 

working hours (2014) 

4.3. Labour market, education and social policies 

particularly for  employers, the public employment 
services have limited capacity for bolder structural 
reforms, in line with the euro area recommendation 
targeted 
3,  which  could  be  addressed  by 
investment.  A  clear  strategy  with  concrete 
performance 
targets,  a 
indicators,  quantified 
mission  statement  and  provisions  for  cooperating 
with services responsible for social protection and 
healthcare  are  still  lacking,  while  the  new  law  on 
public employment services is still in the pipeline.  

The level of undeclared work in Cyprus is high, 
though declining. According to the data provided 
by  Cyprus  for  the  Employment  Committee  self-
assessment,  the  proportion  of  undeclared  work 
decreased from 23 % in 2013 to 15 % in 2017. The 
most  cases  are  detected  among  the  self-employed 
(European  Commission,  2017d).  To  remedy  the 
situation,  structural  reforms  of  a 
legal  and 
organisational  nature  have  been  approved.  For 
example a Single Inspections Service has been set 
up and higher penalties — overall and particularly 
in  public  contracts.  Recent  inspections  show  that 
around  60  %  of  undeclared  workers  are  non-EU 
citizens,  which  could  be  linked  to  barriers  to 
formal labour market participation. 

Graph 4.3.4:  Active labour market policies participants (lhs) 

and expenditure (rhs) (2016) 

Source: European Commission 

services  need 

Public  employment 
to  be 
organised  better  if  they  are  to  fulfil  their 
enhanced  role.  The  Mutual  Assistance  Project 
review  of  April  2018  envisages  a  number  of 
measures  to  increase  capacity  and  capability,  as 
well  as  organisational  reforms.  In  particular,  an 
such  as  cross-
expanded  digital  approach, 
registration 
registration. 
and  multi-channel 
However,  although  the  services  are  improving, 

Source: Eurostat 

42 

050100Industry excl. constructionConstructionNon-tradeable servicesTradeable servicesPublic admin., education andhealthTotalPart-timeFull-time0,00,20,40,60,81,01,21,41,601020304050607080BELUHUDKFRSENLESFIIEPLPTCZATSKDEEELTMTHRCYSILVBGROEL% of GDPparticipation shareALMP participants per 100 persons wanting to work (lhs)ALMP expenditure as % of GDP (rhs) 
 
 
4.3. Labour market, education and social policies 

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

The European Pillar of Social Rights is designed as a compass for a renewed process of upward convergence 
towards better working and living conditions in the European Union.(1) It sets out twenty essential principles 
and rights in the areas of equal opportunities and access to the labour market; fair working conditions; and 
social protection and inclusion. 

Cyprus  faces  challenges  with  regard  to  a 
the  Social 
number  of 
indicators  of 
Scoreboard  supporting 
  the  European 
Pillar  of  Social  Rights.  The  incidence  of 
early school leaving is growing and share of 
young  people  who  are  not  in  employment, 
education  nor  training  (NEETs)  remains 
high.  The  gross  domestic  household  income 
is  still  below  the  2008  level.  On  the  other 
hand,  the  risk  of  poverty  or  social  exclusion 
(except  for  people  with  disabilities),  the 
income 
long-term 
inequality,  and 
unemployment are below EU averages. 

the 

or 

in 
The  share  of  young  people  not 
education, 
training 
employment 
remained high in 2017. In the age group 15-
29  years,  almost  one  third  had  completed 
tertiary education and 55 % were men living 
in semi-urban areas. While the NEET rate for 
tertiary  educated  was  well  above  the  EU 
average,  it  was  significantly  lower  among 
people  with  vocational  upper  secondary  and 
post-secondary  non-tertiary  education.  The 
estimated share of NEET under 25 registered 
for the Youth Guarantee was 19 % and 44 % 
of  those  registered  waited  for  an  offer  for 
more than 4 months. In cooperation with the 
the  Ministry  of 
Ministry  of  Labour, 
Education launched a program to reach out to 
the  NEETs  and 
them  with 
individualised guidance. 

to  provide 

Progress is being made with regard to the 
level of digital skills. In 2017, only 50 % of 
Cypriots possessed at least basic digital skills (as compared with the EU average of 57 %) and  the rate of 
people with advanced ICT skills was among the lowest in the EU. Digital education is promoted in schools 
through  new  curricula,  participation  in  European  Computer  Driving  License  courses,  and  competitions  in 
fields such as coding and robotics.  Other measures include free  workshops for adults and training courses 
with emphasis on the use of internet and its basic applications. 

(1)  The European Pillar of Social Rights was proclaimed on 17 November 2017 by the European Parliament, the Council 
and  the  European  Commission.  https://ec.europa.eu/commission/priorities/deeper-and-fairer-economic-and-monetary-
union/european-pillar-social-rights/european-pillar-social-rights-20-principles_en 

43 

Early leavers from education and training                                                    (% of population aged 18-24)To watchGender employment gapOn averageIncome quintile ratio (S80/S20)Better than averageAt risk of poverty or social exclusion (in %)Better than averageYouth NEET (% of total population aged 15-24)Critical situationEmployment rate (% population aged 20-64)On averageUnemployment rate                         (% population aged 15-74)Weak but improvingLong-term unemployment           (% population aged 15-74)Better than averageGDHI per capita growth Critical situationNet earnings of a full-time worker earning average wageNo dataImpact of social transfers (other than pensions) on poverty reductionOn averageChildren aged less than 3 years in formal childcareOn averageSelf-reported unmet need for medical careOn averageIndividuals' level of digital skillsWeak but improvingSocial protection and inclusionEqual opportunities and access to the labour marketMembersStatesareclassifiedaccordingtoastatisticalmethodologyagreedwiththeEMCOandSPCCommittees.Themethodologylooksjointlyatlevelsandchangesoftheindicators in comparison with the respective EU averages and classifies Member States insevencategories(from"bestperformers"to"criticalsituation").Forinstance,acountrycanbeflaggedas"betterthanaverage"iftheleveloftheindicatorisclosetoEU average, but it is improving fast. For methodological details, please consult the draft Joint Employment Report 2019, COM (2018)761 final.NEET: neither in employment nor in education and training; GDHI: gross disposable household income.                     Dynamic labour markets and fair working conditionsSOCIAL SCOREBOARD FOR CYPRUS 
 
 
 
4.3. Labour market, education and social policies 

of  childcare  remains  below  the  EU  average  and 
falls  short  of  the  Barcelona  target  (see  Section 
4.3.3).   

The  guaranteed  minimum 
income  scheme 
appears  to  be  having  a  significant  positive 
impact on poverty and inequality.  According to 
the results of a EUROMOD simulation (see Graph 
4.3.6),  the  risk-of-poverty  rate  in  2018  would  be 
significantly  (15  %)  higher  if  the  scheme  was  not 
in  place.  The  impact  on  child  poverty  appears 
smaller (a 5.5 % decrease). Full implementation of 
the  guaranteed  minimum  income  reform  can  also 
bring the poverty gap down by 31 %. (58) Since the 
scheme  was  introduced,  the  impact  of  changes  in 
social  exclusion  benefits  on  inequality  increased 
substantially.  Based  on  the  simulation,  the  reform 
has the potential to reduce the Gini-coefficient by 
2.9 % and the income quintile ratio by 9.9 %.  

Graph 4.3.6:  Impact of the guaranteed minimum income 

scheme on the at-risk-of-poverty rate and the 
relative median at-risk-of-poverty gap in 2018 
(% change) 

(1) The impact of the guaranteed minimum income scheme 
is calculated as the percentage change of each indicator 
under the full implementation of the guaranteed minimum 
income scheme and under the implementation of the 
Public Assistance scheme, which was in place before 2014. 
The incomes used for the simulations refer to 2015. The 
poverty line is fixed at 60% of median equivalised disposable 
income. 
Source: European Commission Joint Research Centre, 
calculations based on the EUROMOD model. 

(58)  The benchmarking exercise in the area of minimum income 
shows that in 2016 the poverty gap for  people aged 18-59 
from  (quasi-)jobless  households  was  below 
the  EU 
average. For details, see the European Commission, 2018h. 

4.3.2.  SOCIAL POLICIES 

roll-out  of 

the 
income 

The  proportion  of  people  at  risk  of  poverty  or 
social exclusion is high but declining. The sharp 
decline  in  severe  material  deprivation  and  in  the 
proportion  of  people  living  in  low  work  intensity 
households were the main drivers of improvement 
(see  Graph  4.3.5).  Monetary  poverty  is  slowly 
falling,  thanks  to  better  economic  and  labour 
market  conditions  and 
the 
guaranteed  minimum 
scheme.  The 
proportion  of  children  at  risk  also  recorded  a 
significant  drop.  However,  the  gap  between  the 
proportion of children of low-skilled parents at risk 
of  poverty  or  social  exclusion  and  those  of  high-
skilled parents has widened, from 36.9 percentage 
points  in  2011  to  64.1  percentage  points  in  2017, 
exceeding  the  EU  average  of  53.4  percentage 
points  (2016).  The  percentage  of  people  with 
disabilities at risk of poverty or social exclusion is 
also  higher  than  the  EU  average  (35.7  %  vs  29.9 
%).  

Graph 4.3.5:  The proportion of people at risk of poverty and 

social exclusion 

Source: Eurostat 

Pension  levels  pose  the  main  challenge  as 
regards  gender  equality.  The  women  pensioners 
aged  65  to  74  receive  48.7  %  less  than  men,  and 
the  gap  widens  at  ages  above  75.  This  is  due  to 
career 
forms  of 
employment, lower pay and higher life expectancy 
gender 
among  women.  Meanwhile, 
employment  gap is  narrower  than the EU average 
(9.5 vs 11.5 percentage points), but the availability 

interruptions,  non-standard 

the 

44 

0510152025303508091011121314151617%Overall risk of poverty or social exclusionMonetary povertyPeople living in very low-work intensity householdsSevere material deprivation rate-45-40-35-30-25-20-15-10-50TotalWomenMenChildrenSocialbenefitrecipientsDifference in at-risk of poverty rateDifference in at-risk of poverty gap 
 
 
                                                           
4.3. Labour market, education and social policies 

%  to  9.4  %  and  remained  at  18.1  %  unchanged 
among foreign-born students.  

Participation  in  early  childhood  education  and 
care is below the EU average and falls short of 
the  Barcelona  target.  At  89.7 %  in  2016  (EU 
average  95.3%),  participation  of  4-6  year-olds  in 
early  childhood  education  and  care  is  unchanged 
from 2015. It slightly increased for children under 
3  (24.8  %  vs  20.8  %),  yet  still  fell  below the 
Barcelona  target  (33  %).  Provision  of  affordable 
high-quality early childhood education and care for 
this  age  group  is  insufficient  resulting  in  high 
reliance  on  informal  care  (Rentzou,  2018)  and 
impacting  Cyprus’  performance  work-life  balance 
and support to children. 

teachers’  appointment  system 

Progress  in  education  reform  is  uneven.  The 
new 
is  being 
implemented:  1 869  out  of  5 020  participants 
passed  the  exam  in  November  2017  and  60 
candidates  were  offered  permanent  positions  as 
pre-primary,  primary  or  secondary  teachers  as  the 
2018/2019 school year, while 278 candidates were 
offered  temporary  positions.  The  talks  between 
government and unions on reforms of the teachers’ 
evaluation  system  and  of  students’  assessment 
stalled last summer, but are somewhat progressing 
since  September.  A  new  proposal  on  teachers’ 
evaluation  by  an  experts’  committee  that  aims  to 
improve  the  quality  of  school  education  was 
submitted  to  the  Minister  on  the  30th  of  January 
2019.  To  increase  the  autonomy  of  schools, 
teachers’  continuous  professional  development  is 
becoming school-based. Overall, school autonomy 
2014). 
remains 
Accountability 
teachers’ 
statutory  obligations  rather  than  their  professional 
goals  like  learning  achievements  or  students’ 
competencies.  Evidence  suggests  that  increased 
school  autonomy  leads  to  improved  students’ 
sufficient 
provided 
performance, 
accountability  mechanisms  and  capacity 
for 
autonomy are in place (OECD, 2018a). 

Bank, 
is  designed  around 

(World 

limited 

that 

The  reform  of  the  secondary  technical  and 
vocational  education  is  progressing,  yet  the 
proportion  of  upper  secondary  students  in  this 
type  of  education  remains  low  (16.7  %  vs  the 
EU  average  of  49.3  %  in  2017).  The  strong 
preference  of  young  Cypriots  to  enter  tertiary 
education  and 
the 
vocational  education  and  training  for  employers 

low  attractiveness  of 

the 

The  tax,  benefit  and  social  protection  system 
has  some  weak  points.  Firstly,  it  may  create 
disincentives to take up employment, in particular 
for single households and single parents. In 2018, a 
beneficiary of the guaranteed income scheme who 
took  up  a  full-time  job  at  50 %  of  the  average 
wage  would  lose  74 %  of  new  earnings  due  to 
higher  taxes  and  lower  benefits  (70  %  for  single 
parent).  To  keep  people  on  the  scheme  searching 
for  jobs,  requirements  changed  and  those  who  do 
not  register  with  the  public  employment  services 
or  refuse  to  take  a  job  offer  are  considered 
longer 
‘voluntary  unemployed’  and 
eligible  for  the  benefit.  Secondly,  the  social 
protection  system  fails  to  formally  cover  the  self-
employed people for unemployment,  accident and 
(European  Commission, 
occupational 
2018i).  

thus  no 

injuries 

for 

The number of asylum seekers is growing, while 
measures  to  integrate  them  in  society  are 
insufficient.  In  2016,  2  840  first-time  asylum 
seekers  applied 
international 
in  Cyprus 
protection,  marking  an  increase  of  35  %  since 
2015. This was just 0.2 % of the EU total, but with 
3  350  applicants  per  million  inhabitants,  Cyprus 
was  among  the  EU  countries  with  the  highest 
refugee ratio. In 2017, the inflow  was bigger, and 
only in the first 9 months of 2018 there were 4 900 
granted 
applications. 
international 
protection  are  eligible 
to  receive  guaranteed 
minimum  income,  but  a  more  comprehensive 
strategy for their integration in society is lacking.  

People 

4.3.3.  EDUCATION AND TRAINING 

spending  on 
The  relatively  high  public 
education is not reflected in observed outcomes. 
The  Cyprus’  spending  on  education  is  high 
compared to the rest of the EU, as a share of GDP 
(6 % in 2016, vs the EU average of 4.7 %) and as a 
share  of  total  government  spending  (15.6  %  vs 
10.2 %). However, as shown  by  the results of the 
2015  Programme 
International  Student 
Assessment  (PISA),  the  educational  outcomes  do 
not match those of other Member States with equal 
or lower spending levels (Agasisti et al, 2016). The 
incidence  of  early  school  leaving  rose  by  1 
percentage  point  in  2017,  reaching  8.6  %  (vs  the 
EU  average  of  10.6  %).  Early  school  leaving 
increased among girls from 4.3 % in 2016 to 7.8 % 
in 2017, while it decreased among boys from 11.4 

for 

45 

 
4.3. Labour market, education and social policies 

prepared and is expected to be full implemented by 
2020.  Other  measures 
include  developing  of 
additional professional standards and strengthening 
the capacity of post-secondary schools and second-
chance schools. 

4.3.4.  HEALTHCARE 

Health  status  in  Cyprus  is  overall  good.  While 
the  life  expectancy  at  birth  is  above  the  EU 
average (82.3 years vs 81 years in EU), at the age 
of 65, both life expectancy and healthy life years in 
Cyprus  are  below  EU  average.  (60)  People  above 
65  years  of  age  have  free  access  to  influenza 
vaccination, but only 32.4 % of them obtained it in 
2014.  This  is  well  below  the  EU  average  and 
marks  a  significant  decline  since  2008  when  the 
respective rate was over 40 %. Smoking rates have 
not  fallen  in  the  way  they  have  in  many  other 
increasing.  Overall, 
countries  and  obesity 
Cyprus  is  lagging  in  terms  of  disease  prevention 
and health provision at older ages. 

is 

Health  spending  and  investment  in  Cyprus 
continue  to  be  among  the  lowest  in  the  EU.  In 
2017, the total health spending was 6.8 % of GDP, 
of which only 42.6 % comes from public sources, 
both rates are among the lowest in the EU. Despite 
the  existence  of  free  services  in  public  healthcare 
for poorer citizens, 4.6 % of Cypriots report having 
unmet  medical  needs  due  to  costs.  Meanwhile, 
direct  out-of-pocket  healthcare  payments  are 
among  the  highest  in  the  EU.  Their  share  is 
particularly high for retail pharmaceuticals (73 %, 
vs the EU average 34 %). Healthcare investment is 
also  much  lower  than  the  EU  average  (0.12  %  vs 
0.65 % of GDP respectively in 2015). 

The  implementation  of  the  universal  national 
health  insurance  system  is  progressing,  but 
challenges  remain.  One  of  the  key  milestones  is 
the  successful  rolling  out  of  the  information  and 
technology system by June 2019. Health providers 
should  be  able  to  receive  continuous  support  and 
training  to  use  the  information  and  technology 
system  tool.  Several  legislations,  including  the 
audit system and the definition of beneficiaries are 
expected to be adopted in the coming months. The 
authorities need to ensure that an adequate number 
of health providers will join the system within the 

60 Based on three-year averages, see OECD, 2018b. 

are  considered  among  the  main  factors  of  low 
participation. To increase the uptake of vocational 
education  and  training,  the  authorities  have  made 
efforts  to  increase  the  capacity  of  schools  and,  in 
cooperation with industry, to update  the curricula, 
but  more  investment  might  be  necessary.  A 
comprehensive 
national 
apprenticeship  system  started  in  April  2017  in 
cooperation  with  the  European  Centre  for  the 
Development of Vocational Training.  

analysis 

the 

of 

Higher education attainment further increased, 
but  many  graduates  still  struggle  to  find 
suitable  jobs.  Tertiary  educational  attainment 
reached 55.8 % in 2017, far above the EU average 
of 39.9 %. The employment rate of recent tertiary 
graduates  is  around  20  percentage  points  higher 
than  that  of  people  with  lower  qualifications,  but 
significantly lower than the EU average (75.2 % vs 
84.9 %). Moreover, the skills mismatch in tertiary 
education  remains  one  of  the  highest  in  the  EU 
(CEDEFOP, 2018). This might be explained by the 
fact  that  the  most  popular  areas  of  study  —  law, 
accounting,  business  administration  —  do  not 
provide  skills  that  would  be  most  sought  after  by 
potential employers. In particular, in 2016 only 9.8 
%  of  students  at  all  levels  graduated  in  science, 
technology, engineering or mathematics (including 
information,  communication  and 
in 
2.4  % 
technology),  compared 
to  26  %  in  the  EU 
(European Commission, 2019b).  

especially  among 

Despite  the  need  for  upskilling  and  reskilling, 
adult  participation  in  lifelong  learning  remains 
low, 
low-skilled.  Adult 
participation  in  learning  is  below  the  EU  average 
(6.9%  vs  10.9%  in  2017)  and  even  lower  among 
low-skilled  adults  (1.0%)  and  the  unemployed 
(5.7%)  who  are  in  most  need  of  upgrading  their 
skills  and  learning  new  ones (59).  In  September 
2018,  a  programme  of  fast-paced  training  for 
practical  vocations  was  initiated,  with  priority 
given  to  the  young  unemployed  (people  up  to  the 
age  of  25).  It  aims  to  provide  initial  training  in 
occupations  with  high  demand  and  to  tackle  high 
unemployment  among  people  between  the  age  of 
18  and  25.  A  comprehensive  system  to  allow 
individuals 
to  validate  qualifications  acquired 
through non-formal and informal learning is being 

(59)  According to the results of the 2018 benchmarking exercise 
on  adult  skills  and  learning.  See  European  Commission, 
2018h for details.  

46 

 
                                                           
                                                           
4.3. Labour market, education and social policies 

Developing  e-health  could  lead  to  considerable 
efficiency  gains.  E-health  could  promote  on-line 
medical  appointments,  which  currently  does  not 
exist  in  Cyprus.  The  planned  e-prescription  will 
allow  medicine  consumption  to  be  monitored,  but 
more  investment  is  needed  for  the  public  health 
services  to  improve  communication  on  disease 
surveillance  and  response.  The  planned  electronic 
record  for  vaccines  will  facilitate  monitoring  of 
their  use.  Cyprus  is  lagging  behind  other  EU 
countries  in  terms  of  laboratory  capacities,  partly 
due to the absence of a data processing information 
and  technology  system,  especially  for  clinical 
microbiology laboratories. 

Cyprus  lacks  specific  legislation  to  regulate 
formal home and community care. The projected 
increase in the number of dependent people in the 
next decades is much higher than the EU average. 
Total long-term care spending in Cyprus accounts 
for only 0.3 % of GDP (against an EU average of 
1.6 %), and only 21 % of the dependent population 
receives 
The 
fragmentation of services and lack of coordination 
hinders access to services. Only a small number of 
dependants 
formal 
arrangements  resulting  in  high  inactivity  rate  due 
to  informal  care.  Most  of  long-term  care  benefits 
are in the form of cash, available only to recipients 
of  guaranteed  minimum  income  and  individuals 
with severe disability. 

long-term 

services. 

receive 

under 

care 

care 

4.3.5.  INVESTMENT NEEDS  

in 

outreach 

investments 

Increased 
and 
activation,  vocational  education  and  training, 
learning,  childcare  and  health  are 
adult 
important  for  improving  Cyprus’  productivity 
and long-term inclusive growth. Skills shortages 
and  mismatches  are  among  the  main  obstacles  to 
business investment, pointing at the need to invest 
more  in  training  of  unused  and  under-used  labour 
potential,  aligning  better  education  curricula  to 
labour  market  needs,  and  investing  in  matching 
vocational  education  infrastructure.  Using  the  full 
labour potential also requires matching investment 
in 
the 
effectiveness  of  public  employment  services  and 
long-term  care 
the  availability  of  child  and 
services. 

inclusion,  health  promotion, 

social 

budgetary  limits,  including  use  of  non-monetary 
incentives.  Finally,  the  communication  strategy  to 
the health stakeholders has been delayed.  

and 

accountability.  The 

infrastructure,  human 

The public hospitals’ reform entails investments 
in 
capital,  health 
technologies  and  information  and  technology 
systems,  but  also  requires  better  management 
practices 
new 
organisation of public hospitals has been set up as 
planned.  An  important  study  on  the  costing  of 
hospitals  has  been  completed  and  the  study  on 
utilisation  and  satisfaction  level  of  patients  is 
planned  to  be  completed  in  early  2019.  The 
organization  aims  to  generate  economies  of  scale, 
better  management  practices,  better  public 
from 
increase 
procurement 
alternative  funding  sources  i.e.  educational  and 
grants, 
research 
donations  etc.  The 
further 
investments  in  primary  and  mental  care  (i.e. 
renovations,  human  capital,  health  technologies, 
information 
infrastructure). 
Moreover, 
the  necessary  capacity  of  health 
authorities  in  accessing  and  managing  financing 
sources remains to be developed. 

partnerships, 
reform  entails 

programmes, 

technology 

revenues 

and 

and 

Efforts  are  made  to  improve  the  efficiency, 
planning  and  integration  of  the  health  sector. 
The hospitals’ occupancy rates decreased between 
2000-2016, contrary to the  general EU trend. In a 
number  of  surgical  procedures  Cyprus  is  below 
other  EU  countries  (OECD,  2018b).  Moreover, 
advanced  medical 
unevenly 
distributed  between  public  and  private  sector  and 
not  sufficiently  used.  A  voucher  system,  allowing 
patients covered by the public health system to use 
private  services,  which  is  in  place  since  2015,  is 
meant 
Improving 
capacity planning and integrating care remain to be 
scaled up.  

the  situation. 

to  alleviate 

equipment 

is 

Cyprus  has  a  shortage  of  adequately  skilled 
health  professionals.  Apart  from  the  relatively 
low  number  of  nurses  compared  to  doctors  in 
Cyprus,  half  of  the  doctors  practicing  in  Cyprus 
are above 50 years old. This trend indicates further 
pressures  in  the  medium  term.  There  is  a  lack  of 
specialised  personnel  among  various  specialities. 
More  efforts  are  needed  to  improve  research 
opportunities, continuous learning, digital skills for 
the  health  personnel  and  the  system’s  overall 
attractiveness. 

47 

 
4.4. COMPETITIVENESS REFORMS AND INVESTMENT 

4.4.1.  PRODUCTIVITY AND INVESTMENT * 

Graph 4.4.1:  Labour productivity 

long-term 

investment 

support  Cyprus’ 

To 
growth, 
investments are needed in environment, energy, 
digitalisation  and 
innovation.  Cyprus  faces 
significant  challenges  in  upgrading  its  waste  and 
water  management  and  creating  a  circular 
economy (see Section 4.4.2). Delays in developing 
Cyprus’  renewable  energy  generation  potential 
might  further  erode  the  country’s  competitiveness 
given  the  high  and  volatile  cost  of  oil  imports. 
Therefore,  additional 
in  energy 
efficiency,  renewable  sources  of  energy  -  notably 
solar  –  and  sustainable  urban  transport  would 
contribute to the long-term sustainability of growth 
(see  Section  4.4.2).  Higher  investment  in  e-
governance, e-commerce, e-education and e-health 
and promoting digital skills would have a positive 
impact on the country’s business environment and 
productivity in the long term (see below). Research 
and  development  (R&D)  spending  in  Cyprus 
remains one of the lowest in the EU, hindering the 
innovation capacity of the research centres and the 
business sector (see below).       

the 

Growth  in  labour  productivity  has  been  weak 
hindering  Cyprus’  real  income  convergence.  In 
the  post-crisis  period,  labour  productivity  has 
lagged  the  euro  area  one,  which  has  hindered 
Cyprus’  real  income  convergence  process  (see 
Graph  4.4.1).  The  increase  in  labour  productivity 
has  been  mainly  driven  by  capital  deepening, (61) 
total  factor  productivity  decreased 
while 
steadily  for  almost  a  decade,  weighing  on  the 
country's  competitiveness.  Major  factors,  such  as 
investment, 
low 
composition  of 
to 
skewed 
construction  —  and  low  R&D  affect  productivity 
performance.  A  positive  development  is  that  the 
productivity  in  key  sectors,  such  tourism-related 
sectors  and 
information,  communication  and 
is  strongly  rebounding  and  has 
technology, 
exceeded  the  pre-crisis  level.  Financial  services 
have  also  almost  caught  up,  construction  and 
manufacturing  are  recovering,  but  are  still  below 
the pre-crisis level (see Graph  4.4.2).  

barriers 
to 
investment  — 

digitalisation, 

(61)  Measured  by  net  capital  stock  at  constant  prices  per 

persons employed in full time equivalent. 

(1)Nominal labour productivity per hour worked  
Source: Eurostat 

Graph 4.4.2:  Labour productivity by sector - period 

averages 

(1) Labour productivity is defined as real gross value added 
of a given sector over total hours worked in the same sector. 
Source: Eurostat 

as 

Following  the  2016  Council  Recommendation, 
Cyprus has appointed the Cyprus Economy and 
Competitiveness 
National 
Council 
in  June  2018.  National 
Productivity  Board 
Productivity  Boards  are  objective,  neutral  and 
independent  institutions  that  can  investigate  the 
productivity  challenges,  contributing  to  evidence-
based policy making, boosting domestic ownership 
of  structural  reforms.  The  Council  has  already 
been consulted in the European Semester exercise. 

48 

020406080100120140160180200BGLVROPLHUHRELEEPTLTCZCYSKMTSIUKESITFISEATFRNLDEDKBELUIE20172007EA19% of EU total based on PPS8090100110120130140150160170Index, 2000=10000-0809-1415-17 
 
                                                           
 
 
 
4.4. Competitiveness Reforms and Investment 

large on both sides — i.e. inflows and outflows in 
the  same  year,  which  is  linked  to  the  activities  of 
holding 
financial 
intermediation.  

companies 

other 

and 

In  2017,  public  investment  in  Cyprus  fully 
caught up with the EU average. After its trough 
of 2.1 % of GDP in 2014, government investment 
increased  to  2.7  %  of  GDP  in  2017  bringing  it  in 
line  with  the  EU  average.  As  a  share  of  total 
government  expenditure,  public  investment  in 
Cyprus outpaced the EU average in 2017, reaching 
7.3 % against 6.0 %.  

Graph 4.4.3:  Investment by category 

Source: Cystat, Eurostat 

investment  with 

Public 
long-term  positive 
growth effects represents only around one third 
of  total  public  investment  in  Cyprus,  which  is 
below the EU average. The composition of public 
investment  can  be  broken  down 
three 
categories:  (i)  expenditure  for  the  long  run;  (ii) 
welfare 
other 
expenditure. (62)  Empirical  studies  typically  find 
that  government  expenditure  for  the  long  run  can 
increase  growth,  particularly  expenditure  on 

expenditure; 

into 

(iii) 

and 

environment  protection 

(62)  Expenditure  for  the  long  run  encompasses  productive 
categories  of  government  expenditure,  such  as  education, 
and 
R&D, 
communication.  Welfare 
of 
expenditure  on  social  protection  and  health.  Other 
expenditure  comprises  the  remaining  of  total  expenditure, 
mainly  covering  general  public  services,  defence  and 
public order and safety. 

transport 
consists 

expenditure 

and 

in  Cyprus  was  robust,  but 

Investment 
it 
continued  to  be  directed  to  activities  less  likely 
to  boost  productivity.  In  2017,  the  ratio  of 
investment to GDP — 20.9 % — was in line with 
euro  area  average  (20.6 %),  indicating  the  strong 
post-crisis recovery. However, for some time now, 
investment  continues 
to  be  concentrated  on 
residential  construction  and  transport  equipment 
(ship  registrations)  —  activities  that  have  very 
limited  capacity  to  boost  productivity.  These  two 
activities  accounts  for  more  than  a  half  of  total 
investment (see Graph 4.4.3).  

construction 

Only some of the current investments are likely 
to have a positive impact in the long term. The 
non-residential 
investment, 
specifically  tourism  infrastructure,  may  positively 
affect growth in the medium to long term, possibly 
furthering  the  new  tourism  strategy  to  attract 
tourists  throughout  the  year  and  make  Cyprus  a 
‘premium’  (higher-value)  destination.  Similarly, 
construction  carried  out  by  Cypriot  private  and 
public universities (relatively small in volume), in 
an effort to establish Cyprus as a regional hub for 
tertiary  education  can  boost  long-term  growth 
potential  and  help  diversify  the  economy.  Cypriot 
universities  also  strengthened 
their  marketing 
efforts  to  expand  their  student  base  and  establish 
links  with  other  reputable  universities,  reflecting 
intangible  investment,  not  easily  captured  by 
statistics.   

and 

financial 

intermediation 

intermediation,  and 

Foreign  direct  investment  is  concentrated  in 
financial 
holding 
companies, ships and real estate. Cyprus receives 
substantial  flows  of  foreign  direct  investment.  In 
2015-2017 
in 
the  main 
particular  holding  companies  were 
recipients  of 
transport, 
flows.  Marine 
these 
reflecting  expanding  ship  registration,  was  the 
second  largest,  followed  by  real  estate  in  the  last 
few  years.  In  2017,  flows  to  financial  activities 
accounted  for  62.2 %  of  total  foreign  direct 
investment,  flows  to  water  transport  for  18.6 % 
and  flows  to  real  estate  for  10.7 %.  However, 
inflows to the financial intermediation and holding 
companies  must  be 
treated  with  caution,  as 
outflows  from  these  sectors  in  some  years  have 
also  been  very  large.  The  largest  inflows  and 
outflows over the last few years were mostly from 
Russia, followed by Luxembourg, the Netherlands, 
the  UK  and  Germany.  In  all  these  cases  except 
Germany  foreign  direct  investment  flows  were 

49 

051015202530000102030405060708091011121314151617% of  nom. GDPShips, aircrafts, etcEquipment ex. ships, aircraft, etc.HousingConstruction ex. housingCultivated assets and livestockEA-average 
 
                                                           
4.4. Competitiveness Reforms and Investment 

listed 

joint  undertaking  for  high-performing  computing, 
blockchain  partnership  and  artificial  intelligence, 
coordinated by the Commission. Based on a recent 
the  main 
study  (Baker,  2016),  which 
obstacles to the growth of e-commerce, the Cypriot 
two  specific 
authorities  are  proceeding  with 
actions.  These  are  (i)  amending 
the  current 
legislation  for  regulating  e-commerce  to  ensure 
security  in  online  transactions  and  (ii)  creating  e-
shops  and  e-platforms  in  Cyprus  through  a  new 
grant scheme. 

Research and innovation  

Cyprus  has  a  small  but  growing  research  and 
innovation system, which plays a limited role in 
economic  growth.  The  R&D  intensity  (64)  in 
Cyprus  stood  at  0.56 %  of  GDP  in  2017,  higher 
than its EU 2020 target (0.5 %) — a target that was 
not  deemed  to  be  ambitious  enough.  Both  public 
and private R&D spending remain well below the 
EU average. In 2017, public R&D expenditure was 
around 0.3 % of the GDP, one of the lowest in the 
EU.  Tertiary  education  and  business  sector  R&D 
expenditure  also  lag  behind  the  EU  average.  The 
size of the research and innovation system and the 
available  resources  are  very  limited:  at  around 
EUR  110  million,  which  puts  the  country  among 
the lowest positions in the EU.  

the 

The  research  output  is  a  point  of  strength  for 
innovation.  In  2017,  about  three  quarters  of  the 
total number of publications were international co-
publication  (among  the  highest  in  the  EU)  and  in 
2014 more than 10 % of Cyprus’ publications were 
top  10 %  worldwide  most  cited 
among 
scientific  publications 
(above  EU  average), 
(CWTS, 2018). In 2017, 55.9 % of the population 
aged  30-34  had  a  tertiary  education  (among  the 
highest in the EU). The tertiary education sector is 
considered  a  driver  of  economic  growth  with 
potential for further expansion in the future (E&Y, 
2018),  thus  contributing  to  Cyprus’  ambition  of 
becoming a regional hub for higher education and 
research.  However,  interaction  between  academia 
and the business sector is limited.  

(64)  Gross  domestic  expenditure  on  R&D  as  a  percentage  of 

GDP. 

education and infrastructure. (63) In Cyprus, public 
investment for the long run accounted  for 32% of 
total  public  investment  in  2016,  compared  to  the 
EU  average  of  49%.  In  particular,  the  most 
important  public  investment  projects  for  the  long 
run  were  geared 
and 
infrastructure.  

education 

towards 

Digitalisation 

Cyprus  made  steady  progress 
in  digital 
economy,  but  challenges  remain.  The  country 
ranks  among  the  last  in  the  EU,  though  showing 
improvement in all aspects of the digital economy 
society  Index.  Further  enhancing  digital  skills  is 
key  in  strengthening  the  digital  economy  and 
society.  Structured  awareness  campaigns  for  the 
digital agenda might help.  

in 

Action is being taken to expand Cyprus’ digital 
public  services  (e-government),  though  supply 
is  still  weak.  Progress 
improving  and 
broadening  Cyprus’  digital  public  services  is  a 
priority for the authorities, even though the supply 
is still  slightly below EU average. The number of 
e-services offered doubled in comparison to 2017. 
More  e-services  are  planned  to  be  available  in 
2019. At the same time, training is being offered to 
people who are not digitally literate to enable them 
to use digital public services.  

E-Commerce is improving, but is still below the 
EU  average.  Consumer  confidence  in  online 
shopping  (50%)  increased  by  7  percentage  points 
but  remains  among  the  lowest  in  the  EU.  By 
contrary,  retailers’  confidence  in  selling  online  in 
their  own  country  increased  by  6  percentages 
points  and  is  above  the  EU  average.  (European 
Commission, 2019c)  

Implementing the digital single market strategy 
is  key  for  ensuring  productivity  gains  in  the 
long term. Cyprus is committed to advancing the 
use  of  new 
signed 
declarations  on  artificial  intelligence,  setting  up  a 

technologies  and  has 

(63)  When  assessing  the  long-term  impact  of  total  public 
expenditure,  other  government  expenditure  categories  not 
classified as investment should also be taken into account. 
European Commission, 2016b, Section III.3 

50 

 
                                                           
                                                           
4.4. Competitiveness Reforms and Investment 

Box 4.4.1: Investment challenges and reforms in Cyprus 

Macroeconomic perspective 

Investment in Cyprus has recovered, with investment to GDP ratio at 20.9% in 2017, in line with 
euro area. However investment continues to be skewed towards non-productive activities such as 
residential construction and transport equipment (mainly ship registration), accounting for more 
than a half of total investment. Public investment has fully recovered, however, it remains weak 
in areas such as R&D and digitalisation. Meanwhile, the overall business environment in Cyprus 
does not appear to facilitate investment, notably due to difficult access to finance for small and 
medium-sized  enterprises,  inefficiencies  of  the  justice  system,  and  cumbersome  procedures  for 
obtaining  necessary  permits.  An  action  plan  for  growth  is  being  implemented  gradually,  which 
mainly  aims  to  create  a  more  dynamic  business  environment,  lighten  the  administrative  burden 
for firms promote entrepreneurship and reform the justice system. 

Assessment of barriers to investment and reform priorities: 

Main barriers to investment and priority actions underway 
1. Finance for firms is mostly dependent on bank lending, which has been only slightly recovering since the 
crisis  (see  Section  4.2.3).  Capital  markets  remain  underdeveloped  and  access  to  alternative  financing 
sources, such as venture capital and equity funding remains limited.  

2.  The  business  environment  remains  weak.  Despite  the  efforts  undertaken,  the  administrative  burden  is 
high, in particular for initiating strategic investment (see Section 4.4.3). Inefficiencies in  the public sector, 
inadequate legal enforcement of claims and lengthy court proceedings weaken the business environment and 
the legal certainty in Cyprus. The digital public services are continuously increasing, however, the overall 
digital uptake of the firms and e-commerce is low.  

and 

information 

The 
communication 
technologies and pharma-chemical sectors have 
the  potential  to  promote  transfer  knowledge. 
Though  still  in  their  starting  phase,  these  sectors 
can  generate  a  demand 
research  and 
innovation.  An  analysis  of  business  R&D 
composition (RIO, 2017) shows that it is currently 
concentrated  in  the  information,  communication 
technology  and  pharma-chemical  sectors, 
and 
which account for around 80 % of its value in the 
services  and  manufacturing  sectors  respectively. 

for 

Export  and  patent  data  confirm  this  analysis. 
Around 20 % of Cyprus' export (USD 600 million) 
originates  from  each  of  the  two  sectors  (MIT, 
2017) and patents awarded between 2009 and 2013 
are  concentrated  in  civil  engineering,  the  pharma-
chemical  sector  and  information,  communication 
and technology (even if the influence of the patent-
box  legislation  on  the  patent  data  is  difficult  to 
assess) (KUL, 2018). These sectors are among the 
priorities of Cyprus' Smart Specialisation Strategy 

51 

Regulatory/ administrative burdenTaxationPublic administrationCSRAccess to financeCSRPublic procurement /PPPsCoop between academia, research and businessJudicial systemCSRFinancing of R&D&IInsolvency frameworkCSRBusiness services / Regulated professionsCompetition and regulatory frameworkRetailEPL & framework for labour contracts ConstructionWages & wage settingDigital Economy / TelecommunicationsEducation, skills, lifelong learning EnergyLegend:TransportNo barrier to investment identifiedCSRInvestment barriers that are also subject to a CSRSome progressNo progressSubstantial progressLimited progressFully addressedPublic administration/ Business environmentFinancial Sector / TaxationR&D&ISector specific regulationLabour market/ Education 
 
 
4.4. Competitiveness Reforms and Investment 

energy  efficiency  market  up  further  include:  (i) 
market  uptake  of  the  available  energy  efficiency 
solutions, 
(iii) 
technological 
digitalisation  and  (iv)  training  workers  in  the 
energy renovation sector.  

innovation; 

(ii) 

Cyprus  is  expected  to  miss  its  greenhouse  gas 
emissions  targets  in  2020  and  2030  by  a  large 
margin, therefore further measures are needed. 
Cyprus  is  expected  to  fall  short  of  its  2020  and 
2030  targets  by  12.5  and  47.4  percentage  points 
respectively,  based  on  the  current  measures  in 
place.  On  the  positive  side,  Cyprus  has  estimated 
that with additional measures, in areas, such as: (i) 
transport  (e.g  promoting  low-emission  vehicles 
and 
(ii)  waste 
management (e.g. promoting biogas and exploiting 
organic  waste),  (iii)  buildings  (e.g.  replacing  old 
systems  and  promoting  co-generation)  and  (iv) 
industry  by  promoting  energy  efficiency  can  help 
reduce the gap to 17 percentage points and it is of 
crucial importance to ensure sufficient investments 
for these measures.  

reduction  of  vehicle  use), 

The  planned  importation  of  liquefied  natural 
gas is expected to help diversify Cyprus’ energy 
mix. Cyprus has launched the process of importing 
liquefied  natural  gas.  The  necessary  infrastructure 
and the contract to import liquefied natural gas are 
expected to be concluded by the end of 2020. This 
might  help  to  diversify  Cyprus’  energy  mix  and 
facilitate compliance with the Industrial Emissions 
Directive,  which  applies  to  plants  that  use  heavy 
fuel  oil  to  generate  electricity  i.e.  the  Electricity 
Authority of Cyprus. 

signed 

There  is  currently  no  wholesale  and  retail 
energy  market in the country. The sole supplier 
the  Electricity  Authority  of  Cyprus  is  a  State-
owned  enterprise  that  operates  as  a  de  facto 
few 
renewable 
monopoly.  There  are  only 
purchase 
power 
generators,  which 
the  Electricity  Authority  of 
agreements  with 
Cyprus  for 
the  whole  production.  Therefore, 
although  the  consumers  are  legally  entitled  to 
choose  their  supplier,  in  practice  the  lack  of 
alternative suppliers means that they are unable to 
do  so.  Steps  are  being  taken  to  open  up  the 
electricity market in Cyprus, but progress has been 
slow. 

and several research centres in the country work in 
these fields.  

Incentives  have  been  put  in  place  to  improve 
knowledge  transfer.  In  2018,  the  law  allowing 
universities  to  create  spin-offs  was  enacted.  In 
addition,  a  policy  support  facility  measure  to 
stimulate the utilisation of research laboratories of 
government–funded  organisations  by  the  business 
community  is  planned  to  start  in  2019..  The 
government  also  plans  to  set  up  a  single  national 
point,  built  on  the  one-stop  shop  principle,  to 
coordinate all knowledge transfer activities, which 
are  currently  split  among  knowledge  transfer 
offices  in  universities  and  research  centres,  with 
low capacity.  

in 

the 

Progress 
smart 
implementing 
specialisation strategy is key in diversifying the 
economy.  Although  it  was  adopted  in  2015,  the 
implementation  of  the  strategy  has  been  delayed. 
Most of the projects are expected to start in 2019. 
In  addition,  the  priority  areas  of  the  strategy  are 
broad,  rather  than  focusing  on  a  few  well-defined 
areas  reflecting  specialisation.  An  update  of  the 
strategy  would  allow  for  a  more  forward-looking 
identification of the investment needs based on the 
analysis  of 
the 
evaluation results of the current strategy.  

remaining  bottlenecks  and 

4.4.2.  THE SERVICES SECTOR AND INTEGRATION 

OF THE MARKETS  

Energy and climate  

Further  efforts  are  needed  for  Cyprus  to  meet 
its energy efficiency and renewable energy 2020 
targets.  The  renewable  energy  share  in  Cyprus 
was  8.9  %  in  2017,  with  the  2020  target  being 
13%.  (CERA,  2018).  Residential  and  commercial 
buildings  constructed  with  no  or  low  levels  of 
thermal  protection,  particularly  in  urban  settings 
are  a  substantial  source  of  energy  inefficiency. 
Framework  conditions 
the 
in 
improved  and 
renewable  energy  sector  have 
several  measures  have  been  introduced,  including 
installations  of  photovoltaic  systems  and  grant 
schemes  for  small  and  medium-sized  enterprises 
and  households.  However,  Cyprus  has  not  yet 
taken full advantage of its considerable potential in 
renewable  energy  generation  notably  from  solar 
sources.  Measures  with  the  potential  to  drive  the 

investing 

for 

52 

 
 
4.4. Competitiveness Reforms and Investment 

investments  gaps  have  been  identified  in  the  area 
of waste management for Cyprus to meet its 2020 
municipal waste recycling target (50 %), set up an 
that  promotes 
effective  management  system 
recycling. Furthermore, complying with the higher 
recycling targets for the post-2020 period might be 
even more difficult without additional measures.  

Water  management  notably  in  urban  areas  is 
characterised by inefficiencies. Water scarcity, in 
combination with over-abstraction of groundwater, 
is  the  main  challenge  for  Cyprus.  The  newly 
adopted  water  pricing  policy  under  the  Water 
Framework  Directive  covers  only  some  water 
services.  On  urban  wastewater, 
is  a 
considerable  amount  of  wastewater  that  is  still 
discharged without collection or treatment — only 
around  half  of  the  total  waste  water  undergoes 
secondary treatment. 

there 

Cyprus  remains  vulnerable  to  climate  change. 
According  to  the  national  plan  and  strategy  for 
adaptation  to  climate  change,  the  implementation 
of  measures  in  the  vulnerable  sectors  (water 
resources,  land  use,  seaside  areas,  biodiversity, 
forestry,  agriculture,  fisheries,  tourism,  energy, 
infrastructure  and  public  health)  has  begun. 
Droughts  and  water  scarcity  are  major  concerns 
and an insufficient policy response might affect the 
country’s  rural  economy  and  tourism.  Therefore, 
sustainable  management  and  efficient  use  of  its 
natural  resources  are  essential  for  Cyprus  to 
mitigate  adverse  climate  change  effects,  preserve 
and  restore  its  natural  environment  and  ensure 
sustainable economic  growth  in the long term. To 
this end, the  effective  management and protection 
of Natura 2000 areas, especially from incompatible 
fragment  or 
activities  or  developments 
degrade  them  (particularly  within  private  land)  is 
of utmost importance.   

that 

Transport  

in  Cyprus 

Passengers’  transport 
is  highly 
dependent  on  private  cars.  Only  3  %  of 
passengers  use buses and there are no railways or 
trams. Cyprus has one of the highest car ownership 
rates  in  the  world  (more  than  600  cars  per  1  000 
inhabitants) and a very low use of green transport. 
In particular in the greater urban area of Nicosia — 
the  largest  agglomeration  in  the  country  —  the 
proportion of trips by public transport is only 3 % 
and  by  bicycle  2  %.  The  continuous  increase  of 

The  planned  EuroAsia  interconnector  would 
end Cyprus’ energy isolation. When constructed, 
the  EuroAsia  interconnector  will  connect  Cyprus 
with Israel, Crete and Attica. A feasibility study is 
currently  under  way.  A  feasibility  study  is  also 
under  way  for  the  EastMed  pipeline,  which  will 
allow  any  natural  gas  extracted 
in  Cyprus’ 
exclusive economic zone to be transported to Crete 
and continental Greece. 

In its final National Energy and Climate Plan to 
be  adopted  by  31  December  2019  in  line  with 
the  Regulation  on  the  Governance  of  the 
Energy  Union  and  Climate  Action  (65),   Cyprus 
will  provide  an  overview  of  its  investment  needs 
until  2030  for  the  different  dimensions  of  the 
Energy Union, including renewable energy, energy 
supply  and  climate 
efficiency, 
security  of 
mitigation  and  adaptation.  The 
information 
provided, including in the draft plan submitted on 
29  January  2019,  will  further  contribute  to  the 
identification  and  assessment  of  energy  and 
climate-related investment needs for Cyprus.  

Environment 

Cyprus'  weak  environmental  performance  is  a 
major  concern.  Waste  generation 
remains 
significantly  higher  than  the  EU  average  and  has 
been  increasing  since  2014. Cyprus  landfills  most 
of  its  municipal  waste  (75  %  vs  24  %  the  EU 
average).  Only  17  % (66)  of  waste  is  recycles, 
significantly  below  the  EU  average  of  46  %  in 
2016.  Furthermore, 
an  overarching  policy 
framework for the circular economy is lacking. 

taxes  makes 

Effective  waste  management 
remains  a 
considerable  challenge.  The  current  facilities  for 
waste treatment do not achieve high recycling rates 
and  the  lack  of  economic  instruments  such  as 
landfill 
recycling  economically 
unattractive.  According to the 2018 early  warning 
report (European  Commission,  2018j),  Cyprus’ 
main obstacles to a proper waste management are: 
(i)  a  lack  of  infrastructure  and  collection  systems 
for  recycling,  (ii)  weak  coordination  among 
competent authorities and the insufficient capacity 
of  the  local  governments,  and  (iii)  the  lack  of 
recycle.  Significant 
to 
financial 

incentives 

(65) Regulation (EU) 2018/1999 of the European Parliament and 

of the Council of 11 December 2018. 

(66)  Including 4 % of composting. 

53 

 
                                                           
4.4. Competitiveness Reforms and Investment 

congestion  together  with  the  lack  of  sustainable 
transportation is likely to have a serious impact on 
the environment and attractiveness of the country’s 
urban areas.  

Professional services  

sources 

judges  and  the  limited  use  of  mediation  are 
additional 
The 
of 
shortcomings  of  the  justice  system  hinder  the  use 
of  insolvency  and  foreclosure  frameworks,  cause 
long  proceedings,  including  for  financial  disputes 
and weaken the payment culture in the country.  

inefficiency. 

and 

and 

agents, 

lawyers 

architects 

competition 

Some  regulated  professions  in  Cyprus  remain 
relatively  restricted.  Professions  such  as  real 
estate 
are 
particularly  restricted,  hindering  the  mobility  of 
professionals 
(European 
Commission,  2017e  and  2017f).  In  particular, 
licensing  requirements,  residency  requirement  or 
shareholding  requirements  restrict  access  to  these 
professions. Existing requirements do not seem to 
be  proportionate.  They  therefore  need  to  be 
assessed to check that they encourage competition 
and ensure a more efficient allocation of resources 
in certain professions. 

Retail trade 

Despite  the  good  performance  of  the  retail 
sector, the procedures to set up and run a retail 
shop  remain  complex  and  hinder  further 
growth.  On  the  regulatory  environment  for  retail, 
both for the establishment of retail outlets and their 
the  Retail  Restrictiveness 
daily  operations, 
Indicator  places  Cyprus  among  the  four  Member 
States  with  the  highest  restrictions  (European 
Commission,  2018k  and  2018l).  The  low  ranking 
is  a  result  of  complex  licencing  procedures  and 
operational restrictions i.e. shop opening hours and 
distribution channels.  

4.4.3.  GOVERNANCE AND INSTITUTIONAL 

QUALITY * 

Justice system  

Serious  inefficiencies  remain  in  the  justice 
system  in  Cyprus.  According  to  the  EU  Justice 
Scoreboard,  the  clearance  rate  for  administrative 
cases  decreased  from  113%  in  2016  to  74%  in 
2017, while disposition time increased from 1.582 
days 
in  2017  (European 
Commission, 2019d). The main inefficiencies stem 
from  outdated  and  complex  rules  for  civil 
procedures,  lack  of  specialisation  of  courts,  a  low 
level  of  digitalisation  and  poor  quality  of 
buildings. The lack of  formal lifelong training  for 

to  2.162 

in  2016 

implementation 

A comprehensive reform of the justice system is 
considered  a  priority  by  the  authorities.  An 
action  plan  covering  a  broad  range  of  reforms 
spanning over several years has been prepared and 
its 
regularly  monitored. 
is 
Measures  are  gradually  being  implemented  to 
address  the  main  challenges.  These  include  the 
creation of a task force of judges to clear the large 
backlog of cases for which the recruitment process 
for  the  judges  and  supporting  staff  is  currently 
underway.  A  ‘mini’  electronic  registry  has  been 
developed  and  is  now  pilot  running  in  all  district 
courts and in the Supreme Court, until the e-justice 
fully  operational.  Other  on-going 
system 
measures  include  assessing  the  recruitment  and 
promotion  criteria  for  judges  and  establishing  a 
training  school  for  judges.  In  parallel,  the  civil 
procedure  rules  are  expected  to  be  revised  by  the 
end  of  2019.  The  new  rules  intend  to  strengthen 
the  enforcement  of  judgments  and  to  improve  the 
efficiency of the judicial system as a whole.  

is 

to 

increase 

is  being 

Action 
the 
taken 
specialisation of courts. Judges are expected to be 
appointed  for  the  handling  of  financial  disputes, 
including  judicial  procedures  for  non-performing 
loans.  Relevant  legislation  was  submitted  to  the 
House of Representatives for approval in February 
2019,  whilst  the  recruitment  procedure  has  been 
launched.  A  new  Administrative  Court  of 
International  Protection,  competent  mainly  for 
asylum  seekers,  has  been  set  up.  Moreover,  the 
establishment  of  a  Commercial  Court  is  expected 
in 2019. Relevant legislation was submitted to the 
House  of  Representatives  for  approval  in  October 
2018.  The  creation  of  these  specialised  courts  is 
expected  to  help  in  shortening  the  length  of 
proceeding  and  address  the  backlog  of  cases.  On 
the  establishment  of  a  Court  of  Appeal,  relevant 
legislation  is  under  preparation.  However,  the 
recruitment  of  the  judges  is  a  controversial  point 
among  authorities.  The  issue  is  linked  to  the 
separation  of  powers  and  the  independence  of  the 
judiciary and warrants close monitoring. 

54 

 
4.4. Competitiveness Reforms and Investment 

Public administration  

Privatisations and State-owned enterprises  

The performance of the public sector is close to 
the  EU  average.  Based  on 
the  Global 
Competitiveness  Index  (WEF,  2018),  the  Cypriot 
public  sector  ranks  close  to  the  EU  average  and 
higher than the global average. Main inefficiencies 
were  identified  in  the  legal  framework  in  settling 
disputes  and  e-participation,  i.e.  the  use  of  online 
services  by  government  to  inform,  interact  and 
engage  the  general  public  and  stakeholders,  both 
below the EU average. 

The  reforms  of  the  public  administration  and 
the  local  governments  are  yet  to  be  completed. 
A set of bills to modernise: (i) the appraisal system 
of  civil  servants,  (ii)  promotion  procedures  and 
(iii) the Public Service  Commission are  still to be 
adopted and implemented. The reform of the local 
governments  has  been  stalled  in  the  House  of 
is 
Representatives  since  2015.  Currently 
gathering  momentum  and  a  revised  proposal  is 
expected to be re-submitted in the coming months. 
The  reform  will  benefit  the  local  communities  by 
improving  local  public  services  and  water  and 
waste  management and simplifying the  process of 
issuing  title  deeds  and  building  permits.  The 
reform also intends to set up a common accounting 
and  financial  reporting  framework  for  all  local 
the 
governments,  which 
management of public finances.     

improve 

could 

it 

to 

June  2016 

Institutional changes are being made to support 
the 
growth-friendly  policies.  In  addition 
Deputy Ministry for Shipping established in 2017, 
a Deputy Ministry for Tourism is operational since 
January 2019. It will be the competent authority in 
charge  of  implementing  the  national  strategy  for 
tourism.  As  mentioned 
in  Section  4.4.1,  an 
Economy and Competitiveness Council was set up 
in 
the  economy’s 
to  monitor 
developments  with  regard  to  competitiveness  and 
to  recommend  policy  measures.  In  addition,  a 
national  research  and  innovation  council  was 
created,  while  discussions  are  currently  underway 
for  the  establishment  of  a  Deputy  Ministry  for 
Research,  Innovation  and  Digital  Transformation. 
The proposal for the creation of a Deputy Ministry 
for  growth  and  competitiveness  has  been  held 
back. 

Progress  on  privatisation  and  governance  of 
State-owned  enterprises  has  been 
limited. 
Following  the  completion  of  the  privatisation  of 
the  Limassol  port,  only  a  small  number  of 
privatisation  projects  remain  active,  such  as  the 
privatisation  of  Larnaca  port  and,  with  slow 
progress,  the  privatisation  of  the  National  Lottery 
and  the  Troodos  Residences.  The  corporatisation 
of  the  Cyprus  Telecommunications  Authority  has 
stalled at the House of Representatives since 2017. 
A  law  to  improve  the  corporate  governance  and 
monitoring  of  the  functioning  of  the  State-owned 
enterprises is pending for adoption at the House of 
Representatives  since  2015.  In  the  meantime,  the 
the 
government 
functioning of the State-owned enterprises.  

is  preparing  guidance  on 

Business environment  

The  business  environment  has  only  moderately 
improved  and  key  reforms  are  still  pending. 
Although  the  ease  of  doing  business  in  Cyprus 
improved  according  to  the  latest  World  Bank 
Doing  Business  report  (World  Bank  2018a),  the 
relative  position  of  the  country  in  the  ranking 
deteriorated.  Cyprus  is  ranked  in  57th  position  (a 
drop  of  four  places  compared  to  last  year)  and 
performs below the EU average - at 23rd position.  

Obtaining  necessary  permits  and  licences  to 
invest in Cyprus remains cumbersome. The law 
that  aims  to  significantly  reduce  the  time  it  takes 
for  a  strategic  investor  to  obtain  all  the  necessary 
permits  and  licences  to  invest  in  Cyprus  is  still 
pending adoption by the House of Representatives. 
Furthermore,  the  procedures  for  issuing  building 
permits, which are mainly issued at local level, are 
complex 
planned 
simplification  reform  based  on  external  experts’ 
recommendations  has  been  delayed (European 
Commission, 2018b).   

lengthy 

and 

and 

the 

The  tax  compliance  burden  in  Cyprus  has 
eased.  With  a  more  efficient  electronic  filing  and 
payment process, Cyprus has shortened the time to 
comply  with  tax  obligations.  According  to  the 
Paying  Taxes  2019  Report (World  Bank,  2018b), 
Cyprus has reduced the time needed to pay and file 

55 

 
4.4. Competitiveness Reforms and Investment 

expanding 

authorities, 

creation  of  a  central  pool  of  experts  that  would 
take  over  procurement  functions  from  the  small 
contracting 
existing 
framework contracts and introducing an electronic 
market  place  for  very  low  procurements.  In 
parallel,  efforts  are  being  made  to  strengthen  the 
capacity  of 
individual  contracting  authorities. 
These  measures  are  expected  to  improve  the 
efficiency  and 
the  public 
procurement procedures.   

transparency  of 

Fight against corruption 

consistency 

The  adoption  and  implementation  of  measures 
against  corruption  need  to  be  accelerated.  The 
national  anti-corruption  strategy  for  2017-2022 
was adopted in 2017. A draft Action plan for 2019-
2021  has  been  prepared,  but  its  political  approval 
is pending.  Although  some initial steps  have been 
taken, many anti-corruption measures remain at an 
early stage. The draft law setting up the new anti-
corruption authority is still to be adopted. The new 
authority  would 
and 
ensure 
effectiveness 
in  preventing  and  combatting 
corruption, carry out administrative investigations, 
keep a register of lobbyists and coordinate the anti-
corruption  action  plan.  The  draft  law  to  protect 
whistle-blowers  has  been  pending  parliamentary 
approval  since  2017.  A  bill  regulating  lobbying 
activities is under legal vetting.  Asset declarations 
are  to  be  filled  in  by  heads  of  public  bodies,  the 
President, members of the executive and members 
of  parliament.  For  certain  categories  (President, 
ministers and members of parliament) declarations 
have 
the  Specialized 
Parliamentary  Committee  and  are  now  public. 
However, it is still unclear how the verification of 
declarations  of  assets  and  interests  for  public 
officials is carried out.  

submitted 

been 

to 

Perceived  corruption  remains  high  despite 
minor  improvements  concerning  its  control. 
According  to  the  Global  Competitiveness  report 
2018 (WEF, 2018), Cyprus had fewer incidents of 
corruption  than  in  the  previous  year.  The  World 
Bank  Governance  Indicators  also  noted  a  slight 
improvement  in  the  corruption  control  index. 
However, the perception of corruption remains one 
of the  highest in Europe,  with 94% of people and 
interviewed  considering 
100 %  of  businesses 
corruption  as  widespread 
their  country 
in 
(European Commission, 2017g).  

taxes (67) from 127 hours in 2016 to 122.5 hours in 
2017.  This  is  significantly  below  the  unweighted 
EU  average  (around  172  hours)  and  median 
(around 143.3 hours).  

the 

trust 

Consumers’ 
institutional 
in 
framework  to  defend  their  rights  is  low,  as  it 
their trust in product safety. Cypriot consumers’ 
trust in organisations (e.g. public authorities, non-
governmental  organisations  and 
  retailers  or 
providers  of  services)  to  protect  their  consumer 
rights increased by 4 percentage points since 2016 
but is still below the EU average, mostly because it 
has  the  lowest  trust  in  the  EU  for  retailers/ 
providers of services. Consumers’ trust in product 
safety  has  decreased  by  3  percentage  points  since 
the 
2016  and 
EU. (European Commission, 2019c)  

is  among 

lowest 

the 

in 

Public procurement  

Despite  measures 
the  number  of 
taken, 
contracts  with  single  bidders  and  directly 
awarded  contracts  is  still  high.  Over  the  last 
years,  Cyprus  has  taken  concrete  measures  for 
simplifying 
the  award  procedures  for  public 
contracts, increase competition and put in place an 
efficient  e-procurement  system.  Trainings  and 
to  contracting 
guidance  are  also  provided 
authorities,  particularly  regarding  the  effective 
market  sounding  and  proper  preparation  of  the 
competitions. However, there is still a high number 
of  contracts  with  a  single  bidder,  48  %  of 
procedures  in  2018,  mainly  identified  in  the 
healthcare  sector.  The  country  ranks  among  the 
first  in  the  EU  when  it  comes  to  the  number  of 
direct  awards  (25  %  of  total  procedures  in  2018), 
also identified in the health care sector. In addition, 
Cyprus has among the highest number of contracts 
awarded  exclusively  based  on  the  lowest  price 
(93 % of public contracts awarded in 2018) in the 
EU, contrary to best practice  favouring the  use of 
more quality-based criteria.  

transparency 

Efficiency, 
qualitative 
assessment  of  public  tenders  could  be  further 
improved  by 
strengthening  capacity.  The 
government  has  announced  measures,  such  as  the 

and 

(67)  The time to comply indicator reflects the number of hours 
it  takes  to  prepare,  file  and  pay  (or  withhold)  corporate 
income  tax,  value  added  or  sales  tax  and  labour  taxes, 
including payroll taxes and mandatory social contributions 
(in hours per year). 

56 

 
                                                           
4.4. Competitiveness Reforms and Investment 

the  cultural  and  natural  heritage,  the  development 
and marketing of local products, the promotion of 
sustainable  urban  mobility  and 
the  circular 
economy  and  the  regeneration  and  security  of 
public space. 

special 

to  ensure 

The 
independence  of  prosecution  and  the 
capacity  of  law  enforcement  to  carry  out 
corruption  investigations  remain  weak.  There 
the 
safeguards 
are  no 
independence of the public prosecutors, which has 
also  been  noted  by  Council  of  Europe’s  Group  of 
States  Against  Corruption. (68)  Moreover,  police 
departments entrusted with carrying out corruption 
lack  specialised  expertise  and 
investigations 
experience  difficulties 
in  gathering  evidence, 
which slows down the pace of the investigations. 

4.4.4.  TERRITORIAL DISPARITIES 

Despite  the  country’s  relatively  homogenous 
character,  there  are  some  disparities  between 
urban  and  mountainous  areas.  Cyprus  accounts 
for  a  single  Nomenclature  of  Territorial  Units  for 
Statistics II region, hence there is no available data 
that  allows 
regional 
disparities  in  terms  of  GDP,  productivity  or  other 
variables. 

the  characterisation  of 

last  decades  development  was 
During  the 
rural  and 
uneven  between  urban  and 
remote 
the 
regions.  While 
mountainous 
mountainous  and  rural  areas  have  been  steadily 
losing population, the urban, sub-urban and coastal 
areas  have  been  growing.  Two  key  problem  areas 
can be identified: (i) some core urban areas are in 
decline as they face complex and varied problems 
due to the exodus of the population and businesses 
to  more  competitively-priced  areas  with  better 
accessibility  and  infrastructure.  This  situation  has 
been accompanied by a more general deterioration 
in economic and social conditions. Moreover, there 
is  higher  unemployment  in  urban  areas  and  (ii) 
population  decline  in  mountainous  areas,  due  to 
their  disadvantages  in  terms  of  job  opportunities 
and quality of life. 

Integrated development  might  be beneficial for 
these  areas.  The  local  economy  of  these  areas 
could 
of 
disadvantaged zones in urban areas, investments in 
tourism  assets  and  services,  the  improvement  of 

regeneration 

benefit 

from 

the 

(68)  Group of States Against Corruption  recommended Cyprus 
to  strengthen  "the  independence  of  the  prosecutorial 
functions”, 4th evaluation round. 

57 

 
 
                                                           
ANNEX A: OVERVIEW TABLE 

Commitments  

Summary assessment (69) 

2018 country-specific recommendations (CSRs)  

CSR 1: Adopt key legislative reforms to improve 
efficiency  in  the  public  sector,  in  particular  as 
regards 
public 
administration and the governance of State-owned 
entities and local governments. 

functioning 

the 

the 

of 

legislative 

Adopt  key 
improve 
efficiency  in  the  public  sector,  in  particular  as 
public 
the 
regards 
administration  

functioning 

reforms 

the 

of 

to 

and the governance of State-owned entities  

Cyprus  has  made  limited  progress  in  addressing 
CSR 1 

There has been limited progress in improving the 
efficiency  of  the  public  administration  by  further 
promoting  e-governance.  However,  the  adoption 
of key legislation on modernising the functioning 
of the public administration is still pending. 

limited  progress  on 

There  has  been 
the 
governance of State-Owned Enterprises. The draft 
law  is  still  pending  adoption  by  the  House  of 
Representatives  since  2015.  In  the  meantime,  a 
proposal to the Council of Ministers and guidance 
notes  are  being  prepared,  which  include  most  of 
the draft law provisions. 

and local governments.   

There  has  been  limited  progress  related  to  the 
reform of local governments. Relevant legislation, 

(69)  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. 

58 

 
 
                                                           
A. Overview Table 

which  was 
submitted 
Representatives in 2015 is being amended. 

to 

the  House  of 

CSR  2:  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  foreclosure  frameworks  and  ensure  reliable 
and  swift  systems  for  the  issuance  of  title  deeds 
and the transfer of immovable property rights. 

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. 

Cyprus  has  made  some  progress  in  addressing   
CSR 2 

implemented,  but 

Limited  progress  in  improving  the  efficiency  of 
the  judicial  system.  A  number  of  measures  are 
being 
they  are  not  yet 
completed.  The  civil  procedures  are  still  under 
revision and the specialisation of courts is only at 
an  initial  stage.  Important  measures  to  specialise 
the  courts,  including  establishing  a  Commercial 
Court,  creating  new  jurisdictions  dealing  with 
disputes related to credit  facilities and appointing 
judges  dedicated  to  handling  financial  disputes, 
are still pending. The e-justice system has not yet 
been developed. 

to 
Take  measures 
insolvency and foreclosure frameworks 

fully  operationalise 

the 

and  ensure  reliable  and  swift  systems  for  the 
transfer  of 
issuance  of 
immovable property rights. 

title  deeds  and 

the 

CSR  3:  Accelerate 
performing 
comprehensive  strategy, 

loans 

the 
by 

reduction  of  non-
a 
legislative 

implementing 

including 

foreclosure 

tools  operational  with 

Substantial  progress  on  making  the  insolvency 
and 
the 
enactment of strengthened legal  frameworks. The 
effective  use  and  the  overall  impact  of  the 
amended  frameworks  will  be  assessed  over  time. 
Measures 
and 
effectiveness  of  the  Insolvency  Service  and  the 
profession  of  insolvency  practitioners  are  still 
pending. 

efficiency 

improve 

the 

to 

Limited progress on the issuance and transferring 
of  title  deeds.  Efforts  to  reduce  the  backlog  are 
ongoing,  however, limited progress  was achieved 
so  far.  A  roadmap  to  reform  the  licensing  and 
permitting  procedures  based  on  findings  of 
external  experts  is  still  under  preparation  and 
further legislative amendments to ensure a reliable 
and swift system are pending. 

Cyprus  has  made  substantial  progress 
addressing CSR 3 

in 

59 

 
A. Overview Table 

allowing 

amendments 
effective 
enforcement  of  claims  and  facilitating  the  sale  of 
loans.  Integrate  and  strengthen  the  supervision  of 
insurance companies and pension funds. 

the 

for 

Accelerate  the  reduction  of  non-performing  loans 
implementing  a  comprehensive  strategy, 
by 
including legislative amendments allowing for the 
effective  enforcement  of  claims  and  facilitating 
the sale of loans. 

in 

implementing 

non-performing 

Substantial  progress 
a 
comprehensive  strategy  to  address  the  high  level 
of 
loans.  The  measures 
undertaken are: (i) the adoption of a legal package 
to facilitate the enforcement of claims and the sale 
of loans, (ii) the partial sale of a public bank and 
the  transferring  of  non-performing  loans  to  an 
asset management company and (iii) the adoption 
of  a  decision  to  introduce  in  2019  a  subsidy 
scheme  for  defaulted  loans  backed  by  primary 
residence.  Additional  measures  to  ensure  an 
overall  positive  impact  of  the  strategy  are  still 
pending.   

Integrate  and  strengthen 
insurance companies and pension funds. 

the  supervision  of 

No  progress  on  creating  a  single  independent 
supervisory authority for insurance companies and 
pension  funds  as  the  bill  is  still  pending  for 
adoption. 

Cyprus  has  made  limited  progress  in  addressing 
CSR 4 

the  action  plan  for  growth, 

CSR  4:  Prioritise  the  implementation  of  key 
elements  of 
in 
particular  fast-tracking  strategic  investments,  and 
take  additional  measures  to  improve  access  to 
finance  for  small  and  medium-sized  enterprises. 
the  performance  of  State-owned 
Improve 
enterprises 
the 
including 
implementation of privatisation projects. 

resuming 

by 

Prioritise  the  implementation  of  key  elements  of 
the  action  plan  for  growth,  in  particular  fast-
tracking strategic investments, 

No  progress  as  the  bill  for  simplifying  and 
shortening the  procedures to  obtain the necessary 
permits  for  strategic  investments  is  still  pending 
adoption. 

and take additional measures to improve access to 
finance for small and medium-sized enterprises. 

Some  progress  as  a  few  measures  are  being 
implemented, mainly supported by EU funds. 

60 

 
 
 
Improve 
enterprises 
including 
implementation of privatisation projects. 

the  performance  of  State-owned 
the 

resuming 

by 

and 

effectiveness  of 

CSR 5: Complete reforms aimed at increasing the 
the  public 
capacity 
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 
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. 

teacher  evaluation  and  actions 

Complete reforms aimed at increasing the capacity 
the  public  employment 
and  effectiveness  of 
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. 

A. Overview Table 

Limited  progress  as  only  few  efforts  have  been 
made  to  improve  the  performance  of  the  State-
Owned  Enterprises.  A  proposal  to  the  Council  of 
Ministers  and  relevant  guidance  notes  are  under 
preparation.  Limited  progress  was  also  made  on 
the  privatisation  of  the  Larnaca  Port  /  Marina,  as 
the tendering is slowly progressing. The project is 
expected  to  advance  in  2019.  For  the  other 
the 
privatisation 
Cyprus 
corporatisation 
Telecommunications  Authority 
the 
timeline is uncertain. 

including 
the 

projects, 

(CyTA), 

of 

Cyprus  has  made  limited  progress  in  addressing 
CSR 5 

Limited  progress  insofar,  as  the  capacity  of  the 
public  employment  services  increased,  but  only 
temporarily  and  measures 
the 
effectiveness  are  still  pending.  There  has  also 
been 
in  outreaching  and 
activating  young  people  not  in  employment, 
education  or 
training.  An  action  plan  was 
prepared, but its implementation is very slow. 

limited  progress 

increase 

to 

Limited  progress,  as  only  some  areas  are 
progressing  well,  such  as  teachers’  appointment 
system,  revised  curricula  and  the  introduction  of 
new  specialisations  in  vocational  and  technical 
education,  in  line  with  labour  market  needs. 
However, only limited progress has been made on 
teachers’  evaluation,  where  a  proposal  is  still 
pending.  Slow  and  fragmented  progress  has  been 
made  with the reform of the vocational education 
and  training  system,  while  no  progress  has  been 
recorded  as  regards  the  capacity  (infrastructure 
and facilities). 

Take  measures to ensure that the National Health  There  has  been  some  progress  in  undertaking 

61 

 
A. Overview Table 

System  becomes  fully  functional  in  2020,  as 
planned. 

measures  to  ensure  that  the  National  Health 
System  becomes  functional  in  2020  as  planned. 
Secondary  legislation  has  been  adopted  and  the 
reform  of  the  primary  healthcare  system  is 
advancing.  

Europe 2020 (national targets and progress)  

Employment  rate  target:  75%  -  77%  of  the 
population aged 20–64. 

70.8%  (2017).  Employment 
in  all 
sectors,  but  it  remains  below  the  pre-crisis  level, 
when  Cyprus  was  already  meeting  its  national 
target. 

increased 

R&D target: 0.5 % of GDP  

National  greenhouse  gas  emissions 
target:  
- 5 % in 2020 compared with 2005 (in sectors not 
included in the EU emissions trading scheme)  

2020 renewable energy target: 13 %  

Energy  efficiency,  2020  energy  consumption 
targets:  

Cyprus’ 2020 energy efficiency target is 2.2Mtoe 
expressed in primary energy consumption  

In  2017,  R&D  intensity  in  Cyprus  was  0.56%  of 
GDP  composed  of  37%  -48%  including  non-
profit-  private  investment  (0.20%  of  GDP)  and 
52% public investment (0.29% of GDP). 

 3% (c.t. 2005) (2017). Greenhouse gas emissions 
in  Cyprus  continue  to  increase,  and  according  to 
preliminary  2017  data  and  the  latest  national 
projections,  Cyprus  is  expected  to  miss  its  target 
with a significant margin of around 12 percentage 
points. 

9.85%  (2017)  Cyprus  renewable  energy  share 
increase  from  9.3 %  in  2016  to  around 9.9  %  in 
2017;  achieving  the  target  for  2020  appears 
problematic.  Considering  Cyprus’  high  potential 
in  this  area  the  objective  is  still  possible,  but  it 
would  require  a  significant  shift  of  the  national 
energy policies. 

2.5  Mtoe  (2017).  Primary  energy  consumption 
was  reduced  during  the  economic  recession  from 
2.5 Mtoe in 2012 to 2.2 Mtoe in 2015, but in line 
with the sustained economic growth  rose again to 
2.5  Mtoe  in  2017. This  poses  a  serious  challenge 
in  reaching  the  target  without  strong  additional 
measures.  Furthermore,  over  90  %  of  Cyprus’ 
energy  consumption  continues  to  be  covered  by 
imported oil and oil products. 

62 

 
Early school/training leaving target: 10 %.  

Tertiary education target: 46 % of population aged 
30-34.  

Target  for  reducing  the  number  of  people  at  risk 
of  poverty  or  social  exclusion,  expressed  as  an 
absolute  number  of  people:  27  000  (base  year 
2010: 19.3 %).  

A. Overview Table 

8.5 % (2017). Cyprus has reached the national and 
EU2020 
early 
school/training  leaving  rate  increased  further  in 
2017, especially among female pupils. 

though 

target, 

even 

the 

55.9 % (2017). Tertiary education attainment rose 
further to 55.9% surpassing both the  national and 
the  EU2020  target.  However,  skills  mismatches 
persist  and  the  share  of  science,  technology, 
engineering 
is 
particularly low. 

and  mathematics  graduates 

The  share  of  people  at  risk  of  poverty  or  social 
exclusion  is  high  at  25.2%  but  declining.  The 
overall rate declined for the second year in a row 
by 19 000 compared to 2016 or 29 000 compared 
to 2015, the number of children at risk of poverty 
or  social  exclusion  also  recorded  significant 
improvement.  This  can  be  attributed  to  a positive 
economic and labour market conditions as well as 
the  roll  out  of  the  guaranteed  minimum  income 
scheme. 

63 

 
ANNEX B: COMMISSION DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS 

64 

General Government debt projections under baseline, alternative scenarios and sensitivity tests2017201820192020202120222023202420252026202720282029Gross debt ratio96.1105.098.491.086.983.881.778.374.871.468.264.961.9Changes in the ratio (-1+2+3)-9.48.8-6.6-7.3-4.2-3.1-2.2-3.4-3.4-3.4-3.2-3.3-3.0of which(1) Primary balance (1.1+1.2+1.3)4.35.55.55.24.33.62.93.03.13.23.13.43.2(1.1) Structural primary balance (1.1.1-1.1.2+1.1.3)4.14.43.62.92.82.92.93.03.13.23.13.43.2(1.1.1) Structural primary balance (bef. CoA)4.14.43.62.92.92.92.92.92.92.92.92.92.9(1.1.2) Cost of ageing0.10.10.0-0.1-0.2-0.3-0.2-0.5-0.3(1.1.3) Others (taxes and property incomes)0.00.00.00.00.00.00.0-0.1-0.1(1.2) Cyclical component0.31.21.82.21.50.70.00.00.00.00.00.00.0(1.3) One-off and other temporary measures0.00.00.00.00.00.00.00.00.00.00.00.00.0(2) Snowball effect (2.1+2.2+2.3)-3.2-2.9-2.4-2.20.20.50.7-0.4-0.3-0.2-0.10.00.2(2.1) Interest expenditure2.62.72.42.22.22.12.12.12.12.12.22.22.3(2.2) Growth effect-4.2-3.5-3.5-2.7-0.40.00.3-0.9-0.9-0.9-0.9-0.9-0.8(2.3) Inflation effect-1.6-2.0-1.3-1.7-1.6-1.6-1.6-1.6-1.5-1.5-1.4-1.3-1.3(3) Stock-flow adjustments-1.817.21.30.00.00.00.00.00.00.00.00.00.0Note: For further information, see the European Commission Fiscal Sustainability Report (FSR) 2018. b. For the medium-term, the risk category (low/medium/high) is based on the joint use of the S1 indicator and of the DSA results. The S1 indicator measures the fiscal adjustment required (cumulated over the 5 years following the forecast horizon and sustained thereafter) to bring the debt-to-GDP ratio to 60 % by 2033. The critical values used are 0 and 2.5 pps. of GDP. The DSA classification is based on the results of 5 deterministic scenarios (baseline, historical SPB, higher interest rate, lower GDP growth and negative shock on the SPB scenarios) and the stochastic projections. Different criteria are used such as the projected debt level, the debt path, the realism of fiscal assumptions, the probability of debt stabilisation, and the size of uncertainties. c. For the long-term, the risk category (low/medium/high) is based on the joint use of the S2 indicator and the DSA results. The S2 indicator measures the upfront and permanent fiscal adjustment required to stabilise the debt-to-GDP ratio over the infinite horizon, including the costs of ageing. The critical values used are 2 and 6 pps. of GDP. The DSA results are used to further qualify the long-term risk classification, in particular in cases when debt vulnerabilities are identified (a medium / high DSA risk category). [2]Thechartspresentaseriesofsensitivitytestsaroundthebaselinescenario,aswellasalternativepolicyscenarios,inparticular:thehistoricalstructuralprimarybalance(SPB)scenario(wheretheSPBissetatitshistoricalaverage),theStabilityandGrowthPact(SGP)scenario(wherefiscalpolicyisassumedtoevolveinlinewiththemainprovisionsoftheSGP),ahigherinterestratescenario(+1pp.comparedtothebaseline),alowerGDPgrowthscenario(-0.5pp.comparedtothebaseline)andanegativeshockontheSPB(calibratedonthebasisoftheforecastedchange).Anadversecombinedscenarioandenhancedsensitivitytests(ontheinterestrateandgrowth)arealsoincluded,aswellasstochasticprojections. Detailed information on the design of these projections can be found in the FSR 2018.CY - Debt projections baseline scenario[1]Thefirsttablepresentsthebaselineno-fiscalpolicychangescenarioprojections.Itshowstheprojectedgovernmentdebtdynamicsanditsdecompositionbetweentheprimarybalance,snowballeffectsandstock-flowadjustments.Snowballeffectsmeasurethenetimpactofthecounteractingeffectsofinterestrates,inflation,realGDPgrowth(andexchangerates in some countries). Stock-flow adjustments include differences in cash and accrual accounting, net accumulation of assets, as well as valuation and other residual effects.[3] The second table presents the overall fiscal risk classification over the short, medium and long-term. a. For the short-term, the risk category (low/high) is based on the S0 indicator. S0 is an early-detection indicator of fiscal stress in the upcoming year, based on 25 fiscal and financial-competitiveness variables that have proven in the past to be leading indicators of fiscal stress. The critical threshold beyond which fiscal distress is signalled is 0.46. 506070809010011020162017201820192020202120222023202420252026202720282029Debt as % of GDP -CYBaselineEnhanced lower GDP growth scenarioAdverse combined scenarioEnhanced higher interest rate scenario506070809010011020162017201820192020202120222023(% of GDP)Stochastic debt projections 2019-2023 -CYp10_p20p20_p40p40_p60p60_p80p80_p90p50Baseline506070809010011020162017201820192020202120222023202420252026202720282029Debt as % of GDP -CYBaselineHistorical SPB scenarioSGP scenario506070809010011020162017201820192020202120222023202420252026202720282029Debt as % of GDP -CYBaselineHigher interest rate scenarioNegative shock on the SPBLower GDP growth scenarioBaselineHistorical SPBLower GDP growthHigher interest rateNegative shock on SPBStochastic projectionsRisk categoryMEDIUMMEDIUMMEDIUMMEDIUMMEDIUMMEDIUMDebt level (2029)61.973.966.565.169.2Debt peak year20182018201820182018Percentile rank17.0%29.0%Probability debt higher10.5%Dif. between percentiles42.2MEDIUMLong termDSAMEDIUMDebt sustainability analysis (detail)Medium termMEDIUMLOWShort termHIGH(S0 = 0.5)(S1 = -0.7)S2LOW(S2 = -0.9)S1 
 
ANNEX C: STANDARD TABLES 

Table C.1: 

Financial market indicators 

(1) Latest data Q3 2018. Includes not only banks but all monetary financial institutions excluding central banks. 
(2) Latest data Q2 2018. 
(3) Quarterly values are annualised. 
* Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators) 

65 

201320142015201620172018Total assets of the banking sector (% of GDP)1)497.7517.6512.9468.1410.9335.4Share of assets of the five largest banks (% of total assets)64.163.467.565.884.1-Foreign ownership of banking system (% of total assets)2)33.935.219.221.619.118.9Financial soundness indicators:2)              - non-performing loans (% of total loans)-38.636.335.430.728.1              - capital adequacy ratio (%)13.515.316.616.816.315.5              - return on equity (%)3)-37.9-7.1-7.71.7-11.53.9Bank loans to the private sector (year-on-year % change)1)-9.4-4.23.6-8.30.7-5.4Lending for house purchase (year-on-year % change)1)-6.8-2.8-3.0-1.0-0.7-0.3Loan to deposit ratio2)-83.783.277.971.965.6Central Bank liquidity as % of liabilities1)-12.46.91.31.61.5Private debt (% of GDP)340.1352.4353.5337.8316.3-Gross external debt (% of GDP)    - public------    - private------Long-term interest rate spread versus Bund (basis points)*493.0483.7404.1368.3230.6174.5Credit default swap spreads for sovereign securities (5-year)*943.9423.1330.6262.5180.0117.3 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Headline Social Scoreboard indicators 

(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) Long-term unemployed are people who have been unemployed for at least 12 months. 
(4) Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2019.       
(5) 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).       
(6) Average of first three quarters of 2018 for the employment rate, long-term unemployment rate and gender employment 
gap. Data for unemployment rate is annual (except for DK, EE, EL, HU, IT and UK data based on first three quarters of 2018). 
Source: Eurostat 

66 

201320142015201620172018 6Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)9.16.85.27.68.5:Gender employment gap (pps)10.47.78.39.79.510.2Income inequality, measured as quintile share ratio (S80/S20)4.95.45.24.94.6:At-risk-of-poverty or social exclusion rate1 (AROPE)27.827.428.927.725.2:Young people neither in employment nor in education and training (% of population aged 15-24)18.717.015.316.016.1:Dynamic labour markets and fair working conditions†Employment rate (20-64 years)67.267.667.968.770.873.7Unemployment rate2 (15-74 years)15.916.115.013.011.18.7Long-term unemployment rate3 (as % of active population)6.17.76.85.84.52.7Gross disposable income of households in real terms per capita4 (Index 2008=100) 81.875.978.082.184.6:Annual net earnings of a full-time single worker without children earning an average wage (levels in PPS, three-year average)::::::Annual net earnings of a full-time single worker without children earning an average wage (percentage change, real terms, three-year average)::::::Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction537.041.536.235.635.9:Children aged less than 3 years in formal childcare24.025.520.824.928.2:Self-reported unmet need for medical care4.44.71.50.61.5: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) 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. 
(2) PISA (OECD) results for low achievement in mathematics for 15 year-olds. 
(3) Impact of socio-economic and cultural status on PISA (OECD) scores. Values for 2012 and 2015 refer respectively to 
mathematics and science. 
(4) Average of first three quarters of 2018 for the activity rate, employment growth, employment rate, part-time employment, 
fixed-term employment. Data for youth unemployment rate is annual (except for DK, EE, EL, HU, IT and UK data based on first 
three quarters of 2018). 
Source: Eurostat, OECD 

67 

Labour market indicators201320142015201620172018 4Activity rate (15-64)73.674.373.973.473.975.0Employment in current job by durationFrom 0 to 11 months15.718.518.119.720.0:From 12 to 23 months8.57.69.59.710.2:From 24 to 59 months17.915.714.913.713.7:60 months or over57.958.257.556.956.1:Employment growth* (% change from previous year)-5.9-1.81.54.63.94.2Employment rate of women(% of female population aged 20-64)62.263.964.064.166.268.7Employment rate of men (% of male population aged 20-64)72.671.672.373.875.779.0Employment rate of older workers* (% of population aged 55-64)49.646.948.552.255.360.9Part-time employment* (% of total employment, aged 15-64)11.913.513.013.412.211.1Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)17.519.018.416.515.314.2Participation in activation labour market policies(per 100 persons wanting to work)5.68.69.47.0::Transition rate from temporary to permanent employment(3-year average)22.020.421.626.331.2:Youth unemployment rate (% active population aged 15-24)38.936.032.829.124.720.1Gender gap in part-time employment (aged 20-64)7.16.35.44.36.66.8Gender pay gap1 (in undadjusted form)14.914.214.013.913.7:Education and training indicators201320142015201620172018Adult participation in learning(% of people aged 25-64 participating in education and  training)7.27.17.56.96.9:Underachievement in education2::42.6:::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)47.852.554.553.455.9:Variation in performance explained by students' socio-economic status3::9.5::: 
 
 
 
 
C. Standard Tables 

Table C.4: 

Social inclusion and health indicators 

* Non-scoreboard indicator       
(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 

68 

201220132014201520162017Expenditure on social protection benefits* (% of GDP)Sickness/healthcare3.53.73.33.43.5:Disability0.70.70.70.70.8:Old age and survivors10.711.511.211.110.5:Family/children1.51.51.41.41.3:Unemployment1.62.01.51.21.0:Housing0.60.40.30.40.3:Social exclusion n.e.c.1.21.11.11.31.2:Total19.820.819.619.418.7:of which: means-tested benefits2.92.72.62.82.8: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)44.043.144.844.344.9:Children at risk of poverty or social exclusion (% of people aged 0-17)*27.527.724.728.929.625.5At-risk-of-poverty  rate1 (% of total population)14.715.314.416.216.115.7In-work at-risk-of-poverty rate (% of persons employed)7.98.97.89.18.27.9Severe material deprivation rate2  (% of total population)15.016.115.315.413.611.5Severe housing deprivation rate3, by tenure statusOwner, with mortgage or loan0.01.11.50.02.00.7Tenant, rent at market price1.92.63.01.31.61.7Proportion of people living in low work intensity households4 (% of people aged 0-59)6.57.99.710.910.69.4Poverty thresholds, expressed in national currency at constant prices*895881487363707273017642Healthy life years (at the age of 65)Females7.78.78.87.310.3:Males8.89.510.48.411.2:Aggregate replacement ratio for pensions5 (at the age of 65)0.40.40.40.40.40.4Connectivity dimension of the Digital Economy and Society Inedex (DESI)6::37.740.448.254.6GINI coefficient before taxes and transfers*42.943.844.847.447.145.8GINI coefficient after taxes and transfers*31.032.434.833.632.130.8 
   
 
 
 
C. Standard Tables 

Table C.5: 

Product market performance and policy indicators 

(1) Value added in constant prices divided by the number of persons employed. 
(2) Compensation of employees in current prices divided by value added in constant prices. 
(3) The methodologies, including the assumptions, for this indicator are shown in detail here: 
http://www.doingbusiness.org/methodology.        
(4) 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.       
(5) Percentage population aged 15-64 having completed tertiary education.       
(6) Percentage population aged 20-24 having attained at least upper secondary education.       
(7) 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       
(8) 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). 

69 

Performance indicators201220132014201520162017Labour productivity per person1 growth (t/t-1) in %Labour productivity growth in industry-4.38-2.634.654.516.163.97Labour productivity growth in construction-6.25-8.36-2.98-1.868.1814.21Labour productivity growth in market services0.330.47-0.92-0.52-0.73-0.67Unit Labour Cost (ULC) index2 growth (t/t-1) in %ULC growth in industry10.70-13.03-2.01-3.34-5.50-3.76ULC growth in construction2.821.10-2.550.96-7.28-11.67ULC growth in market services1.15-4.75-2.79-0.350.130.67Business environment201220132014201520162017Time needed to enforce contracts3 (days)7357351100110011001100Time needed to start a business3 (days)8.08.08.08.06.06.0Outcome of applications by SMEs for bank loans4:1.411.341.760.761.57Research and innovation201220132014201520162017R&D intensity0.440.480.510.480.530.56General government expenditure on education as % of GDP6.306.806.006.006.00:Employed people with tertiary education and/or people employed in science and technology as % of total employment474850494848Population having completed tertiary education5353536363838Young people with upper secondary education6889092949190Trade balance of high technology products as % of GDP-1.00-0.23-1.24-0.33-1.90-1.59Product and service markets and competition200320082013OECD product market regulation (PMR)7, overall::1.65OECD PMR7, retail::1.67OECD PMR7, professional services::3.11OECD PMR7, network industries8::2.64 
 
 
 
 
 
 
 
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 (Europe 2020-2030)(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 use in industry (in kgoe) divided by gross value added of industry, including construction 
(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 use in transport sector including international aviation, (in kgoe) divided by transport 
industry gross value added (in 2010 EUR) 
Transport carbon intensity: GHG emissions in transport sector divided by gross value added of the transport activities 
Energy import dependency: net energy imports divided by gross inland energy consumption plus consumption of 
international maritime bunkers  
Aggregated supplier concentration index:  Herfindahl-Hirschman index for net imports of crude oil and NGL, natural gas and 
hard coal. Smaller values indicate larger diversification and hence lower risk. 
Diversification of the energy mix: Herfindahl-Hirschman index of the main energy products in the gross inland consumption of 
energy 
* 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); Eurostat (all other indicators) 

70 

Green growth performance201220132014201520162017MacroeconomicEnergy intensity kgoe / €0.130.120.130.130.130.13Carbon intensity kg / €0.460.440.470.470.47-Resource intensity (reciprocal of resource productivity)kg / €0.880.680.680.670.750.86Waste intensity kg / €0.10-0.11-0.13-Energy balance of trade % GDP-7.5-6.3-5.9-4.1-3.4-4.2Weighting of energy in HICP%9.429.539.338.357.467.43Difference between energy price change and inflation %17.9-7.0-8.8-17.5-13.512.9Real unit of energy cost% of value added17.316.915.215.716.2-Ratio of environmental taxes to labour taxesratio0.230.250.270.260.25-Environmental taxes% GDP2.62.73.13.02.92.9Sectoral Industry energy intensity kgoe / € 0.080.100.130.120.110.10Real unit energy cost for manufacturing industry excl. refining% of value added34.837.333.235.137.1-Share of energy-intensive industries in the economy% GDP3.52.92.93.03.2-Electricity prices for medium-sized industrial users€ / kWh0.230.200.180.140.120.14Gas prices for medium-sized industrial users€ / kWh------Public 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%13.614.616.817.917.216.1Share of GHG emissions covered by ETS*%50.350.653.250.153.1-Transport energy intensitykgoe / €0.830.700.740.790.830.84Transport carbon intensitykg / €1.791.501.591.721.80-Security of energy supplyEnergy import dependency%97.096.393.297.796.296.3Aggregated supplier concentration indexHHI0.00.00.00.00.0-Diversification of energy mixHHI0.900.880.880.870.870.86 
 
 
 
 
ANNEX D: INVESTMENT GUIDANCE ON COHESION POLICY 

FUNDING 2021-2027 FOR CYPRUS 

Building  on  the  Commission’s  proposal  for  the  next  Multi-Annual  Financial  Framework  for  the  period 
2021-2027 of 2 May 2018 (COM (2018) 321), this Annex presents the  preliminary Commission services’ 
views  on  priority  investment  areas  and  framework  conditions  for  effective  delivery  for  the  2021-2027 
Cohesion Policy (70). These priority investment areas are derived from the broader context of investment 
bottlenecks,  investment  needs  and  regional  disparities  assessed  in  the  report.  This  Annex  provides  the 
basis  for  a  dialogue  between  Cyprus  and  the  Commission  services  in  view  of  the  programming  of  the 
Cohesion  policy  funds  (European  Regional  Development  Fund,  Cohesion  Fund  and  European  Social 
Fund Plus). 

Policy Objective 1: A Smarter Europe – Innovative and smart industrial transformation 

Cyprus remains a  moderate  innovator,  with innovation performance having declined since 2010. Public 
and private research and development expenditure levels are among the lowest in the EU and interaction 
between  academia  and  businesses  is  very  limited.  In  order  to  strengthen  innovation  performance  and 
foster  productivity  growth,  investments  should  be  geared  towards  already  identified  or  potential  new 
smart specialisation areas, on the basis of national needs and potential. Priority investment needs( 71) have 
been identified to enhance research and innovation capacity of the business sector and increase the 
uptake of advanced technologies, and in particular:  

  promotion  of  business  investment  in  research  and  innovation  and  entrepreneurial  universities  and 

collaboration between research institutions, universities and businesses; 

  promotion  of  business  technology  transfer,  networking,  clusters  and  open  innovation,  including  in 

cooperation with other countries; 

  support of activities that allow innovations to reach the market, including diffusion of digital and other 

key enabling technologies, especially for start-ups and small and medium-sized enterprises; 

  support of the establishment of Living Labs, test-beds and ecosystems that bring together the demand 
and supply sides to promote the development and actual use of innovative solutions for public sector 
needs. 

Cyprus  has  a  moderate  digital  enabling  environment  and  low  performance  on  digital  transformation. 
Priority  investments  needs  have  been  identified  to  reap  the  benefits  offered  by  digitalisation  and  E-
services for citizens, businesses and public sector, and in particular to: 

  provide support for the increase of Information and Communications Technology uptake in small and 

medium-sized enterprises, including supporting infrastructures and services; 

 

increase  the  range  of  e-service  provision  (e-government,  e-procurement,  e-inclusion,  e-health,  e-
learning,  
e-skilling, e-commerce) and their uptake by citizens and businesses. 

Increasing entrepreneurship and the innovation capacity of the business sector and boosting investments 
and access to finance are crucial for the country to improve competitiveness of small and medium-sized 
enterprises. High priority investment needs have been identified to enhance growth and competitiveness 

(70)  This Annex is to be considered in conjunction with the EC Proposal for a Regulation of the European Parliament and of the 
Council on the European Regional Development Fund and on the Cohesion Fund COM(2018) 372 and the EC Proposal for a 
Regulation of the European Parliament and of the Council on the European Social Fund Plus COM(2018) 382, in particular as 
regards the requirements for thematic concentration and urban earmarking outlined in these proposals. 

(71)  The intensity of needs is classified in three categories in a descending order – high priority needs, priority needs, needs. 

71 

 
 
                                                           
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Cyprus 

and to increase export market shares of small and medium-sized enterprises, and in particular to:  

 

foster the  creation of  new  firms,  growth of start-ups/scale-ups, accelerators; develop and implement 
new business models for small and medium-sized enterprises through business advisory services; 

 

facilitate access to finance and advanced business services for small and medium-sized enterprises; 

  boost internationalisation of small and medium-sized enterprises through cooperation and clustering, 
identification  of  and  participation  in  new  export  markets,  participation  in  industry  led  and  research 
driven inter-regional cooperation networks and clusters; 

  support  training  and  reskilling  for  smart  specialisation  areas  within  firms,  research  institutions, 

advisory services and build the necessary administrative capacity, in particular in digital skills. 

Policy  Objective  2:  A  low  carbon  and  greener  Europe  –  Clean  and  fair  energy  transition,  Green 
and blue investment, circular economy, climate adaptation and risk prevention 

Cyprus' building stock, constructed with no or very low level of thermal protection, represents a source of 
energy inefficiency. High priority  investment  needs  have  been identified to  promote energy efficiency 
measures, and in particular to: 

 

improve energy efficiency in residential and public buildings and small and medium-sized enterprises 
premises. 

Cyprus is highly dependent on fossil fuels and its considerable potential for renewable energy generation 
has  been  underexploited  so  far.  The  high  levels  of  greenhouse  gas  emissions  are  mostly  due  to  energy 
production and transport. Priority investment needs have been identified to  promote renewable energy, 
and in particular solar power, also in the context of the “Clean Energy for EU islands” Initiative, namely 
to:  

  promote  small-scale  electricity  generation  based  on  renewable  energy  sources,  e.g.  by  renewable 

energy self-consumers, and locally led initiatives, notably in rural areas. 

Cyprus is characterised by the over-abstraction of groundwater and water scarcity, while a considerable 
amount of wastewater is still discharged without collection or treatment. High priority investment needs 
have  been  identified    to  promote  sustainable  water  management  and  improve  resource  efficiency,  in 
particular: 

 

reinforcement,  upgrading  of  water  supply  networks,  water  leakage  control    and  other  water  saving 
measures, including water reuse, for purposes other than drinking water (e.g. urban irrigation); 

  collection and treatment of wastewater. 

Significant gaps still remain in reaching EU’s objectives in the area of solid waste management. Waste 
generation is higher than EU average. Cyprus landfills the majority of its solid waste and lags behind in 
recycling and reuse. High priority investment needs have been identified to ensure the transition towards 
the circular economy and to improve waste management, also in the context of the “Clean Energy for 
EU islands” Initiative, and in particular to: 

  promote separate collection schemes and units for waste streams (paper, plastic, metal, glass, and bio-
waste), reuse centres, repair networks, composting and  sorting plants, other  measures to prepare for 

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D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Cyprus 

reuse and recycling; 

 

raise awareness and support sustainable consumption practices and behaviour; 

  modernise or upgrade existing recycling infrastructure to new long-term recycling targets.  

Forest fires, agricultural land abandonment, erosion, desertification and loss of biodiversity are some of 
the consequences of climate change in Cyprus, which affect not only the rural economy but also tourism, 
thus  compromising  economic  development.  Investment  needs  have  been  identified  to  mitigate  climate 
change effects and enhance biodiversity, and in particular: 

  prevention  and  preparedness  measures  and  awareness-raising  campaigns  for  disaster  risk 
management, flood protection, development of early warning systems and training for civil protection 
units, management of land, forests and rivers to prevent specific risks;  

  support of green infrastructure in urban environment and effective management and protection of the 

Natura 2000 areas. 

Policy  Objective  3:  A  more  connected  Europe  –  Mobility  and  regional  Information  and 
Communications Technology connectivity 

While road and port infrastructures are well developed, there is a very low use of green urban transport. 
Priority investment needs have been identified to  promote sustainable multimodal urban mobility, in 
the framework of sustainable urban mobility strategies,  in particular in Nicosia, as largest urban area: 

  promotion  of  a  shift  towards  sustainable  and  accessible  modes  of  transport,  such  as  low-carbon 
collective public transport and active modes of transport, only for non-fossil-based means of transport; 

  support infrastructure investments into the backbone of the urban transport system, such as light rail or 

tramlines, in particular in Nicosia, and cycling friendly infrastructure. 

Policy Objective 4: A more social Europe – Implementing the European Pillar of Social Rights 

The share of  youth  not in education, employment or training is high and the labour  market situation of 
young people remains precarious, while participation in, and targeting of, activation measures are limited. 
High  priority  investment  needs  have  therefore  been  identified  to  improve  access  to  employment,  in 
particular  for  youth  and  long-term  unemployed,  promoting  self-employment  and  the  social 
economy, and modernise labour market institutions and services, and in particular to: 

 

improve  labour  market  matching  and  upskilling/reskilling  of  employees  and  promote  a  tailored  and 
inclusive  strategy  and  approach  to  the  labour  market  integration  of  the  youth,  in  particular  through 
mapping  and  profiling  of  youth  not  in  education,  employment  or  training  by  Public  Employment 
Services; 

  support active labour market measures accessible to all through the validation of competences, skills 
and career outplacement, targeted and well-designed wage and recruitment subsidies, job and training 
mobility measures, on-the-job training and second-chance programmes; 

  support self-employment, job creation and social innovation by facilitating, access to (micro-) finance 

and business development services, including for inactive people. 

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D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Cyprus 

Participation in vocational education and training and adult participation in learning remain low; Science, 
Technology,  Engineering,  Mathematics  and  Information  and  Communications  Technology  skills  are 
lacking  and  a  comprehensive  lifelong  learning  approach  is  missing.  Priority  investment  needs  have 
therefore  been  identified  to  improve  the  quality,  effectiveness  and  labour  market  relevance  of 
education  and  training  and  promote  lifelong  learning,  including  digital  skills,  better  anticipating 
change and new skills requirements, and in particular to: 

 

 

improve  basic  skills  attainments,  including  for  disadvantaged  groups,  and  support  digital  skills’ 
development and validation; 

improve  the  labour  market  relevance  of  education  and  training  through  enhanced  monitoring  and 
evaluation, including graduate tracking; 

  make vocational education and training more attractive by combating stereotypes and set up flexible 
governance mechanisms; promote partnerships between relevant stakeholders in order to (a) provide 
information  on  labour  market  needs,  (b)  promote  workplace  learning  and  (c)  invest  in  vocational 
education and training infrastructure in line with evolving skills needs; 

  support continuous training for educators;  

 

implement adult learning programmes in consultation with social partners and civil society, supported 
by guidance and validation services. 

Material  deprivation  and  social  exclusion  rates  are  above  pre-crisis  levels  and  the  number  of  asylum 
seekers is growing; healthcare spending is low and out-of-pocket payments high. Investment needs have 
therefore been identified to address material deprivation, promote the socio-economic integration of 
third country nationals and marginalised communities,  enhance access to affordable and effective 
services  and  social  protection  and  improve  effectiveness  and  resilience  of  healthcare  systems  and 
long-term care services, and in particular to: 

  strengthen cooperation between relevant stakeholders for increased outreach and personalised services 
to  disadvantaged  people  and  provide  social  inclusion  and  long-term  integration  measures;  deliver 
basic  material  assistance  to  people  most  in  need,  including  migrants  and  refugees,  and  community-
based services for vulnerable groups; 

 

increase the provision of affordable high-quality early childhood education and care; 

 

improve the healthcare system and ensure integration of primary, hospital and long-term care. 

74 

 
 
 
 
 
 
 
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Cyprus 

Policy Objective 5 –  A Europe  closer  to  citizens  by  fostering  the  sustainable  and  integrated  
development  of urban, rural and coastal areas and local initiatives 

Cyprus'  remote  mountainous  and  rural  areas  have  been  losing  population  and  do  not  offer  enough  job 
opportunities  or  basic  services,  while  some  urban  core  areas  face  decline  and  varied  problems  (e.g. 
depopulation,  deterioration  of  historic  urban  cores  and  of  economic  and  social  conditions).  Priority 
investment needs have been identified, also in the context of the “Clean Energy for EU islands” Initiative, 
to  foster  the  integrated  territorial  development  of  urban,  rural  and  mountainous  areas,  and  in 
particular to: 

  promote Sustainable Urban Development strategies in  the  main urban centres,  fostering their social, 

economic and environmental development, cultural heritage and security; 

  promote the integration of smaller urban centres in the urban network, including urban-rural linkages; 

 

regenerate  disadvantaged  zones/areas  in  the  urban  areas,  including  the  promotion  of  productive 
activities and the social economy in deprived neighbourhoods; 

  promote circular economy, sustainable tourism, culture and cultural heritage and alternative economic 
activities in mountainous and rural areas, in the context of sustainable integrated development plans. 

Factors for effective delivery of Cohesion policy 

  broader use of financial instruments and/or contributions to a Cyprus’ compartment under InvestEU 

for revenue-generating and cost-saving activities;  

  have in place a clear division of responsibilities in the programming, management and implementation 

cycle; 

 

improve  public  procurement  performance,  in  particular  by  optimising  the  number  of  contracting 
authorities,  while  at  the  same  time  ensuring  sufficient  administrative  capacity  necessary  for  the 
effective administration and implementation of the Funds and its necessary support; 

  ensure simplification and transparency of selection and implementation procedures; 

  put in place improved and  more  efficient  measures to prevent and address conflict of interest, fraud 

and corruption; 

  strengthen Public Employment Services' effectiveness and enhance autonomy based on a multi-annual 

strategic roadmap; 

  strengthen  authorities' capacity to develop and implement training policy measures; 

  promote social dialogue and social partners' capacity. 

75 

 
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