COMMISSION STAFF WORKING DOCUMENT Country Report Cyprus 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2020 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: 2020-02-26
Institutions: European Commission, Secretariat-General
Subjects: Cyprus, economic situation, green economy, investment, labour market, macroeconomics, public finance, social policy, structural adjustment, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 26.2.2020  SWD(2020) 512 final  COMMISSION STAFF WORKING DOCUMENT Country Report Cyprus 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2020 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(2020) 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 
4.5.  Environmental sustainability 

Annex A: Overview Table 

Annex B: Commission debt sustainability analysis and fiscal risks 

Annex C: Standard Tables 

Annex D: Investment guidance on Just Transition Fund 2021-2027 for Cyprus 

Annex E: Progress towards the Sustainable Development Goals (SDGs) 

References 

LIST OF TABLES 

Table 1.1: 
Table 2.1: 
Table 3.1: 
Table 4.2.1: 
Table 4.4.1: 
Table C.1: 
Table C.2: 
Table C.3: 
Table C.4: 
Table C.5: 

Key economic and financial indicators – Cyprus 

Assessment of the 2019 country-specific recommendations implementation 

Macroeconomic imbalance procedure assessment matrix – Cyprus 

Financial soundness indicators, all banks in Cyprus 

Selected indicators on digitalisation of businesses, 2019 (% of enterprises) 

Financial market indicators 

Headline Social Scoreboard indicators 

Labour market and education indicators 

Social inclusion and health indicators 

Product market performance and policy indicators 

1 

4 

8 

16 

22 

28 

28 
33 
42 
52 
62 

67 

75 

76 

82 

84 

89 

15 
18 
26 
35 
55 
76 
77 
78 
79 
80 

 
 
 
81 
84 

8 
9 
11 
11 
12 
13 
14 
16 
28 
31 
37 
37 
38 
38 
39 
39 
40 
41 
41 
41 

44 
46 
47 
50 
51 
52 
54 

Table C.6: 
Table E.1: 

Green growth 

Indicators measuring Cyprus’ progress towards the SDGs 

LIST OF GRAPHS 

Housing price developments 

Tourism arrivals and revenues 

Real effective exchange rates 

Key labour market developments 

Real GDP growth and contributions 

New and pure new loans for house purchase 

Graph 1.1: 
Graph 1.2: 
Graph 1.3: 
Graph 1.4: 
Graph 1.5: 
Graph 1.6: 
Graph 1.7:  General government budget balance and gross debt 
Graph 2.1:  Overall multiannual implementation of 2011-2019 CSRs to date 
Graph 4.1.1:  Government debt projection (% GDP) 
Graph 4.1.2:  Revenue from environmentally-related taxes 
Graph 4.2.1:  Private debt, percentage of GDP 
Graph 4.2.2:  Private debt stocks 
Graph 4.2.3:  Changes in private debt-to-GDP ratio and breakdown 
Graph 4.2.4:  Private debt stock and NPLs stock 
Graph 4.2.5:  Breakdown of households indebtedness 
Graph 4.2.6:  Current account balance components 
Graph 4.2.7:  Net international investment position 
Graph 4.2.8:  Net Lending/ Borrowing by Sector 
Graph 4.2.9:  Household savings rate 
Graph 4.2.10:  Demand, output and trade balance 
Graph 4.3.1:  Temporary, part-time and self-employment (without employees) - proportion in 

employment 

Graph 4.3.2:  The proportion of people at risk of poverty and social exclusion (2005-2018) 
Graph 4.3.3:  Risk of poverty and social exclusion  for children below the age of six (%) (2010-2018) 
Graph 4.3.4:  Adult learning participation per ISCED levels. (2010-2018) 
Graph 4.3.5:  Distribution of out-of-pocket payments for healthcare 
Graph 4.4.1: 
Graph 4.4.2:  Productivity factors 

Investment by category 

2 

 
 
 
 
LIST OF BOXES 

Box 2.1: Commission Structural Reform Support Programme in Cyprus 

Box 2.2: EU funds and programmes to address structural challenges and to foster growth and 

competitiveness in Cyprus 

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 

Box 4.5.1: Transition to a more sustainable and decarbonised growth model (in particular in the 

electricity and transport sectors) 

19 

20 
43 
53 

65 

3 

 
 
 
 
 
 
 
EXECUTIVE SUMMARY 

impede 

its  medium-term 

Cyprus’ economy is still characterised by large 
economic  imbalances,  which,  unless  addressed, 
may 
economic 
prospects.  Cyprus’  large  imbalances  are  a  legacy 
of  the  2013  crisis  and  include  high  stocks  of 
private,  public  and  external  debt  and  non-
performing  loans.  In  this  context,  there  is  also  a 
need  to  step  up  reforms  in  key  areas  to  attract 
productivity-enhancing  investments,  diversify  the 
economy 
and 
environmentally  sustainable  growth  in  the  long 
term. (1)  

inclusive 

foster 

help 

and 

impact,  reflecting  a 

Economic growth has remained resilient so far, 
but  is  expected  to  slow  down  in  the  coming 
years.  GDP  growth,  projected  to  be  3.2%%  in 
2019,  has  remained  strong,  supported  by  resilient 
domestic  demand.  Meanwhile,  net  exports  had  a 
negative 
less  supportive 
external environment. The economy is expected to 
continue growing — albeit at a slower pace — by 
around 2.8%% in 2020 and 2.5% in 2021, in view 
of the anticipated weakness of the global economy. 
The  current  account  deficit 
is  significantly 
negative, and is set to worsen to around 10%% of 
GDP  in  2019-2021  due  to  lower  exports  and 
increased imports in the context of strong domestic 
demand.  Unemployment  fell  to  7.5%%  in  2019, 
the lowest level since 2011, and is expected to fall 
further.  Inflation  remained  low,  and  this  trend  is 
projected to continue over the next couple of years.  

Cyprus  is  expected  to  record  a  significant 
budget  surplus  in  2019.  The  headline  budget 
balance  is  set  to  return  to  surplus  in  2019  (above 
3.5%% of GDP) and to remain in surplus in 2020 
and  2021,  which  would  enable  considerable  debt 
reduction.  To safeguard fiscal sustainability going 
forward  expenditure  developments  should  be 
carefully  monitored,  especially  in  the  light  of 
possible future risks to the robustness of revenues. 

(1)  This  report  assesses  Cyprus’s  economy  in  the  light  of  the 
European  Commission’s  Annual  Sustainable  Growth 
Strategy,  published  on  17  December  2019.  In 
this 
document, the Commission sets out a new strategy on how 
to address not only the short-term economic challenges but 
also  the  economy’s  longer-term  challenges.  This  new 
economic agenda of competitive sustainability has on four 
dimensions:  environmental  sustainability,  productivity 
gains,  fairness  and  macroeconomic  stability.  At  the  same 
time,  the  Commission  published  the  Alert  Mechanism 
eighth 
the 
Report 
the 
macroeconomic 
procedure.  The  Alert 
imbalance 
Mechanism  Report  found  that  Cyprus  warranted  an  in-
depth review, which is presented in this report. 

round  of 

initiated 

that 

4 

The  long-term  sustainability  of  the  growth 
model of Cyprus is put at risk by rising external 
uncertainties  and  pending  structural  reforms. 
Growth  relies  heavily  on  specific  sectors,  such  as 
tourism,  foreign-funded  residential  construction 
and  services  linked  to  foreign  companies,  which 
are  vulnerable 
to  potential  negative  external 
developments.  There  is  a  need  to  improve  the 
environmental  sustainability  of  tourism  and  to 
the  sector  further.  More  generally, 
diversify 
investment 
that  could 
strengthen  Cyprus’  economic 
structure  and 
increase  its  potential  growth,  such  as  digital 
transformation,  R&D, 
renewable  sources  of 
energy,  sustainable  transport  and  the  circular 
economy. At the same time, to ensure that growth 
the  population,  more 
benefits  all  groups  of 
investment  is  needed  in  vocational  education  and 
training,  adult  learning,  early  childhood  education 
and care, and health. 

lags  behind 

in  areas 

Overall,  Cyprus  has  made  limited (2)  progress 
in  addressing 
country-specific 
the  2019 
recommendations.  

There has been some progress:  

 

 

 

in  improving  the  governance  of  state-owned 
enterprises; 

in  facilitating  the  reduction  of  non-performing 
loans; 

in strengthening the effectiveness of the public 
employment  services  and  getting  more  young 
people into jobs and training; 

  on the National Health Insurance System; 

  on energy efficiency and renewable energy; 

 

in improving R&D; and 

 

in  improving  access  to  finance  for  small  and 
medium-sized enterprises. 

Cyprus has made limited progress: 

(2)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
country-specific  recommendation 
the 
overview table in Annex A.  

is  presented 

in 

 
 
                                                           
                                                           
 

in  improving  the  efficiency  of  the  public 
administration and local governments;  

 

in tackling aggressive tax planning;   

 

 

 

 

 

 

in  reforming  the  education  system;  and  in 
increasing employers' engagement and learners' 
in  vocational  education  and 
participation 
training;  

in  improving  the  affordability  of  childhood 
education and care; 

in focusing investment-related economic policy 
on  sustainable  transport,  waste  and  water 
management, digitalisation and digital skills; 

in  improving  the  effectiveness  of  the  justice 
system and payment discipline; 

in  setting  up  a  reliable  system  to  issue  and 
transfer immovable property rights; and 

in  accelerating  anti-corruption  reforms  and 
the 
safeguarding 
prosecution. 

independence 

the 

of 

Cyprus has made no progress: 

  on privatisations. 

Cyprus  faces  a  few  challenges  according  to  the 
indicators  of  the  Social  Scoreboard  supporting 
the  European  Pillar  of  Social  Rights.  Youth 
unemployment  and  the  number  of  young  people 
not in employment, education or training remain at 
significantly  high  levels.  Moreover,  the  gender 
employment  gap  remains  wide.  The  real  gross 
disposable household income (GDHI) per capita is 
still below the 2008 levels and significantly lower 
than  the  EU  average  in  2018.  The  guaranteed 
minimum income scheme helped to reduce income 
inequalities.  Further  efforts  should  be  made  in 
developing 
encouraging 
skills 
upskilling and reskilling. 

digital 

and 

targets  under 

Cyprus has made some progress in reaching its 
national 
the  Europe  2020 
strategy. It met its targets  for R&D spending and 
the  share  of  renewable  energy  in  the  total  energy 
mix.  Cyprus  exceeded 
targets  on  higher 
education  attainment  and  on  reducing  the  school 

its 

Executive summary 

drop-out  rate  (‘early  school  leaving’).  However, 
the energy consumption remained unchanged, and 
in the absence of additional  measures,  this affects 
targets  for 
to  achieve 
Cyprus’  capacity 
greenhouse  gas  emissions.  The  employment  rate 
increased,  and  poverty  and  social  exclusion 
decreased, but the target seems to be unattainable. 

its 

Cyprus  performs  relatively  poorly  in  achieving 
the  Sustainable  Development  Goals.  More 
specifically,  Cyprus  underperforms  with  regard  to 
the environment (SDG 2, 6, 7, 12, 13, 15), gender 
equality  (SDG  5),  and  education  (SDG  4)  except 
for tertiary education attainment. Cyprus performs 
relatively  well  when  it  comes  to  good  health  and 
well-being  (SDG  3) (3).  The  main  findings  of  the 
in-depth  review  contained  in  this  report  and  the 
related policy challenges are as follows:  

is  essential 
loans 

  Despite the considerable progress made over 
last  two  years,  the  stock  of  non-
the 
performing loans remains high. In mid-2019, 
The  share  of  non-performing  loans  accounted 
for  33.5%  of  the  total  loans  in  the  banking 
sector,  which  is  still  one  of  the  highest 
proportions in the EU. The effective use of the 
legal framework, including for foreclosures and 
to  reducing  non-
insolvency, 
the 
performing 
payment  discipline  and  addressing  strategic 
defaulters. Non-performing loans, including the 
growing proportion held outside of the banking 
in 
sector,  need 
particular,  the  case  for  the  loans  held  by  the 
state-owned 
company 
(KEDIPES)  where  delays  and  organisational 
set-up  challenges  need  to  be  addressed  to 
ensure a successful performance. Strengthening 
the  supervision  of  credit-acquiring  companies 
is also important. 

to  be  resolved.  This 

asset  management 

further,  enhancing 

is, 

  The  banking  sector’s  profitability  remains 
under  significant  pressure.  While  sales  of 
non-performing  loans  are  expected  to  reduce 
the proportion of bad loans held by the banks in 

(3)  Within the scope of its legal basis, the European Semester 
can help drive national economic and employment policies 
towards the achievement of the United Nations Sustainable 
Development  Goals  by  monitoring  progress  and  ensuring 
closer  coordination  of  national  efforts.  The  present  report 
contains  reinforced  analysis  and  monitoring  on  the  SDGs. 
A new annex (ANNEX E) presents a statistical assessment 
of trends in relation to SDGs in Cyprus during the past five 
years, based on Eurostat’s EU SDG indicator set. 

5 

 
                                                           
Executive summary 

  Potential growth is expected to increase over 
the  medium  term.  The  projected  increase  of 
the  labour  force  and  increased  investment  are 
set  to  be  the  main  drivers  of  higher  growth 
potential.  Technological  progress 
is  also 
expected to make a small positive contribution 
after  performing  negatively  for  a  long  period. 
However,  the  continued  focus  on  residential 
investment, 
sized 
enterprises’  ongoing  difficulties  in  accessing 
finance, the high level of private sector’s debt, 
the  business 
and 
and 
environment 
productivity in the longer term. 

in 
could  hamper  growth 

and  medium 

shortcomings 

small 

the 

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

  Key  challenges  remain 

in  relation 

transport  emissions.  Despite 

to 
environmental  sustainability.  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.  Despite  some 
action,  Cyprus  remains  vulnerable  to  climate 
change due to droughts and water scarcity.  At 
the  same  time,  Cyprus  is  among  the  Member 
the  highest  green-house  gas 
States  with 
emissions  per  person.  Sustainable  mobility  is 
key for Cyprus owing to the large and growing 
share  of 
the 
country’s vast potential in renewable sources of 
energy, notably solar energy, investment in this 
area  is  considerably  lagging  way  behind,  and 
the  economy  heavily  relies  heavily  on  fossil 
fuels.  Decisive  efforts  to  transition  to  a  more 
climate-friendly  growth  model  are  essential  to 
improving  the  competitiveness  and  the  long-
term 
economy.  The 
Commission’s  proposal  for  a  Just  Transition 
the  next  multi-annual 
Mechanism  under 
financial framework  for 2021-2027, includes a 
Just Transition Fund, a dedicated just transition 
scheme  under  InvestEU,  and  a  new  public 
the  European 
facility  with 
sector 
Investment  Bank.  It  is  designed  to  ensure  that 
the  transition  towards  EU  climate  neutrality  is 
fair by helping Cyprus to address the social and 
economic  consequences.  Key  priorities  for 
support  from  the  Just  Transition  Fund  are 
identified in Annex D, building on the analysis 

potential 

loan 

the 

of 

2020, low interest margins, excess liquidity and 
high  operating  costs  still  dampen  banks’ 
profitability. 

debt 

ratios 

corporations’ 

  Private sector debt remains high, although it 
is  decreasing.  Both  households’  and  non-
financial 
are 
decreasing. The reduction is helped by nominal 
GDP  growth,  write-offs  of  bad  loans,  cash 
repayments, and debt-to-asset swaps. The legal 
frameworks  for  insolvency  and  foreclosure, 
and the ESTIA scheme should help reduce the 
private  sector  debt.  The  introduction  of  e-
auctions 
the 
foreclosure  process.  The  housing  market 
recovery could help reduce private debt, but the 
existing  inefficiencies  in  the  system  of  issuing 
and 
title  deeds  complicates 
foreclosure  procedures  and  hinders  the  sale  of 
properties held as collateral. 

transferring 

in  2019 

facilitate 

should 

  Government  debt  is  projected  to  steadily 
decline  steadily  from  2019  onwards.  After 
increasing  in  2018  because  of  the  measures  to 
support  the  sale  and  orderly  winding  down  of 
the Cyprus Cooperative Bank, the debt-to-GDP 
ratio  is  set  to  decrease  to  82%%  of  GDP  by 
2021,  mainly  due 
to  expected  sizeable 
headlines surpluses and solid economic growth. 
However, 
fiscal 
sustainability analysis shows that risks remain. 
In particular, the still high level of public debt 
and the combination of a large current account 
deficit  and  high  private  debt  make  Cyprus 
vulnerable  to  potential  financial  and  economic 
shocks.  However,  relatively  modest  medium-
term 
risks 
somewhat. 

financing  needs  mitigate 

Commission’s 

the 

the 

  Despite 

some 

improvement, 

the  net 
international 
investment  position  (NIIP) 
remains a key vulnerability, in particular as 
is  widening 
the  current  account  deficit 
considerably.  The  position 
remains  very 
negative and a widening current account deficit 
hampers  further  improvement.  The  position  is 
even  more  negative  when  one  excludes  its 
components  that  could  be  affected  by  large 
negative  valuation  effects  in  the  case  of  a 
global downturn (net foreign direct investments 
and net portfolio equity). 

6 

 
Executive summary 

of  the  transition  challenges  outlined  in  this 
report. 

education  and 
training  are  essential 
fostering sustainable growth in the future.  

for 

  The  health 

sector 

is  undergoing  a 
fundamental  reform.  The  new  National 
Health  Insurance  System  is  expected  to  make 
the health sector more efficient and affordable, 
but  some  operational  challenges  remain.  It 
provides  a  pivotal  opportunity  for  targeted 
investments  to  improve  public  healthcare  and 
develop  e-health,  among  other  things.  The 
reform  needs  to  be  carefully  implemented  to 
reduce the fiscal risks.    

to 

absence 

purposes.  The 

In  addition 
European 

for  concern. 
of 

  Economic  evidence  suggests  that  Cyprus’ 
tax  rules  are  used  for  aggressive  tax 
of 
planning 
withholding  taxes,  the  design  of  the  Cypriot 
corporate tax residence rules, and the residence 
and  citizenship  by  investment  schemes,  are  a 
the 
cause 
implementation 
and 
internationally  agreed  initiatives,  Cyprus  has 
announced  some  unilateral  measures.  These 
include  the  introduction  of  withholding  taxes 
on  dividend,  interest  and  royalty  payments  to 
countries  on  the  EU  list  of  non-cooperative 
jurisdictions on tax matters, the introduction of 
a tax residency test based on incorporation, and 
the reviewing of the transfer pricing framework 
to 
transfer  pricing 
recommendations from the OECD base erosion 
and profit shifting project. 

into  account 

take 

the 

  Inefficiencies 

in 

the 

and 

the  public  sector  are 
harming  the  business  environment.  Key 
reforms to improve the efficiency of the public 
administration  and  the  local  government  are 
still pending. The impact of the efforts made to 
improve 
financial 
governance 
monitoring  of  state-owned  enterprises  remains 
to be seen. Private investment, including in key 
utilities, 
through 
privatisations  and  simplifying  procedures. 
Corruption  is  perceived  as  a  problem  by 
businesses,  and  adopting  pending  key  anti-
corruption  legislation,  as  well  as  stepping  up 
the  implementation  of  the  adopted  action  plan 
are  essential 
the  business 
environment.  

improving 

facilitated 

could 

for 

be 

that 

undermine 

and  weak 

  The  justice  system  continues  to  face  serious 
inefficiencies 
the 
enforcement  of  contracts.  Lengthy  court 
proceedings 
enforcement  of 
judgements harm the business environment and 
hinder  banks  from  using  the  available  legal 
tools 
loans. 
Addressing these inefficiencies would also help 
to  strengthen  the  payment  discipline  in  the 
country.  Preparations  for  the  justice  system 
reform  are  advancing  but  there  are  still  no 
tangible results.  

non-performing 

reduce 

to 

  The  housing  market  as  a  whole  has  seen  a 
recovery,  but  the  sector  is  segmented.  The 
housing market has been recovering, supported 
by  buoyant  foreign  demand  for  new  luxury 
residences stemming mainly from the residence 
and  citizenship  by  investment  schemes.  In 
contrast,  domestic  demand  for  housing  and 
demand  for  existing  properties  remain  low. 
This is also reflected in differences in housing 
price  trends  developments  between  new  and 
existing residences and between regions.  

still 

scope 

for  bringing 

  The labour  market is still facing challenges. 
Despite measures undertaken in this area, there 
is 
the  public 
employment  services  into  line  with  best  EU 
practices. Furthermore, the public employment 
services’  effectiveness  is  at  risk  as  additional 
recruitments  are  only  on  short-term  contracts. 
Further  progress  to  reduce  undeclared  work  is 
hindered by a lack of resources and the fact that 
legislation is still pending.     

reflected 

  Reforms  of  the  education  and  training 
systems  face  considerable  challenges.  The 
relatively high public spending on education is 
not 
in  observed  outcomes,  as 
highlighted  by  the  recent  results  from  the 
Programme 
Student 
Assessment.  The  weak  support  for  early 
childhood  education  and  care  undermines 
potentially  high  long-term  benefits  of  quality 
childcare, and hinders people from  working or 
job.  Improving  educational 
looking  for  a 
achievements  and  skills,  as  well  as  increasing 
participation  in  adult  learning  and  vocational 

International 

for 

7 

 
1.  ECONOMIC SITUATION AND OUTLOOK 

Economic growth 

a 

environment.  After 

Economic growth remains strong, although it is 
slowing down  amid an increasingly challenging 
international 
solid 
expansion of 4.1%% in 2018, real GDP slowed in 
the  first 
to  3.3%% 
three  quarters  of  2019 
reflecting  a  weakened 
(seasonally  adjusted), 
international environment, while domestic demand 
remained  solid.  According  to  the  Commission’s 
2019  Winter  Forecast  (European  Commission, 
2020a), economic growth is estimated to moderate 
further  in  the  fourth  quarter  of  2019,  due  to 
external  headwinds  and  a  full-year  growth  is 
projected to reach %3.2% (see Graph 1.1.). 

Graph 1.1: 

Real GDP growth and contributions 

Source: European Commission 

Private  and  public  consumption 
support 
growth. Household consumption continued to rise 
on  the  back  of  strong  employment  growth  and 
moderately  increasing  wages.  Low  inflation  also 
supported  households’  real  purchasing  power. 
Private  consumption 
to  continue 
supporting  growth  in  the  medium  term.  Public 
consumption  is  also  set  to  increasingly  boost 
growth over the  forecast period. This is driven by 
the gradual reinstatement of the public wages’ cuts 
implemented during the crisis and the government 
expenditure  in  relation  to  the  newly  established 
National Health Insurance System (NHIS). 

is  expected 

Investment  remains  robust,  albeit  skewed 
towards residential construction. Since 2015, the 
investor  citizenship  scheme  (Cyprus  investment 
residential 
programme)  has  been  boosting 

8 

in 

investment 

these  sectors 

construction activity. According to estimates of the 
Ministry of Finance, the proportion of real estate / 
construction  investment  through  the  scheme  in 
increased 
total 
significantly  from 19.5%% in 2015 to 37.7%% in 
2018  (Ministry  of  Finance,  2019a).  Based  on  the 
same  study,  the  direct  impact  of  the  scheme  on 
GDP  is  estimated  to  be  relatively  small,  while 
being quite substantial in terms of added value and 
employment in the construction sector. (4)%%The 
revision  of  the  scheme  in  May  2019  (5),  which 
makes  the  conditions  more  stringent  and  the 
investment potentially less attractive, may lead to a 
slowdown of demand for new high-end residences 
in the coming years. Other construction investment 
has  also  been  buoyant,  especially  in  relation  to 
tourism. This sector is also mainly foreign-funded, 
but is not linked to the investor citizenship scheme. 
Investment 
is 
recovering  after  the  crisis,  pointing  to  some 
increase  in  productivity-enhancing  investments. 
Investment in transport equipment is  very  volatile 
and  difficult  to  predict  due  to  the  activities  of 
to 
special 
registration/deregistration  of  ships. (6)  Domestic 
banks  so  far  seem  to  have  limited  links  with  the 
buoyant  activity  in  the  construction  sector  as 
mortgage  lending  remains  low  compared  to  the 
pre-crisis  level  (see  Graph  1.3).  Nevertheless,  the 
developments  in  construction  investment  warrant 
close  monitoring,  in  particular  for  a  potential 

in  machinery  and  equipment 

purpose 

entities 

related 

(4)  The study does not take into account the indirect impact of 
the scheme due to spill-over effects and other sectors of the 
economy, including consumption, professional services and 
tax revenue.    

to 

(5)  Since July 2019 applicants are required to make donations 
(minimum  €75,000 
the  Research  and  Innovation 
Foundation  (RIF)  or  to  certified  innovative  or  social 
enterprises  and  minimum  €75,000  to  the  Cyprus  Land 
Development  Agency  for  affordable  or  other  housing 
measures)  in  addition  to  the  minimum  investment  of  €2 
million.  The  mandatory  period  to  hold  real  estate  projects 
increased from 3 to 5 years. A cap of 700 citizenships per 
year  was  also  introduced.  For  additional  amendments  see 
(Section 4.4.3)    

to 

register  ships 

(6)  Legal  entities  registered  and  resident  for  tax  purposes  in 
Cyprus  with  few  employees  and/or  no  production,  which 
are  controlled  by  non-resident  entities.  These  are  widely 
used 
in  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. 
For more information on special purpose entities and their 
impact  on  statistics  and  the  real  economy  see  (European 
Commission, 2018a). 

-10-6-2261012131415161718192021Real GDP (y-o-y%)Private consumptionPublic consumptionInvestmentChanges in inventoriesNet exportspps.forecast 
   
                                                           
1. Economic situation and outlook 

slowdown 
domestic lending. 

in  foreign  demand  and 

increasing 

in  previous  years, 

Net  exports  have  become  a  drag  on  the 
economy,  as  tourism  momentum  moderates. 
Exports  of  services  notably  tourism  —  a  key 
component  of  total  exports  —  are  estimated  to 
considerably slowed down in 2019. The sector has 
recently experienced several setbacks. After record 
increases 
tourist  arrivals 
moderated  and  revenues  declined  in  2019  (see 
Graph  1.2),  as  a  result  of  the  subdued  external 
environment, the bankruptcy of airlines and travel 
companies  (7)  and  increasing  competition  from 
neighbouring  countries.  Given  the  uncertainty 
surrounding the future trade relations  between the 
EU  and  the  UK  —  Cyprus’  largest  tourist  market 
—,  as  well  as  the  expected  subdued  economic 
prospects  in  the  EU,  the  downward  path  is 
expected  to  continue  in  the  near  term,  while  a 
slight  recovery  is  projected  in  2021.  Imports  are 
expected  to  continue  increasing  in  line  with  solid 
domestic demand. 

Graph 1.2: 

Tourism arrivals and revenues 

agro-tourism,  the  bulk  of  the  investment  flowed 
into accommodation and infrastructure that put the 
environment  at  risk.  If  decisive  efforts  are  not 
made  urgently  to  ensure  that  the  tourism  sector  is 
environmentally sustainable in the long term, then 
the sector risks losing its appeal and, ultimately, its 
profitability. It is therefore also essential to address 
challenges  related  to  the  green  energy  transition, 
effective  waste  and  water  management  and  the 
protection  of  nature  and  biodiversity  (see  Section 
4.5).  Furthermore,  the  reliance  of  the  sector  on  a 
limited  number  of  markets  makes  -  UK,  Russia 
and Israel account for  more than 60%% of tourist 
arrivals  –makes  the  sector  vulnerable  to  potential 
adverse economic developments. Increased market 
diversification  would  help  mitigate  these  risks.  In 
this  respect,  addressing  bottlenecks  in  air  travel 
connections is key. 

Downside  risks  cloud  the  economic  outlook. 
These  risks  are  primarily  external,  notably  the 
slowing  global  demand  coupled  with  increased 
competition  in  the  tourism  sector.  In  this  context, 
the  real  GDP  is  expected  to  edge  down  further  to 
2.8%%  in  2020  and  2.5%%  in  2021  (European 
Commission,  2020a).  This  path  reflects  a  gradual 
move  towards  the  estimated  potential  growth  of 
around 2.5%% in the medium term. 

increase 

Diversification  of  Cyprus’  growth  model 
remains  a  key  challenge.  Growth  is  heavily 
resilient  on 
to  external 
sectors  vulnerable 
tourism,  foreign-funded 
developments  notably 
construction  activity, 
in  particular  residential 
construction,  and  services  in  connection  with  the 
setting  up  and  providing  services  to  foreign 
companies  under  the  special  purpose  entities’ 
regime. To a certain extent, this is to be anticipated 
for  a  small,  open,  service-oriented  economy. 
However, 
the  country’s  potential 
growth  and  to  improve  its  resilience  to  economic 
to 
developments,  diversifying 
mitigate these risks is essential. Moreover, Cyprus 
is  vulnerable 
the 
international  corporate 
tax  framework,  which 
could jeopardise its role as a business service hub. 
There  are  new  emerging  sectors,  such  as  tertiary 
education, ICT and energy, but so far their impact 
on growth has been limited. It would be important 
to support the development of these sectors, which 
also have the potential to raise the country’s future 
productivity. 

to  potential  changes 

the  economy 

in 

(1) Revenues data available for the first 11 months in 2019                                           
to 
(2) Expenditures data available for the first 11 months in 2019 
Source: Statistical Service of Cyprus 

Diversifying the tourism sector and ensuring its 
environmental  sustainability  is  crucial.  So  far, 
the  expansion  of 
in 
Cyprus has come at a price  to the  island’s  natural 
environment.  Despite  some  efforts  to  increase  the 
share  of  eco-friendly  tourism  services,  such  as 

tourism-related  services 

(7)  The bankruptcy of Germania led to arrivals from Germany 
decreasing by one fifth of. The share of the global air travel 
company  Thomas  Cook,  which  went  into  liquidation  in 
September  2019,  was  around  6%  of  the  tourist  market  of 
Cyprus. 

9 

-821222111213141516171819y-o-y% changeRevenuesArrivalsExpenditure per person  
                                                           
to  care 

At the same time, it is important to ensure that 
growth  benefits  all  of  society.  Despite  solid 
economic  growth  since  2015,  many  young  people 
still stay out of employment, education or training 
and  a  high  number  of  women  remain  out  of  the 
labour  market  due 
responsibilities. 
Furthermore,  the  proportion  of  involuntary  part-
time  workers,  though  decreasing,  remains  one  of 
the  highest  in  the  EU.  Addressing  care  facilities’ 
gaps,  skills  mismatches,  and  upskilling  and  re-
skilling  needs,  in  particular  in  digital  and  green 
transformation,  would  help  to  ensure  that  all 
groups  of  the  population  are  benefitting  from 
growth (see Sections 4.3.3 and 4.5). 

takes  diversification, 

It  is  essential  that  the  new  long-term  growth 
social  and 
strategy 
environmental considerations duly into account. 
The  new  long-term  strategy  for  the  sustainable 
growth  of  Cyprus  economy  is  currently  under 
preparation  and  provides  good  opportunity  to  re-
orient the country’s economic development. While 
tourism  is  expected  also  in  the  future  to  be  the 
pillar  of  the  economy,  it  is  key  for  Cyprus’ 
economy to become more diversified by focussing 
on  more  innovative  sectors  that  would  increase 
productivity, 
time, 
environmental sustainability and social inclusion. 

ensuring, 

same 

the 

at 

Inflation 

Inflationary pressures remain subdued. In 2019, 
HICP inflation  was 0.5%, lower than 2018, 0.8%. 
This  development  was  attributed  to  the  decline  in 
energy  prices,  owing  to  the  reduction  of  excise 
duties on the main fuels (as from December 2018) 
and  the  lower  price  of  oil  in  2019  compared  to 
2018.  The  continuous  decline  in  prices  of  non-
energy  industrial  goods  also  contributed  to  low 
in  2019.  More  specifically,  global 
inflation 
competition  has  been  affecting 
the  price  of 
increasing  competition  among 
imports,  while 
supermarkets  in  Cyprus,  more  internet  sales  and 
the  liberalisation  of  shop  opening  hours  and 
periods  for  sales  have  also  been  pushing  prices 
down  further.  Energy  prices  are  expected  to 
decrease  further  in  2020  and  2021  reflecting 
declining  oil  prices.  Inflation  is  expected  to 
average  at  0.8%  and  1.2%  in  2020  and  2021 
respectively (European Commission, 2020a). 

1. Economic situation and outlook 

Housing market 

Foreign  demand  for  high-end  new  residences 
has been the key driver of the housing market’s 
recovery  in  the  aftermath  of  the  crisis.  From 
2014  to  2017,  sales  of  properties  rose  in  double 
digits.  In  2019  and  2018,  sales  of  properties 
increased  by  12.2%  and  5.8%,  respectively. 
Foreigners,  predominately  non-EU  nationals, 
accounted  for  almost  50%  of  the  total  properties 
sold since 2014. The sales were concentrated in the 
coastal 
luxury 
apartments  and  villas.  In  the  first  half  of  2019,  a 
spike of sales was observed reflecting the surge of 
applications  to  the  investor  citizenship  scheme 
following  the  announcement  in  May  2019  of 
revisions to the scheme. The compulsory purchase 
by a resident of a property worth at least €500,000 
under  the  scheme  coupled  with  the  traditional 
foreign  demand  for  second  homes  in  a  holiday 
destination  are  the  main  drivers  of  the  housing 
market’s recovery after the crisis. 

concern  mainly 

areas 

and 

In  contrast,  domestic  demand  for  housing  and 
demand  for  existing  properties  remains  low. 
Domestic  demand  is  still  hindered  by  the  housing 
debt overhang and the limited demand for existing 
properties, which is also reflected in the  moderate 
price  increases  in  this  segment  of  the  market  (see 
Graph  1.4).  This  weighs  on  the  ability  of  over-
indebted borrowers to sell their properties (used as 
collateral  against  their  loans)  to  repay  their  debt 
and  on  the  ability  of  banks  to  offload  real  estate 
from  their  balance  sheets  (see  Section  4.2.1). 
Although  new  mortgage 
lending  has  been 
increasing, it is still well below pre crisis level (see 
Graph 1.3). 

Real  estate  activity  is  set  to  slowdown  in  the 
medium  term.  The  registration  of  contracts  for 
property sales considerably decelerated during the 
second half of 2019, 0.7% year-on-year, compared 
to  24.4%  in  the  first  half,  possibly  reflecting  the 
slowdown  of  applications 
investor 
citizenship  scheme.  This  points  to  a  modest 
expansion of the sector in the near term as there is 
only a slight upturn in domestic demand.   

the 

for 

Residential property prices  are picking up, but 
so 
far  remain  contained.  Housing  prices 
increased  for  a  fourth  year  in  a  row  (see  Graph 
1.4),  but  remain  below  the  pre-crisis  levels.  The 
rise  is  greater  for  new  residences,  with  foreign 

10 

1. Economic situation and outlook 

demand  leading  to  substantial  price  differences 
among  regions.  In  terms  of  valuation,  European 
Commission house price valuation methods do not 
point  to  significant  undervaluation  (the  overall 
valuation  gap  is  estimated  to  be  -4.6  percentage 
points), but the analysis does not take into account 
the market segmentation. (8) A possible slowdown 
in  foreign  demand  and  re-sale  of  properties 
acquired  through  the  investor  citizenship  scheme 
after  the  compulsory  holding  period,  as  well  as 
rising  sales  of  collaterals  by  banks  and  by  credit-
acquiring  companies  (see  Section  4.2.1)  should 
also curb housing prices rises in the medium term.  

Graph 1.3:  New and pure new loans for house purchase 

by the  market, i.e. the terms  of the rental contract 
are  not  subject  to  any  restrictions.  The  increasing 
housing  cost,  mainly  in  coastal  areas  stemming 
from  the  investor  citizenship  scheme  has  put 
pressure  on  the  government  to  announce  policies 
for  affordable  housing  and 
increase  rent 
allowances for vulnerable groups of the population 
(see Section 4.3.2). 

to 

Graph 1.4:  Housing price developments 

Source: Eurostat 

Labour market 

(1)New loans include restructured loans 
(2)Data available until November 2019  
Source: Central Bank of Cyprus 

Rental  prices  are  increasing  and  the  market  is 
highly  segmented.  Rental  prices  increased  by 
3.4%  in  2019.  The  rental  market  consists  of  two 
categories  of  properties  and  two  sets  of  rules. 
Properties  that  were  built  before  2000  are  subject 
to  a  rental  control  law  that  cap  rental  increases. 
Initially, the law allowed for a rental increase of up 
to  14%  every  two  years,  but  since  the  crisis,  any 
increase  in  rent  is  prohibited.  For  properties  built 
from  2000  onwards,  rental  conditions  are  defined 

(8)  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 fact that a small sample was 
taken, the analysis has the caveat that it does not take into 
account foreign demand. 

increasing 

rose  by  4.1% 

Strong  economic  growth  has  been  reflected  in 
positive  labour  market  developments.  In  2018, 
employment 
the 
employment  rate  to  73.9%  and  above  the  EU 
average  of  73.2%,  as  reflected  positively  in  the 
Social Scoreboard and the SDG 8. Employment is 
expected  to  rise  further  during  the  forecast  period 
(2019-2021)  albeit  at  a  slower  pace.  The 
unemployment  rate  continued  its  downward  path 
falling  to  7.5%  in  2019  and  is  expected  to  fall 
gradually  to  5.7%  in  2021,  thus  approaching  its 
pre-crisis level. Long-term unemployment also fell 
to 2.7% in 2018 and is now below the EU average 
of  2.9%.  However,  youth  unemployment  and  the 
proportion  of  young  people  not  in  education, 
employment  or 
(NEETs),  although 
decreasing,  remain  high  and  are  above  the  EU 
average, at 20.2% and 13.2%, respectively in 2018, 
compared  to  15.2%  and  10.5%  in  the  EU.  This 
may  weigh  on  current  and  future  equality  of 
opportunities (see Graph 1.5 and Section 4.3.1). 

training 

Wages  have 
increased,  while 
disposable  income  remains  below  pre-crisis 

gradually 

11 

-70-50-30-1010305070901100500100015002000250030003500080910111213141516171819New loans for house purchase (lhs)Pure new loans for house purchase, (lhs)New loans for house purchase, (y-o-y%) (rhs)Pure new loans for house purchase, (y-o-y%), (rhs)mn EURy-o-y% change-15,0-10,0-5,00,05,010,015,011Q211Q412Q212Q413Q213Q414Q214Q415Q215Q416Q216Q417Q217Q418Q218Q419Q219Q4Purchase of new dwellingsPurchase of existing dwellingsActual rentals for housingy-o-y% change   
                                                           
   
1. Economic situation and outlook 

Currently, Cyprus is one of the best performers in 
the  EU  in  terms  of  the  net  income  of  minimum 
income  recipients  and  of  low  wage  earners  as  a 
percentage of the at-risk-of-poverty threshold. For 
minimum  income  recipients  the  proportion  is 
86.7%  compared  to  59.1%  in  the  EU  and  for  low 
wage  earners,  72.7%  compared  to  42.6%  in  the 
EU.  Income  inequality  returned  to  the  pre-crisis 
level.  However,  the  share  of  poorest  people  is 
increasing  and  the  risk  of  poverty  or  social 
exclusion  is  higher  for  children,  people  with 
disabilities  and  non-EU  born  people  (see  Section 
4.3.2). 

External position  

international 

investment  position 
The  net 
improved,  but  remains  very  negative.  The 
position  decreased  gradually  from  -127%  of  GDP 
in  2017  to  around  -115% in  the  third  quarter  of 
2019,  supported  mostly  by  increasing  nominal 
GDP  (denominator  effect)  and  valuation  changes. 
The  position  remains  well  below  the  prudential 
and fundamental levels.  

Cyprus’  current  account  deficit  is  widening, 
exceeding the prudential thresholds. The current 
account  deficit  widened  considerably  in  the  third 
quarter  of  2019  to  7.4%  (around  4%  in  cyclically 
adjusted  terms)  from  4.4%  in  2018  (or  -1% 
cyclically  adjusted).  The  deterioration  reflects  the 
worsening of the international environment with an 
adverse  impact  on  revenues  from  tourism  (see 
Graph  1.2).  This  coupled  with  solid  demand  for 
imports  point  to  a  further  deterioration  of  the 
current  account  during  the  period  2019-2021.  For 
more  analysis,  including  information  on  adjusted 
statistics for special purpose entities see Sections 3 
and 4.2.4.  

Competitiveness  

Cyprus  is  set  to  maintain  cost-competitiveness 
from  2019  onwards,  but  market  shares  are 
decreasing. After a significant depreciation during 
the  real  effective  exchange  rate 
the  crisis, 
increased  in  2018,  while  from  2019  onwards  it  is 
estimated to continue depreciating (see Graph 1.6). 
Despite  that,  in  2019,  the  market  shares  are 
estimated to have fallen reflecting intensified cost-
competition by neighbouring countries, such as the 
significant depreciation of the Turkish lira over the 
last years. This trend is expected to continue in the 

a 

as, 

trade, 

decline 

unemployment, 

levels. Even though GDP has been back at the pre-
crisis  level  since  2017,  the  real  gross  disposable 
income  per  head  is  still  well  below  2008  levels. 
The  moderate  increase  in  wages  in  the  private 
sector  is  explained  by  several  factors  such  as 
remaining 
in 
unionisation  and  a  relatively  high  number  of 
workers  in  low  skilled  and  low-paying  sectors, 
such 
construction. 
tourism 
Productivity  is  still  stagnant,  which  also  points  to 
moderate  wage  increases.  Wage  renegotiations 
between employers and trade unions in several key 
sectors (banking, construction and hotels) in 2019 
are  expected  to  result  in  wage  increases  in  the 
coming  years.  Wage  increases  are  greater  in  the 
public  sector,  because  in  addition  to  the  annual 
wage  increases  owing  to  inflation  indexation  and 
seniority 
the  government  will 
gradually phase out the wage cuts made during the 
crisis period by 2023. 

increments, 

and 

Graph 1.5: 

Key labour market developments 

Source: Eurostat 

Social developments  

Poverty  and  income  inequality  are  improving, 
but  for  certain  vulnerable  groups  the  risk  of 
poverty  is  still  high.  The  at-risk-of-poverty  or 
social  inclusion  (AROPE)  indicator  and  its  sub-
components (9) keep decreasing (see Section 4.3.2) 
as  a  result  of  strong  economic  growth  and  the 
social  protection  reforms  introduced  since  2014. 

(9)  The at-risk of poverty, the severe material deprivation and 
the proportion of households in very low work intensity. 

12 

01020304050607080900510152025303540450001020304050607080910111213141516171819Activity rate 20-64 (rhs)Unemployment rate 15-74 (lhs)Long-term unemployment rate 15-74 (lhs)Youth unemployment rate 15-24 (lhs)NEET rate 15-24 (lhs)%%  
                                                           
1. Economic situation and outlook 

coming  years.  Furthermore,  fluctuations  in  the 
Russian  rouble  and  the  UK  pound  also  influence 
the  Cypriot  economy  due  to  the  strong  trade  and 
investments links. 

Increased  social  contributions  elevate  labour 
costs.  While  in  2018,  the  unit  labour  costs 
remained broadly constant and below the euro area 
average,  they  increased  in  2019  owing  to  the 
higher  social  security  contributions  coupled  with 
the  introduction  of  contributions  to  the  National 
Health  Insurance  System  (NHIS).  This  is  set  to 
continue  in  2020  and  2021  partly  due  to  the 
additional increases of NHIS contributions in 2020 
and  expected  moderate  increases  in  wages  in  the 
coming years. The introduction of universal health 
coverage  could  have  a  positive  impact  on  labour 
force  participation  and  productivity  leading  to 
higher GDP per capita (OECD, 2019a), however it 
may  initially  deteriorate  the  competitiveness  of 
labour costs. 

Graph 1.6: 

Real effective exchange rates 

Source: Eurostat, Bruegel 

Financial sector 

The  banking  sector  continues  to  be  profitable, 
but profits are weaker than in the previous year 
and asset quality remains a challenge. Following 
losses  in  2017,  the  banking  sector  returned  to 
profitability in 2018 and remained profitable in the 
first half of 2019. Overall, banks are still finding it 
difficult  to  generate  profits  owing  to  low  interest 
margins, excess liquidity, high operating costs and 
large  stocks  of  non-performing  loans.  Throughout 
2019,  progress  in  reducing  non-performing  loans 
slowed  down.  Future  asset  disposals  are  expected 
to  materialise  in  2020,  significantly  reducing  the 

13 

stocks  of  bad  loans  in  the  banking  sector  (see 
Section  4.2.3).  In 
the  stocks  of  non-
turn, 
performing  loans  held  by  the  credit-acquiring 
companies  are  expected  to  increase.  Enhancing 
payment  discipline,  including  improving  financial 
literacy (10)  would  help  underpin  a  sustainable 
workout of bad loans and sustain deleveraging. 

New  lending  to  domestic  residents  increased  in 
2019 compared to the previous year. The private 
sector  continues  to  rely  on  internal  resources  and 
foreign  funding,  as  new  lending  from  domestic 
banks  is  contained  by  large  proportions  of  non-
performing  loans,  elevated  debt  and  tighter  credit 
standards.  Nevertheless,  in  the  first  half  of  2019 
new  lending  increased  by  6%  year-on-year  (the 
gross volume of new loans reached €1.53 billion in 
2019, up from €1.44 billion in 2018). Just as in the 
previous year, the bulk of the new lending went to 
non-financial  corporations,  whereas  the  housing 
loans  constituted  slightly  more  than  25%  of  the 
total new loans. 

Public finances 

After  a  temporary  general  government  deficit 
in  2018  owing  to  one-off  support  measures  for 
the  sale  of  the  Cyprus  Cooperative  Bank, 
Cyprus  is  expected  to  record  a  significant 
budgetary  surplus  in  2019.  The  Commission 
2019  autumn  forecast  projects  that  the  headline 
budget  balance  will  return  to  surplus  in  2019,  at 
3.7% of GDP (see Graph 1.7). The deficit of 4.4% 
of  GDP  recorded  in  2018  was  caused  exclusively 
by  one-off  operations  to  support  the  banking 
sector.  Public  finance  performance  in  Cyprus  has 
improved  significantly  since  2014,  when 
it 
recorded  a  deficit  of  8.7%  of  GDP,  reflecting  the 
budgetary  consolidation  measures  implemented 
during  the  crisis,  notably  to  limit  expenditure 
growth, combined with buoyant tax revenue. 

The  budgetary  performance  is  expected  to 
remain  strong  but  the  structural  balance  is  set 
to deteriorate. The headline balance is forecast to 
record a surplus of over 2.5% of GDP in 2020 and 
slightly below 2.5% in 2021 as increasing current 
expenditure  will  outpace  revenue  growth  (see 

(10)  Gross  inadequacies  in  financial  literacy  make  borrowers 
prone to mistakes, even defaults (Agarwal et al., 2010). In 
the  case  of  Cyprus,  there  are  indications  that  financial 
literacy  is  at  low  levels  (see  Panayiotis  and  Anyfantaki, 
2019). 

-35-25-15-5515250001020304050607080910111213141516171819CYELESMTPTEGTRy-o-y% change  
                                                           
1. Economic situation and outlook 

Progress on sustainable development goals  

Cyprus  performs  relatively  poorly  in  achieving 
the  Sustainable  Development  Goals,  especially 
regarding the environmental goals. According to 
Eurostat’s Sustainable Development Goals (SDGs) 
indicators  (see  Annex  E),  over  the  past  5  years 
Cyprus  has  been  making  rather  uneven  progress. 
Cyprus  performs  well  with  regard  to  good  health 
and well-being (SDG 3) despite the fact that most 
of the health determinants indicators are below the 
EU  average.  Cyprus  is  performing  below  EU 
average when it comes to environmental impact of 
agriculture  (SDG  2),  clean  water  and  sanitation 
(SDG  6),  affordable  and  clean  energy  (SDG  7), 
responsible  consumption  and  production  (SDG 
12),  climate  action  (SDG  13)  and  life  on  land 
(SDG  15).  Many  of  the  indicators  in  those  areas 
are  further  deteriorating  from  already  sub-par 
levels and this is particularly the case for nitrate in 
groundwater  and  soil  sealing  index,  which  seems 
consistent  with  the  fact  that  Cyprus  scores  below 
the EU average and  has  further deteriorated when 
it comes to generation and recycling rate of waste. 
Cyprus has also further deteriorated when it comes 
to final energy consumption, resource productivity, 
and  climate  mitigation,  which  does  not  bode  well 
for its environmental outcomes in the future. Apart 
from environment, Cyprus is also underperforming 
when it comes to gender equality (SDG 5) and the 
situation  is  further  deteriorating  when  it  comes  to 
gender  gap  for  tertiary  educational  attainment, 
gender  gap  for  employment  rate  of  recent 
graduates  and  gender  gap  in  inactive  population 
due  to  caring  responsibilities.  On  the  other  hand, 
some  improvement  is  observed  when  it  comes  to 
gender  pay  gap  and  the  number  of  leadership 
positions  held  by  women.  Finally,  Cyprus  is  also 
underperforming  in  quality  education  (SDG  4) 
despite  the  fact  that  it  scores  above  EU  average 
when  it  comes  to  tertiary  educational  attainment. 
The  situation  is  further  deteriorating  with  respect 
to  underachievement 
reading  and  adult 
in 
participation in learning. 

Section  4.1.2).  The  structural  balance  is  expected 
to remain positive but is set to decline from above 
1% in 2019 to below 1% in 2020 and 0.4% in 2021 
driven  by  a  large  output  gap  and  increasing 
expenditure.  The  declining  structural  balance 
emphasises 
to  carefully  monitor 
expenditure  developments,  especially  in  light  of 
possible future risks to the robustness of revenues, 
as described in Section 4.1. 

the  need 

The  public  debt-to-GDP  ratio  is  projected  to 
decline substantially in the coming years.  After 
increasing  in  2018  owing  to  the  banking  support 
measures,  the  debt-to-GDP  ratio  is  expected  to 
decrease substantially, from 101% of GDP in 2018 
to 94% of GDP in 2019, and to 82% in 2021 (see 
Section  4.1.1  and  the  debt  sustainability  analysis 
presented in Annex B).  

Graph 1.7:  General government budget balance and 

gross debt 

Source: European Commission 

the  potential 

Downside risks to the fiscal outlook remain. Key 
risks  include:  (i)  expenditure  pressures  related  to 
the wage bill, (ii) the financial sustainability of the 
new  National  Health  Insurance  System  (NHIS), 
realisation  of  contingent 
(iii) 
liabilities  from 
the  banking  sector,  and  (iv) 
uncertainty concerning the sustainability of strong 
tax  revenue  performance.  Positive  cash  balances 
from 
the  Asset  Management  Company 
(KEDIPES), dealing with the residual entity of the 
CCB are an upside risk. 

14 

50556065707580859095100105110115-10-9-8-7-6-5-4-3-2-101234512131415161718192021% 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. 
(4) Defined as the income tax on gross wage earnings plus the employee's social security contributions less universal cash 
benefits, expressed as a percentage of gross wage earnings 
Source:  Eurostat and ECB as of 4-2-2020, where available; European Commission for forecast figures (Winter forecast 2020 for 
real GDP and HICP, Autumn forecast 2019 otherwise) 

15 

2004-072008-122013-1620172018201920202021Real GDP (y-o-y)4,90,10,34,44,13,22,82,5Potential growth (y-o-y)3,82,2-0,82,22,02,32,52,6Private consumption (y-o-y)6,20,40,04,53,3...Public consumption (y-o-y)2,72,4-3,22,13,5...Gross fixed capital formation (y-o-y)10,0-8,12,824,1-6,6...Exports of goods and services (y-o-y)3,51,46,18,74,6...Imports of goods and services (y-o-y) 5,9-0,14,912,82,4...Contribution to GDP growth:Domestic demand (y-o-y)6,5-1,1-0,17,61,3...Inventories (y-o-y)-0,20,4-0,3-0,51,2...Net exports (y-o-y)-1,40,50,7-2,71,6...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)1,31,0-0,41,21,00,90,90,9Capital accumulation (y-o-y)2,01,40,21,31,11,41,51,6Total factor productivity (y-o-y)0,4-0,2-0,6-0,3-0,10,00,10,2Output gap4,2-0,2-6,61,43,43,94,03,7Unemployment rate4,67,015,011,18,47,56,66,0GDP deflator (y-o-y)3,02,0-1,01,71,41,51,51,7Harmonised index of consumer prices (HICP, y-o-y)2,12,7-0,70,70,80,50,81,2Nominal compensation per employee (y-o-y)3,72,7-2,81,00,53,43,13,0Labour productivity (real, person employed, y-o-y)1,4-0,10,7-0,90,0...Unit labour costs (ULC, whole economy, y-o-y)2,32,8-3,51,90,63,02,72,5Real unit labour costs (y-o-y)-0,70,7-2,50,2-0,81,51,20,8Real effective exchange rate (ULC, y-o-y)0,60,8-4,02,60,6-0,3-0,10,5Real effective exchange rate (HICP, y-o-y)-0,1-0,4-1,60,51,5-1,9-1,6-0,8Net savings rate of households (net saving as percentage of net disposable income)1,4-0,5-8,8-2,8-4,0...Private credit flow, consolidated (% of GDP)29,418,51,06,78,4...Private sector debt, consolidated (% of GDP)244,5308,6342,8304,0282,6...of which household debt, consolidated (% of GDP)88,5117,1126,2105,197,0...of which non-financial corporate debt, consolidated (% of GDP)155,9191,5216,6198,9185,6...Gross non-performing debt (% of total debt instruments and total loans and advances) (2).8,935,328,917,4...Corporations, net lending (+) or net borrowing (-) (% of GDP)-9,82,27,3-2,85,9-5,1-6,6-7,5Corporations, gross operating surplus (% of GDP)23,720,021,620,520,920,320,020,1Households, net lending (+) or net borrowing (-) (% of GDP)-7,7-5,5-5,6-3,5-5,3-5,7-6,0-5,2Deflated house price index (y-o-y)6,8-4,9-0,51,30,2...Residential investment (% of GDP)10,98,24,05,15,8...Current account balance (% of GDP), balance of payments.-7,7-2,6-5,1-4,4-8,1-10,6-11,1Trade balance (% of GDP), balance of payments.-6,41,7-0,40,8...Terms of trade of goods and services (y-o-y)-0,5-0,40,30,8-0,50,10,00,2Capital account balance (% of GDP).0,30,40,40,6...Net international investment position (% of GDP).-123,6-153,8-126,5-121,3...NENDI - NIIP excluding non-defaultable instruments (% of GDP) (1).-69,2-206,7-210,1-176,1...IIP liabilities excluding non-defaultable instruments (% of GDP) (1).622,7661,6571,2524,6...Export performance vs. advanced countries (% change over 5 years)-13,5-8,7-4,615,414,2...Export market share, goods and services (y-o-y)-5,6-4,34,01,61,1-3,7-4,3-2,8Net FDI flows (% of GDP).9,136,4-6,9-34,5...General government balance (% of GDP)-0,9-4,1-3,91,7-4,43,72,62,4Structural budget balance (% of GDP)..1,91,01,91,70,60,5General government gross debt (% of GDP)60,460,5106,093,9100,693,887,881,8Tax-to-GDP ratio (%) (3)32,232,332,833,333,836,239,239,5Tax rate for a single person earning the average wage (%) (4)...9,19,5...Tax rate for a single person earning 50% of the average wage (%) (4)...7,87,8...forecast 
 
 
  
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

of 

all 

56% 

Since  the  start  of  the  European  Semester  in 
2011, 
country-specific 
recommendations  addressed  to  Cyprus  have 
recorded  at  least  ‘some  progress’. (11)  44%  of 
these  country-specific  recommendations  (CSRs) 
recorded  ‘limited’  or  ‘no  progress’  (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  reforms  address  most  of  the  CSRs  made  in 
2011  and  2012.  As  regards  the  CSRs  made  after 
the  programme’s 
cover 
persisting  challenges,  which  are  also  reflected  in 
the CSRs for 2019. 

completion  mostly 

Graph 2.1:  Overall multiannual implementation of 2011-

2019 CSRs to date 

* The overall assessment of the country-specific 
recommendations related to fiscal policy exclude 
compliance with the Stability and Growth Pact. 
** 2011-2012: Different CSR assessment categories.  
***The multiannual CSR assessment looks at the 
implementation since the CSRs were first adopted until the 
February 2020 Country report. 
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 
has  helped  in  ensuring  the  transparency  and 
sustainability  of  the  public  finances.  The  pension 
system and retirement age were reformed to ensure 
the system’s long-term sustainability. The country-
specific  recommendations  on  social  benefits  and 

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

past, see in particular Section 4.  

16 

the  high  ‘at-  risk-  of-  poverty’  rate  among  the 
elderly  were  addressed  by 
the 
guaranteed  minimum  income,  which  allows  for 
more  efficient  and  targeted  social  benefits.  The 
reform has helped reduce income inequalities. 

introducing 

of 

2018 

since 

during 

notably 

undertaken 

On  the  financial  sector,  significant  reforms 
the 
were 
implementation 
the  macroeconomic 
adjustment  programme  2013-2016  mainly 
through  the  harmonisation  and  integration  of 
the supervision of banks and cooperative credit 
institutions.  Furthermore, 
the 
authorities have been working on a comprehensive 
strategy  to  reduce  non-performing  loans.  The 
strategy is comprised: (i) the adoption in 2018 of a 
legislative  package,  including  amendments  to  the 
foreclosure and insolvency  frameworks and to the 
Sale of Loans Law and a new Securitisation Law; 
(ii)  the  sale  of  the  Cyprus  Cooperative  Bank, 
which  struggled  with  a  high  volume  of  non-
performing loans (completed in 2018), and (iii) the 
setting-up  of  a  temporary  State  support  scheme 
(ESTIA)  aimed  at  reducing  non-performing  loans 
collateralised  by  primary  residences  (ongoing). 
Key challenges in the  sector  remain. Most sector-
specific obstacles  to the  freedom of establishment 
and  the  freedom  to  provide  services  have  been 
removed.  

Some  measures  were  introduced  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, the long-term unemployed and receivers of 
the  guaranteed  minimum  income,  and  policies  to 
the  upgrade  workers’  skills.  Some  measures  were 
also  undertaken  to  make  the  vocational  education 
system  more  attractive.  Since  2017,  progress  has 
been  made  on  the  long-standing  recommendation 
regarding  the  reform  of  the  national  healthcare 
system  with 
the  necessary 
the  adoption  of 
legislative framework in 2017, the launching of the 
first  phase  in  2019  and  the  ongoing  preparations 
for full implementation in 2020.  

Cyprus  has  so  far  made  limited  progress  in 
country-specific 
addressing 

2019 

the 

No Progress9%Limited Progress35%Some Progress35%Substantial Progress19%Full Implementation2% 
  
                                                           
2. Progress with country-specific recommendations 

enterprises 

and  medium-sized 

management inefficiencies remain, and progress is 
limited. Grant schemes are being implemented for 
small 
and 
households to encourage energy efficiency and the 
use  of  renewables,  however  challenges  remain. 
Authorities  have  announced  several  measures  to 
improve  digitalisation  and  upgrade  digital  skills, 
but implementation is still pending. Some progress 
was  recorded  on  research  and  innovation  as  the 
new  strategy  is  in  place  and  efforts  to  bring 
universities  and  businesses  together  are  moving 
ahead.     

There  has  also  been  some  progress  regarding 
access  to  finance  for  small  and  medium-sized 
enterprises  as  several  grant  schemes  and 
financial  instruments  are  being  implemented 
and an equity fund is being set up. Measures to 
simplify  and  shorten  the  procedures  for  obtaining 
the necessary permits for strategic investments are 
pending enactment. It has proved very challenging 
to carry out privatisations. 

Although  preparations  for  a  comprehensive 
reform  of  the  justice  system  are  ongoing, 
legislation  and  administrative  measures  that 
would  improve  the  efficiency  of  the  system  are 
pending.  These  include  the  establishment  of 
commercial  courts,  the  recruitment  of  judges  and 
the  handling  of  financial  disputes.  A  reliable  and 
efficient  system  for 
transferring 
immovable property rights (e.g. building and land) 
is pending and progress is slow. An action plan for 
anti-corruption  reforms  is  being  implemented,  but 
key  legislation  is  pending  adoption.  The  capacity 
to  investigate  corruption  has  been  strengthened 
including with the adoption of the bill on telephone 
the 
tapping. 
independence  of 
the  prosecution  are  being 
discussed.  

Some  measures 

issuing  and 

regarding 

to 

(see  Table  2.1).  Reforms 
recommendations 
related 
the  public 
efficiency  of 
the 
administration  and  local  governments  are  still 
pending  enactment.  Some  measures  were  adopted 
concerning 
the  governance  of  State-owned 
enterprises,  but  their  efficacy  has  yet  to  be 
assessed.  Limited  progress  was  recorded  on 
addressing  aggressive  tax  planning,  since  the 
transposition  of  relevant  EU  Directives  is  still  in 
the  process,  and  additional  measures  such  as  the 
introduction  of  a  withholding  tax  on  dividend, 
interest,  and  royalty  payments  to  countries  in 
Annex  I  of  the  EU  List  of  Non-cooperative 
jurisdictions on tax matters are only announced.   

Some  measures  to  help  reduce  non-performing 
loans  (NPLs),  notably  the  ESTIA  scheme  (for 
addressing  NPLs  collateralised  by  primary 
residences)  and  e-auctions 
(for  properties 
subject  to  foreclosure  proceedings)  are  being 
implemented.  Cyprus  is  also  progressing,  albeit 
slowly, with addressing the challenges faced by the 
state-owned 
company, 
asset  management 
KEDIPES.  For  example,  the  setting-up  of  the 
governance  structure  of  the  State-owned  asset 
management  company  is  facing  delays.  Some 
efforts  are  under  way 
improve  payment 
discipline,  but  their  effectiveness  remains  to  be 
seen.  The  new  insolvency  department  is  expected 
to  operate  more  efficiently  and  effectively  and 
promote  the  insolvency  framework.  Efforts  to 
the  supervision  of  credit-acquiring 
strengthen 
insurance  companies  and 
companies  and  of 
pension  funds  are  facing  delays  as  the  relevant 
draft bills are pending for adoption.  

to 

Some  progress  has  been  made  on  the  outreach 
efforts  for  young  people  not  in  employment, 
education or training. The capacity of the public 
employment  services  was  strengthened,  but  on  a 
short-term  basis,  thus  risking  the  longer-term 
sustainability of the services. The education reform 
is  progressing  unevenly,  and  results  on 
the 
evaluation  of  teachers  are  not  yet  available. 
Supporting  actions  for  affordable  early  childhood 
education  and  care  are  still  lagging  behind.  The 
first  phase  of  the  National  Health  System  was 
introduced  in  2019  and  preparations  are  ongoing 
for  the  second  phase  planned  for  mid-2020. 
However, fiscal sustainability risks remain.  

Measures  to  promote  sustainable  transport  are 
only  at  an  initial  stage.  Serious  waste  and  water 

17 

2. Progress with country-specific recommendations 

Table 2.1: 

Assessment of the 2019 country-specific recommendations implementation 

(1) The assessment of CSR 4 does not take into account the contributions of the EU 2021-2027 cohesion funds as the 
Regulatory framework underpinning the programming of the 2021-2027 EU cohesion funds has not yet been adopted by the 
co-legislator, pending inter alia agreement on the MFF. 
Source: European Commission 

18 

2019 Country-Specific Recommendations (CSRs) Overall assessment of progress with 2019 CSRs: Limited 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. Address features of the tax system that may facilitate aggressive tax planning by individuals and multinationals, in particular by means of outbound payments by multinationals.                                                                                    Overall limited progress   Limited progress, as the relevant laws are pending adoption.   Some progress through the adoption of measures to improve oversight and reporting. Their effectiveness is still to be assessed.   Limited progress on the local governments reform as it is pending enactment.  Limited progress on addressing aggressive tax planning.     CSR2: Facilitate the reduction of non-performing loans including by setting up an effective governance structure for the State-owned asset management company, taking steps to improve payment discipline and strengthening the supervision of credit-acquiring companies. Strengthen supervision capacities in the non-bank financial sector, including by fully integrating the insurance and pension-fund supervisors.  Overall limited progress   Some progress on facilitating the reduction of non-performing loans through implementation of the ESTIA scheme and e-auctions. Slow progress, though, in setting up the state-owned asset management company.  Limited progress on improving payment discipline.      Limited progress on strengthening the supervision of credit-acquiring companies, as the law is still under preparation.   Limited progress on the supervision capacities in the non-bank financial sector as the law is pending adoption.   CSR3: Complete reforms aimed at increasing the effectiveness of the public employment services and reinforce outreach and activation support for young people. Deliver on the reform of the education and training system, including teacher evaluation, and increase employers' engagement and learners' participation in vocational education and training, and affordable childhood education and care. Take measures to ensure that the National Health System becomes operational in 2020, as planned, while preserving its long-term sustainability.  Overall some progress  Some progress, as the reforms are progressing and their effectiveness is improving, but the sustainability of services is at risk, as the additional recruitments are on short-term contracts.    Limited progress on educational reform.   Limited progress on affordable early childhood education and care.  Some progress on healthcare, as the first phase of the reform has been launched and the second phase is under way. Operational and sustainability risks remain. CSR4: Focus investment-related economic policy on sustainable transport, environment, in particular waste and water management, energy efficiency and renewable energy, digitalisation, including digital skills, and research and innovation, taking into account territorial disparities within Cyprus. Adopt legislation to simplify the procedures for strategic investors to obtain necessary permits and licences. Improve access to finance for SMEs, and resume the implementation of privatisation projects. Overall limited progress   Limited progress on sustainable transport.   Limited progress on waste and water management.   Some progress on energy efficiency and renewable energy measures.  Limited progress on digitalisation and digital skills.  Some progress on increasing R&D capacity.  Limited progress on facilitating strategic investments as the relevant law is pending adoption.   Some progress on improving access to finance.    No progress on privatisation projects.    CSR5: Step up efforts to improve the efficiency of the judicial system, including the functioning of administrative justice and revising civil procedures, increasing the specialisation of courts and setting up an operational e-justice system. Take measures to strengthen the legal enforcement of claims and ensure reliable and swift systems for the issuance and transfer of title deeds and immovable property rights. Accelerate anti-corruption reforms, safeguard the independence of the prosecution and strengthen the capacity of law enforcement.  Overall limited progress  Limited progress on the judicial system reform as key legislation is pending for adoption.   Limited progress on ensuring reliable and swift systems for issuing and transferring title deeds.  Limited progress on anti-corruption reforms and the independence of the prosecution services as legislations are pending adoption.   
   
 
2. Progress with country-specific recommendations 

Box 2.1: Commission Structural Reform Support Programme in Cyprus 

Upon  request  from  a  Member  State,  the  Commission  can  provide  tailor-made  expertise  via  the 
Structural  Reform  Support  Service  to  help  design  and  implement  growth-enhancing  reforms.  Since 
2015, such support has been provided to Cyprus, including the support provided previously under the special 
Support Group for Cyprus, to help the country undertake a series of reforms. Up until now, support has been 
provided  for  over  120  projects.  In  2019,  several  projects  in  various  policy  areas  were  delivered  on  the 
ground. 

The  Commission  has  been  supporting  the  Cypriot  authorities  in  the  area  of  governance  and  public 
administration  in  the  design  of  a  workforce  planning  system,  enabling  the  alignment  of  the 
government’s  human resources  management with the country’s strategic priorities. Support was also 
provided  for  improving  the  web  presence  of  the  government  through  a  study  for  the  design  of  new 
information  platforms  and  services.  As  regards  judicial  reform,  the  Commission  has  supported  the 
development of evaluation criteria for the recruitment and promotion of judges, which has already been used 
for the recruitment of new judges.  In addition, a comprehensive study was delivered in 2019 to assess the 
feasibility of the introduction of a digital audio recording system in the court proceedings. 

In  the  area  of  growth  and  business  environment,  the  Commission  has  supported  Cyprus’  efforts  to 
improve  environmental  inspections,  by  providing  a  comprehensive  training  and  development 
programme.  The  Cypriot  authorities  are  also  benefitting  from  expertise  for  developing  economic 
diplomacy.  Moreover,  a  new  project  was  approved  in  2019,  which  will  focus  on  developing  a  long-term 
economic  strategy  for  sustainable  development  and  international  competitiveness.  Another  project,  which 
started  in  2019,  will  provide  support  to  the  Cypriot  authorities  in  revising  the  national  strategy  for  the 
management of municipal waste.  

Support has also been provided in the area of labour market, social welfare, health and education. In 
the  area  of  the  health  sector,  Cyprus  has  benefitted  from  technical  support  for  capacity  planning, 
leading to the launch of the first phase of the National Health Insurance System (NHIS) in June 2019. 
Additionally,  the  Commission  supported  the  Cypriot  Health  Insurance  Organisation  in  designing  a  budget 
negotiation strategy with healthcare providers, based on international best practices. In 2019, a new project 
was launched to support Cyprus with the completion of the special education reform in order to make the 
school  system  more  inclusive.  Additionally,  another  education  project  was  initiated,  which  will  focus  on 
addressing student disengagement and school dropouts. 

The Cypriot authorities have been receiving support in the area of revenue administration, tax policy 
and  public  financial  management,  including  support  for  the  management  of  changes  resulting  from 
reforms  of  the  public  financial  management  system.  The  Commission  has  also  delivered  a  project  to 
strengthen the administrative capacity of the Ministry of Finance by setting up mechanisms to monitor and 
evaluate  performance  in  the  framework  of  strategic  planning.  Additionally,  the  Cyprus  Tax  Department 
received support to prepare the procurement of a new integrated tax administration system. 

Lastly, the Cypriot authorities are working with the Commission in the area of finance and access to 
finance to improve the insolvency framework.  In 2019, support was delivered to improve the efficiency 
and effectiveness of the operations of the Insolvency Service of Cyprus and to enhance the overall regulation 
of  insolvency  practitioners.  This  will  lead  to  the  establishment  of  a  new  Insolvency  Department  at  the 
Ministry of Energy, Commerce and Industry in early 2020. The Commission has also started work on a new 
project,  which  will  focus  on  raising  awareness  about  Cyprus’  insolvency  framework  and  developing  a 
customer service policy for the Insolvency Service of Cyprus.  

19 

 
 
 
 
 
2. Progress with country-specific recommendations 

Box 2.2: EU funds and programmes to address structural challenges and to foster growth 
and competitiveness in Cyprus 

Cyprus  is  one  of  the  countries  that  benefit  significantly  from  EU  support.  Cyprus  receives 
€873.6  million  from  the  EU  cohesion  policy  funds (1)  in  the  current  Multiannual  Financial 
Framework, equivalent to around 0.6% of its GDP. By the end of 2019, Cyprus allocated almost 
the entirety of this amount to specific projects and had already spent €407.3 million on concrete 
projects (2), showing a level of implementation well above the EU average. 

While  achieving  more  harmonious  development  through  reducing  economic,  social  and 
territorial  disparities,  EU  cohesion  funding  also  plays  a  significant  role  in  addressing 
structural  challenges  in  Cyprus.  The  cohesion  policy  programmes  for  Cyprus  have  allocated 
€188  million  for  smart  growth  (including  support  to  research  &  innovation  and  to  small  and 
medium-sized  enterprises),  €370  million  for  sustainable  growth  (including  environmental 
infrastructure) and sustainable transport and €164 million for inclusive growth (including training 
and  social  inclusion).  In  2019,  following  the  performance  review (3),  €42.6  million  were  made 
available for Cyprus within performing priorities. 

EU  cohesion  funding  is  contributing  to  major  transformations  of  the  Cypriot  economy.  By 
2019,  investments  driven  by  the  European  Regional  Development  Fund  and  the  cohesion  fund 
have  contributed  to  connecting  Limassol  Port  to  the  main  motorway  in  the  Trans-European 
Transport  Network,  and  to  providing  some  5,000  population  equivalent  with  new  or  improved 
waste  water  treatment.  Furthermore,  the  investments  supported  more  than  400  enterprises; 
generated  975  new  direct  jobs  (full  time  equivalents)  and  more  than  €12  million  of  private 
matching funding, and contributed to reducing greenhouse gas emissions by 15,000 tons of CO2. 

Cohesion  Policy  is  helping  Cyprus  to  achieve  the  digitalisation  of  its  economy  and  develop 
eGovernment.  It has helped to develop the IT system for the introduction and support of the new 
General  Healthcare  System.  The  system  will  perform  all  the  basic  functions  related  to  the 
provision of services within the framework of the System, having allowed some 615  providers to 
register  as  personal  doctors  and  more  than  1,200  as  specialist  doctors,  as  well  as  around  500 
pharmacies  to  join.  Over  80%  of  the  population  has  also  registered  as  beneficiaries  (687,000 
people), while more than 1 100 000 visits to personal doctors and some 700,000 visits to specialist 
doctors have taken place so far. 

The  European  Social  Fund  (ESF)  has  been  contributing  to  major  transformations  of  the 
Cypriot labour market. The European Social Fund has supported more than 10,500 unemployed 
persons, including more than 3,000 long-term unemployed, 5,500 young people, and 500 jobless 
people  above  54  years  old.  The  policy  contributes  to  the  upgrading  of  technical  and  vocational 
education and training, and will train almost 3,000 people by 2023. 3,200 people have successfully 
been employed after participating in such work/training schemes. 

Agricultural  and  fisheries  funds  and  other  EU  programmes  also  contribute  to  addressing 
development  needs.  As  well  as  receiving  support  of  €132.2  million  from  the  European 
Agricultural  Fund  for  Rural  Development  (EAFRD),  and  €39.7  million  from  the  European 
Maritime  and  Fisheries  Fund  (EMFF),  Cyprus  also  benefits  from  other  EU  programmes.  The 
Connecting Europe Facility has allocated €66.5 million to specific projects for strategic transport 
networks  (TEN-T),  and  Horizon  2020  has  provided  €231  million  for  research  and  innovation, 
including €72 million for small and medium-sized enterprises. 

EU  funding  contributes  to  the  mobilisation  of  important  private  investment.  European 
Structural  and  Investment  funds (4)  provide  programmes  with  about  €40  million  in  the  form  of 
loans and guarantees. 

20 

 
 
 
 
 
 
 
2. Progress with country-specific recommendations 

EU  funds  already  invest  substantial  amounts  on  measures  in  line  with  the  Sustainable 
Development Goals (SDGs). In Cyprus the European Structural and Investment Funds support 12 
out the 17 SDGs and up to 91% of the expenditure contributes to achieving those goals. 

(1)  European Regional Development Fund, Cohesion Fund, European Social Fund, Youth Employment Initiative. 
(2)  https://cohesiondata.ec.europa.eu/countries/CY  
(3)  The  performance  review  is  regulated  by  Article  22  of  Regulation  (EU)  No 1303/2013,  whereby  5-7 %  of  overall 
resources  allocated  are  released  to  operational  programmes’  priority  axes  that  have  achieved  their  milestones.  The 
amount does not include national co-financing. 

(4)  European Regional Development Fund, Cohesion Fund, European Social Fund, European Agricultural Fund for Rural 

Development Fund and European Maritime and Fisheries Fund 

21 

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

DEPTH REVIEW 

Introduction 

excessive 

concluded 

in-depth  review 

The  2020  Alert  Mechanism  Report  concluded 
that  a  new 
should  be 
undertaken for Cyprus to assess the persistence 
or  unwinding  of  the  imbalances  (European 
Commission,  2019a).  In  February  2019,  the 
that  Cyprus  was 
Commission 
experiencing 
macroeconomic 
imbalances  in  particular  involving  a  very  high 
share  of  non-performing  loans,  high  stocks  of 
private,  public  and,  external  debt  in  a  context  of 
still  relatively  high  unemployment  and  weak 
potential  growth.  In  the  updated  scoreboard,  a 
number of indicators remain beyond the indicative 
thresholds, namely the current account balance, the 
net international investment position, private sector 
debt, government debt and the unemployment rate. 
This  chapter  summarises  the  findings  of  the 
analyses  in  the  context  of  the  macroeconomic 
imbalance  procedure 
is 
that 
contained in various sections in this report. (12) 

in-depth  review 

Imbalances and their gravity 

The non-performing loans (NPL) ratio declined 
visibly  since  its  peak  but  remains  one  of  the 
highest  in  the  EU.  After  a  significant  decline  in 
the NPL ratio in 2018 (from  50.4% at the start of 
the year to 35.6% at the end of the year) driven by 
two  one-off  operations  (13),  very  limited  progress 
was  made  with  NPL  reduction  in  2019. In  June 
2019,  the  NPL  ratio  stood  at  33.5%,  down  from 
35.6%  at  the  beginning  of  the  year.  The  largest 
volume of NPLs belongs to households, amounting 
to  a  share  of  37.1%  of  gross  loans  to  households. 
For  non-financial  corporations  the  stocks  are 
lower,  equivalent  to  a  NPL  ratio  of  30.2%.  The 
decline in the stock of NPLs during the first half of 
the year reflects write-offs, cash repayments, debt-
to-asset  swaps  and  curings  (migration  of  non-
performing 
into  performing  categories). 
Large  asset  sales  are  expected  to  materialise  in 

loans 

(12)  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  debt  are 
discussed in Section 4.2. 

(13)  The  decline  in  2018  was  driven  by  the  transfer  of  the 
Cyprus  Cooperative  Bank’  NPLs  to  the  newly  established 
state-owned  asset  management  company  (KEDIPES)  and 
the  sale  of  a  large  NPL  portfolio  (Helix)  by  the  Bank  of 
Cyprus. 

22 

2020, accelerating the reduction of bad loan in the 
banking system. 

Private sector debt continues to decline, but it is 
still  at  high  levels.  In  consolidated  terms,  the 
private  debt-to-GDP  ratio  has  been  falling  in  the 
last  years,  reaching  282.6%  of  GDP  at  the  end  of 
2018,  compared  to  an  EU  average  of  138.3%  of 
GDP. Private debt in Cyprus is inflated by the debt 
of non-financial special purpose entities, which has 
been relatively stable as a percentage of GDP since 
2013  –  close  to  70%  of  GDP.  Nevertheless,  the 
debt  stock  of  special  purpose  entities  increased 
from  2015  to  2018  by  approximately  15%.  Both 
households  and  non-financial  corporations  are 
over-indebted.  In  September  2019,  households’ 
debt 
at  91.2%  while  non-financial 
corporations’  debt-to-GDP  ratio  was  169.6% 
(103.5%  excluding  special  purpose  entities).  Both 
are above fundamental and prudential benchmarks, 
even  when excluding special  purpose entities (see 
Section 4.2.3). 

stood 

ratio 

The  public  debt  ratio  remains  elevated, 
although it decreased in 2019. While in 2018 the 
government  debt-to-GDP 
increased  by 
approximately 7 percentage points to 100.6% (due 
to one-off factors related to the sale of the Cyprus 
Cooperative Bank , in 2019 public debt is coming 
down  – close  to 94% of GDP (see Section 4.1.1). 
Cyprus enjoys favourable market access, with low 
sovereign  bond  yields  and  has  been  given  an 
investment  grade  rating  by  all  the  main  rating 
agencies, apart from Moody’s. 

international 

The  country’s  net 
investment 
position  (NIIP),  particularly  concerning  net 
external debt, remains a source of vulnerability. 
In  the  third  quarter  of  2019,  the  NIIP  stood  at 
around -115% of GDP — one of the largest in the 
EU. The  ‘defaultable’ part of the  NIIP (14),  which 
excludes  foreign  direct  investment  and  portfolio 
equity shares, amounted to around -160% of GDP, 
reflecting large external debt liabilities. According 
to  the  Central  Bank  of  Cyprus,  a  part  of  this 
around  -30%  of  non-adjusted  GDP  relates  to  the 
debt  of  non-financial  special  purpose  entities 

(14)  The NIIP excluding non-defaultable instruments or NENDI 
is part of the MIP scoreboard auxiliary indicators and aims 
to capture risks related to the composition of the NIIP. 

 
                                                           
                                                           
(excluding  net  foreign  direct  investment  and  net 
portfolio  equity  shares).  Even  taking  this  effect 
into  account,  the  ‘defaultable  part’  of  the  NIIP  is 
well  beyond  estimated  benchmarks  (see  Section 
4.2.4).  Another  part  of  this  net  external  debt  (-
81%)  is  in  the  government  sector,  the  bulk  of 
which 
international 
financial  institutions  under  the  macroeconomic 
adjustment  programme,  and  is  less  exposed  to 
short-term risks. 

is  explained  by  debt 

to 

large  current  account  deficit 

The 
is  not 
conducive  to  external  rebalancing.  The  current 
account  deficit  amounted  to  -7.4%  in  the  third 
quarter of 2019, reflecting an adverse international 
environment  coupled  with  continued 
strong 
domestic  demand.  The  current  account  balance  is 
below  the  current  account  ‘norm’  (15)  implied  by 
fundamentals and below what would be required to 
stabilise  the  NIIP  and  its  ‘defaultable’  part  at 
prudent  levels  (see  Section  4.2.4).  Excluding  the 
activities of ship-owning SPEs the current account 
was still significantly negative at -4.4%. 

The labour market has improved on the back of 
solid growth. Most indicators improved markedly 
and  unemployment  fell  to  7.5%  in  2019.  Long-
term  and  youth  unemployment  also  decreased 
significantly,  reducing  the  gravity  of  the  problem 
(see Sections 1 and 4.3.1). 

Potential  growth  is  gradually  increasing.  In 
2018, potential growth was estimated at 2%, and is 
expected to increase to 2.3% in 2019 and to 2.5% 
in 2020. Labour and gross fixed capital formation 
continue to be the main drivers of potential growth 
but  total  factor  productivity  is  also  expected  to 
provide  a  small  positive  contribution  from  2020 
onwards,  after  10  years  of  negative  contributions. 
However,  the  high  dependency  on  construction 
investment for residential properties, the remaining 
debt  overhang  and  insufficient  progress  with 
structural reforms constrain potential growth in the 
longer term (see Sections 1 and 4.4).  

(15)  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 

Evolution, prospects and policy responses 

to 

the 

foreclosure 

The Cypriot government continues to follow the 
three-pillar  strategy  aimed  at  reducing  non-
performing loans (NPLs) that was introduced in 
2018.  The  first  pillar  –  a  legislative  package  that 
strengthened  the  framework  for  NPL  resolution  – 
was  implemented  already  in  2018.  However,  the 
framework 
amendments 
approved  by  Parliament  in  August  2019  risk 
weakening  this  framework,  if  implemented.  The 
Supreme  Court  is  expected  to  decide  on  the 
constitutionality  of  these  amendments  in  spring 
2020. Under the second pillar, in 2018, the Cyprus 
Cooperative  Bank  was  sold  and  KEDIPES,  the 
state-owned  asset  management  company,  was 
established  to  manage  the  remaining  ‘bad  assets’ 
of  the  Cyprus  Cooperative  Bank  residual  entity. 
KEDIPES  holds  approximately  €6.8  billion  of 
non-performing loans and is, thus, the largest asset 
management company in EU relative to the size of 
the  economy.  While  it  has  been  set  up  and  is 
operational,  progress  needs  to  be  stepped-up, 
including implementing a long-term business plan, 
a  new  organizational  model  and  enhancing  its 
governance.  The  last  pillar  of  the  strategy,  the 
ESTIA  scheme  –  for  NPLs  collateralised  with 
primary  residences  –  was  launched  in  September 
the  banks’ 
2019 
(see  Section  4.2.1),  with 
to  be 
assessment  of  applications  expected 
completed 
in  spring  2020.  The  checks  and 
approvals by the competent  Ministry are expected 
to be completed in summer 2020. 

Other steps have also been  taken to reduce the 
NPLs.  Other  efforts  to  facilitate  the  reduction  of 
non-performing  loans  include  the  introduction  of 
e-auctions  (in  November  2019),  strengthening  the 
supervision  of  credit-acquiring  companies,  which 
is  under-way,  and  ongoing  judicial  reform.  The 
planned  reform  of  the  judicial  system  aims  to 
increase  the  efficiency  of  the  system,  strengthen 
the  enforcement  of  judgments  and  ultimately 
improve  the  payment  culture  in  the  country  (see 
Section 4.4.3). 

Private  sector  debt  reduction  reflects  both 
strong  GDP  growth  and  nominal  debt 
reduction,  nevertheless  further  deleveraging  is 
needed.  Both  households’  and  non-financial 
corporations’  debt  ratios  are  on  a  declining  path, 
helped  by  GDP  growth  (denominator  effect).  The 
nominal  debt  stocks  are  also  declining  (albeit 

23 

                                                           
For 

households’ 

slowly) in both sectors, driven by write-offs of bad 
loans,  cash  repayments  and  debt-to-asset  swaps 
(see Section 4.2.3). In 2018, the deleveraging was 
led by non-financial corporations excluding special 
purpose entities, as their debt stock declined faster 
than 
continuing 
stocks. 
deleveraging  in  the  future,  it  is  important  to 
maintain  the  strengthened  foreclosure  framework. 
This is even  more relevant,  given that the  take-up 
of  the  ESTIA  scheme,  which  provides  very 
attractive  terms  (including  debt  reductions)  to 
defaulted  borrowers,  was  lower  than  expected. 
Furthermore,  the  absence  of  an  efficient  and 
reliable  system 
issuing 
property rights hinders foreclosure procedures and 
makes  it  difficult  to  value  collaterals  (see  Section 
4.2.3). Private debt reduction may accelerate once 
the credit-acquiring companies – which now hold a 
significant  share  of  NPLs  –  become  successful  in 
extracting value from their portfolios of bad loans.  

transferring  and 

for 

to 

by 

forecast 

Public debt is expected to continue declining in 
2020-2021,  underpinned  by  strong  projected 
budgetary  surpluses.  Cyprus’  debt-to-GDP  ratio 
approximately 
decline 
is 
6 percentage  points  per  year  in  2020  and  2021, 
mainly  on  the  back  of  high  primary  surpluses  (of 
above 4% of GDP). As in 2019, the government is 
engaged  in  active  debt  management  operations, 
and plans to repay the IMF loan in the first part of 
2020. Despite all this, the downside risks to fiscal 
sustainability 
(see 
Section 4.1.1).  

significant 

remain 

Cyprus’  net  international  investment  position 
narrowed  somewhat,  but  remains  a  key 
vulnerability,  as  the  current  account  deficit  is 
widening. The net international position improved 
from  -121% of GDP at the end of 2018 to  -115% 
in  the  third  quarter  of  2019.  A  decline  in  foreign 
government  debt  by  about  12.8  percentage  points 
(year-on-year),  partly  offset  by  an  increase  in 
equity  liabilities  and  long-term  debt  of  other 
sectors, contributed to the adjustment and has also 
helped 
the 
international  investment  position  by  around  15 
percentage points, from 175% of GDP to -160% of 
GDP  (see  Section  4.2.4).  Further  adjustment  is 
expected  to  be  limited,  as  it  is  forecast  that  the 
current account will remain in a substantial deficit 
of  around  10%  of  GDP  in  2020  and  2021.  The 
structure  of  foreign  liabilities  in  the  recent  years 
shows a  shift from loans and other investments to 

‘defaultable’  part  of 

lower 

the 

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

foreign  direct  investment.  The  foreign  direct 
investment  in  Cyprus,  however,  mostly  involves 
the  financial  transactions  of  holding  companies, 
property sales and ship registrations, as opposed to 
green field investments and those that have greater 
potential to enhance productivity. 

Some  policies  are  in  place  to  improve  the 
business  environment  and  competitiveness,  but 
implementation needs to be stepped up. Most of 
the  progress  made  concerns  e-governance  and 
strengthening entrepreneurship, by also addressing 
issues  related  to  the  internationalisation  of  small 
and  medium-sized  enterprises.  A  law  to  facilitate 
major  investments  through  simplified  procedures 
is  expected  to  be  adopted.  Some  institutional 
to  prioritise 
measures  were  also  undertaken 
flagship  sectors  for  Cyprus  such  as  tourism  and 
shipping,  with  the  establishment  of  competent 
deputy  ministries. 
regarding 
digitalisation, a new deputy ministry is expected to 
be  established,  which  will  be  responsible  for  the 
implementation of a digital transformation strategy 
and  R&D  policy.    The  planned  reform  of  the 
justice  system  is  crucial  for  a  conducive  business 
environment.  In  addition,  a  long-term  growth 
strategy  to  overhaul  Cyprus's  growth  model  is 
under preparation. However, tangible results of the 
above  measures  are  only  expected  in  the  medium 
term. Other reforms that would help to improve the 
efficiency  of  the  public  administration  and  the 
local governments are pending. 

Furthermore, 

Labour  productivity  remains  low.  Depressed 
investment  activity  during  the  crisis  and  the 
current  concentration  on  residential  buildings  are 
not  conducive  to  productivity  growth.  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  and  reskilling  of  workers  in 
particular,  in  digital  skills  are  essential  in  raising 
productivity  in  the  long-term  (see  Sections  4.3.1 
and 4.4.1). 

is 

rapidly 

falling.  The 
Unemployment 
unemployment rate fell from 8.4% in 2018 to 7.5% 
in 2019. Unemployment among young people also 
declined  to  17.5%  in  2019.  While  unemployment 
is  still  above  the  pre-crisis  period,  there  are 
positive signs that unemployment is set to continue 
falling in the near term (see Sections 1 and 4.3.1). 
Despite  some  efforts,  more  action  is  needed  to 

24 

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

in 

for 

the 

remains 

to  follow 

2018.  However, 

the  main  priority 

performing  loans.  On  this  front,  the  government 
three-pillar  strategy 
continues 
the 
introduced 
reform 
commitments  are  still  pending  in  several  areas. 
judicial 
The  effective 
implementation  of 
the 
reform 
for 
enforcement  of  claims  and 
the  better 
functioning  of  the  economy.  Setting  up  a  reliable 
and  transparent  system  to  issue  and  transfer  title 
deeds is important to facilitate the resolution of the 
non-performing loans and to improve the business 
environment.  Other  key 
structural  priorities 
local 
include 
government  reforms  and  privatisations.  Instead  of 
planned  legislative  measures,  some  administrative 
measures, were taken to address the long-standing 
pending  reform  of  the  governance  of  the  State-
owned enterprises. The efficacy of these measures 
is  yet to be  assessed. A continued commitment to 
sound  public  finances  and  the  safeguarding  of 
fiscal  surpluses  are  essential  for  ensuring  public 
debt reduction. 

the  public  administration  and 

improve  the  efficiency  of  the  public  employment 
services  and  to  promote  active  labour  market 
policies (see Section 4.3.1). 

Overall assessment 

the 

levels  and  a 

Cyprus continues to experience significant stock 
imbalances  such  as  a  considerable  number  of 
non-performing  loans,  high  private  and  public 
debt 
large  stock  of  foreign 
liabilities.  Despite  significant  consolidation,  the 
asset  quality  of  the  banking  sector  remains  a 
large  proportion  of  non-
concern  given 
performing loans in total loans. Private debt is still 
excessive  despite  its ongoing  reduction,  with both 
households 
corporations 
experiencing  a  debt  overhang.  The  public  debt 
stock also remains elevated, at above 90% of GDP. 
Furthermore,  Cyprus  continues  to  have  a  large 
negative  net  international  investment  position, 
linked in turn with a large current account deficit, 
which  make  the  country  vulnerable  to  economic 
shocks,  changes  in  investors’  sentiment  and  the 
deterioration of the global environment. 

non-financial 

and 

The constellation of risks changed in 2019, with 
some 
imbalances  unwinding  while  others 
deteriorated.  Private  and  public  debt  are 
decreasing, but from still high levels. Government 
debt  is  coming  down  after  the  increase  in  2018, 
which reflected government support to the banking 
sector. The non-performing loans decreased slowly 
throughout  2019,  with  more  significant  progress 
expected  in  2020  assuming  that  plans  for  large 
asset  disposals  materialise.  Nevertheless,  despite 
the  off-loading 
sector, 
vulnerabilities associated with NPLs persist, as the 
bad  loans  still  remain  in  the  economy.  Other 
sources  of  vulnerabilities  stem  from  the  widening 
of  the  current  account  deficit,  which  does  not 
support  the  correction  of  the  external  debt  stock 
improved 
imbalances.  The 
significantly,  with 
rate 
declining  to  a  nine-year  low.  Potential  growth  is 
gradually increasing. 

the  unemployment 

labour  market 

the  banking 

from 

implementation 
is  essential 
imbalances, 

of  key  policy 
Steadfast 
for  correcting 
the 
measures 
excessive 
improving  economic 
resilience  and  supporting  sustainable  growth. 
Some  progress  has  been  made  on  implementing 
the  measures 
address  macroeconomic 
imbalances,  particularly  the  high  stock  of  non-

that 

25 

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) 

26 

 Gravity of the challenge Evolution and prospects Policy response Imbalances (unsustainable trends, vulnerabilities and associated  risks) Financial sector The non-performing loans (NPL) ratio was around 20 % of total loans in mid-2019, covering all loans and advances, and 33.5 % considering only the non-financial private sector. Cyprus thus, continues to have one of the highest ratios in the EU. Both households and non-financial corporations have large shares of NPLs, partly reflecting a weak payment discipline. A non-negligible share of NPLs lies outside the banking system, held by credit-acquiring companies, including the state-owned asset management company, KEDIPES. The capacity of Cypriot banks to generate profits continues to be challenged by excess liquidity, high operating costs and large stocks of NPLs.  (see Section 4.2.1) Progress in reducing NPLs in the banking sector slowed down in 2019.  Acceleration is expected in 2020 if the sales of large-portfolio materialise.  (see Section 4.2.1)  The insolvency and foreclosure frameworks were strengthened in 2018 to enhance the debt repayment discipline in the country. Attempts to weaken these frameworks are detrimental.  Successful management of the Cyprus Asset Management Company is a key priority for repaying the state, as well as for reducing the high stock of NPLs outside the banking sector.  The ESTIA scheme was launched  in September 2019. (see Section 4.2.1) Furthermore, it is essential to accelerate reforms that would improve the handling of NPL cases by the courts.  (see Section 4.4.3)  Private debt Standing at 261 % of GDP in Q3 2019 (195 % excluding special purpose entities), private sector debt remains one of the highest in the EU.  The level of debt is above benchmarks for both non-financial corporations and households, exposing them to risks. Corporate debt remains high even when excluding the debt of special purpose entities.  Household sector debt-overhang reflects high stocks of mortgage and consumption loans. Corporate debt is concentrated in construction, real estate activities and trade. A large proportion of private debt stock is non-performing mainly due to weak contract enforcement.  (see Section 4.2.3)  The private sector debt-to-GDP ratio continues to decline on the back of strong nominal growth (denominator effect), but also due to decreases in the stock of debt. As nominal growth decelerates, more active deleveraging is needed to reach prudential benchmarks.     The use of foreclosures is picking-up following the strengthening of framework in 2018. Insolvency tools remain under-utilised. (see Section 4.2.1) Private debt reduction may accelerate with credit-acquiring companies becoming successful in extracting value from their portfolios of bad loans. (see Section 4.2.3) Full implementation of insolvency and foreclosure frameworks, as adopted in 2018, may accelerate private debt reduction.  The ESTIA scheme may also contribute to reducing private debt. However, its effects remain to be seen especially in view of the lower than expected take-up of the scheme. (see Section 4.2.1)   E-auctions were introduced in November 2019, facilitating foreclosures. (see Section 4.2.1) Progress to strengthen debt repayment discipline by improving the handling of the NPLs in courts and the enforcement of judgements is slow (see Section 4.4.3). A quick and transparent system for issuing and transferring property titles that would enable liquidation of collaterals is still pending.  Public debt Public debt is resuming its declining path after a one-off increase in 2018.  The level of the government debt still remains high exposing the country to changes in financial or economic conditions.  (see Section 4.1)  Cyprus’ debt-to-GDP ratio is expected to fall below 90 % by the end of 2020, and to continue declining in 2021 (based on the Commission’s Autumn Forecast), on the back of continued structural budgetary surpluses. (see Section 4.1)  Ensuring that government debt continues to fall requires a strong fiscal performance, based on prudent expenditure management. (see Section 4.1)  External position The net international investment position remains negative and large. It stood at -121 % of The net international investment position is declining mainly as a result of the nominal GDP growth A tourism strategy is set to be implemented with the aim of further extending the season and improving the quality of tourism services.  
 
   
 
3. Summary of the main findings from the MIP in-depth review 

Table (continued) 

Source: European Commission  

27 

GDP at the end of 2018. Adjusting for non-financial special purpose entities, according to Cyprus Central Bank’s data, the net international investment position is close to the scoreboard’s threshold (-35 %), but its  ‘defaultable’ part is large and close to -130 %, excluding the special purpose entities, as external debt liabilities are covered by positive foreign direct invesment and portfolio equity positions are often subject to large valuation effects.  The current account is in  substantial deficit, at -7.4 % of GDP in 2019 Q3.  (see Section 4.2.4) and valuation effects.  Strong domestic demand for imports and intensifying competition in the tourism sector are projected to keep the current account in substantial deficit, which will not help to decrease the net international investment position and its ‘defaultable’ part in the near term.  Domestic savings are recovering but remain low, particularly for the household sector. Investment, notably in the construction sector, has accelerated.  (see Sections 1 and 4.2.4) However, its medium-term impact remains to be seen. Connectivity difficulties have surfaced again with the bankruptcy of certain airlines.   The real effective exchange rate appreciation in 2017 and 2018 has been reversed almost fully in 2019 Looking ahead, stronger productivity gains and low wage inflation become of key importance. (see Sections 1 and 4.2.4)  Adjustment issues Potential growth Potential growth, estimated at around 2.5 % in 2018-2021, remains modest in view of the need to support further deleveraging.  There are concerns regarding the sustainability of the current growth model.  (see Sections 1, and 4.4)  Potential growth is forecast to increase somewhat in the medium-term.  The composition of investment (skewed to residential construction) is not conducive to increasing potential growth. (see Section 1 and 4.4) Productivity growth remains stagnant. (see Section 4.4) Key structural reforms that would significantly improve the business environment, attract strategic investments and diversify the economy are delayed.  Progress in implementing privatisation projects to attract investment, increase competition and reduce prices in network industries is limited.  (see Section 4.4) Conclusions from IDR analysis Cyprus continues to experience significant stock imbalances such as a considerable stocks of non-performing loans, high private and public debt levels and a large stock of external liabilities – all in a context of still moderate potential growth and relatively high, albeit decreasing unemployment. This makes the country vulnerable to external shocks.  Stock imbalances, in particular public debt, household and corporate debt, and the net international investment position are declining, mainly on the back of strong economic growth. The non-performing loan ratio of the banking sector also decreased in 2019, but only modestly compared with the progress in 2018. In contrast, the current account deficit deteriorated significantly, driven by a weaker international environment and still solid domestic demand. As a result, there is no support for the reduction of external debt.  Making full use of the foreclosure and insolvency frameworks remains essential for the reduction of non-performing loans and private debt and for improving payment discipline. Addressing the challenges of the state-owned asset management company and strengthening the supervision of credit acquiring companies are important for the work-out of non-performing loans outside the banking sector. Furthermore, steadfast efforts are needed to improve the system for issuing and transferring property titles, the handling of the non-performing loans in the courts and the enforcement of judgements. Measures are still needed to foster competitiveness and diversify investments towards more productivity-enhancing sectors and the environment, thus ensuring sustainable growth in the long term and rebalancing the current account. Ensuring fiscal discipline and maintaining budget surpluses are crucial for public debt reduction.     
   
 
4.  REFORM PRIORITIES 

4.1.  PUBLIC FINANCES AND TAXATION 

4.1.1.  DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS 

The  general  government  gross  debt-to-GDP 
ratio  is  projected  to  decline  steadily  from  2019 
onwards.  The  government’s  support  for 
the 
Cyprus  Cooperative  Bank  sale  increased  public 
debt  by  about  8%  of  GDP  in  2018,  and  was 
financed  by  several  government  bonds  issued  in 
April and July 2018. The debt reduction trend that 
started  in  2015,  when  the  debt-to-GDP  ratio 
reached 109.2% of GDP, is expected to resume in 
2019. From 100.6% of GDP in 2018, the  debt-to-
GDP ratio is expected to decline to 94% of GDP in 
2019,  to  88%  in  2020  and  to  82%  in  2021 
(European  Commission,  2020a).  The  projected 
steady  decline  of  the  debt-to-GDP  ratio  is  driven 
by  sizeable,  but  slowly  declining  headline 
surpluses,  a  favourable interest rate  and economic 
growth differential (snow-ball effect) supported by 
robust real growth and active debt management. 

is 

Risks  to  the  sustainability  of  the  government’s 
finances  are  considered  low  in  the  short  term 
but international imbalances expose the country 
to potential short-term challenges. After one-off 
operations  negatively  affected  the  government’s 
finances  in  2018,  the  value  of  the  S0  indicator, 
which 
the  Commission’s  early-detection 
indicator  of  fiscal  stress,  returned  to  ‘low  risk’. 
This  improvement  reflects  the  strong  budgetary 
performance in 2019. However, the S0 indicator is 
only  slightly below the critical threshold,  whereas 
the financial competitiveness sub-index still points 
to  considerable  vulnerabilities  to  international 
shocks.  In  particular,  it  emphasises  weaknesses 
stemming  from 
the  current 
account deficit in the context of the large negative 
net  international  investment  position,  as  well  as 
high private debt, a significant proportion of which 
is  short  term  (see  Section  2  for  a  summary  of  the 
MIP assessment).  

the  widening  of 

fiscal  performance 

substantial  decline 

economic  conditions  and  assumes  a  constant 
structural  primary  balance  based  on  the  last 
Commission  forecast  year  (2021).  The  debt-to-
GDP ratio is projected to decline below the critical 
60%  threshold  by  2027,  and  to  stand  at  48%  of 
GDP  by  2030. This  corresponds  to  a  reduction  of 
3.7  percentage  points  on  average  per  year  from 
2021  onwards.  This 
in 
government  debt  would  be  driven  mostly  by  the 
is 
continued  strong 
assumed under the no fiscal policy change scenario 
(with the structural primary balance stable at 2.2% 
of  GDP),  and  would  be  further  supported  by 
favourable snow-ball effects (i.e. the interest rate – 
growth  rate  differential)  and  decreasing  costs 
associated  with  ageing.  The  sustainability  gap 
indicator S1 also points to low risk in the medium 
term.  Over 
the  debt 
sustainability analysis and the S2 indicator point to 
low  risk,  as  pressures  on 
the  government’s 
finances  related  to  ageing,  in  particular  pensions, 
are  more  than  compensated  by  the  strong  initial 
budgetary position. 

longer  run,  both 

that 

the 

Graph 4.1.1:  Government debt projection (% GDP) 

Source: European Commission 

Despite  the  large  debt-to-GDP  ratio,  Cyprus  is 
considered to face low fiscal sustainability risks 
long  term.   The  debt 
in  the  medium  and 
that 
(DSA) 
sustainability  analysis 
medium-term  risk  is  low  under  the  baseline 
scenario (see Annex B), which is based on normal 

indicates 

Risks relating to the debt structure are low and 
financing  conditions  continue  to  improve.  The 
weighted  average  maturity  of  government  debt  is 
expected  to  increase  again  in  2020  after  the 
issuance  in  January  2020  of an  €1  billion  10-year 
benchmark  and  €750  million  20-year  benchmark. 

28 

405060708090100110BaselineHigher interest rate scenarioNegative shock on the SPBLower GDP growth scenario% of GDP  
  
reflecting 

for  38%  of 

creditors (78%), 

This  recent  issuance  reflects  ongoing  efforts  to 
smooth  the  maturity  profile  of  government  debt 
and  to  take  advantage  of  favourable  financing 
conditions, following the issuances of international 
benchmarks  bonds  (10-year,  15-year  and  30-year 
bonds) since September 2018. In September 2019, 
a large proportion of government debt was held by 
the 
non-resident 
important  share  of  official  borrowing  from  the 
European  Stability  Mechanism  (31%)  and  recent 
additional  issuances  of  foreign  bonds,  which 
accounted 
total  government 
debt (Ministry  of  Finance  of  Cyprus,  2019b).  The 
yields  on  Cyprus’  government  debt  decreased 
throughout  2019,  partly  driven  by 
improved 
sovereign  rating  of  Cyprus  since  2018  and  by 
international  trends  of  declining  sovereign  yields 
in  2019.  (16)  Interest  payments  are  expected  to 
decrease  further  on  account  of  favourable  market 
conditions  and  debt  reduction.  Given  the  high 
headline  budgetary  surpluses,  financing  risks  are 
thus relatively low  in  the short and  medium term. 
The  early  repayment  of  the  Russian  loan  in 
September 2019 and the expected early repayment 
of  the  remainder  of  the  IMF  loan  in  early  2020 
would  reduce  the  country’s  financing  needs  and 
the annual cost of debt in the coming years. 

Contingent  risks  remain  a  major  source  of 
concern, as the ratio of non-performing loans in 
the  economy  is  still  high.  The  government’s 
financial support for the orderly  winding down of 
the  publicly-owned  Cyprus  Cooperative  Bank 
(CCB)  significantly  reduced  the  level  of  non-
performing  loans  in  the  banking  sector,  as  bad 
assets  were  transferred  to  an  Asset  Management 
Company  (KEDIPES)  and  consolidated  in  the 
general government sector. These operations led to 
a  change  in the nature of the  contingent liabilities 
to which the government is exposed. Some implicit 
contingent  liabilities  from  the  large  portfolio  of 
non-performing  loans  from  the  CCB  materialised 
into  government  debt  in  2018  whereas  the  asset 
protection schemes offered to Hellenic Bank in the 
context of the CCB sale increased the government 
exposure  to  explicit  contingent  liabilities.  As  a 
result  the  explicit  public  guarantees  increased  to 
about 22.6% of GDP in 2018 (Ministry of Finance 
of  Cyprus,  2019c),  the  bulk  of  which  concern 

(16)  The  interest  rate  on  the  10-year  and  20-year  benchmark 
bonds issued in January 2020 is respectively of 0.625% and 
1.25%. 

4.1. Public finances and taxation 

financial  sector  measures  (13.4%).  The  remainder 
of explicit public  guarantees  relate to state-owned 
enterprises,  private  corporations,  local  authorities, 
and  exposure  to  retail  loans.  Explicit  contingent 
liabilities 
the  financial  sector  are 
expected  to  have  decreased  to  11.8%  of  GDP  in 
2019 and to 10.5% of GDP in 2020, bringing down 
total  public  guarantees  to  an  expected  19.4%  of 
GDP  by  2020  (Ministry  of  Finance  of  Cyprus 
2018. 

linked 

to 

4.1.2.  FISCAL FRAMEWORK AND POLICY 

CHALLENGES 

Policy challenges 

average, 

revenue, 

in  public  expenditure  growth 
The  rise 
underlines  the  need  for 
it  to  be  strictly 
managed.  While  public  expenditure  in  Cyprus 
current 
the  EU 
remains  below 
expenditure growth has risen since 2017. The high 
pace  of  public  expenditure  was  offset  by  buoyant 
tax 
the  strong 
largely  caused  by 
macroeconomic and job market conditions. At the 
same  time,  the  favourable  economic  and  fiscal 
outlook  have  increased  pressure  for  a  further 
increase in public expenditure. Future expenditure 
growth  is  expected  to  outpace  revenue  growth 
even  though  the  level  of  revenue  would  still 
exceed 
expenditure.  Expenditure 
developments should, thus, be carefully monitored 
to maintain the favourable fiscal position and debt 
reduction.  This 
is  particularly  crucial  amid 
concerns  about  the  sustainability  of  the  recent 
strong  increases  in  tax  revenue  (further  discussed 
in Section 4.1.3) and given the deterioration of the 
international  environment  which  could  affect 
economic  growth.  Moreover,  there  is  a  need  to 
create some fiscal space, possibly by re-prioritising 
existing expenditure, to support the  transition to a 
greener  economy,  especially  as  Cyprus  faces 
several environmental challenges (see section 4.5).  

that 

of 

costs.  Currently  pending 

The public wage bill continues to grow and the 
forthcoming  court  decisions  could  entail  large 
additional 
court 
decisions  could  potentially  lead  to  the  reversal  of 
civil  service  pay  cuts  implemented  during  the 
crisis,  thus  representing  a  substantial  short-term 
risk  to  the  government’s  finances.  The  final 
decision  is  expected  early  2020  and  could  lead  to 
substantial  fiscal  costs  in  addition  to  already 

29 

                                                           
4.1. Public finances and taxation 

legislated stepwise reversals  of  wage cuts.  Setting 
up  a  permanent  legal  mechanism  could  allow  to 
safeguard  against  the  growth  of  the  public  wage 
bill.  Such  a  permanent  mechanism  would  secure 
long-term  wage  moderation  in  the  public  sector, 
and thereby, would contribute to the sustainability 
of public finance. The mechanism that was agreed 
upon  in  2016  in  order  to  cap  the  growth  of  the 
public  wage  bill  at  nominal  GDP  growth  through 
collective  agreements  still  applies,  but  has  proven 
insufficient to stem the growth of the public wage 
bill.  In  2019,  wage  increments,  the  resumption  of 
new  recruitment,  and  a  revised  cost  of  living 
allowance 
and  most 
importantly the gradual reversal of wage cuts since 
the  crisis  have  significantly  increased  the  public 
sector wage bill. All in all, the public sector wage 
bill  is  expected  to  amount  to  12.4%  of  GDP  in 
2019 compared to 11.7% in 2018. 

indexation 

system, 

The  impact  of  the  health  reform  on  public 
finances  requires  close  financial  monitoring. 
The  first  phase  of  the  reform  implementation  has 
thus  far  been  relatively  smooth,  with  encouraging 
rates  by  citizens  and  growing 
registration 
enrolment  of  health  providers  (also  see  Section 
4.3.4).  However,  a  number  of  implementation 
challenges  have  arisen  and  need  to  be  addressed 
promptly to ensure the effectiveness of the system. 
In particular, the timely charging of public doctors 
posed  challenges  and  the  execution  of  the  budget 
of public  hospitals  has been  delayed. At the  same 
time,  a  number  of  specialists  are  leaving  public 
hospitals and opting to contracting with the health 
insurer  for  outpatient  services.  This  could  affect 
public hospitals' ability to become competitive and 
therefore  financially  autonomous.  The  details  of 
the  participation  of  the  private  hospitals  in  the 
National Health Insurance System (NHIS) are still 
under  negotiation.  In  addition,  there  are  potential 
risks  to  the  government’s  finances,  as  the  law 
establishing the NHIS commits the government to 
funding  potential  financial  losses  incurred  during 
the  transition  towards  the  autonomous  financial 
management of public hospitals (expected over the 
first  five  years  of  the  reform  implementation, 
namely 2019-2024). 

reforms 

administration 

Revenue 
have 
progressed  slowly.  The  Council  of  Ministers 
approved a legislative amendment in October 2019 
criminalising  the  non-payment  of  income  taxes. 
However, progress on implementing the integrated 

tax  administration  system  remains  rather  slow. 
Seven  chapters  of  the  Tax  Procedure  Code  are 
awaiting 
legal  vetting,  whereas  chapters  on 
administrative  penalties,  criminal  provisions  and 
tax collection are still to be agreed. Furthermore, it 
is expected to take several years for the new tax IT 
system  to  become  operational.  A  tender  was 
launched for the implementation of the new tax IT 
system,  which  could 
tax 
collection. Finally, the creation of a tax portal that 
will  enhance  communication  between  the  tax 
authorities and taxpayers is still underway. 

improve 

income 

4.1.3.  TAXATION* 

in  Cyprus  seems 
While  the  tax  structure 
favourable  to  growth,  the  tax  base  remains 
narrow, depending heavily on consumption and 
corporate  income  taxes.  Tax  revenue  in  2018 
amounted to 33.8% of GDP, which remains lower 
than the EU average of 39.2%. Consumption taxes 
are  the  major  contributor  to  tax  revenues  in 
Cyprus,  mainly  due  to  the  substantial  revenues 
from  value  added  tax  (VAT),  which  accounts  for 
9.9%  of  GDP.  Also  corporate  income  taxes 
represent  a  significant  source  of  revenue.  They 
amounted  to  5.5%  of  GDP  in  2018,  largely 
exceeding  the  EU  average  of  2.7%  of  GDP, 
although  the  effective  average  corporate  income 
tax rate is lower than the EU one (13% vs 19.8%). 
Revenue from taxes on labour amounted to 11.9% 
of  GDP  in  2018,  well  below  the  EU  average  of 
19.6%. The  tax  system’s  potential  for  growth  and 
its  general  tax  base  narrowed  in  2017,  when  the 
recurrent 
immovable  property  was 
abolished. In addition, households’ capital income 
is virtually untaxed. 

tax  on 

Strong  tax  revenue  growth  in  recent  years 
might  have  been  caused  by  temporary  factors. 
Tax  revenue  started  to  recover  in  2016  and 
increased  by  20%  in  2016-2018,  amounting  to  an 
increase  of  more  than  4%  as  a  proportion  of 
nominal  GDP.  The  strong  revenue  growth  has 
partially  reflected  the  economic  upswing  and 
strengthening  job  market  conditions.  While  the 
cycle  remains  favourable,  there  are  risks  that  the 
strong  growth of revenue  may not continue in the 
future  because  it  is  mainly  due  to  two  specific 
potentially  volatile  revenue  items.  About  58%  of 
the increase in tax revenue observed in 2016-2018 
is  due  to  increasing  value  added  tax  revenue, 

30 

4.1. Public finances and taxation 

remain  low  as  compared  to  other  Member  States. 
There  are  several  examples  of  sound  fiscal 
measures  on  environment,  such  as  the  domestic 
and  irrigation  water  pricing  policy,  supported  by 
environmental  non-governmental  organisations 
and  academia.  However,  Cyprus  remains  one  of 
the  few  Member  States  that  does  not  appear  to 
have a landfill tax nor an incineration tax for waste 
management  (European  Environment  Agency, 
2016). 

which  is  concentrated  in  a  few  sectors  (e.g. 
construction,  information  and  communication). 
Corporate  income  tax  revenue  growth  accounted 
for  another  17%  of  the  total  increase  in  tax 
large 
collection 
companies 
tax 
jurisdiction might decide to relocate this corporate 
income  tax  revenue,  for  example  in  the  case  of 
changes 
tax 
in 
framework. 

in 
that  benefit 

international  corporate 

2016-2018.  However, 

from  Cyprus’ 

the 

Despite  increasing  social  contributions,  the  tax 
burden  on  labour  will  remain  comparatively 
low compared to the EU average. The tax burden 
on labour is among the lowest in the EU, which is 
reflected in a tax wedge (17) of 18.7% compared to 
42.9%  in  the  EU  in  2018.  The  tax  wedge  is 
however  set  to  increase  substantially  in  2019  and 
2020  due  to  the  pre-legislated  increases  in  the 
social  security  contribution  rate  in  2019  and  the 
introduction of compulsory health contributions to 
finance  the  National  Health  Insurance  System  in 
2019  and  2020.  Nevertheless,  even  after  these 
changes,  tax  revenue  from  labour  and  the  tax 
wedge  are  expected  to  remain  well  below  the  EU 
average. 

Cyprus intends to introduce a Carbon Tax and 
a Digital Tax. Consultations are being carried out 
to introduce a Digital Advertising Tax of 3%. The 
Carbon Tax is intended to be fiscally neutral and is 
expected to be introduced gradually from 2021. In 
order  to  ensure  that  the  transition  to  a  green, 
climate-neutral economy leaves no one behind, the 
the 
effects  of 
distribution 
and 
corresponding  compensatory  measures  for  the 
most  vulnerable  households  should  be  taken  into 
account  (see  European  Commission,  2019b). 
Consultations  are  being  carried  out  to  introduce  a 
Digital Advertising Tax of 3%. 

environmental 
of  wealth 

taxation  on 
income 

and 

In 

2018, 

environmental 

While  revenues  from  environmentally-related 
taxes  are  above  the  EU  average,  there  is  scope 
to  adjust  the  tax  system  in  order  to  better 
support  environment  and  climate  policy 
objectives. 
taxes 
accounted for 2.8% of GDP and for 8.2% of total 
tax  revenues,  whereas  the  EU  average  amounted, 
respectively, to 2.4% of GDP and to 6.2% of total 
tax revenues. Although energy taxes are the major 
contributor  to  environmental  tax  revenues,  excise 
duties on fuels do not reflect the carbon emissions 
and  therefore  do  not  foster  the  most  energy-
efficient technologies. In particular, circulation and 
registration  taxes  are  not  differentiated  according 
to CO₂  emissions and vehicle usage. Excise duties 
on  fossil  fuels  used  for  heating  (gas  oil,  natural 
gas,  etc.)  are  low.  Despite  considerable  progress 
made  on 
‘diesel  differential’ 
the 
(difference  in  the  excises  on  diesel  versus  petrol) 
since 2005, excises duties on those transport fuels 

reducing 

(17)  The ratio between the amount of taxes paid by an average 
single  worker  (a  single  person  at  100%  of  average 
earnings)  without  children  and  the  corresponding  total 
labour  cost  for  the  employer.  The  average  tax  wedge 
measures  the  extent  to  which  tax  on  labour  income 
discourages employment. 

Graph 4.1.2:  Revenue from environmentally-related taxes 

Source: Eurostat 

The  economic  evidence (18) 
that 
Cyprus’  tax  rules  are  used  by  companies  and 
individuals 
tax 
planning.  Eurostat  data  show  that,  on  average, 
90% of total dividend payments from Cyprus were 

in  aggressive 

that  engage 

suggests 

(18)  The  high  levels  of  inward  and  outward  foreign  direct 
investment,  in  addition  to  the  high  levels  of  dividend  and 
interest  payments  as  a  percentage  of  GDP.  See  European 
Commission, 2019c. 

31 

00,511,522,533,54ELDKHRSILVITNLBGFICYPLBEEEMTPTSKFRATUKHUCZROSELTESDELUIEEUEAEnergyTransport (excluding fuel taxes)Pollution/Resources% of GDP                                                           
   
                                                           
4.1. Public finances and taxation 

tax 

test 

based 

residency 

Cyprus plans to introduce a withholding tax on 
dividend,  interest,  and  royalty  payments  to 
countries  in  Annex  I  of  the  EU  List  of  Non-
cooperative  jurisdictions  on  tax  matters.  The 
design and timeline of this measure will need to be 
examined.  Cyprus  intends  to  introduce  a  further 
corporate 
on 
incorporation. This test would be in addition to the 
existing “management and control” test and would 
bring Cyprus into line with other jurisdictions and 
could  reduce  the  potential  for 
tax  planning. 
Required changes to the notional interest deduction 
regime are expected to be adopted by Parliament in 
the  first  quarter  of  2020  in  order  to  bring  it  into 
line  with  the  Code  of  Conduct  on  Business 
Taxation  of  the  Council.  Cyprus  has  ratified  the 
Multilateral  Convention  to  Implement  Tax  Treaty 
Related  Measures  to  Prevent  Base  Erosion  and 
Profit  Shifting  and  has  chosen  to  apply  it  to  the 
vast majority of its treaty partners. However, it has 
introduced  numerous  reservations,  not  forming 
part  of  the  minimum  standard  which  significantly 
limits  the  effectiveness  of  implementation  of  the 
multilateral  convention  in  Cyprus.  Cyprus  is  in 
consultations with the OECD in order to deal with 
concerns 
‘Citizenship’  and 
‘Residence  by  investment’  schemes.  The  Cyprus 
tax  authority  is  reviewing  the  wider  transfer 
pricing legal framework with a view to update the 
law  taking  into  account  the  OECD  BEPS  project 
transfer 
the 
Organisation  for  Economic  Co-operation  and 
Development’s  project  on  base  erosion  and  profit 
shifting.  The  effectiveness  of  these  planned  and 
new measures in limiting the scope for aggressive 
tax  planning  and  their  impact  on  the  corporate 
income tax revenue in the medium term will need 
to be assessed. 

recommendations 

relating 

pricing 

the 

to 

in 

sent  to  non-EU  countries  over  the  period  2013-
2017. Cyprus does not provide information on the 
country  destination  of  the  dividends.  The  rules 
identified  as  being  of  particular  concern  include: 
the absence of withholding taxes (19), the design of 
the  Cypriot  corporate  tax  residence  rules,  and  the 
residence  and  citizenship  by  investment  schemes. 
Owing  to  the  absence  of  withholding  taxes,  the 
outbound  payment  of  dividends,  interest,  and 
royalties from Cyprus based companies to non-EU 
jurisdictions  could  lead  to  little  or  no  taxation  if 
these  payments  are  not  taxed,  or  taxed  at  a  low 
level,  in  the  recipient  jurisdiction.  The  Cypriot 
corporate  tax  residence  rules  are  based  on  the 
management  and  control  test,  so  that  a  company 
may  be  incorporated  in  Cyprus  without  being  a 
Cypriot  tax-resident.  This  has  the  potential  to 
create a mismatch that could also be exploited for 
tax planning purposes. In 2015, Cyprus introduced 
a  notional  interest  deduction  regime  in  order  to 
deal  with  the  debt-equity  bias.  However,  in  2019 
the Code of Conduct on Business Taxation Group 
decided this regime needs to be amended to bring 
it  into  line  with  the  agreed  EU  rules  on  tax 
and 
competition.  Finally, 
‘Residence  by  investment’  schemes  operated  by 
Cyprus  (Citizenship  by  Investment:  Scheme  for 
Naturalisation of Investors in Cyprus by Exception 
and Residence by Investment Scheme) give access 
to a low personal tax rate on income from foreign 
financial assets and do not require an individual to 
spend  a  significant  amount  of  time  in  Cyprus. 
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 
the  Organisation  for 
to 
reporting.  According 
Economic Co-operation and Development, there is 
potentially  a  high  risk  that  they  could  be  misused 
to circumvent the automatic exchange of financial 
account information by helping to conceal the real 
jurisdictions of residence. 

‘Citizenship’ 

the 

Cyprus is acting to curb aggressive tax planning 
through  the  implementation  of  European  and 
internationally  agreed  initiatives  as  well  as 
unilateral  measures.  Cyprus  is  in  the  process  of 
transposing into national law the first EU Directive 
on Anti-Tax Avoidance. 

(19)  There  is  a  withholding  tax  on  royalties  if  the  intellectual 

property rights are used locally. See ZEW, 2016. 

32 

                                                           
 
4.2.  FINANCIAL SECTOR 

4.2.1.  BANKING SECTOR DEVELOPMENTS* 

Considerable  progress  has  been  made  with 
deleveraging  and  de-risking  banks’  balance 
sheets.  Following  the  carve-out  of  the  distressed 
assets  of  the  Cyprus  Cooperative  Bank  (CCB) 
during  its  liquidation,  and  major  sales  of  non-
performing  loans  (NPLs)  by  commercial  banks, 
the banking sector shrank to below 300% of GDP 
in  mid-2019,  compared  to  338%  at  the  end  of 
2017,  and  more  than  700%  before  the  financial 
crisis  of  2013.  Performing  CCB  assets  were 
acquired by Hellenic Bank, which benefits from an 
asset  protection  scheme. (20)  There  has  been  an 
overall reduction in the importance of subsidiaries 
of  Greek  banks  in  Cyprus,  which  were  once  a 
channel of contagion, although in some cases they 
still  have  a  high  level  of  non-performing  loans. 
Correspondent  banking 
that  were 
previously under pressure have stabilised. (21) 

relations 

of 

debt-to-asset 

The largest domestic bank, the Bank of Cyprus, 
continues its efforts to improve asset quality.  In 
March 2019, the bank disposed of a small portfolio 
of  terminated  loans  (with  a  gross  value  of  €245 
million)  to  APS  Loan  Management  (a  foreign 
investor  in  NPLs).  The  Bank  of  Cyprus’s  direct 
real  estate  exposure  remains  large,  primarily  on 
the 
account 
repossessions  of  foreclosed  assets.  In  the  short 
term,  the  sale  of  the  Helix  II  portfolio  (up  to 
€2.8 billion of NPLs) in the first half of 2020, with 
ongoing  additional  sales  of  unsecured  loans  and 
collateralised loans granted to foreigners, together 
with  additional  reductions  in  NPLs  due  to  the 
ESTIA scheme, should help improve asset quality 
further.  At  the  same  time,  cost  reduction  is 
latest  voluntary  redundancy 
ongoing,  as 

swaps 

and 

the 

(20)  Hellenic  Bank 

took  over  almost 

the  entire  Cyprus 
Cooperative  Bank’s  performing 
loan  portfolio,  all 
government  bonds  and  customer  deposits.  Around  €2.1 
billion  (gross  book  value)  of  the  performing  loans 
transferred  to  Hellenic  Bank  are  covered  by  the  asset 
protection  schemes  (APSs)  provided  by 
the  Cyprus 
Cooperative  Bank  and  counter-guaranteed  by  the  Cypriot 
Republic.  Hellenic  Bank  also  took  over  a  NPL  portfolio 
worth approximately €0.7 billion (gross book value), which 
was entirely covered by the APSs. Under the current set-up 
of  the  APSs,  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 APSs will be ten to twelve years, depending 
on the loans. 

(21)  See European Commission, 2019d. 

scheme  reduced  staff  numbers  by  470,  equivalent 
to more than 10% of total staff.  

the  acquisition  of 

the  CCB’s 
Following 
performing  assets,  the  business  model  and  risk 
profile  of  the  Hellenic  Bank  have  changed 
significantly.  The  incorporation  of  CCB’s  assets 
made the Hellenic Bank the second largest bank in 
Cyprus. The operational integration of the acquired 
parts  of  CCB  (including  the  migration  to  a 
common 
in 
infrastructure)  was 
September  2019.  The  gap  between  the  salary 
structure  of  former  CCB  employees  and  Hellenic 
Bank employees is an important challenge. 

finalised 

IT 

Pressures  on  profitability  remain  significant.  
Profits  in  2019  have  benefited  significantly  from 
the  conversion  of  deferred  tax  assets  to  deferred 
tax  credits  (DTCs)  for  Bank  of  Cyprus. (22) 
However,  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.  

and 

efficiency 

diversifying 
Enhancing 
investment could support bank profitability. All 
major  banks  are  engaging  in  measures  to  reduce 
their physical  footprint.  At 62% in June 2019, the 
system-wide  cost-to-income  ratio  remains  above 
the EU average and is, in fact, artificially lowered 
by  including  the  accrued  interest  income  on 
impaired  assets  and  excluding 
the  offsetting 
provisioning  charges.  Furthermore,  staff  costs  can 
only  be  reduced  slowly  and  in  a  delayed  manner. 
Although the larger banks have already invested in 
enhanced  internet  banking  capacities,  there  is  still 
significant potential for improvement, especially in 
the  case  of  the  online  marketing  of  products.  In 
addition,  the  declining,  but  still  high  level  of 
private  debt,  severely  constrains  the  pool  of 
bankable  investment  projects.  Better  investment 
opportunities  for  banks,  firms  and  retail  savers 
may  be  supported  by  improved  NPL  resolution 
actions  and  broader  measures  to  improve  the 
investment climate. 

(22)  Pursuant  to  legislation  enacted  in  March  2019,  which 
allowed the conversion of a bank’s deferred tax assets that 
arose  from  the  acquisition  of  a  resolved  bank,  to  deferred 
tax credit, Bank of Cyprus converted the deferred tax asset 
that was transferred from Laiki, following its resolution in 
2013, to deferred tax credits. This resulted in an immediate 
accounting  profit  of  €101  million  and  an  improved  CET1 
capital position of €285 million. 

33 

 
                                                           
 
                                                           
4.2. Financial sector 

by  the  end  of  June  2019  the  NPL  ratio  of  non-
financial corporations stood at 30.2%, whereas for 
households it was 37%. The planned sale of large-
scale  NPL  portfolios  by  the  two  biggest  banks  in 
Cyprus,  if  successful,  would  imply  a  significant 
further 
in  2020.  The  envisaged 
transactions would in turn, increase the NPL stock 
held  outside  the  banking  sector,  which  has  grown 
significantly  in  2018  to  represent  more  than  half 
the entire stock of NPLs. 

reduction 

Coverage levels have been gradually increasing. 
The average  coverage ratio  for the  banking  sector 
rose  to  51.4%  as  of  June  2019,  as  compared  with 
47%  a  year  earlier.  Thus,  the  aggregate  coverage 
level  continues  to  exceed  the  EU  average  of 
46.2%.  This  development  largely  reflected  the 
transfer  of  the  Cyprus  Cooperative  Bank’s  bad 
the  state-owned  asset  management 
assets 
company,  KEDIPES.  A  part  of 
the  overall 
provisioning  levels  is  also  explained  by  the 
offsetting of accrued interest on NPLs.  

to 

Progress  in  setting  up  KEDIPES  has  been 
slower  than  expected.  With  a  net  book  value  of 
20%  of  GDP,  KEDIPES  is  the  largest  asset 
management  company  in  the  EU  relative  to  the 
size  of  the  economy.  Adequate  capacity  building, 
proper  governance  and  operational  independence 
of KEDIPES are key for achieving the objective of 
maximising  government  proceeds.  The  poor 
quality  of  data  on  borrowers  (e.g.  regarding  their 
income)  makes  appropriate 
occupation  and 
resolution  strategies  difficult  to  determine,  and 
potentially  ineffective.  Once  operational,  the  key 
elements of the strategy for KEDIPES are likely to 
involve  tapping  the  ESTIA  scheme,  restructuring, 
foreclosures and NPL sales. Furthermore, from the 
authorities’  point  of  view,  KEDIPES  should 
become  a  much  leaner  organisation  dealing  with 
oversight  of  the  servicer,  managing  operations 
with  Hellenic  Bank  and  making  regular  payments 
to the government. 

to 

2019 

amendments 

The  August 
the 
foreclosure  framework,  if  implemented,  risk 
undermining the progress achieved through the 
July 2018 reform. The reform of 2018 was a key 
step  towards  improving  financial  stability,  inter 
alia by  strengthening the effective  enforcement of 
claims  and  the  effective  resolution  of  NPLs.  As  a 
result, foreclosure is gradually becoming a credible 
threat against strategic defaulters. At the request of 

Bank  profitability  prospects  are  adversely 
affected  by  excess  liquidity.  With  a  regulatory 
liquidity  buffer  of  €21.7  billion  (around  one-third 
of  the  total  assets),  Cypriot  banks  continue  to 
maintain significant excess liquidity. Several banks 
attempted  to  reduce  the  size  of  customer  deposits 
by  lowering  interest  rates,  which  are  at  historical 
lows  of  0.3%-0.5%.  These  efforts  have  not  been 
successful to date, partly as there are no alternative 
low-risk  investment  opportunities  available  to 
retail savers. As a further step, some banks already 
charge  negative  rates  on  large  corporate  deposits, 
but  these  have  not  yet  been  extended  to  retail 
depositors. 

Capital  levels  have  increased  slightly.  Recent 
NPL reductions, the injection of capital in Hellenic 
Bank  and  the  one-off  conversion  of  deferred  tax 
assets  into  deferred  tax  credits  have  strengthened 
the  aggregate  capital  position  to  16.3%,  up  from 
14.8% at end-2018. 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. 

Meeting  the  minimum  requirement  for  own 
funds  and  eligible  liabilities  (MREL)  will  be 
challenging.  Binding  MREL  targets  or  phase-in 
arrangements for Cypriot banks have not yet been 
announced by the Single Resolution Board. Due to 
their  heavy  reliance  on  deposit  funding,  Cypriot 
banks will need to raise more non-deposit funding 
to meet their MREL requirements. This will create 
additional  pressure  on  banks  already  facing 
profitability and asset quality challenges. 

Following  a  strong  reduction  in  2018,  the  NPL 
ratio declined only marginally in 2019. The NPL 
ratio  went  down  to  33.5%  in  June  2019.  (23) 
Although  it  is  declining,  the  ratio  remains  very 
high  (see  Table  4.2.1).  The  NPL  ratio  therefore 
remains  well  above  the  EU  average  of  around 
3.0%. The stock of non-performing loans for both 
households 
non-financial 
contracted significantly in 2018, while subsequent 
declines  have  been  more  moderate.  In  particular, 

corporations 

and 

(23)  Based  on  ECB  data,  this  figure  is  the  private  sector  NPL 
to  non-financial 
ratio  consisting  only  of  exposures 
corporations  and  households,  excluding  loans  to  financial 
institutions and the government sector.  

34 

                                                           
4.2. Financial sector 

Table 4.2.1: 

Financial soundness indicators, all banks in Cyprus 

(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) For comparability, annualized values are presented. 
Source: ECB 

the  President,  the  amendments  to  the  foreclosure 
framework  approved  by  Parliament  on  2  August 
2019 were referred to the Supreme Court, which is 
expected to decide on their constitutionality in the 
spring  of  2020.  In  the  meantime,  the  foreclosure 
framework as adopted by Parliament in July 2018 
will remain effective. 

longer 

revised 

procedures 

framework, 

The 
if 
foreclosure 
implemented,  can  be  expected  to  have  adverse 
effects  on  progress  in  NPL  resolution  and 
financial  stability.  The  new  law  may  render 
foreclosure 
and  more 
cumbersome,  with  negative  implications  for  bank 
profitability,  capitalisation,  credit  ratings  and  on 
the  prospects  and  price  of  future  NPL  portfolio 
sales. The inflow of new NPLs is likely to rise, as 
the  incentives  for  borrowers  to  adhere  to  the 
contractual repayment schedule may be reduced by 
the  extension  of 
foreclosure  deadlines  and 
recovery  periods.  The  foreclosure  amendments 
may also have consequences for the functioning of 
the  ESTIA  scheme,  as  they  would  undermine  the 
consequences  of  non-participation  (the  threat  of 
the swift initiation of foreclosure procedures).  

Electronic  auctions  started  in  November  2019. 
As  a  first  step,  a  pilot  of  the  new  system  was 
successfully  tested.  The  first  e-auction  took  place 
on  18 December  2019.  The  electronic  process 
the  sale  of  collateral  and 
could  streamline 
consequently  contribute  to  the  enforcement  of 
claims.  

There  has  been  limited  progress  on  insolvency 
personal 
proceedings. 
insolvency  arrangements  are  still  scarcely  used 
despite  the  legislative  amendments  made  in  2018. 

Examinership 

and 

the 

review  of 

The  establishment  of  a  separate  department  of 
insolvency  by  early  2020  should  enhance  the 
efficiency  and  effectiveness  of  the  insolvency 
framework.  Meanwhile, 
the 
insolvency  practitioners’ 
the 
regulation  of 
the 
In  particular, 
is  underway. 
profession 
the 
authorities  are  reviewing 
the  design  of 
framework 
insolvency 
for 
practitioners  and  will  soon  finalise  the  training 
programmes  and  certification  standards  for  the 
profession. 

licensing  of 

the 

The  period  for  applications  to  the  ESTIA 
scheme ended with a lower uptake than initially 
expected.  Following several months of delay, the 
ESTIA  scheme,  which  provides  subsidies 
to 
qualifying  borrowers  with  NPLs  collateralised  by 
primary  residences,  was  launched  on  2 September 
2019. (24)  Applications  were  to  be  submitted  by 
mid-November  2019,  but 
the  deadline  was 
extended  until  the  end  of  2019  due  the  limited 
take-up  –  possibly  reflecting  expectations  for  a 
future, more generous scheme and, in some cases, 
reluctance  to  reveal  assets  (as  per  the  wealth 
criteria) or concerns about eligibility. In total, there 
were  5,638  applications  submitted,  whereas 
originally  the  government  expected  above  10,000 

(24)  The  ESTIA  scheme  is  designed  to  provide  debt  reduction 
subsidies  for  eligible  borrowers  with  NPLs  backed  by 
primary  residences.  Under  the  scheme,  a  subsidy  will  be 
paid  by  the  government  to  lower  the  debt  servicing  costs, 
including  interest  charges,  of  all  eligible  performing 
borrowers  by  one  third.  The  eligibility  criteria  are:  (i)  a 
maximum  net  household  income  ranging  from  €20,000  to 
€60,000, depending on family size; (ii) a primary residence 
with  a  market  value  of  up  to  €350,000  and  with  at  least 
20% of the outstanding balance more than 90 days past due 
as of end September 2017; and, (iii) a maximum net wealth 
of  80%  of  the  market  value  of  the  primary  residence, 
capped at €250,000. 

35 

2014q42015q42016q22016q32016q42017q12017q22017q32017q42018q12018q22018q32018q42019q12019q2Non-performing loans (1)38,636,337,636,835,434,133,432,130,730,828,121,820,220,919,5o/w foreign entities17,126,624,324,326,525,224,824,724,224,823,624,120,519,919,2o/w NFC & HH sectors (2)54,655,156,255,554,853,752,751,350,449,344,737,435,634,833,5o/w NFC sector57,255,357,255,755,052,850,949,348,346,437,536,833,732,130,2o/w HH sector52,155,055,255,454,754,554,553,252,452,050,738,037,737,737,0Coverage ratio31,737,237,838,541,042,246,246,346,447,947,050,449,851,051,4Return on equity (3)-7,1-7,76,34,71,72,0-18,8-13,1-11,99,83,99,97,110,29,4Return on assets (3)-0,6-0,60,70,5-0,3-0,1-1,9-1,3-1,10,90,30,40,30,80,8Total capital ratio15,316,616,616,916,817,316,316,316,315,415,616,517,118,018,7CET 1 ratio14,215,615,716,015,915,814,915,014,914,014,214,914,815,616,3Tier 1 ratio14,616,016,216,516,416,315,415,515,414,614,815,616,117,117,8Loan to deposit ratio83,783,278,678,877,978,276,673,771,973,165,660,560,360,558,8                                                           
 
  
 
4.2. Financial sector 

applications  based  on  the  preliminary  assessment 
of eligibility criteria. The process of assessing the 
applications 
is  on-going,  with  government 
approvals expected at the end of July 2020. 

A  number  of  concerns  remain  regarding  the 
implementation  of  ESTIA.  There  are  concerns 
about the authorities’ capacity to verify the wealth 
criterion for assets held abroad. Lastly, the success 
of  the  scheme  depends  crucially  on  rigorous 
adherence  to  the  2018-strengthened  foreclosure 
framework. 

4.2.2.  OTHER FINANCIAL ISSUES 

Supervision of non-bank financial sectors 

the  new 

authority  was 

functioning  of 

The 
integration  of  the  supervisors  of  the 
pension  funds  and  insurance  companies  is 
progressing slowly. The draft legislation covering 
independent 
the 
submitted 
supervisory 
for 
in  October  and  is 
discussions  in  Parliament 
it 
pending  approval.  The  aim 
implemented  in  2021.  The  management  of  the 
several  hundred  small  occupational  pension  funds 
remains  challenging.  The  entry  into  force  of  the 
new  legislation  and  the  increased  supervisory 
powers  should  trigger  a  consolidation  in  both  the 
pension  sector  and  the  insurance  sector.  Staff 
numbers are expected to increase as a result of the 
new legislation and planned integration.  

to  have 

is 

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  it  had  a  modest  presence  in  Cyprus,  the 
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). The court appointed liquidators at the end 
of  August  2019.  Without  a  burden-sharing 
agreement, the handling of claims from Bulgaria is 
expected to proceed slowly via arbitration and with 
very  limited  compensations,  given  the  company’s 
few remaining assets.  

financial 

crisis,  which 

Diversifying  the  investment  opportunities  for 
retail  savers  and  the  financing  possibilities  for 
corporations remains a challenge.  Cyprus ranks 
lowest  within  the  EU  in  terms  of  non-bank 
financing  of  the  non-financial  corporations,  as 
listed  shares  account  for  only  around  2%  of  the 
total financial liabilities of businesses. Households 
hold  nearly  two  thirds  of  their  financial  assets  as 
cash and bank deposits, the highest ratio within the 
EU.  The  local  stock  and  bond  markets  are  small, 
especially since the 2001 crash and the more recent 
2013 
discouraged 
instruments.  In 
investment 
the  poor  protection  of  minority 
addition, 
shareholders  and 
insolvency 
ineffective 
procedures  deter  capital  market  development.  At 
the same time, the major banks aim to expand their 
product  portfolios  by  selling  investment  and  life 
insurance  products.  The  Securities  and  Exchange 
Commission  is  making  efforts  to  develop  the 
alternative investment fund industry, following the 
example  of  Luxembourg  and  Ireland.  Although 
these  funds  currently  cater  mostly  to  cross-border 
investors,  the  growing  expertise  and  activity  may 
be  drawn  upon  to  provide  wider  investment 
opportunities to domestic investors. 

in  capital  market 

the 

Access to finance 

the 

Following 

Access  to  finance  for  small  and  medium-sized 
enterprises  is  improving  but  still  challenging. 
Given the still high level of non-performing loans, 
banks’  appetite  to  lend  is  rather  low  and  bank 
credit supply is limited. Alternatives to bank loans 
and  grant  finance  are  evolving.  Regarding  the 
progress  with  the  legal  framework,  consultations 
on the set of conditions and rules under which the 
crowdfunding  service  providers  will  operate,  are 
ongoing. 
new  Alternative 
Investment Fund Manager (AIFM) Law in 2018, a 
new 
the 
legislation  has  been  submitted  for 
authorisation  and  supervision  of  fund  managers 
managing  funds  under  the  AIFM  thresholds.  The 
funding agreement for the Cyprus Energy Fund, a 
loan instrument under the European Structural and 
Investment  Funds,  was  concluded.  In  2020,  it  is 
expected  to  provide  financial  resources  to  small 
and medium-sized enterprises, households and the 
public  sector,  enabling  them  to  invest  in  energy 
efficiency  and  renewable  energy  sources.  It  has 
been decided to set up a co-investment equity fund 
with  the  aim  of  increasing  the  availability  of 
alternative  financing  sources,  particularly  for 

36 

4.2. Financial sector 

innovative  companies  and  start-ups.  The  Equity 
Fund for Cyprus will be established with an initial 
public investment of approximately €20 million, in 
combination with additional private funds.  

entities  reduces 
the 
corporate  sector,  although  it  remains  well  above 
100% of GDP. (28) 

the  over-indebtedness 

in 

Graph 4.2.1:  Private debt, percentage of GDP 

The capacity building for the supply side of the 
business  ecosystem  is  lagging  behind.  While 
small and medium-sized enterprises have access to 
support  structures  (such  as  the  Point  of  Single 
Contact,  a  one-stop-shop,  Enterprise  Europe 
Network,  the  Advice  for  Small  Business  facility), 
local  private  equity  finance  sources,  like  the 
assess 
business 
investments particularly into innovative SMEs and 
start-ups. 

resources 

angels, 

lack 

to 

4.2.3.  PRIVATE INDEBTEDNESS* 

Private  debt  continues  on  a  downward  path, 
remaining nevertheless elevated – close to 260% 
of  GDP  in  September  2019  (195%  excluding 
special purpose entities). The private debt-to-GDP 
ratio  is  declining,  with  both  households  and  non-
financial  corporations  undergoing  deleveraging 
(see  Graph  4.2.1). (25)  Despite  the  reductions,  the 
large debt overhang remains a vulnerability in both 
sectors. At the end of 2018, household debt fell to 
97.0% of GDP, thus  approaching the fundamental 
benchmark  of  93%. (26)  Nevertheless,  it  remains 
well  above  the  prudential  benchmark  estimated  at 
40%  of  GDP. (27)  Meanwhile,  the  consolidated 
debt  of  the  corporate  sector  stood  at  185.6%  of 
GDP,  exceeding  the  fundamental  and  prudential 
thresholds of 157% and 69% of GDP, respectively. 
In  Cyprus,  the  debt-to-GDP  ratio  of  non-financial 
corporations is heavily influenced by non-financial 
special  purpose  entities,  which  mainly  have 
foreign  debt.  Thus,  excluding  the  special  purpose 

Source: Eurostat 

Graph 4.2.2:  Private debt stocks 

Source: Eurostat, Central Bank of Cyprus 

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

thus 
sector, 
corporations. 
(26)  Fundamental-based 

are 

derived 

from 
benchmarks 
regressions  capturing  the  main  determinants  of  credit 
growth and take into account a given initial stock of debt. 
In  the  case  of  Cyprus,  the  initial  household  debt  stock 
corresponding  to  household  debt  in  1995  was  already 
relatively high, much above the prudential benchmark. This 
possibly  introduced  an  upward  bias  of  the  fundamental 
benchmark. 

Debt  reduction  has  been  supported  by  both 
nominal  GDP  growth  and  nominal  debt  stock 
declines.  The  stocks  of  debt  for  both  households 
and  non-financial 
slowly 
decreasing  (see  Graph  4.2.2).  At  the  end  of  2018, 
the corporate  sector excluding the special purpose 
entities  was  indebted  with  approximately  €24.8 
billion (i.e. 117.3% of GDP),  whereas households 
held  a  debt  stock  of  approximately  €20.5  billion 

corporations 

are 

(27)  Prudential  thresholds  represent  the  debt  threshold  beyond 
which the probability of a banking crisis is relatively high, 
based  on  a  signalling  approach.  Methodologies  are 
described in European Commission, 2017a and updates to 
the  methodology  have  been  subsequently  proposed  in 
European Commission, 2018b. 

(28)  This is still significantly above the prudential threshold of 
69%  and  is  also  above  the  fundamentals-based  threshold 
for  non-financial  corporations  debt  excluding  special 
purpose entities (82%), where the initial stock of debt has 
been corrected for the presence of special purpose entities.  

37 

0501001502002503003504000506070809101112131415161718Non-financial corporations, debt-to-GDP ratioHousehold, debt-to-GDP ratioPrivate sector, debt-to-GDP ratioSpecial-purpose entities, debt-to-GDP ratio% of GDP0510152025300809101112131415161718ThousandsNon-financial corporations debt stock excluding SPEsHousehold debt stockSpecial purpose entities debt stockbn EUR                                                           
   
 
   
                                                           
4.2. Financial sector 

sales, the private debt declined more gradually. In 
the  future,  continued  work-out  of  NPLs  will  be 
important  for  reducing  private  indebtedness.  The 
ESTIA scheme could potentially have a significant 
impact  on  reducing  private  debt.  However,  the 
scheme’s take-up was lower than expected. In this 
context, it is crucial to maintain in place the 2018-
strengthened  foreclosure  framework,  particularly 
for addressing strategic defaulters, as banks will be 
able  to  act  more  forcefully  against  defaulting 
borrowers  who  did  not  apply 
for  ESTIA. 
Borrowers’  participation  in  insolvency  processes 
should  also  facilitate  debt-workouts,  but  so  far, 
progress  with  insolvency  proceedings  has  been 
limited (see also Section 4.2.1). 

Graph 4.2.4:  Private debt stock and NPLs stock 

(97.0%  of  GDP).  Overall,  in  2018  deleveraging 
was  driven  by  corporations  excluding  special 
purpose  entities,  as  their  debt  volumes  decreased 
quicker (-3.8%) than those of households (-2.6%). 
Conversely,  the  special  purpose  entities  saw  their 
stocks slightly increasing (€14.2 billion at the end 
of  2018).  Nevertheless, 
the  special  purpose 
entities’  debt  as  a  percentage  of  GDP  has  been 
stable (see Graph 4.2.1). 

Cash repayments, write-offs of non-performing 
loans  and  debt-to-asset  swaps  drive  down  the 
stocks  of  private  debt.  Changes  in  the  private 
debt-to-GDP  ratio  and  the  breakdown  of  the  key 
factors  driving  its  decline  are  illustrated  in  Graph 
4.2.3. (29)  Despite  the  positive  credit  flows,  the 
(unconsolidated)  private  debt  ratio  continued  to 
decline  in  2019,  reflecting  strong  GDP  growth 
(grey  bars)  as  well  as  cash  repayments,  write-offs 
of  non-performing  loans,  debt-to-asset  swaps  and 
other valuation changes – as indicated by the light 
blue bars in the graph. Furthermore, in the second 
quarter of 2019, deleveraging picked-up compared 
to  the  first  quarter  due  to  increases  in  write-offs 
and  cash  repayments  of  non-performing  loans  – 
mainly related to non-financial corporations. 

Graph 4.2.3:  Changes in private debt-to-GDP ratio and 

breakdown 

Source: Central Bank of Cyprus, Eurostat 

Inefficiencies  in  the  system  for  issuing  and 
transferring  title  deeds  (30)  remain  hindering 
liquidation  of  collaterals.  A  significant 
the 
number  of  buyers,  even  those  who  have  paid  the 
full  price  for  a  property,  still  do  not  have  a  title 
deed.  A  collateral  without  a  title  deed  cannot  be 
liquidated  or  foreclosed,  and  even  deters  banks 
from  using 
thus 
significantly  preventing  faster  debt  reduction.  A 
new  system  of  property  transactions  increasing 
transparency  and  due  diligence  of  transactions  is 
under discussion (European Commission, 2019e).   

it  for  debt-to-asset  swaps, 

Debt  reduction  may  accelerate  in  the  medium 
term in view of the large NPL portfolios held by 
are 
credit-acquiring 

companies,  which 

(30)  The legal document constituting the evidence of a right to 

the ownership of property. 

Source: Eurostat 

to  be 
Reducing  private  debt  continues 
challenging as the level of non-performing loans 
remains high. The debt overhang is coupled with 
large stocks of bad loans (see Graph 4.2.4). While 
the  non-performing  loans  (NPLs)  in  the  banking 
sector  decreased  sharply  in  2018  though  loans 

(29)  The graph relies on unconsolidated debt series. 

38 

-50-40-30-20-10010203040Other changesInflationReal growthCredit flowPrivate sector debt-to-GDP ratio, changey-o-y change0102030405060NPL stock in the banking sector (households & non-financial corporations)Debt stock of households and non-financialcorporations excluding SPEsbn EUR   
                                                           
  
                                                           
4.2. Financial sector 

specialised  in  managing  and  maximising  loan 
recoveries.  The  market  for  credit  acquiring 
companies  was  established  in  Cyprus  in  2018,  in 
connection  with  the  development  of  a  secondary 
market  for  loans.  The  transfer  of  bad  loans  from 
Cyprus Cooperative Bank to the state-owned asset 
management company (which is set-up as a credit 
acquiring  company)  together  with  the  Bank  of 
Cyprus’s  sale  of 
the  Helix  NPL  portfolio, 
constitute the largest transactions, which increased 
the credit acquiring companies’ holdings of loans.  
As  a  result,  both  households  and  non-financial 
corporations  owe  part  of  their  debt  to  credit-
acquiring companies instead of banks.  Graph 4.2.5 
illustrates this shift in the structure of liabilities for 
households  –  where  the  grey  bars  incorporate  the 
debt  owed  to  credit  acquiring  companies.  These 
changes  may  speed  up  debt  reduction  for  both 
households and non-financial corporations.  

Graph 4.2.5:  Breakdown of households indebtedness 

imports. 

Imports  of 

and secondary income balances are also in deficit, 
albeit  at  a  lesser  extent  (see  Graph  4.2.6).  As  a 
small  open  economy,  Cyprus  is  highly  dependent 
consumer  goods 
on 
predominate,  followed  by  intermediate  goods, 
notably  for  manufacturing  and  construction.  In 
addition, Cyprus relies on imports of fuels, and has 
a  93.6%  energy  import  dependency  compared  to 
55.1%  for  the  EU  average  in  2017  (SDG  7). 
Exports of services  notably tourism, transport and 
financial  services  have  the  highest  proportion, 
around 60-65%, of total exports. While exports of 
goods are only 20% of total exports. Even though 
the  presence  of  non-financial 
(ship-owning) 
special purpose entities (SPEs) distorts export and 
import  statistics  through  the  registration  and  de-
registration  of  ships,  its  impact  on  the  current 
account balance is limited in general. (31) The most 
recent widening of the current account deficit is to 
some  extent  associated  with  a  reduction  in  the 
services  surplus,  linked  to  the  slowdown  in 
tourism. At the same time, goods imports continue 
to be robust, prompted by investment, particularly 
construction investment (see Section 1). 

Graph 4.2.6:  Current account balance components 

Source: European Commission 

4.2.4.  SAVINGS AND INVESTMENT IMBALANCE* 

The  current  account  balance  is  expected  to 
deteriorate  significantly,  also 
in  cyclically 
adjusted  terms.  In  the  third  quarter  of  2019,  the 
current  account  deficit  is  estimated  to  reach  7.4% 
of  GDP  (around  4%  cyclically  adjusted).  It  is 
useful  to  keep  in  mind  that  the  current  account 
balance  in  Cyprus  has  never  been  in  a  positive 
territory at least for the last 20 years. The deficit is 
mainly  attributable  to  a  structural  negative  trade 
balance,  which  is  not  fully  compensated  by  the 
surplus  in  the  services  balance.  Primary  income 

Source: Eurostat, European Commission  

international 

The  net 
investment  position 
(NIIP)  is  also  improving  on  the  back  of  strong 
nominal GDP growth and valuation effects, but 
net  external  debt  remains  large.  Despite  the 
negative contribution of current account dynamics 
to  the  adjustment,  nominal  GDP  growth  and 

(31)  In  years  where  net  registrations  of  ships  (imports-exports) 
cover the depreciation in the shipping stock there would be 
no impact on the current account.  

39 

020406080100120140Foreign liabilitiesOther domestic debt liabilitiesLoans by OFIsShort-term bank loansLong-term bank loansHouseholds, debt-to-GDP% of GDP-40-20020400809101112131415161718Capital accountSecondary income balancePrimary income balanceTrade balance - servicesTrade balance - goodsTrade balanceCurrent account balance (CA)% of GDP   
    
                                                           
4.2. Financial sector 

over the next 10 years a current account balance of 
about  -2%  and  a  positive  trade  balance  of  about 
2%  would  be  required.  Given  that  only  the 
‘defaultable’  part  of  the  NIIP,  which,  excluding 
non-financial SPEs, amounted to around -130% of 
GDP  in  the  third  quarter  of  2019,  as  explained 
above, a current account surplus close to 3% and a 
trade surplus close to 9% would be needed in order 
to  generate  enough  savings  to  reduce  it  to  a 
prudential value of around -56% of GDP.  

Graph 4.2.7:  Net international investment position 

Source: Eurostat, European Commission 

The large current account deficit is mirrored in 
savings  falling  short  of  domestic  investment, 
particularly 
in  the  household  sector.  The 
household  sector  has  consistently  been  a  sizeable 
contributor to the economy’s  negative net lending 
position (Graph 4.2.8). Households in Cyprus have 
been  net  borrowers  since  at  least  as  far  back  as 
2000.  While  the  households’  savings-investment 
gap  has  narrowed  since  the  crisis,  it  remains 
negative  and  is  widening  again.  The  government 
sector was running large deficits during  the global 
financial crisis and in its aftermath, but has turned 
net lender for most of the period since 2016 (with 
the  exception  of  2018  when  it  had  to  intervene 
again  in  support  of  the  banking  sector).  Both 
financial  and  non-financial  corporations,  have 
fluctuated  between  surplus  and  deficit  over  the 
past three years. 

the  Macroeconomic 

valuation  changes  helped  to  reduce  the  NIIP 
further in the third quarter 2019 to -115%, from its 
through  of  -164%  in  2014.  As  a  reference,  this  is 
Imbalance 
well  beyond 
Procedure  scoreboard  threshold  of  -35%,  and  the 
country  specific  fundamental  and  prudential  NIIP 
benchmarks  of  -46%  and  -56%,  respectively, 
estimated  for  Cyprus. (32)  Excluding  net  foreign 
direct  investments  (FDI)  and  net  portfolio  equity 
positions,  which  are  at  times  subject  to  large 
valuation effects, the ‘defaultable’ part of the NIIP 
amounted  to  around  -160%  of  GDP  in  the  third 
quarter  of  2019,  reflecting  still  very  large  net 
external  debt  liabilities  (see  Graph  4.2.7).  A 
significant  part  of  this  net  external  debt  (about 
30%)  corresponds 
liabilities 
(excluding  FDI  and  equity)  of  ship-owning  non-
financial special purpose entities. Excluding these, 
the  ‘defaultable’  part  of  the  NIIP  still  amounts  to 
around  -130%  of  GDP.  Even  though  there  is  a 
relatively  large  positive  equity  and  FDI  position 
covering part of these external debt liabilities, the 
former could be subject to large negative valuation 
effects in the case of a global downturn. 

to  external  debt 

current 

account 

The current account deficit is well below what is 
warranted  both  in  terms  of  fundamentals  and 
to 
prudential  considerations.  According 
the 
‘norm’ 
Commission’s 
estimates (33),  fundamental  drivers,  mostly  a  low 
share  of  manufacturing,  explain  only  about  2 
percentage  points  of  the  deficit.  Moreover,  the 
current  account  balance  is  below  what  is  required 
to  ensure  no  further  deterioration  of  the  negative 
net 
(NIIP)  position. 
investment 
According  to  data  from  the  Central  Bank  of 
Cyprus,  the  NIIP  of  non-financial  special  purpose 
entities (SPEs) (including debt, equity and foreign 
direct  investments  net  positions)  stood  at  about  -
80%  of  GDP  in  the  third  quarter  of  2019. 
Excluding this, the NIIP was around -35% of GDP 
in the third quarter of 2019. To maintain this level 

international 

(32)  The  country-specific  prudential  benchmark  denotes  the 
NIIP level beyond which the probability of an international 
economic  and  financial  crisis  becomes  higher.  The  NIIP 
level  explained  by  fundamentals  represents  the  NIIP  that 
would result if a country had run its current account in line 
with  fundamentals  since  1995.  For  details  see  Turrini  and 
Zeugner, 2019. 

(33)  This  benchmark  is  derived  from  regressions  representing 
the  main  fundamental  drivers  of  the  saving-investment 
balance  (e.g.  demographics,  resources),  as  well  as  policy 
factors and global financial conditions, see Coutinho et al., 
2018. 

40 

-400-2000200400080910111213141516171819*Reserve assetsNet portfolio investment, equity and investment fund shares/unitsNet portfolio investment, debt securitiesOther investment (net)Net direct investmentNet financial derivatives and employee stock optionsNet Int'l investment position (NIIP)NENDI (NIIP excluding non-defaultable instruments)% of GDP                                                           
    
4.2. Financial sector 

Graph 4.2.8:  Net Lending/ Borrowing by Sector 

Source: Eurostat, European Commission 

of 

disposable 

Household  savings  are  recovering,  but  remain 
low.  Following  a  significant  fall  in  households’ 
savings during the banking crisis, the savings rate 
has started to recover since 2016 supported by the 
growth 
income.  However, 
historically,  the  savings  rate  in  Cyprus  is  among 
the  lowest  in  the  EU,  well  below  the  euro  area 
average (see Graph 4.2.9). Households continue to 
borrow to finance investment, particularly housing 
investment,  even though the  flow of new credit is 
still lower than before the crisis (see Section 1). 

and 

lower 

sectors 

export-oriented 
import 
dependence  is  essential  to  ensure  that  levels  of 
external  debt  remain  sustainable  in  the  future. 
Stagnant  productivity,  moderate  GDP  and  export 
growth and/or an increasing  domestic demand, all 
else unchanged, could undermine the sustainability 
of the external debt levels in the medium term (see 
Graph 4.2.10). 

Graph 4.2.10: Demand, output and trade balance 

Source: Eurostat 

Graph 4.2.9:  Household savings rate 

(1)Available data for the 3 first quarters of 2019 
Source: Eurostat 

Without  rebalancing,  the  trade  deficit  is  likely 
to continue to widen further. A more permanent 
shift  in  the  composition  of  investment  towards 

41 

-35-30-25-20-15-10-50510150001020304050607080910111213141516171819*CorporationsGeneral governmentHouseholds and NPISHTotal economy% of GDP-6-4-202468101214-6-1491404050607080910111213141516171819y-o-y% changeGross household saving rate Euro Area 19 (lhs)Gross household saving rate Cyprus (lhs)Real disposalble income (y-o-y%) (rhs)% 151617181920212223242510111213141516171819*20*21*Trade balanceAggregate DemandOutput (GDP)Constant 2015 EUR mn    
  
    
4.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

4.3.1.  LABOUR MARKET 

but 

conditions 

challenges 

labour  market 

are 
Overall, 
remain. 
improving 
Unemployment fell sharply compared to the crisis 
years (7.5% in 2019 compared to 16.1% at its peak 
in 2014).  In the medium term, Cyprus is expected 
to  achieve  almost  full  employment  conditions. 
However,  with 
labour  market 
the  favourable 
environment,  new  challenges  are  emerging  for 
upskilling  and  re-skilling  as  some  sectors  have 
started  to  face  labour  shortages.  Furthermore  and 
despite  progress,  youth  unemployment  (17.2%  in 
the third quarter of 2019) and the number of young 
people  not  in  employment  education  or  training 
(13.2%  in  the  third  quarter  of  2019)  remain  at 
considerably  high  levels  compared  to  the  EU 
average  (14.4%  and  10%,  respectively).  This  is 
probably  due  to  the  lack  of  job  opportunities  for 
tertiary  graduates,  low  enrolment  in  vocational 
education and training and difficulties in school-to-
work 
could  be 
factor 
transition.  Another 
undeclared work (see also Box 4.3.1). 

Outreach  to  young  people  not  in  employment, 
education  or  training  (NEETs)  and  other 
vulnerable  groups  continues  to  be  one  of  the 
key  issues.    Recently,  Cyprus  has  strengthened 
outreach  activities  by  mapping  and  profiling  the 
population  of  NEETs  twice  a  year  and  building 
partnerships  with  local  actors  as  part  of  an  action 
plan.  The  plan  was  set  up  in  April  2019  and  is 
currently  being  implemented,  but  its  results  are 
still to be evaluated. Efforts are also being made to 
promote 
the  public 
employment  services,  the  counselling  and  career 
education  services  and  other  providers  of  Youth 
targeting  unregistered 
Guarantee 
youth through regional partnerships and informing 
schools 
training 
employment 
opportunities. 

collaboration  between 

interventions, 

about 

and 

Public  Employment  Services’  operations  have 
been temporarily enhanced but their long-term 
capacity  is  at  risk.  The  hiring  of  30  additional 
counsellors  and  the  restructuring  of  the  Services’ 
procedures  have  improved  the  quality  of  tailor-
made services and individualised counselling with 
encouraging  monitoring  results.  (34)  However,  the 
support provided to the registered unemployed still 

(34)  1.420  persons  under  29  years  old  have  been  served  since 
September 2018 and almost 500 have been placed in a job. 

does not include systematic provision of individual 
action  plans  and  the  coordination  with  other 
services  is  weak.  Furthermore,  as  the  counsellors 
are only on short-term contracts, the sustainability 
of the enhanced services is at risk. The preparation 
of a strategic document and the  full review of the 
existing  manual  of  the  Services’  operations  are 
expected to be completed by early 2020. 

Active  Labour  Market  Policies  and  targeted 
schemes  for  vulnerable  groups  remain  below 
the  EU  average.  Cyprus  has  increased  its  budget 
allocation  by  26.4%  in  2019  compared  to  2018, 
following  the  needs  arising  from  the  current 
increasing  labour  market  demand.  From  2015-
2019, various training schemes were implemented, 
financed by both national and EU funds, aiming to 
help  around  48,000  vulnerable  persons  into  work 
or  train,  notably  youth,  guaranteed  minimum 
income  recipients,  and  people  with  disabilities. 
Cyprus  has  also  recently  introduced  a  monitoring 
these  schemes. 
and  evaluation 
However, 
the 
and 
the 
comprehensive  analysis  are  not  yet  available  to 
inform  better  decision  on  shifting  investments  to 
areas  where  employment  activation 
is  most 
successful. 

tool 
evaluation 

for  all 

results 

Permanent employment is growing strongly, the 
fastest  in  the  EU,  while  in-work  poverty  is 
declining. In 2019 (average Q1-Q3) an increasing 
trend  was  observed  in  both  the  number  of 
employees  with  permanent  contracts  (increase  by 
11,600,  4.0%)  and  the  number  of  self-employed 
(increase  by  2,900,  6.3%).  However,  self-
employed  have  limited  social  protection  as  they 
continue  not  to  have  access  to  unemployment 
injuries 
benefits,  accident  and  occupational 
schemes.  The  number  of  employees  with 
temporary contracts decreased by 800 (1.7%) (see 
graph 4.3.1). Involuntary part-time work as a share 
of employment decreased in 2018 to 63.9%, but is 
still  among  the  highest  in  the  EU.  At  the  same 
time,  the  in-work-poverty  rate  further  declined  to 
7.4% in 2018, lower than the EU average (9.5%), 
and it is also well below the EU average for single 
parents  (CY  7.1%  vs  EU  23.6%)  and  for  young 
people  (CY  6.7%  vs.  EU  12.3%).  However,  it 
remains  above  EU  average 
temporary 
employees  (CY  17.6%  vs  EU  16.2%)  while  the 
rate  increased  for  part-time  employees  (CY  16% 
vs EU 15.7%).  

for 

42 

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

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

The  Social  Scoreboard  supporting  the  European  Pillar  of  Social  Rights  points  to  a  few  employment 
and social challenges in Cyprus. In 2019 Q3, the long-term unemployment rates dropped to 2.2% and the 
employment rate increased to 75.5%. However, the real gross disposable household per capita income is still 
below the 2008 level and was still about 15% lower than the EU average in 2018 (at 90 against 106 for the 
EU,  current  prices,  million  euro).  The  gender  gap  in 
inactivity due to caring responsibilities and the gender 
pay  gap  are  high,  placing  Cyprus  quite  low  on  the 
Gender Equality Index. The share of people at risk of 
poverty or social exclusion is at the EU average. The 
early school-leaving rate remains rather stable (7.8%), 
whilst  further progress could be made  with regard to 
individuals’ 
level  of  digital  skills,  as  well  as 
upskilling  and  reskilling  of  the  population.  On  the 
positive  side,  Cyprus  performs  better  than  the  EU 
average in terms of income inequality (at 4.3 against 
5.2  for  the  EU),  as  measured  by  the  income  quintile 
share  ratio  (S80/S20).  Furthermore,  the  guaranteed 
minimum  income  scheme  (GMI)  has  had  a  positive 
impact on the conditions of vulnerable groups. 

Although  decreasing,  the  share  of  young  people 
not in employment, education or training (NEETs) 
is  still  a  concern.  Despite  positive  labour  market 
the  rate  of  youth  unemployment 
developments, 
(17.2% in 2019 Q3) and NEETs (13.2% in 2019 Q3) 
remain  at  considerably  high  levels  compared  to  the 
EU  average.  There  has  been  some  improvement  in 
to  further 
reinforcing  youth  outreach  measures, 
strengthen  activation  and  increase  the  potential  for 
sustainable  growth.  On  average, 
the  estimated 
proportion of NEETs under 25 registered in the Youth 
Guarantee  was  23%  in  2018  and  34%  of  those 
registered had been waiting for an offer for more than 
4  months.  This 
improvement 
compared  to  2017  (when  these  statistics  were  19% 

is  a  significant 

and 44%, respectively), but more efforts are still needed.  

Cyprus strives to ensure fair labour market working conditions, through its newly established unified 
inspection service.  The reform of the labour inspectorate is coupled with the implementation of an action 
plan that aims at improving the effectiveness and efficiency of the inspectorate. The objective is to transform 
undeclared  work  into  declared  formal  work,  and  include  preventive  measures  rather  than  only  focus  on 
deterring measures with sanctions and suppression. The success of this reform is essential as closely linked 
with other ongoing reforms such as the provision of a guaranteed minimum income and the introduction of a 
statutory minimum wage.  

43 

 
 
 
 
4.3. Labour market, education and social policies 

growth  per  employee  was  1.0%  with  the  highest 
rates  recorded  in  the  construction  sector  (1.3%) 
followed  by  the  services  sectors  (1.1%)  while  the 
industry sector lagged behind with 0.7%. In 2018, 
the  public  sector  wages  per  employee  grew  faster 
(1.9%) than wages in the private sector (0.2%) (see 
section 4.1.2 for a description of the growth of the 
overall  public  sector  wage  bill).  This  reverses  the 
trend  observed  during  2014-2017,  when  public 
sector wages lagged behind private sector wages (-
1.7% 
(European 
- 0.7%, 
Commission, 2019f).  

respectively) 

vs 

in 

The  government  is  planning  to  introduce  a 
statutory  minimum  wage,  once  the  economy 
reaches  full  employment.  Cyprus  has  committed 
to  introduce  a  statutory  minimum  wage  once  the 
unemployment  rate  falls  below  5%.  Currently, 
minimum  wages  apply  only  in  selected  sectors. 
Minimum  wages  for  nine  professions  with  low 
union  representation  are  fixed  each  year  by  a 
governmental decree. A separate wage grid applies 
to  minimum  wage  workers  who  completed  six 
months’  experience 
job.  In 
addition,  the  newly  signed  sectoral  collective 
agreement  in  the  hotel  industry,  provides  for  new 
wage  minimum  which  was  legislated  through  a 
Minimum  Wage  Order  issued  by  the  Minister  of 
Labour,  Welfare  and  Social  Insurance.  The 
legislated  minimum  varies  within 
the  13 
occupations (for 6 occupations, an increased wage 
level  is  provided  for  workers  with  experience  in 
the  construction  sector,  a 
the 
collective  agreement  was  also  reached  in  which 
elements  such  as  working  hours,  overtime, 
holidays,  contributions  to  provident  funds  and 
bonuses would be passed in legislation. 

industry).  In 

their  current 

There  is  room  for  improving  gender  equality. 
Cyprus ranks as one of the least equal countries in 
the  EU  on  the  Gender  Equality  Index  2019 (36), 
with  its  score  being  11.1  points  lower  than  the 
EU’s  average  score  (56.3  out  of  100  points).  The 

in 

labour  productivity,  prices 

calculated  as  the  wage  growth  predicted  on  the  basis  of 
changes 
the 
unemployment  rate,  and  wage  growth  consistent  with 
constant unit labour cost based real effective exchange rate 
(see  European  Commission,  2019f;  Arpaia,  A.  and  Kiss, 
A., 2015. 

and 

(36)  The  Gender  Equality  Index  is  a  tool  to  measure  the 
progress  of  gender  equality  in  the  EU,  developed  by  the 
European  Institute  for  Gender  Equality.  Available  at: 
https://eige.europa.eu/gender-equality-index/2019). 

latest 

forecast 

The  under-utilisation  of  highly  qualified 
graduates’  skills  remains  a  concern.  In  2018, 
while  the  tertiary  education  attainment  was  very 
high  (57.1%),  one  third  of  these  high-skilled 
people  were  employed  in  occupations  that  do  not 
require  tertiary  education.  However,  according  to 
the 
study  and  analysis  on 
employment  demand  of  the  Human  Resource 
Development  Authority 
(Human  Resource 
Development Authority, 2017) the  majority of the 
jobs  that  will  be  created  in  2017-2027  will  be  in 
middle  and  high-level  occupations.  The  study 
total 
shows  a  forecasted  annual 
employment demand of 3.9% and 3.5% for middle 
and 
respectively. 
Nevertheless, labour  shortages still exist.  In 2019, 
the 
employers 
construction  and  industry  sectors,  7.5%  and  3.0% 
of  the  total  respectively,  while  in  the  services 
sector the proportion was 2.3%.  Labour shortages 
were  also  reported  for  the  tourist  and  agriculture 
sectors, as well as for ICT professionals. 

labour  shortages 

occupations 

high-level 

reported 

increase 

in 

in 

Graph 4.3.1:  Temporary, part-time and self-employment 

(without employees) - proportion in 
employment 

Source: Eurostat 

lowest  growth 
In  2018, 

in 
Cyprus  has  one  of  the 
compensation  per  employee. 
the 
compensation  of  employees  in  Cyprus  grew  by 
0.5%  one  of  the  lowest  rates  in  the  EU.  This  was 
below 
economic 
fundamentals (2.9%) and marginally above the rate 
consistent  with  a  stable  evolution  of  cost 
competitiveness. (35)  At  the  same  time,  wage 

consistent  with 

rate 

the 

(35)  This  is  a  benchmark  for  wage  growth  consistent  with 
domestic  and  international  labour  market  conditions.  It  is 

44 

02468101214161800010203040506070809101112131415161718Self-employment (without employees) - totalTemporary employees 20-64Part-time employment 20-64%     
                                                           
                                                                                   
 
4.3. Labour market, education and social policies 

as  the  introduction  of  a  statutory  minimum  wage 
(Eurofound,  2019a).  In  June  2019,  the  social 
partners  have  concluded  a  Code  Preventing  and 
Dealing  with  Harassment  and  Sexual  Harassment 
at  Work.  The  social  partners  receive  EU  funds  to 
further  improve  their  capacity.  Similarly,  civil 
society organisations also have many opportunities 
for participation in policymaking and could benefit 
from further financing. 

Cyprus has taken steps to reduce the high levels 
of  undeclared  work.  Undeclared  work  reduced 
from 21% in 2012 to 12.7 % in 2019 Q3 (National 
Labour  Inspectorate  Cyprus),  improving  working 
conditions  and  access  to  social  protection  and 
security  for  workers.  However, 
the  National 
is  still  pending  for 
Labour  Inspectorate  bill 
approval  in  the  House  of  Representatives,  thus 
reducing the scope of further action on undeclared 
work.  The  amendments  include  an  increase  in 
administrative  fines, and  the  right to inspectors to 
directly  impose  administrative  fines  instead  of 
going through the current heavy procedures of the 
legal  system.  Trust  in  organisations  in  charge  of 
tackling  undeclared  work  is  rather  low  (European 
Commission,  2020b).  To  that  respect,  an  action 
plan  has  been  set  up  for  further  improving  the 
effectiveness  and  efficiency  of  the  services  (see 
Box 4.3.1).  

4.3.2.  SOCIAL POLICIES 

The social situation has been improving because 
of  positive  economic  developments  and  a  good 
social safety net. Strong economic growth and the 
introduction  of  a  guaranteed  minimum  income 
have  had  a  significant  positive  impact  on  poverty 
and  inequality  in  Cyprus  (European  Commission, 
2019h). The guaranteed minimum income scheme 
encompasses  access  to  supporting  social  services 
it  has  been  further 
when  needed.  Recently, 
improved  by  extending  eligibility  criteria  and 
increasing  allowances  for  vulnerable  groups. 
Depending  on  the  family  composition  and  the 
province  of  residence,  in  August  2019  the  rent 
allowances were increased by up to 57% compared 
to 2014. 

Despite the introduction of a general minimum 
income, social protection in general is somewhat 
underfunded  compared  to  the  EU  average. 
Government  expenditure  on  social  protection 

the 

employment  rate  for  women  reached  69.7%  in 
2019  Q3.  While  still  lower  than  that  for  men 
(81.7% in 2019 Q3), it remains higher than the EU 
average of 68.2% (2019 Q3). Female participation 
in  the  labour  market  is  relatively  high,  but  this 
participation  is  disproportionately  concentrated  in 
poorly  paid  occupations,  resulting  in  an  increased 
gender  pay  gap.  This  gap  is  lower  in  the  public 
sector  and  higher  among 
low-income 
population.  The  pension  gender  gap  for  2017  is 
also  higher  than  the  EU  average  (41.1%  vs.  EU 
35.7%).  Furthermore,  in  2018,  the  percentage  of 
inactive  female  population  (aged  20-64)  that  was 
responsibilities  was 
inactive  due 
considerably  higher,  at  58.4%, 
than  the  EU 
average  (31.7%).  In  order  to  promote  gender 
equality  and  encourage  more  women  to  work  or 
look  for  a  job,  thereby  contributing  to  advancing 
towards SDG 5, it is essential to encourage further 
female participation in the labour market, increase 
the  availability  of  affordable  and  accessible 
childcare  and  long-term  care  services,  and  foster 
voluntary  part-time  work  as  well  as  other  flexible 
working arrangements (see Section 1). 

to  caring 

The  inclusion of women in  digital jobs, careers 
and entrepreneurship is also a challenge. Cyprus 
scores 41.3 (50 in the EU) in the Women in Digital 
(European  Commission,  2019g). 
Scoreboard 
Female  ICT  specialists  represent  0.8%  of  total 
employment,  while  men  make  up  3.8%  (vs  1.4% 
respectively).  The 
and  5.7% 
female 
government  has  been 
entrepreneurship  schemes  encouraging  women 
participation 
fields  of  activity. 
Furthermore,  the  third  national  action  plan  on 
gender equality 2019-2023 aims to tackle the issue 
by  focusing  on  the  education  and  training  of 
women in ICT. 

implementing 

the  EU, 

technical 

in 

in 

Social  dialogue  has  a  long  tradition  in  Cyprus 
and  is  embedded  into  the  decision  making 
process,  especially  regarding  employment  and 
social  issues.  Collective  bargaining  takes  place  at 
sectoral and enterprise levels. Although the labour 
union  density  has  been  decreasing,  its  role  and 
contribution in maintaining a stable labour market 
environment  has  been  significant  in  the  past, 
particularly 
(European 
the 
Commission, 2019h). Social partners are involved 
and  consulted  on  ongoing  reforms,  such  as  the 
introduction  of  the  National  Health  Insurance 
System, the fight against undeclared work, as well 

during 

crisis 

45 

4.3. Labour market, education and social policies 

25.5%, unchanged in 2018 and just above the EU 
average  of  24%.  However,  there  has  been  an 
increase in the AROPE for children below the age 
of  6  (see  Graph  4.3.3).  Supporting  measures  for 
vulnerable  children  in  schools  co-financed  by  EU 
funds  have  a  positive  impact  on  combating  child 
poverty and social exclusion.   

rate 

(AROPE) 

for  people  with 
Challenges  also  persist 
at-risk-of-poverty-or-social-
disabilities.  The 
exclusion 
for  people  with 
disabilities  is  significantly  higher  than  the  EU 
average  (34.1%  vs.  28.7%  in  2018).  People  with 
disabilities  face  particularly  strong  challenges 
regarding  poverty,  educational  attainment  and 
employment. The employment rate for people with 
disabilities  is  lower  than  the  EU  average.  As  a 
response,  in  July  2019,  the  government  increased 
and expanded the mobility benefits of people with 
disabilities  by  50%.  Moreover,  the  European 
Social  Fund  is  funding  projects  that  support 
disabled  people  and  help  them  into  work  and 
training,  including  de-institutionalisation  through 
plans for setting up 10 additional social homes. 

the  age  of 

The  early  childhood  education  and  care  gap  is 
higher  for  children  under  the  age  of  three. 
While  92%  of  children  aged  four  to  six  were 
enrolled  in  early  childhood  education  and  care 
(ECEC)  in  2017  (EU  average  95.4%),  in  2018  
31.4%  of  children  under 
three 
participated,  below  the  EU  average  of  35.1%  and 
the  Barcelona  target  (33%).  Cyprus  relies  heavily 
on informal settings or private  institutions. Out of 
349 day care centres for preschool age children in 
2019, only  4  were  public,  while  279  were  private 
and  66  were  operated  by  non-governmental 
organisations/local  authorities,  the  majority  of 
which is being subsidised via a State Aid Scheme.  
In addition, childcare services are also provided by 
around 60 private Child Minders. Free childcare is 
to  guaranteed  minimum 
mainly 
income  recipients,  who  also  receive  subsidisation 
for private childcare. Depending on the age of the 
child,  the  type  and  provider  of  services,  monthly 
to  €400,  creating  a 
from  €70 
fees 
disproportionate  burden 
families.  Social 
for 
protection 
families  and  children,  as  a 
for 
proportion of GDP, is comparatively low at 1.3% v 
EU 2.5% in 2016. This low investment is linked to 
weak  support  for  disadvantaged  children  in  early 
(ECEC)  and 
childhood  education  and  care 

limited  only 

range 

exclusion) 

(13.1%  in  2018)  remains  lower  than  the  EU 
average  (18.8%  in  2017).  Most  of  the  social 
protection expenditure in Cyprus goes to pensions 
and health care,  with other  functions of the  social 
protection system (family benefits, unemployment 
benefits,  disability  benefits,  housing  benefits  and 
social 
less 
resources.  The  number  of  general  minimum 
income  beneficiaries has fallen considerably  since 
2015  on  the  back  of  strong  employment  growth. 
Cyprus  is  also  in  the  process  of  upgrading  its 
occupational  pension  framework  considering  the 
supplementary 
mandatory 
of 
inclusion 
occupational pension schemes. 

relatively 

receiving 

Poverty indicators have been improving but the 
depth  of  poverty  has  increased.  The  proportion 
of  people  at  risk  of  poverty  or  social  exclusion 
(AROPE) and of material and social deprivation  is 
declining    but  still  above  the  EU  average  (21.7% 
and 12.9% in 2018)  (see Graph 4.3.2) whereas the 
at-risk of poverty (AROP) rate  was 15.4%,  below 
the  EU  average  of  17.1%  (2018).  The  depth  of 
poverty increased in 2018 (from 15.1% to 18.6%) 
with an increasing number of poor people furthest 
from  the  poverty  threshold.  Migrants  are  more 
affected as reflected by the proportion of people at 
risk of poverty or social exclusion of non-EU-born 
(CY 40% vs. EU 37.2% in 2018). 

Graph 4.3.2:  The proportion of people at risk of poverty and 

social exclusion (2005-2018) 

Source: Eurostat 

to  be  disproportionally 
Children  continue 
affected  by  a  risk  of  poverty.  The  proportion  of 
children below the age of 18 at risk of poverty or 
social exclusion (AROPE) remained  unchanged at 

46 

051015202530350506070809101112131415161718At-risk-of-poverty-or-social-exclusion rateAt-risk-of-poverty rateSevere material deprivationPeople living in low work intensity households% of population     
4.3. Labour market, education and social policies 

highest  asylum  application  by  inhabitant  ratio 
across EU Member States since 2017 (5,235 first-
time applicants per million population in 2017 and 
8,805  in  2018).  In  the  first  eight  months  of  2019, 
around  8,400  first-time  asylum  applications  were 
registered,  more  than  double  than  in  the  same 
period  in  2018.  Subsequently,  the  number  of 
pending  asylum  applications  reached  16,700  in 
August  2019,  compared  to  7,700  in  August  2018. 
A  national  strategy  for  the  integration  of  non-EU 
country  nationals, 
including  beneficiaries  of 
international protection, is under preparation.  

is 

The  cost  of  housing 
increasing  with 
particularly  negative  consequences  for  young 
people. Rents and purchasing prices of residences, 
in  particular  new  properties,  are  on  the  rise  (see 
Section  1).  Although  the  housing  cost  overburden 
rate for the poor is well below the EU average (CY 
10.3%  vs  EU  37.9%  in  2017),  the  severe  housing 
deprivation  among  young  people  is  more  than 
double  the  rate  of  the  general  population  (Grow 
Digital  Cyprus,  2019).  In  response,  the  rent 
allowances 
income 
recipients  were  increased  as  well  as  for  the 
recipients  of 
rent  assistance,  while  housing 
schemes  that  support  low-  and  middle-income 
households  are  being  implemented.    In  addition, 
households  that  are  debt-overburdened  with  debt 
and  cannot  repay  their  housing  loans  could  be 
benefitting from the “ESTIA” scheme (see Section 
4.2.3). 

for  guaranteed  minimum 

4.3.3.  EDUCATION AND SKILLS  

social 

targets  and 

Cyprus’  performance  on  key  Europe  2020 
scoreboard 
education 
indicators is mixed and basic skills achievement 
remains a concern.  In 2018, the school drop-out 
rate (‘early school leaving’) declined, with 7.8% of 
18-24  year-olds  leaving  school  early  compared  to 
8.5% in 2017, improving its position in the Social 
Scoreboard.  Tertiary  educational  attainment  has 
risen  further.  At  57.1%,  Cyprus  has  the  second-
highest  tertiary  educational  attainment  rate  in  the 
EU  (the  average  is  40.7%).  Underachievement  in 
basic skills among 15 year old remains a concern, 
as  also  flagged  by  the  SDG  4.  Modernising  the 
education  system  is  therefore  vital  to  improving 
educational  outcomes.  However,  education  and 
training reforms are only progressing slowly. This 
makes  it  difficult  to  address  challenges  including 

undermines potential long-term benefits of quality 
ECEC for inclusive educational outcomes. 

returning 

increased 

inequality 

significantly 
Income 
during the crisis years but returned to pre-crisis 
levels  in  2018.  In  particular,  the  Gini  index 
increased  from  29.5  in  2009  to  34.8  in  2014. 
Nevertheless,  the  Gini  index  (37)  recorded  an 
impressive  reduction  in  inequality  between  2015 
and  2017  (falling  from  33.6  in  2015  to  29.1  in 
2018), 
level. 
Furthermore, while in 2017 the disposable income 
of the richest 20% of the population was 4.6 times 
that of the poorest 20% (vs. 5.1% in the EU), this 
ratio  further  dropped  to  4.3  in  2018,  implying  a 
reduction  in  inequality.  However,  in  2018,  the 
annual  real  gross  disposable  household  income 
(GDHI) per head remains significantly lower  than 
the  EU  average  (90  vs.  106)  and  below  the  2008 
levels. (38) 

pre-crisis 

its 

to 

Graph 4.3.3:  Risk of poverty and social exclusion  for 

children below the age of six (%) (2010-2018) 

Source: Eurostat 

The number of asylum applications is growing, 
thus  requiring  a  national  integration  strategy. 
Cyprus  has  become  one  of  the  EU  countries  that 
receives the  most asylum  seekers,  with one  of the 

(37)  The  Gini  coefficient  is  a  summary  statistic  of  inequality. 
The  closer  the  Gini  is  to  1,  the  more  unequal  is  the 
distribution of income. If there is no inequality in a society, 
the indicator is equal to 0. If all national income is earned 
by one person alone, the Gini coefficient is equal to 1. 
(38)  The values are offered as an index calculated in relation to 
the European Union (EU28) average set to equal 100. If the 
index of a country is higher than 100, this country's level of 
adjusted gross disposable income of households per person 
is higher than the EU average and vice versa. 

47 

05101520253035101112131415161718Cyprus 0-6EU 0-6 years   
                                                           
4.3. Labour market, education and social policies 

between 

disadvantaged 

highest  in  the  EU  (9.3%).  Similarly,  the  reduced 
performance  gap  between  pupils  with  a  migrant 
background  and  those  without  is  a  result  of  the 
steeper  rise  in  underachievers  among  the  latter. 
Differences 
and 
advantaged  schools  in  average  reading  score  are 
high, equivalent to two to three years of schooling, 
and  students  at  private  schools  outperform  their 
peers  at  public  schools  by  more  than  one  year  of 
schooling.      Given  the  low  general  performance 
level,  sustained  efforts  to  deliver  educational 
reforms  that  raise  educational  quality  across  the 
board are therefore crucial. A comprehensive skills 
strategy  as  well  as  improvements  in  teacher 
evaluation  and  training  can  help  tackle  these 
challenges. 

Inclusive  education  has  been  strengthened. 
Remedial measures, including supportive teaching 
and  psychosocial  support,  to  improve  equality  in 
education  are  provided  through  the  ESF-funded 
DRASE  programme  and  were  expanded  in  the 
2019-2020  school  year  to  102  schools,  covering 
15.6%  of  the  student  population.  New  2019  draft 
legislation  on  special  needs  education  aims  to 
make education more inclusive. In 2018-19, 8,534 
children  (16%  of  all  children)  followed  all-day 
programmes,  which  exist  at  143  primary  schools 
(43%)  and  57  kindergartens  (21%).  To  facilitate 
the  integration  of  newly  arrived  migrants  into 
schools,  Cyprus  has  launched  several  measures  to 
improve 
initial  assessment,  networking  and 
support  for  teachers  and  schools  and  Greek-
education. 
language 
in 
However,  no 
for 
providing  post-secondary  education  for  young 
migrant  adults;  even  though  the  proportion  of 
young people (aged 18-34) among recently arrived 
asylum seekers is especially high at 62% (2018). 

integration  policy  exists 

provision 

primary 

Schools  focus  on  competences  for  sustainable 
development is being developed. At pre-primary, 
primary  and  secondary  level  schools  integrate 
environmental  and  social  topics  for  sustainable 
development.  Environmental  programmes  include 
topics on global warming, climate change, energy, 
urban development, and means of transport. Since 
2007, 
for 
Environmental  Education 
is  monitored  and 
upgraded on annual basis. 

the  National 

Strategic 

Plan 

Employment  prospects 
educated  graduates  have 

for  recent 

tertiary 
improved  but 

poor  educational  outcomes,  low  participation  in 
vocational  education  and 
training  and  adult 
learning,  as  well  as  lacking  digital  skills.  Labour 
market  needs  and  opportunities,  including  the 
greening  of  the  economy,  require  stronger  efforts 
in upskilling and reskilling.  

There  was  slow  progress  on  the  2019  proposal 
for  a  unified  student  assessment  system.  The 
new  system  provides  for  modern  pedagogic 
assessment  methods,  which  aim  at  improving 
pupils’  educational  outcomes.  After  stakeholder 
discussions,  it  has  been  implemented  in  primary 
education  as  of  September  2019  while  resistance 
from  teacher  unions  and  students  has  delayed 
implementation 
education. 
Consultation  on  the  new  proposal  for  teacher 
evaluation  ended  in  December  2019.  A  second 
round  of  competitive  entry  exams  under  the  new 
teacher  appointment  system  was  conducted  in 
November 2019. In 2018 and 2019, 866 candidates 
were  hired  through  the  new  system  and  the  same 
number from the old system valid until 2027.  

secondary 

in 

The  skills  level  of  Cyprus’  students  remains  of 
concern.  The  performance  of  15-year-olds  in 
reading, maths and sciences in the Organisation for 
Economic  Co-operation 
and  Development 
Programme  for  International  Student  Assessment 
(PISA)  2018  showed  a  high  proportion  of  low 
achievers in Cyprus in all three subjects and a low 
proportion  of  top  performers  compared  to  other 
EU countries (OECD, 2019a). Reading proficiency 
has  decreased  on  average  since  2015  while 
performance  in  maths  and  science  has  increased 
somewhat.  The  proportion  of  students  without 
basic  reading  skills  rose  by  8.1pps,  more  than  in 
any  other  EU  Member  State.  At  the  same  time, 
Cyprus reduced the proportion of low achievers in 
both  maths  (-5.7pps)  and  science  (-3.2pps)  more 
than  any  other  EU  Member  State,  suggesting  that 
targeted remedial measures for those competences 
have had an impact. 

Socio-economic profile and type of schools have 
a  significant  impact  on  learning  outcomes. 
Almost two out of three students (58.9%) from the 
lowest socioeconomic quartile are low achievers in 
reading  (EU:  34.8%).  A  smaller  gap  between  the 
lowest  and  highest  quartile  since  2009  is  mainly 
due  to  a  decreased  performance  across  the  socio-
economic spectrum – the 29.7% proportion of low 
achievers in the top socio-economic quartile is the 

48 

4.3. Labour market, education and social policies 

concerns  remain.  The  employment  rate  of  recent 
tertiary educated graduates grew by 6.2 percentage 
points  since 2017 to 81.3% (EU average: 85.4%). 
However,  33.3%  of  these  high-skilled  people  are 
employed  in  occupations  that  do  not  require 
tertiary  education.  This  proportion  has  remained 
relatively  stable  over  the  last  decade  indicating  a 
terms  of 
persistent  significant  challenge 
matching  skills  with  available  job  requirements. 
Cyprus has not  yet set up a qualification  database 
for  its  national  qualifications  framework  which 
was  also  referenced  to  the  European  one  in  2017. 
Furthermore,  systematic  graduate  tracking  will 
help  to  inform  on  skills  mismatches,  in  particular 
for  tertiary  graduates,  who  constitute  the  vast 
majority of graduates in Cyprus.  

in 

Digital and science, technology, engineering and 
mathematics  skills  need  to  be  strengthened 
further. Despite an increasing number of Cypriots 
going  online,  basic  and  advanced  digital  skills' 
levels remain a challenge. Only 45% of individuals 
between  16  and  74  years  old  report  basic  digital 
skills  (58%  in  the  EU).  In  the  labour  force,  i.e. 
individuals  aged  25-64  who  are  employees,  self-
employed  or  family  workers,  the  proportions  of 
those reporting low digital skills (42%) or at  least 
basic  digital  skills  (51%)  are  higher  than  the  EU 
average  (26%  and  68%).  The  proportion  of  ICT 
graduates remains low. Out of the total number of 
university  graduates  in  2019,  only  2.7%  acquired 
an  ICT  degree  (3.6%  in  the  EU)  (European 
Commission,  2019k).  A  new  Scheme  for  Digital 
Entrepreneurship with a total budget of €6 million, 
was  launched  in  December  2019.  Cyprus  at  10% 
has  one  of  the  lowest  proportions  of  science, 
technology, engineering and mathematics (STEM) 
graduates  in  the  EU%.  In  response,  a  voluntary 
STEM  programme for sixth graders was launched 
in  October  2019  and  is  being  piloted  in  nine 
primary  all-day  schools  started  in  October  2019 
and  the  creation  of  the  first  STEM  school  was 
approved in April 2019. To boost digital education 
at  schools, 
the  European  Computer  Driving 
Licence certification is provided free of charge for 
secondary students.  

The  National  Coalition  for  Digital  Skills  and 
Jobs  contributed  towards  the  enhancement  of 
digital  skills.  More  than  40  stakeholders  (Grow 
Digital  Cyprus,  2019)  are  involved  and  have 
proposed measures in order to ensure the adequate 
and continuous supply of high quality graduates to 

keep up with labour market needs. The Coalition’s 
Action Plan ran until the end of 2019 and aimed to 
promote  the  diffusion  and  the  improvement  of 
digital  skills  in  order  to  address  the  anticipated 
future  mismatch  between  ICT  professionals  and 
job vacancies.  

in  vocational  education  and 
Participation 
training  (VET)  remains  low.  The  government  is 
making  efforts  to  improve  VET  capacity  by 
building  new  technical  schools,  and  to  enhance 
outreach  to  the  rural  areas.  In  2019,  participation 
levels  in  upper  secondary  VET  rose  to  20% 
(national  sources)  from  16.7%  in  2017,  but 
remains  well  below  the  EU  average  of  47.8% 
(UOE,  2017).  The  government  set  a  participation 
target of 35% by 2025 following the completion of 
the  new  infrastructures.  Students  enrolled  in  VET 
had  at  best 
to  work-based 
limited  exposure 
learning. (UOE, 2017). The level of employability 
of  recent  VET  graduates  in  2018  saw  a  notable 
increase  to 67.3% as compared to 51.8% in 2017, 
but  remains  below  the  EU  average  of  79.5%  in 
2018  (LFS,  2018).  The  setting-up  of  a  national 
monitoring  system of IVET and CVET graduates, 
which  will  inform  the  upgrading  of  the  VET 
system,  is  at  the  last  stages  of  planning  and  the 
system is expected to be operational in 2020. The 
main  areas  of  ongoing  apprenticeship  reforms 
include updating legislation, improving the quality 
of  training  in  the  workplace  and  increasing  the 
attractiveness for the employers. 

Despite  the  need  for  upskilling  and  reskilling, 
adult  participation  in  learning  remains  below 
the EU average. Only 6.7% of adults aged 25-64 
have  had  a  recent  learning  experience  during  the 
last  four  weeks,  negatively  flagged  in  SDG  4, 
compared to the EU average of 11.1% (LFS, 2018) 
(Graph 4.3.4). Around 50 adults aged 25 or above 
have  acquired  an  upper-secondary  qualification 
(UOE,  2017),  which  highlights  the  need  for  more 
substantial  upskilling  and  reskilling  efforts.  In 
response,  Cyprus  plans  to  set  up  a  validation 
mechanism  of  non-formal  and  informal  learning 
with  the  first  results  from  its  pilot  project  to  be 
completed in 2020. To address the challenges with 
regard  to  adult  learning,  a  new  Lifelong  Learning 
strategy  covering  2021-2027  is  currently  being 
developed.  The  authorities  intend  to  upskill  4,000 
people,  mostly  NEETs,  as  part  of  the  national 
efforts to implement the Council Recommendation 
on Upskilling Pathways. 

49 

4.3. Labour market, education and social policies 

is  considering 
increased  demand 

The  implementation  of  the  health  reforms  is 
progressing  steadily.  The  first  phase  (outpatient 
services)  of  the  healthcare  reform  started  in  June 
2019. While its implementation has been relatively 
successful (in terms of the number of beneficiaries, 
doctors and pharmacies enrolled in the system, and 
the  quality  of  IT  and  audit  systems),  the  health 
further 
insurance  organisation 
for 
to  manage 
initiatives 
services 
The 
and  medicinal 
communication  strategy  is  ongoing  and  health 
providers are receiving support and training for the 
new  tools.  One  of  the  key  milestones  is  the 
successful  enrolment  of  specialised  care  in  the 
system by June 2020, as planned. The negotiations 
with  private  clinics  have  advanced40.  Successfully 
Insurance 
implementing 
System  will  be  crucial  in  order  to  contain  fiscal 
risks (see section 4.1.2). 

the  National  Health 

products. 

Before  the  system  becomes  fully  functional  in 
2020,  challenges  and  investment  needs  remain. 
Over  80%  of  the  population  have  registered  as 
beneficiaries. Therefore, further progress is needed 
in  order  to  achieve  universal  health  coverage. 
Although  unmet  health  care  needs  are  lower  than 
the  EU  average  (CY1.4%  vs  EU1.8%),  they  vary 
considerably by income, owing to the high costs of 
private  sector visits. Currently, there  is an  uneven 
distribution  of  health  workers  and  specialised 
personnel in the public and the private sector, with 
a  number  of  public  hospital  doctors  opting  to  go 
private.  More  efforts  are  needed  to  improve 
research opportunities, continuous learning, digital 
skills for health personnel and the system’s overall 
attractiveness.  The  new  IT  system  —  a  tool  to 
implement 
the 
performance of primary or hospital care and assess 
quality  and  effectiveness  —  has  been  enhanced. 
The  introduction  of  accreditation  and  quality 
monitoring systems is still outstanding and crucial. 
The  capacity  that  the  newly  set  up  State  Health 
Service  Organisation needs in order to access and 
manage the financing sources  of public healthcare 
providers still has to be developed. The actions for 
a  long-term  plan  on  the  necessary  investments  in 

capacity  planning,  measure 

40  The  Private  Hospitals  Association  has  approved  in  January 
2020 the Memorandum of Understanding proposed by the 
Health  Insurance  Organisation,  which  sets  the  main 
principles  for  private  hospitals  to  operate  within  the 
General Health System. This is expected to accelerate and 
assist  the  on-going  negotiations  between  the  HIO  and  the 
private hospitals. 

Graph 4.3.4:  Adult learning participation per ISCED levels. 

(2010-2018) 

Source: Eurostat 

4.3.4.  HEALTHCARE 

Cyprus currently enjoys an overall good health 
status  but  the  outlook  is  less  bright.  The  life 
expectancy at birth is above the EU average (82.2 
years vs 80.9 years in the EU). However, Cyprus is 
lagging behind in terms of disease prevention and 
health  promotion  in  some  key  areas,  such  as 
smoking  and  childhood  obesity  (SDG  3).  This 
jeopardises  the  population’s  health  status  in  the 
long term. 

The introduction of the National Health System 
is  expected  to  help  decrease  high  out  of  pocket 
health  expenditure.  In  2017,  health  expenditure 
was  €1,674  per  person  (or  6.7%  of  GDP) 
compared  to  the  EU  average  of  €2,884  (9.8%  of 
the  public  share  of  health 
GDP).  At  43%, 
expenditure  remains  the  lowest  in  the  EU  (EU 
79%) while out of pocket payments (39) are among 
the  highest  in  the  EU  (44.6%)  (see  Graph  4.3.5). 
The new universal health system is a  major social 
reform that is expected to benefit Cyprus’ residents 
and  is  in  line  with  the  health  targets  of  the  UN 
Sustainable  Development  Goals  (SDG  3).  It  aims 
at  reducing  the  high  out-of-pocket  expenditure, 
contributing 
and 
reducing 
improving access for all. It will also help to change 
the fragmentation between the two current systems 
(private and public). 

inequalities 

to 

(39)  On-the-spot payments to healthcare providers. 

50 

024681012141618201018101810181018All levelsISCED 0-2ISCED 3-4ISCED 5-8EUCY%    
                                                           
                                                           
4.3. Labour market, education and social policies 

primary,  secondary  and  mental  care  have  not 
started.  As  healthcare  investments  remain  lower 
than the EU (0.12% vs 0.65% of GDP), a steering 
to 
role  would  promote 
improve the quality, accessibility and efficiency of 
health care. 

investments 

targeted 

Graph 4.3.5:  Distribution of out-of-pocket payments for 

healthcare 

Source: OECD, European Observatory on Health (2019) 

Long-term care services are under-developed in 
Cyprus.  This  is  particularly  worrying  because,  as 
the  population  ages,  the  number  of  dependent 
people  is  projected  to  increase  at  a  faster  pace  in 
the  next  decades  than  the  EU  average.  With  only 
3.5%  of  current  health  spending  (0.3%  of  GDP), 
long-term  care  receives  low  levels  of  funding,  as 
opposed  to  a  much  higher  EU  average  of  16.3% 
(1.6%  of  GDP).  Only  21%  of  the  dependent 
population  receives  long-term  care  services.  Most 
long-term  care  benefits  are  in  the  form  of  cash, 
available  only  to  guaranteed  minimum  income 
recipients  and  people  with  severe  disabilities.  In 
addition,  through  the  2018  State  Aid  Scheme,  99 
programmes,  operated  by  NGOs  and 
local 
authorities,  were  subsidised,  covering  long-term 
social  care  needs  for  elderly  and  people  with 
disabilities.  Cyprus  lacks  specific  legislation  to 
regulate  formal  home  and  community  care,  with 
high  fragmentation  of  services  and 
lack  of 
coordination,  creating  many  negative  side  effects 
for dependent people and burdening their families. 
The  number  of  long-term  care  workers  is  well 
below the EU average (OECD, 2019b). 

51 

OOP 44.6%Oupatient medical care InpatientPharmaceuticals Dental care Others 6.3%12.5%14.1%4.7%7.1%  
 
4.4. COMPETITIVENESS, REFORMS AND INVESTMENT 

Cyprus, lagging behind the EU average  of  around 
50%  in  2017.  In  coming  years,  more  projects 
related to renewable sources of energy, and natural 
gas,  waste  management  and  R&D  are  planned, 
which  could  boost  potential  growth  and  address 
environmental challenges.  

for 

investment 

digitalisation 

in 
Long-standing  needs 
environment, 
and 
energy, 
innovation  remain  unaddressed,  and  could 
impede Cyprus’ growth potential in the future. 
Environmental  and  circular  economy  investments 
are not being prioritised, despite the high risks that 
underinvestment in these areas carries for the well-
being of Cyprus’ population and tourism revenues 
in  the  longer  term.  In  particular,  investments  in 
water  and  waste  management,  energy  efficiency 
transport  are 
and  sustainable 
long  overdue. 
Moreover, 
is  still  sizeable  unexplored 
there 
investment potential in green energy transition (see 
Section  4.5).  Despite  a  progressive  increase  since 
2000,  research  and  innovation  intensity  remains 
among  the  lowest  in  the  EU.  Digitalisation  is  key 
in improving competitiveness and modernising the 
public  sector.  Despite  some  improvement,  Cyprus 
still ranks among the lowest in the EU in terms of 
digital  performance 
(European  Commission, 
2019k). 

Graph 4.4.1:  Investment by category 

4.4.1.  INVESTMENT AND PRODUCTIVITY  

Investment  

remains 

relatively 

Despite the recovery after the crisis, investment 
in  Cyprus 
low  and 
concentrated in sectors with weak prospects for 
raising  long-term  growth.  In  2018,  the  ratio  of 
investment, excluding ships (41), to GDP amounted 
to  17.5%.  Even  when  ships  are 
included, 
investment  is  still  lower  than  the  EU  average 
(20.4%)  (see  Graph  4.4.1).  Despite  the  increasing 
trend,  Cyprus  is  currently  underperforming  with 
respect 
share. 
Construction  predominates,  notably  housing 
supported  by  foreign  demand  in  relation  to  the 
investor citizenship scheme.  

to  SDG  8  on 

investment 

Some  investments  are  expected  to  boost  the 
productivity  of  the  Cypriot  economy,  but  their 
share  is  still  limited.  Tertiary  education  has 
emerged as a relatively new sector with increasing 
infrastructure investment carried out by private and 
public  universities.  Investment  in 
the  energy 
sector,  notably  renewables  is  still  low  despite  the 
country’s  natural  advantage  in  this  area.  At  the 
same time, tourism, which is expected to continue 
to  be  the  key  sector  in  Cyprus,  is  expanding  and 
upgrading its infrastructure.  

Public investment has recovered since the crisis. 
It  exhibited  a  strong  rise  during  the  period  2015-
2017, and in 2018, it remained at the levels of the 
previous  year.  (42)  As  a  percentage  of  GDP  it 
reached 2.6% compared to the EU average of 2.9% 
in  2018.  In  the  same  year,  public  investment 
represented 6.4% of total government expenditure, 
slightly above the EU average of 6.3%. Investment 
that  could  positively  affect  growth  accounted  for 
around  30% (43)  of  total  public  investment  in 

(41)  Shipping 

related 

transactions 

(ship 
registrations/deregistrations)  introduce  bias  in  Cyprus’ 
economic  statistics  by  significantly  affecting  investment, 
export  and  import  data.  The  data  in  this  paragraph  refer 
only  to  the  gross  fixed  capital  formation,  where  are  the 
SDG indicator includes inventories. 

(42)  Excluding  the  fixed  assets  transfer  as  collateral  from  the 
former  Cyprus  Cooperative  Bank  to  an  asset  management 
company. 

(43)  It  includes  government  expenditure  on  R&D,  education, 
environment, transport and communication (Categorisation 
based on European Commission, 2016). 

Source: Statistical Service of  Cyprus, Eurostat 

52 

051015202530010203040506070809101112131415161718% of  nom. GDPTransport equipment ex. ships and aircraftShips, aircrafts, etcMachinery and equipmentHousingConstruction ex. housingEU-average 
                                                           
   
4.4. Competitiveness, reforms and investment 

Box 4.4.1: Investment challenges and reforms in Cyprus 

Macroeconomic perspective 

Investment,  excluding  ships,  in  Cyprus  is  on  an  upward  trajectory  since  2014,  predominately  driven  by 
construction (in particular dwellings) and is supported by external demand. Part of the construction activity 
concerns  infrastructure,  notably  related  to  the  tourism  sector,  and  it  is  expected  to  enable  growth  in  the 
medium term (see Section 1). Public investment has also been recovering, however, public investment with 
potential to boost  growth is still low.  

Assessment of barriers to investment and reforms priorities: preliminary assessment 

The business environment in Cyprus, although improving, it is not optimal for boosting investments in the 
country. Cyprus’ position in the latest World Bank Doing Business report improved as starting a business 
become  less  expensive  due  to  lower  registering  cost  and  paying  and  filling  labour  contributions  become 
easier  with  the  creation  of  an  online  system.  However,  access  to  finance,  enforcement  of  contracts, 
efficiency of the court system and dealing with construction permits remain weak points.  

1.  Access  to  finance  represents  a  significant  constraint  to  investing  in  Cyprus,  especially  for  small  and 
medium-sized enterprises (see Section 4.2.2). Banks are reluctant to lend due to the debt overhang, and 
alternative  funding  sources  such  as  venture  capital,  crowdfunding  and  equity  financing  are  still 
restrained. The first equity fund in Cyprus is under preparation, whereas a number of grant schemes and 
financial instruments are being implemented.  

2.  Administrative  burden  is  still  high,  in  particular  in  relation  to  enforcing  contracts  and  dealing  with 
construction permits. Moreover, registering and transferring property, lengthy court proceedings and low 
clearances  rates  have  a  negative  impact  on  the  business  environment  (see  Section  4.4.2).  Further 
strengthening  of  digital  public  services  and  their  uptake,  as  well  as  swift  implementation  of  the 
investment  law  that  would  facilitate  strategic  investments  are  important  elements  for  a  competitive 
business environment.  

investment 

is 
The  stock  of  foreign  direct 
considerably  high  relative  to  the  size  of  the 
economy.  It  amounts  to  1805%  of  GDP  for 
outward  and  1770%  of  GDP 
inward 
investment.  A significant part of stocks of foreign 
direct  investment  (both  inward  and  outward)  is 
linked to the activities of holding companies in the 

for 

financial  sector,  as  opposed  to  green  field  and 
other types of investment that could help raise the 
potential growth. Important source and destination 
include  financial  centres  (including, 
countries 
the 
the  United  Kingdom, 
Luxembourg, 
Netherlands, Jersey and British Virgin Islands) and 
including  Russia,  which 
non-EU 

countries 

53 

 
4.4. Competitiveness, reforms and investment 

altogether  account  for  about  50%  of  gross  stocks, 
while  the  positions  of  other  partner  countries  are 
classified as confidential.  

Graph 4.4.2:  Productivity factors 

Productivity  

the  presence  of 

Labour  productivity  remains  low,  weighing  on 
the  country’s  competitiveness.  In  2018,  labour 
productivity  per  hour  increased  slightly  by  0.6%. 
Growth  was driven  mainly by strong employment 
(see  Graph  4.4.2).  Stagnant  productivity  growth 
might  be  driven  by  the  fact  that  jobs  are  mainly 
low-skilled (and in particular this is what we see in 
Services). As Cyprus is characterised by a highly-
educated  workforce, 
skill 
mismatches  has  intensified  (Cyprus  Economy  and 
Competitiveness Council, 2019). The country has a 
significant  rate  of  on-the-job  over-qualification, 
which  has  expanded  over  past  years  and  reached 
more  than  20%  in  total  employment  in  2017 
(Vandeplas  and  Thum-Thysen,  2019).    This  may 
suggest  that  employed  labour  is  under-utilised. 
Different  strategies  can  be  helpful  in  order  to 
tackle  this  issue. (44)  At  the  same  time,  there  are 
noticeable  shortages  of  workers  in  tourism,  ICT, 
agriculture  and  manufacturing  (see  Section  4.3). 
By  contrast,  there  is  an  over-supply  of  qualified 
labour 
(European 
financial 
Commission,  2019e). Productivity  caught  up  with 
or exceeded pre-crisis levels  in the sectors related 
to 
services. 
and 
Construction and manufacturing are recovering but 
still lag behind (see Graph 4.4.2).  

financial 

tourism, 

sector 

ICT 

the 

in 

Total  factor  productivity  is  starting  to  stabilise 
after a prolonged dip, but remains low. Despite 
some  improvement  since  2014,  prolonged  weak 
total  factor  productivity  (see  Graph  4.4.2)  has 
affected  the  country’s  competitiveness.  This  path 
reflects 
and 
level  of 
digitalisation,  and  a  predominance  of  investments 
in residential construction and shipping. Moreover, 
difficulties  in  accessing  finance  (see  Section  4.2) 
constrain  investment  by  small  and  medium-sized 
enterprises. 

innovation 

low 

a 

(44)  These  strategies  include  ensuring  the  quality  and  labour 
market  relevance  of  education  and  training  programs, 
initiatives  to  promote  the  regional  development  of  skills-
intensive industries, reducing barriers to the entry of firms, 
and creating jobs that make good use of people’s skills. 

Source: European Commission 

54 

8085909510010511011512000010203040506070809101112131415161718Total Factor ProductivityCYELITUKEA192000=100-10-8-6-4-20246800010203040506070809101112131415161718Decomposition of value added growthLabour (hours worked)Labour productivity per hours workedGVA70901101301501701902000=10000-0809-1415-18Labour productivity by sector -period averages  
                                                           
   
4.4. Competitiveness, reforms and investment 

Deputy  Ministry  for  Research,  Innovation  and 
Digital Policy is expected to help to implement the 
the  digital 
renewed  national 
strategy 
including  e-
transformation  due 
government and research and innovation.  

in  2020, 

for 

Cyprus  is  committed  to  making  progress  on 
new  digital  technologies.  Cyprus  is  a  member  of 
the  European  High-Performance  Computing  Joint 
Undertaking.  The  country  has  also  signed  the 
Declaration  on  the  Cooperation  Framework  on 
High-Performance  Computing,  the  Declaration  on 
the  European  Blockchain  Partnership,  and  the 
Declaration 
on  Artificial 
Intelligence. In June 2019 Cyprus has published its 
National  Blockchain  Strategy.    In  January  2020, 
the  country’s  first 
the  government  approved 
national Artificial Intelligence strategy. 

cooperation 

on 

to 

the 

Europe 

Facility 

Connectivity  and  broadband  coverage  are 
progressing.  In  total,  90%  of  households  have 
access  to  broadband  networks,  although  in  rural 
areas  the  coverage  drops  to  65%.  While  the  offer 
on  Next  Generation  Access  is  above  the  EU 
take-up  by  households 
average  of  83%, 
remains low (20% in Cyprus and 49% in the EU). 
Efforts  are  being  made  with  the  help  of  the 
Connecting 
develop 
telecommunications  infrastructure  and  services  in 
order  to  meet  rising  demand.  The  Department  of 
Electronic Communications (DEC) is planning the 
auction of 700 MHz and 3.6 GHz band in June or 
July 2020. The broadcaster has agreed to clear 700 
MHz  from  broadcasting  by  September  2020.  The 
main  issue  with  the  effective  utilisation  of  this 
band  is  the  interference  from  Cyprian  territories, 
which  are  not  under  the  effective  control  of  the 
Republic  of  Cyprus.  The  band  will  be  vacated  in 
that  area  when  new  digital  TV  equipment  is  in 
place  with  EU  funding.  The  3.4-3.8  GHz  band  is 
currently free of use. 

Research and Innovation 

While  Cyprus  benefits  from  a  highly  educated 
population, its R&D system remains very small, 
and its role in economic development is limited. 
In 2018, 57.1% of the population aged 30-34 had a 
tertiary  education.  However,  only  a 
small 
percentage of these graduates have degrees linked 
to  technological  innovation.  Cyprus  is  among  the 
lowest  performers  in  the  EU  in  terms  of  science 
and  engineering  graduates.  The  R&D  intensity 

4.4.2.  DIGITAL TRANSFORMATION RESEARCH 
AND INNOVATION AND BUSINESS 
ENVIRONMENT  

Digitalisation 

the 

ICT 

digital 

infrastructure 

Cyprus  performs  well  in  relation  to  digital 
sector’s 
infrastructure,  however 
contribution  to  growth  remains  low.  While  the 
country’s 
(broadband 
connection,  internet  bandwidth,  etc.)  is  above  the 
EU average and it has one of the highest shares of 
in 
small  and  medium-sized 
proportion to the total number of these enterprises, 
Cyprus  has  one  of  the  EU’s  lowest  rates  of  ICT 
sector  added  value  as  a  percentage  of  GDP 
(European  Commission,  2018c).    Increasing  this 
potential 
the 
economy.   

further  would  help  diversify 

ICT  enterprises 

in  business 
Cyprus  has  made  progress 
digitalisation  but  does  not  fully  exploit  its 
potential.  Cypriot  enterprises  still  lag  behind  in 
the  uptake  of  several  of  the  most  common  digital 
technologies (see Table 4.4.1). Small and medium-
sized  enterprises  and  big  firms  in  Cyprus  are 
lagging behind the EU average in digitalisation.  In 
2019,  10%  of  small  firms  were  selling  online, 
compared  to 16.2%  in  the  EU,  and  31.9%  for  big 
firms  (39.2%  in  the  EU)  (European  Commission, 
2020d).  The  use  of  e-commerce  is  increasing.  To 
further  foster  e-commerce,  the  authorities  have 
recently  launched  a  grant  scheme  to  incentivise 
small and medium-sized enterprises to invest in the 
relevant equipment and services. 

Table 4.4.1:  Selected indicators on digitalisation of 

businesses, 2019 (% of enterprises) 

Source: European Commission, 2020d 

some 

Cyprus 

Despite 
still 
efforts, 
underperforms in e-government. The number of 
e-government users increased in 2019 compared to 
2018,  although  the  number  of  digital  public 
services  provided  in  the  country  remains  low. 
However, 20 e-government projects are underway, 
with  a  total  budget  of  more  than  €250  million, 
aiming  to  promote  the  further  digitisation  of  the 
public  sector.  The  expected  establishment  of  the 

55 

TechnologyCyprusEU average3D printing1%4.1%Industrial or service robots1.2%6.7%Big Data (analyse from any data source)4.7%12.3%Cloud services14%18% 
  
 
increased  progressively  from  0.21%  in  2000  to 
0.5% of GDP in 2018, but is among the lowest in 
the  EU.  Both  public  and  private  R&D  intensities 
remain well below the EU average. (45) 

The  quality  of  the  public  research  system  is  a 
point  of  strength,  but  its  interaction  with  the 
business  sector  is  very  limited.  Despite  being 
founded recently (in 1992), public universities and 
research centres in Cyprus, achieve relatively good 
scientific  performance.  (46)  However,  university-
business cooperation is very weak, due to both low 
demand  from  the  business  side  and  a  lack  of 
entrepreneurial culture in the academic sector.  As 
a  result,  the  commercialisation  of  research  results 
remains  at  a  low  level  (Demetriades  et  al.,  2020). 
(47) 

Even  though  the  volume  of  research  and 
innovation  (R&I)  activities  remains  limited, 
investments.  The 
increased 
several  sectors 
business landscape in Cyprus is not conducive to a 
high  level  of  research  and  innovation  activities. 
95%  of 
the  business  population  are  micro 
companies  —  mainly  risk-averse,  family-run 
businesses  without  professional  management  and 
innovation  capacity.  (48)  However,  despite  these 
structural 
the 
pharmaceutical  and  software  publishing  sectors 
have led to a significant increase in business R&D 
(Business  R&D 
2016 
expenditure 

investments 

features, 

since 

in 

(45)  In  2018,  public  R&D  intensity was  0.28%,  the  fourth 
lowest  in  the  EU  (average  of  0.69%),  of  which  0.23% 
comes  from  tertiary  education  (EU  average  of  0.46%  of 
GDP). The R&D expenditure in the business sector was the 
second  lowest  in  the  EU,  at  0.20%  of  GDP  in  2018, 
compared an EU average of 1.41% in 2018. 

(46)  In  2018,  about  69%  of  the  total  number  of  publications 
were  international  co-publications  (among  the  top  ranking 
in  the  EU)  and  in  2016  9%  of  Cyprus'  publications  were 
among  the  top  10%  worldwide  most  cited  scientific 
publications, (Centre for Science and Technology Studies, 
2019). 

(47)  Incentives  have  been  adopted  recently 

to  stimulate 
academia-business  cooperation.  Following  the  adoption  of 
the law allowing universities to create spin-offs in 2018, an 
expert panel appointed by the Horizon 2020 Policy Support 
Facility  provided  recommendations  in  December  2019  on 
how  to  stimulate  the  use  of  public  laboratories  by 
businesses. 

(48)  According  to  the  2018  Global  Competitiveness  Report 
(World Economic Forum, 2018), Cyprus is ranked 101st on 
the  reliance  of  companies  with  regard  to  professional 
management. 
towards 
entrepreneurial  risk,  it  is  ranked  40th,  while  it  is  ranked 
78th regarding the embracing of disruptive ideas. 

terms  of 

attitudes 

the 

In 

4.4. Competitiveness, reforms and investment 

expenditure  as  a  percentage  of  GDP  increased 
from 0.11% in 2015 to 0.20% in 2018).  

A new R&I Strategy Framework for the period 
2019-23  has  been  announced  by  the  National 
Board  for  Research  and  Innovation  in  May 
2019,  with  ambitious  yet  uncertain  outcomes. 
Key enablers of this strategy framework include a 
new  integrated  governance  system,  in  particular 
the  establishment  of  a  Deputy  Ministry  for 
Research,  Innovation  and  Digital  Policy,  and  a 
focus  on  knowledge  transfer  and  commercial 
exploitation to stimulate R&I activity in the private 
sector. One of the planned measures is the creation 
of clusters of excellence, gathering universities and 
businesses  in  the  areas  of  environment/climate, 
agrotech,  maritime,  health  and  ICT,  in  line  with 
the  national  Smart  Specialisation  Strategy,  which 
should  be  updated  to  reflect  the  recent  changes  at 
national  level  and  new  priorities  at  EU  level. 
Several  measures  have  been  announced,  most  of 
them  to  be  implemented  with  existing  financial 
resources.  Consequently,  it  is  not  clear  whether  a 
key  deliverable  of  the  strategy,  the  target  of 
tripling  the  national  R&D  intensity  to  1.5%  by 
2023  (with  half  of  the  expenditure  expected  from 
the private sector) can be achieved. 

implementation  of  the 
Despite  efforts,  the 
Smart  Specialisation  Strategy 
to  boost 
innovation performance continue to face several 
challenges.  Cyprus  mobilised  a  wide  range  of 
public  and  private  innovation  actors.  Reinforcing 
the  bottom-up  dimension  of 
the  process  by 
involving    local  innovation  stakeholders,  boosting 
the  matching  of  academia  with  businesses  and 
putting  in  place  a  monitoring  and  evaluation 
mechanism remain important  to help diversify  the 
increase  competitiveness.  The 
economy  and 
establishment  of 
the  Deputy  Ministry  of 
Innovation  and  Digital  Policy  is  expected  to 
facilitate the implementation of the strategy. 

Business  environment  and  functioning  of  the 
markets  

The  ease  of  doing  business  in  Cyprus 
is 
improving.  According  to  the  latest  World  Bank 
Doing  Business  report,  the  country  was  classified 
at  54th  position  —  a  rise  of  three  positions 
compared to the previous year. The country got its 
best  scores  in  the  categories  ‘starting  a  business’ 
and  ‘trading  across  borders’.  Enforcing  contracts, 

56 

                                                           
4.4. Competitiveness, reforms and investment 

such  as  hypermarkets,  shopping  malls  and  outlet 
villages  are  discouraged  by  the  complex  and 
lengthy procedures needed to obtain the necessary 
licences. The examination of the applications takes 
one  to  three  years,  a  period  which  is  sufficiently 
long to discourage investors. Moreover, in the last 
ten  years,  a  large  amount  of  applications  were 
rejected.  This  kind  of  investment  is  expected  to 
create jobs and further reduce retail prices. On the 
positive  side,  the  flexible  opening  hours  of  shops 
and the absence of regulation for sales have had a 
positive impact on the retail sector. 

4.4.3.  GOVERNANCE AND INSTITUTIONAL 

QUALITY 

State-owned Enterprises and Privatisation 

Investment  potential 
is  hindered  by  slow 
progress  on  privatisations.  The  privatisation  of 
the  port  of  Larnaca  and  the  corporatisation  of  the 
Cyprus  Telecommunications  Authority 
are 
progressing slowly. These two large-scale projects 
could help attract investment, increase competition 
and reduce prices in network industries.  

somewhat.  Some 
including 

Monitoring  of  state-owned  enterprises  has 
administrative 
improved 
measures, 
increased  oversight  and 
reporting requirements, were introduced in view of 
improving  the  corporate  governance  of  state-
owned  enterprises.  The  effectiveness  of  these 
measures  are  still  to  be  assessed.  In  particular, 
additional efforts are needed to create a transparent 
process  for  board  nominations  and  further  align 
and 
improve  corporate  governance  practices. 
These  measures    replace  provisions  envisaged  in 
the  draft  law  for  the  governance  of  state-owned 
enterprises, which was withdrawn from the House 
of Representatives as  it  was  deemed that it  would 
not be adopted.  

improved 

corporate 

A solid performance of state-owned enterprises, 
through 
governance 
practices  and  possibly  privatisation,  are  key  to 
reduce state’s exposure to contingent liabilities. 
Facilitating  private  investment  in  key  utilities  and 
well-governed 
state-owned 
and  monitored 
companies is essential to mitigate a potential build-
up of public contingent liabilities in the future. 

getting  credit  and  dealing  with  construction 
permits  remain  the  weak  points  of  the  Cypriot 
business environment. In 2019, Cyprus reduced the 
cost of registering a company and implemented an 
online  system 
labour 
contributions. 

filing  mandatory 

for 

than 

the 
residency 

For  certain  regulated  professions,  Cyprus  has 
more  restrictive  regulation 
the  EU 
(OECD)  average.  This  is  the  case  for  lawyers, 
architects, civil engineers and real estate agents, as 
demonstrated  by 
the  European  Commission’s 
restrictiveness  indicator  (European  Commission, 
2017b)  and  as  confirmed  more  recently  by  the 
indicator 
OECD  Product  Market  Regulation 
existing 
(2018).  Some 
licensing 
of 
and 
requirements 
requirements, 
shareholding  requirements  may  disproportionately 
restrict  market  competition  and  the  mobility  of 
professionals, 
resource 
allocation.  No  specific  measures  to  address  these 
issues  have  been  adopted  or  proposed  so  far. 
Focused 
the 
proportionality  of  the  identified  restrictions  on 
professional  services  would  improve  the  growth 
opportunities  and  economic  performance  of  these 
sectors. 

assessment  of 

distorting 

efficient 

reviews 

and 

Obtaining  permits  and  licences  to  invest  in 
Cyprus remains cumbersome. The law aiming to 
simplify  the  procedure  for  a  strategic  investor  to 
obtain  permits  and  licences  to  invest  in  Cyprus  is 
the  House  of 
still  pending  adoption  by 
Representatives.  Furthermore,  the  procedures  for 
issuing building permits  —  mainly issued at local 
level  —  are  complex  and  lengthy.  It  can  take 
several  years  for  a  large-scale  project.  Having 
acknowledged  all  the  above,  the  Government 
announced in November 2019 the  New Policy for 
the  simplification  and  significant  acceleration  of 
the permitting procedures, with the involvement of 
the  private  sector.  The  development  of  a 
mechanism  for  the  same-day  issuing  of  building 
permits 
residential  developments 
concerning  more  than  50%  of  permits  issued 
annually, is already well advanced and expected to 
be  launched  within  first  half  of  2020.  The  local 
government  reform,  which  is  currently  under 
preparation,  should  help 
these 
bottlenecks (see Section 4.4.3). 

in  addressing 

for  certain 

Setting  up  large  retail  shops  in  Cyprus  is  also 
challenging.  Investments  in  large  retail  outlets 

57 

Public administration and local government 

The long awaited public administration reform 
is still pending. Overhauling the appraisal system 
for civil servants and the promotion procedures is 
essential for improving the efficiency of the public 
administration. To this respect a reform is pending 
since 2015. Revised proposals on  the recruitment, 
appraisal and promotion systems were submitted to 
the House of Representatives in October 2019 and 
they are currently under discussion.   

and 

them 

granting 

system  by 

The reform of local government is progressing. 
The  reform  aims  to:  (i)  improve  the  efficiency  of 
the  number  of 
the 
reducing 
municipalities 
new 
responsibilities  with  greater  administrative  and 
financial  autonomy, 
(ii)  create  clusters  of 
communities  with  their  own  budgets  in  order  to 
benefit from economies of scale, and (iii) improve 
the  efficiency  of  water  and  waste  management  at 
local level. Overall, the authorities expect that the 
reform  will  make  local  governments  significantly 
more  efficient  while  generating  savings  in  public 
funds.  The  reform  has  been  pending  since  2015, 
but  a  revised  proposal  is  in  the  final  stage  of 
preparation.  Importantly,  the  reform  is  also  set  to 
simplify  the  procedures  for  building  and  spatial 
permits and to speed up the issuance of title deeds. 

Justice system 

to 

civil, 

resolve 

efficiency 

commercial 

challenges.  While 

The  justice  system  in  Cyprus  continues  to  face 
the 
serious 
performance of courts improved in 2018, the time 
needed 
and 
administrative  cases  in  first  instance  courts  (737 
days  compared  to  1118  in  2017),  still  remains 
among  the  highest  in  the  EU.  In  administrative 
justice,  efficiency  gains  at  first  instance,  reflected 
in  a  reduced  length  of  proceedings  (487  days 
compared  to  2162  days  in  2017)  and  higher 
clearance  rates  (219/2%  compared  to  73/6%  in 
2017)  coincide  with  very  lengthy  proceedings  in 
the  final  instance  (2156  days;  2020  EU  Justice 
Scoreboard, forthcoming). The main inefficiencies 
stem  from  outdated  and  complex  rules  for  civil 
procedures,  the  absence  of  digitalisation,  non-use 
of  mediation.  Furthermore,  courts’  buildings  are 
considerably  subpar  thus  hindering  the  efficient 
operation of the courts.  

4.4. Competitiveness, reforms and investment 

expressed 

authorities 

The 
their 
have 
commitment to overhaul the justice and address 
shortcomings.  Nevertheless,  so  far  there  are  only 
limited  tangible  results  and  most  planned  reforms 
are  delayed.  The  revised  rules  of  civil  procedure 
—  a  key  element  of  the  reform  —  were  initially 
expected  to  be  in  place  at  the  beginning  of  2020, 
however,  no  concrete  revised  timeline  has  been 
announced. 

Specialisation  of  Courts  is  ongoing,  but  key 
legislation  is  still  pending.  The  Administrative 
Court  of  International  Protection  dealing  with 
asylum  seekers  became  operational  in  June  2019 
with  three  judges.  Its  capacity  is  expected  to  be 
strengthened  in  the  coming  months.  The  draft 
legislations for the establishment of a Commercial 
Court, an Appeal Court and the re-operation of the 
Constitutional  Court  are  pending  for  adoption. 
Furthermore,  efforts  to  recruit  additional  judges 
and  to  set  up  a  taskforce  to  clear  a  fifteen-year 
backlog of cases, including cases dealing with non-
performing  loans,  have  been  delayed.  In  the 
meantime,  six  existing  judges  have  been  assigned 
to  handle  financial  disputes,  including  the  ones 
related to non-performing loans. When completed, 
the  specialisation  of  courts,  coupled  with  the 
expected  strengthening  of  the  capacity  of  all 
courts, is expected to help in reducing the lengthy 
court  proceedings  and 
the  debt 
repayment discipline in the country.  

improving 

improve 

to  help 

Strengthening  the  enforcement  of  judgments  is 
also  essential 
the  debt 
repayment  discipline.  Inefficiencies  regarding 
court  proceedings  are  coupled  with  weak 
enforcement of judgments, adversely affecting the 
payment discipline in the country. To this end, an 
amendment  to  the  Civil  Procedure  Law  that  will 
make it easier to carry out court decisions to seize 
movable  property  is  still  pending  for  adoption. 
Furthermore,  the  revised  rules  of  civil  procedure 
are  expected  to  improve  the  enforcement  of 
judgments.   

Public procurement 

Measures have been taken to open up the public 
procurement  market 
attract  more 
competition.  Such  measures  included  simplifying 
the  award  procedures  to  make  it  easier  for 
economic  operators  to  participate,  as  well  as 
generalising  the  use  and  enhancing  the  capacities 

and 

58 

4.4. Competitiveness, reforms and investment 

to 

of  the  existing  e-procurement  system.  An  effort 
train  and  support 
has  also  been  made 
procurement  officers  with  a  view 
to  better 
preparing  and  carrying  out  award  procedures, 
including  with  respect  to  promoting  green  and 
socially responsible procurement.  

indicators 
Nevertheless,  some  performance 
continue  raising  concerns.  Despite  measures 
taken, there is still a high number of contracts with 
a  single  bidder  (49%  of  procedures  in  2018,  as 
opposed  to  24%  in  2009).  Cyprus  remains  one  of 
the  EU  countries  with  the  highest  proportion  of 
direct awards (25% of total procedures in 2018, as 
opposed  to  just  1%  in  2009).  Most  single  bid 
procedures  and  direct  awards  take  place  in  the 
health  procurement  sector.  In  addition,  Cyprus 
remains  one  of  the  EU  countries  with  the  highest 
number of contracts awarded exclusively based on 
the lowest price (93% of public contracts awarded 
in  2018,  against  an  average  of  47%  in  the  EEA 
countries),  contrary  to  best  practice  favouring  the 
use of more quality-based criteria.   

contracting 

administrative 

smaller 
by 

capacity, 
Strengthening 
professionalising  procurement  staff,  as  well  as 
other  targeted  measures  could  help  addressing 
these deficiencies and foster a truly competitive 
and  efficient  public  procurement  market. 
Measures  pursued  by  the  government,  such  as   
enhancing  central  purchasing, 
training  and 
professionalising contracting authorities, as well as 
authorities 
supporting 
(including 
award 
organising 
procedures on their behalf), are expected to have a 
positive  impact on a short-term basis. In addition, 
contracting  authorities  are  taking  some  positive 
steps with a view to opening up competition, such 
as  undertaking  joint  procurement  together  with 
other  contracting  authorities  in  Cyprus  or  abroad. 
Lastly, the authorities have undertaken an effort to 
raise  awareness  among  contracting  authorities  on 
the 
importance  of  using  quality-based  award 
criteria,  in  order  to  guarantee  the  quality  and 
sustainability of public purchases. 

centrally 

Fight against corruption 

Perception  of  corruption  in  Cyprus  remains 
high  in  the  business  context.  The  Worldwide 
Governance  Indicators  and  other  indexes  show  a 
decline  in  Cyprus’s  performance  on  control  of 
corruption  (WGI,  2019,  TI,  2019).  Corruption 

in 

the 

perception  has 
latest 
ameliorated 
Eurobarometer survey, although the scores remain 
high,  with  88%  of  businesses 
that 
corruption  is  widespread  in  their  country  (as 
compared  to  100%  in  2017).  86%  of  businesses 
believe  that  bribery  and  networking  is  often  the 
easiest  way  to  obtain  certain  public  services,  one 
of  the  highest  score  among  the  EU,  (European 
Commission, 2019l). 

thinking 

Implementation of actions to fight corruption is 
progressing  but  coordination  capacity  remains 
insufficient. An action plan against corruption was 
approved by the Council of Ministers in May 2019 
and  is  currently  being  implemented.  Focal  points 
have  been  designated  in  the  public  bodies  and 
codes of conduct for the Council of Ministers and 
for  the  public  prosecutors  have  been  adopted. 
Furthermore,  the  law  for  the  establishment  and 
operation of the internal affairs service, a body in 
charge  of  tackling  corruption  in  the  Cypriot 
national police force, has been enacted.  However, 
the  office  for  transparency  and  prevention  of 
corruption, the body in charge of coordinating the 
remains 
implementation  of 
severely understaffed.  

the  action  plan, 

Key legislation for the prevention of corruption 
law  establishing  an 
is  pending.  The  draft 
independent  authority  against  corruption  was 
submitted  to  the  House  of  Representatives  for 
adoption  in  March  2019.  The  authority  would 
strengthen the consistency and effectiveness of the 
actions  taken  by  the  public  and  private  sector  in 
preventing  and  combating  corruption.  However, 
the  procedure  for  appointing  the  president  of  the 
authority  is  key  to  ensure  independence.  A  draft 
law  to regulate  lobbying activities is also pending 
the 
for  adoption  since  May  2019.  Finally, 
amendment  of 
including 
provisions  on  protecting  whistle-blowers  is  under 
discussion in the House of Representatives. 

the  Reporting  Act, 

is 

transparent,  but 

Asset  disclosure 
the 
verification  of  declarations  could  be  improved. 
Asset declarations of the President of the Republic, 
the  House  of 
ministers  and  members  of 
Representatives  were  submitted 
to  a  special 
parliamentary  committee  and  published  in  2019. 
The  body  entrusted  with  the  verification  of  the 
other  officers  and  PEPs’  declarations  is  a  special 
Council, consisting of three members appointed by 
the  Council  of  Ministers  in  2017.  The  special 

59 

4.4. Competitiveness, reforms and investment 

evaluation (GRECO, 2016) In order to improve the 
effective  prosecution  of  corruption  cases,  the 
specialisation  of  prosecutors  in  financial  crimes 
could be further strengthened.  

to 

New  rules  have  been  introduced  to  address 
risks related to the investor citizenship scheme, 
but questions about  its long-term sustainability 
remain. The European Commission has identified 
a  number  of  inherent  risks  related  to  the  investor 
citizenship  and  residence  schemes  in  Cyprus,  in 
particular  as  regards  security,  money  laundering, 
tax evasion and corruption. (49) Moreover, investor 
citizenship schemes potentially raise concerns with 
respect 
the  EU 
their  compatibility  with 
Treaties.(50)  The  Cypriot  authorities  have  adopted 
some  measures  and  recommendations  to  address 
these  risks, 
including  by  establishing  certain 
categories  of  high-risk  individuals  who  are  not 
eligible  to  acquire  Cypriot  nationality  through  the 
investor  scheme,  such  as  politically  exposed 
persons,  persons  facing  criminal  charges,  being 
under  investigation  or  having  been  convicted  for 
serious  offences  in  the  country  of  origin,  persons 
having  a  connection  with  legal  entities  subject  to 
EU  or  international  sanctions.  The  new  measures 
foresee  the  automatic  rejection  of  applicants  who 
have  been  previously  rejected  by  other  EU 
Member  States.  Furthermore,  investors  are  now 
to  obtain  a  Schengen  visa  before 
required 
applying.  However, 
these  measures  are  not 
applicable to the investor residence scheme despite 
similar  risks,  and  their  effective  implementation 
remains to be assessed.  

Territorial Disparities 

Significant  socio-economic  differences  persist 
within Cyprus. In 2018, the unemployment rate in 
cities  was  at  7.7%  of  the  active  population,  lower 
than the rate in both towns and suburbs (9.7%) and 
rural  areas  (9.2%).  In  Cyprus,  highly  educated 
workers tend to live in cities, while the proportion 
of  early  leavers  from  school  and  training,  as  well 
as  NEETs  tends  to  be  higher  in  towns,  suburbs, 

(49)  Following  reports  about  potential  inadequacies  in  the 
screening  process,  the  Cypriot  authorities  announced  the 
revocation  of  the  nationality  of  29  individuals  who  had 
obtained Cypriot nationality pursuant to the scheme and a 
review  of  all  naturalisations  granted  until  2018.  The 
European  Commission  continues  to  also  monitor  wider 
issues of compliance with EU law raised by the scheme. 
(50)  European commission, 2019m and European Commission, 

2019n. 

Council  entrusted  with  verification  of 
the 
information  has  filed  several  fines  for  non-
submission of declarations, but  has not  found any 
irregularities to date. However, there are concerns 
regarding  the  accuracy  of  the  declarations.  The 
need  to  improve  the  effectiveness  of  monitoring 
the  asset  declarations  was  also  pointed  out  by  the 
Group  of  States  Against  Corruption  (GRECO, 
2016  and  2018).  As  regards  conflicts  of  interest, 
while  codes  of  conduct  exist  for  members  of  the 
government, public officials and prosecutors, there 
are  no  similar  provisions  for  the  members  of  the 
House of Representatives.  

Corruption  issues  of  public  and  private  sector 
are  handled  by  the  Cyprus  Police.  Specific 
measures  have  been  taken  to  improve  its 
capacity  of  handling  such  cases, 
including 
within  the  Police.  Between  2013  and  2018, 
Cyprus Police reported that a total number of 120 
corruption  cases  had  been  investigated  or  were 
under  investigation,  out  of  which  98  have  been 
completed.  37  persons  were  convicted 
for 
corruption in 26 cases, out of which there were 12 
high-level  corruption  convictions,  including  the 
deputy Attorney General, members of the House of 
Representatives  and  ex-ministers.  Furthermore, 
measures have been taken to improve the capacity 
and  reinforce  the  financial  investigation  unit  and 
forensics,  by  the  recruitment  of  four  forensic 
accountants.  As  for  the  corruption  within  the 
Cyprus  Police,  an  internal  affairs  service  was 
investigate  corruption 
to 
established 
committed  by  police  officers.  The  newly 
established  service  is  fully  operational  and  has 
already investigated 12 corruption cases, of which 
one resulted in a conviction. The bill on telephone 
the  House  of 
tapping  was  approved  by 
Representatives 
is 
envisaged to improve the investigative capacity for 
corruption-related crimes.  

January  2020.   This 

in  2018 

in 

of 

the 

independence 

Strengthening 
the 
prosecutorial  functions  and  enhancing  the 
autonomy  of  law  officers  and  prosecutors  are 
still  pending.  A  draft  law  revising  the  existing 
provisions  related  to  the  Law  Office’s  budgetary 
independence,  the  separation  of  functions,  and 
recruitment  procedures,  is  still  under  discussion. 
The  office  of  Attorney  General  combines  several 
functions,  a  situation  that  calls  for  checks  and 
balances  to  prevent  risks  of  undue  influence  over 
the prosecution system as signalled by the GRECO 

60 

                                                           
4.4. Competitiveness, reforms and investment 

and rural areas. Labour market inefficiencies and a 
less  educated  work  force  in  towns,  suburbs,  and 
rural  areas  translate  into  a  higher  percentage  of 
population  at-risk-of  poverty  and  exclusion.  In 
2018,  the  lowest  at-risk-of-poverty  and  exclusion 
rates  are  found  in  cities  (at  20.4%  of  total 
population),  while  more  than  one  out  of  four 
people living in towns, suburbs, and rural areas is 
at risk of poverty and social exclusion. 

61 

4.5.  ENVIRONMENTAL SUSTAINABILITY 

to 

(4.5 

than 

tourists 

to  provide 

times  more 

Cyprus’ growth model has a negative impact on 
the environment and hinders climate neutrality.  
So  far,  economic  growth  in  Cyprus  has  been 
mainly  driven  by  tourism  and  construction.  For 
instance,  in  2019,  the  island  hosted  around  4 
million 
its 
population).  Construction  activity  is  expanding  at 
the  housing  and 
satisfy 
double  digits 
accommodation  demand  and 
the 
necessary infrastructure. Over the years, this model 
has  adversely  affected 
island’s  natural 
environment, notably its coastal areas. In addition, 
Cyprus is performing below the EU average with a 
deteriorating  trend  when  it  comes  to  resource 
productivity  (how  efficient  is  the  economy  when 
using  material  resources  to  produce  wealth  – 
Sustainable  Development  Goal  (SDG)  8  on 
sustainable economic growth). Moreover, growing 
population  and  a  strong  migration  inflow  are 
putting  pressure  on  Cyprus’  resources.  Therefore, 
protecting  and  using  resources  efficiently  is  of 
paramount 
to  ensure  sustainable 
growth in the future.   

importance 

the 

jobs  and  opportunities  to  tap  into  new  export 
markets.  This  is  also  very  much  highlighted  by 
Cyprus  weak  relative  performance  in  reaching 
Sustainable  Development  Goals,  especially  SDG 
12 on responsible consumption and production.  

generation 

High  waste  generation,  low recycling  rates  and 
strong  dependence  on  landfilling  are  major 
concerns.  Municipal  waste 
is 
significantly  higher  than  the  EU  average  (640  kg 
per year per inhabitant compared to around 482 kg 
in the EU in 2016) as also highlighted by SDG 12. 
Cyprus landfills most of its municipal waste (75% 
compared  to  the  EU  average  of  24%)  which 
contributes to high greenhouse emissions. Cyprus’ 
recycling  rate  for  municipal  waste  is  only  17% 
(4%  of  which  is  from  composting),  which  is 
significantly  below  the  EU  average  of  46%  in 
2016.  According  to  the  Early  Warning  Report 
(European  Commission, 
2018d),  Cyprus’s 
continued  difficulties  in  implementing  EU  waste 
law  are  mainly  due  to  the  lack  of  the  necessary 
infrastructure,  lack  of  coordination  and  lack  of 
incentives.  

It 

to: 

is  essential 

Steering  the  transition  to  a  greener  and  more 
sustainable economic growth leading to climate 
neutrality  calls  for  a  long-term  comprehensive 
strategy. 
that  environmental 
concerns and sustainability are well-integrated into 
the  new  long-term  growth  strategy  for  Cyprus 
which  is  under  preparation.  Future  economic 
growth  would  need  to  go  hand  in  hand  with 
(i)  address  prolonged 
decisive  efforts 
inefficiencies  in  waste  and  water  management 
(SDG 12), (ii) use energy more efficiently (SDG 7 
and  SDG  12),  (iii)  invest  more  in  renewable 
sources of energy (SDG 7,12 and 13), (iv) promote 
sustainable transport (SDG 9 and SDG 11), and (v) 
protect  the  country’s  natural  environment  and 
biodiversity (SDG 13, 14 and 15). This policy mix 
is key in improving the country’s competitiveness, 
fostering new areas of  economic growth and jobs, 
protecting  citizen’s  health  and  quality  of  life  as 
well as maintaining the island’s attractiveness as a 
tourist destination.  

Waste and water management  

An  overarching  policy  framework  for  the 
circular  economy  is  lacking.  Policy  as  well  as 
funding  measures  and  mechanisms  promoting  the 
circular economy still largely depend on EU funds. 
Investing in the circular economy could create new 

for 

source 

The  absence  of  financial 
incentives  makes 
recycling unattractive. Cyprus does not apply any 
taxes  on 
landfill  or  mechanical  biological 
treatment.  Therefore,  incentives  for  recycling  and 
for producers to take responsibility for their waste 
are limited, despite the fact that a large network of 
collecting  and  separating  waste  points  supported 
by  EU  funds  is  now  operational.  Eliminating 
landfilling  and  putting  in  place  the  necessary 
infrastructure 
separation, 
re-use, 
recycling  and  high-level  composting  remain  a 
challenge.  The  2010  and  2013  targets  for  the 
diversion  of  biodegradable  municipal  waste  from 
landfills  were  missed  by  a  significant  margin.  In 
addition,  Cyprus  is  lagging  behind  the  2020 
municipal  waste 
target  of  50% 
recycling 
(European  Commission,  2019o).  In  addition, 
Cyprus does not recover energy from its municipal 
waste and the output of the  mechanical biological 
treatment  facilities  is  landfilled.  Furthermore,  this 
the  growing  greenhouse  gas 
contributes 
emissions  of  the  country  bringing  it  even  further 
away from its 2020 and 2030 targets. 

to 

Additional  investments  are  needed  to  increase 
municipal  waste  recycling.  Investments  of  €102 
million  are  required  to  achieve  the  2035  targets 
Projects 
(European 

Commission, 

2019o). 

62 

 
4.5. Environmental sustainability 

fires, 
crop 

forest 
poor 

agricultural 
yields, 

the  exception  of  2019,  and  higher  temperatures 
(average  rise  of  +0.5°C)  are  putting  extreme 
pressures on the country’s scarce natural resources,  
particularly on water, agricultural land, forests and 
soils,  and  are  threatening  ecosystem  biodiversity. 
land 
Furthermore, 
abandonment, 
erosion, 
desertification and loss of biodiversity also pose a 
challenge and negatively affect the  rural economy 
and tourism. In this respect, effective protection of 
the Natura 2000 areas from incompatible activities 
or  developments  that  fragment  or  degrade  them, 
especially  on  private  land,  is  vital.  Furthermore, 
severe weather events such as droughts, heatwaves 
or  water  shortages  are  all  expected  to  call  for  a 
rethink of social assistance, education and training 
and  other  climate  change  adaptation  policies  (see 
Section 4.3). 

Cyprus  is  far  off  track  from  meeting  its  2020 
and even more so 2030 greenhouse gas emission 
reduction  targets.  For  2020,  the  target  will  be 
missed  by  9  percentage  points,  and  by  25 
percentage  points 
compromising 
significantly the transition to climate neutrality and 
sustainable  growth  (see  Box  4.5.1).  This  is  also 
highlighted by SDG 13 on climate action. 

for  2030 

implemented 

Improving  the  energy  efficiency  of  buildings 
has  great  potential  for  unlocking  economic, 
social  and  environmental  benefits.  The  big 
majority  of  buildings  in  Cyprus  were  constructed 
with no or low levels of thermal protection, which 
is  a  substantial  source  of  energy  inefficiency. 
Several  measures  are  being 
to 
support energy efficiency in households, small and 
medium-sized  enterprises  and  public  buildings,  in 
particular  with  the  help  of  the  EU  funds  and 
additional ones that  have been announced,  mainly 
through the Energy Financial Instrument expected 
to be activated in 2020. However, the budgets  for 
some  grants  schemes  from  national  funds  are 
decided  on  an  annual  basis,  preventing  long-term 
investment  planning  on  the  part  of  the  applicants. 
Furthermore,  a  shortage  of  skilled  labour  in 
hinders 
building 
energy-efficient 
implementation.  

sector 

supporting actions higher up in the waste hierarchy 
(prevention,  re-use,  recycling)  will  help  in  this 
direction,  whereas  creating  installations,  such  as 
mechanical  biological  treatment  facilities,  with  a 
large  capacity  for  the  treatment  of  residual  waste, 
may 
public 
awareness 
communication 
activities could also be useful. 

recycling.  Raising 

discourage 

through 

various 

to 

Significant investment is also needed to improve 
water  management  and  prevent  floods.  Cyprus 
has  reported  investment  needs  of  around  3.5%  of 
improve  water 
significantly 
its  GDP 
management  (including  removal  of  obstacles  to 
fish  migration,  re-naturalisation  of  the  flow  of 
rivers,  and  various  measures  for  flood  prevention 
and  mitigation)  and  to  ensure  adequate  water 
collection  and  treatment.  Regarding  the  latter,  a 
considerable  amount  of  urban  wastewater  is  still 
discharged  without  collection  or  treatment.  Only 
54.4%  of  the  total  waste  water  is  subject  to 
secondary  treatment,  well  below  the  EU  average. 
Unfortunately,  many  ongoing  projects  in  this  area 
are  expected  to  be  completed  only  by  2027,  far 
exceeding the 2012 compliance deadline.  (51) The 
third  river  basin  management  plan (52)  and  its 
environmental  impact  assessment  are  expected  to 
be  published  in  2021.  The  plan  will  assess  the 
status of all water bodies in Cyprus and will update 
policies and measures for the efficient use of water 
in all sectors.  

Climate change and energy efficiency 

some 

action,  Cyprus 

Despite 
remains 
vulnerable  to  climate  change  due  to  droughts 
and  water  scarcity.  Cyprus  has  taken  measures 
outlined in the  national climate change adaptation 
plan  and 
the  draft  national  climate  change 
adaptation  strategy  for  agriculture  (MARDE, 
2019), however challenges remain and  need to be 
addressed in a more decisive manner. Rainwater is 
the  only  natural  supply  of  water,  and 
is 
supplemented  by  desalinated  sea  water.  This 
practice  is  energy-intensive  and  therefore  costly 
and  polluting,  as  it  depends  on  fossil  fuels. 
Prolonged lower precipitation in recent years, with 

(51)  Council Directive 91/271/EEC of 21 May 1991 concerning 
https://eur-

waste-water 

urban 
lex.europa.eu/legal-
content/EN/TXT/?uri=CELEX:31991L0271  

treatment: 

(52)  The  plan  was  prepared  under  the  Water  Framework 
Directive and is currently under public consultation.  

Higher  energy  efficiency  of  buildings  would 
in  Cyprus.  The 
alleviate  ‘energy  poverty’ 
proportion  of  the  population  unable  to  keep  their 
homes  adequately  warm  (SDG  1)  is  considerably 
higher  in  Cyprus  (21.9%)  than  the  EU  average 

63 

                                                           
4.5. Environmental sustainability 

of electricity from renewables and reduce the price 
of  electricity,  has  faced  several  setbacks  and 
progress so far has been limited.  

The  transition  from  highly  polluting  oil  power 
plants  towards  increased  use  of  renewable 
energy  sources  for  electricity  production  is 
becoming urgent (see Box 4.5.1). Measures have 
been  taken  to  reduce  the  sulphur  oxides  and 
nitrogen oxides emissions of the  fossil fuel power 
plants  which  can  improve  air  quality.  A  process 
has  started  to  convert  these  plants  to  natural  gas, 
but  this  will  not  increase  the  share  of  RES  and 
contribute sufficiently to the low-carbon transition. 
The  Commission’s  proposal  for  a  Just  Transition 
Mechanism will also help ensure that the transition 
towards  climate  neutrality  is  fair  by  helping  most 
affected  regions  address  the  social  and  economic 
consequences (see Annex D). 

Labour market and skills  

The  transition  to  a  green  economy  is  a  key 
opportunity for job creation and re-skilling.  (53)  
In Cyprus, jobs are expected to be created  mostly 
in green(ing) areas of manufacturing, construction 
and  the  services  sectors,  as  well  as  in  waste 
management  and  sustainable  finance.  Therefore, 
education  and  adult  learning  policies  need  to  be 
reviewed  (see  Section  4.3.3).  Climate  action  is 
expected to favour job creation for all skill groups, 
introducing  in  particular  more  low  to  middle-
the  market 
skilled,  middle-paying 
(Eurofound, 2019b).  

jobs 

in 

A  special  focus  on  the  gender  dimension  of  a 
just transition is essential to ensure that women 
benefit  equally  from  new  opportunities.  Since 
new  green  jobs  are  expected  to  be  created  in 
sectors  with 
female 
traditionally 
representation,  education  and  skills  need  to  be 
to  mitigate  pre-existing  gender 
strengthened 
inequalities (SDG 5). Therefore, if nobody is to be 
left  behind,  the  transition  will  require  careful  and 
fair management. In this context, social dialogue is 
crucial.  

limited 

(53)  See European Commission, 2019b.  

In  addition, 

(7.4%). 
the 
population  with  arrears  on  utility  bills  is  also  one 
of the highest in the EU (12.2% CY vs 6.6% EU).  

the  proportion  of 

Ensuring sustainable and green mobility system 
is key for Cyprus due to the large and growing 
proportion  of  transport  in  CO2  emissions. 
Transport,  which  currently  accounts  for  40%  of 
final energy demand, is the  most energy  intensive 
sector  in  the  economy  (see  Box  4.5.1).  The 
increasing  share  of  transport  in  CO2  emissions 
also jeopardises the meeting of the 2020 and 2030 
climate and energy targets. 

Energy transition  

Cyprus’  transition  to  green  energy  is  a  key 
challenge.  Cyprus  is  among  the  Member  States 
with  the  highest  greenhouse  gas  emissions  per 
capita in EU (SDG 13). Moreover, these emissions 
have  increased  significantly  since  1990.  The  two 
sectors  with  the  highest  emissions  are  electricity 
and 
transport  (see  Box  4.5.1).  Apart  from 
addressing  environmental  and  climate  concerns,  a 
transition to renewable energy  sources  would also 
significantly reduce the costs of energy generation 
(SDG  7),  especially  given  Cyprus’  potential  for 
solar energy generation. In addition, it would also 
reduce  Cyprus’  reliance  on  imported  fossil  fuels 
and,  thus,  reduce  Cyprus  exposure  to  fluctuations 
in global oil prices.  

Efforts  to  import  liquefied  natural  gas  are 
ongoing.  The  authorities  have  committed 
to 
complete  the  necessary  infrastructure  and  the 
contract to import liquefied natural gas by the end 
of  2021.  This  is  expected  to  help  to  diversify  the 
energy  mix  in  the  country,  although  not  in  the 
direction of renewables.  

The opening up of the electricity market is long 
overdue.  The  Electricity  Authority  of  Cyprus  –  a 
state-owned enterprise – is the only active supplier 
of  electricity,  although  there  are  currently  14 
licensed  suppliers.  Only  few  private  renewable 
generators  are  available  for  wholesale  production. 
Therefore,  consumers  actually  have  no  choice 
when  it  comes  to  their  electricity  supplier.  The 
process  of  opening  up  the  electricity  market  in 
Cyprus, which is paramount to increase production 

64 

                                                           
4.5. Environmental sustainability 

Box 4.5.1: Transition to a more sustainable and decarbonised growth model (in particular 
in the electricity and transport sectors) 

Cyprus is among the Member States with the highest greenhouse gas emissions per capita at 11.6 tonnes of 
CO₂   equivalent  per  capita  in  2017,  compared  with  the  EU  average  of  8.8  tonnes.  Moreover,  emissions 
increased significantly by 56% between 1990 and 2017 – among the highest in the EU. Emissions in Cyprus 
are almost equally split between sectors inside the EU Emissions Trading System (ETS) (52%) and sectors 
outside of it (non-ETS sectors) (48%). They are dominated by energy production, which amounted to 33% 
of total emissions in 2017, closely followed by transport with a share of 21% of total emissions.  

Cyprus  will  not  be  able  to  meet  its  greenhouse  gas  emission  reduction  target  for  the  non-ETS  sectors  for 
2020, and even less so the target for 2030 (see Graph1a). The projected gap to the target for 2020 is 9%, 
while for 2030 it is 22% with additional measures foreseen so far by the government, and 25% with existing 
ones. 

Electricity production – challenges and possible solutions  

Almost half of the emissions comes  from two big power stations (1) since more than 90% of electricity is 
generated  from  imported  heavy  oil  or  diesel.  Only  about  10%  of  final  energy  consumption  came  from 
renewable energy sources in 2017, despite the fact that Cyprus has a unique potential in terms of producing 
solar power. Even in the absence of relevant taxes (see Section 4.1), the final tariffs for consumers remain 
higher  than  the  EU  average.  This  has  a  negative  impact  on  air  quality  (2)  and  electricity  prices  (0.1762 
€/kWh without taxes in comparison with 0.1356 €/kWh in the EU. (3)  

According to the final National Energy and Climate Plan of January 2020 (54), Cyprus estimates that it will 
reach  a  final  renewable  energy  sources  share  of  15%  by  2021  and  22.9%  by  2030.  These  targets  appear 
difficult to reach, unless policy and investment measures, especially in storage technologies, are stepped up. 
The  Plan  also  forecasts  an  investment  of  around  €30  million  a  year  in  renewable  energy  sources  (mostly 
photovoltaic and wind, but also biomass) as  well as the replacement by oil for natural gas as a source for 
electricity production from 2022. Significant investments in natural gas have already been committed, but 
investments in renewable energy sources are lagging behind. 

Since  March  2019,  several  support  schemes  focusing  on  small  scale  renewable  energy  sources,  energy 
saving in households, deployment of photovoltaic systems, biogas and biomass plants have been announced, 
but  have  not  yet  started.  However,  the  legal  and  regulatory  environment  is  not  conducive  for  large-scale 
investments in renewable energy sources. For instance, a 50 MW project on concentrated solar power, which 
was approved for  receiving a €60 million EU funding from the NER300 programme, has not proceeded yet 
due  to the  difficulties  in  financing  since  there  are  no  support  schemes  (with  feed  in  tariffs)  since  2015  in 
Cyprus.  Investments  for  improving  interconnections  with  neighboring  countries  and  for  creating  the 
necessary storage capacity can also enhance the penetration of renewable energy sources in the country. 

More  decisive  action  is  needed  to  create  an  open  electricity  market  to  allow  renewable  energy  sources 
producers  to  introduce  a  carbon  tax  and  to  promote  investments  in  large-scale  renewables.  That  would 
significantly increase electricity production from renewable energy sources, eventually replacing oil power 
plants. These measures, apart from having a positive impact on emissions, are expected to bring significant 
health  and  environmental  benefits.  They  would  also help  improve  the  cost-competitiveness  of  the  country 
and  reduce  prices  for  consumers,  by  lowering  the  cost  of  electricity  production,  as  the  cost  of  producing 
electricity from renewable energy sources is much lower than from fossil oil. This shift would also minimise 
the  exposure  of  the  Cypriot  economy  to  oil  price  risks.  Favourable  conditions  would  also  be  created  for 
enterprises  specialised,  among  others,  in  planning  and  installation  of  photovoltaic  panels  and  building 
insulation, which would help diversify the economy and create new jobs.  

(54)  The  Commission  will  assess,  in  the  course  of  2020,  the  final  National  Energy  and  Climate  Plan  submitted  by  Cyprus  on 

22.01.2020. 

65 

                                                           
4.5. Environmental sustainability 

Road transport – challenges and possible solutions  

Transport emissions are steadily growing and constitute 21% of Cyprus’ total emissions. The use of private 
cars is well above the EU average, while the use of public transport is very low (3% of total trips). Cyprus 
has  a  very  low  share  of  renewables  in  transport  (2.5%),  and  the  uptake  of  alternative  fuels  in  the  road 
transport mode is extremely low. In addition, the authorities’ plans to increase the share of electric vehicles 
in the car fleet appear modest and they would not deliver results if energy keeps being produced from fossil 
fuels.  Cyprus  will  likely  not  comply  with  requirements  on  renewable  energy  sources  for  road  transport 
fuels. (4) In 2018 the percentage of biofuels was only 2.69% (5), which is very far from the 10% renewable 
energy sources target for the transport sector for 2021-2030. 

To  tackle  this  challenge,  sustainable  public  urban  and  inter-urban  transport  is  essential.  This  could  include 
electric  and  hybrid  buses,  trams  and  light  rail  systems.  Increasing  the  use  of  public  transport  will  have 
environmental, health and productivity-enhancing benefits by reducing the time spent in the car. Promoting 
the use of electric vehicles is also crucial, but the necessary charging infrastructure is lagging behind, despite 
some EU funded projects. The potential for using biofuels could also be explored further. The shift to more 
sustainable  transport  would  help  create  new  jobs  and  new  value  added  to  the  economy  from  enterprises 
specialised  in  selling  and  repairing  electric  vehicles,  as  well  as  the  planning  and  installation  of  recharging 
facilities.  Furthermore,  the  swift  introduction  of  a  carbon  tax  for  non-ETS  sectors,  including  transport,  and 
decreasing the environmentally harmful fossil fuel subsidies (see Section 4.1) are essential policy measures 
that  would  give  the  right  price  signal  for  behavioural  change,  and  generate  income  that  could  be  used  to 
finance sustainable mobility and other climate and energy investments, including up-skilling and re-skilling 
and other labour market transition needs. The implementation of the Sustainable Urban Mobility Plans for all 
cities  as  well  as  the  National  Transport  Plan  should  contribute  to  the  necessary  modal  shift  from  road 
transport (and in particular private vehicles) to public transport and to sustainable and clean modes. Further 
efforts are needed to reduce the current modal share of cars (over 90%) and to increase the use of sustainable 
and clean modes. 

(1)  Vassilikos Power Station – 22.6 % of total emissions and Dhekelia Power Station – 16 %. 
(2)  Exposure to air pollution by particulate matter (µg/m3) is higher than EU average. 
(3)  https://ec.europa.eu/eurostat/statistics-

explained/index.php?title=Electricity_price_statistics#Electricity_prices_for_household_consumers  

(4)  Each  MS  is  obliged  to  fulfil  two  obligatory  targets  for  road  transport  fuels  by  2020,  according  to  EU  Directives 
2009/28/EC  and  2009/30/EC:  10 %  of  the  energy  consumption  of  transport  sector  should  come  from  RES,  such  as 
biofuels. In addition, fuel suppliers are required to reduce the greenhouse gas intensity of the transport fuels entering 
the  market by  6 %  compared  with  the  fuel  baseline  standard  (greenhouse  gas  emission  of  EU  transport  fuels  mix  in 
2010). 

(5)htps://ec.europa.eu/eurostat/documents/38154/4956088/SUMMARY+partial+provisional+results+SHARES+2018/25ce9

f29-7053-17c5-12a6-8efe878b6031 

66 

-25-20-15-10-50510201820202030Graph 1a: Targets and emissions under the effort sharing legislation (% change from 2005)TargetEmissions (preliminary data)Projection with additional measures%0246909500051015202530Graph 1b: GHG emissions by sectorEnergy supplyEnergy use in manufacturing industriesIndustrial processes and product useTransportOther energy useAgricultureWaste managementInternational aviationMt CO2-eq   
 
 
ANNEX A: OVERVIEW TABLE 

Commitments  

Summary assessment (55) 

2019 Country-Specific Recommendations (CSRs)  

of 

the 

functioning 

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.  Address  features 
of the tax system that may facilitate aggressive tax 
planning  by  individuals  and  multinationals,  in 
particular  by  means  of  outbound  payments  by 
multinationals. 

the 

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 

limited  progress  in  improving  the  efficiency  of 
the  public  administration  by  further  promoting  e-
governance.  However,  the  key  legislation  on 
modernising 
the  public 
administration 
is  still  pending  endorsement, 
despite  the  fact  that  revised  legislation  was 
submitted  to  the  House  of  Representatives  in 
October 2019. 

functioning  of 

the 

Some  progress  has  been  made  on 
the 
improvement  of  the  governance  of  State-owned 
enterprises 
for 
increased oversight and reporting were introduced 

requirements 

additional 

as 

(55)  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 or 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. 

67 

 
                                                           
A. Overview Table 

by  decisions  of  the  Council  of  Ministers.  These 
administrative  measures  are  intended  to  replace 
provisions  envisaged  in  the  draft  law  for  the 
governance of State-owned enterprises, which was 
withdrawn from the House of Representatives as it 
was  deemed 
it  would  not  be  adopted  
However  the  effectiveness  of  these  measures  is 
still to be assessed. In particular, additional efforts 
are  needed  to  create  a  transparent  process  for 
board  nominations  and  to  further  align  and 
improve corporate governance practices. 

that 

Limited  progress  on  the  reform  of  the  local 
government,  despite  the  intense  preparations  for 
revising  the  proposal  of  the  government,  as  it  is 
still pending for adoption. 

Limited  progress  since  Cyprus  is  in  the  process 
of  transposing  into  national  law  the  first  EU 
Directives  on  Anti-Tax  Avoidance.  Some 
additional  measures  were  announced,  such  as  the 
introduction  of  withholding  taxes  on  dividend, 
interest  and  royalty  payments  to  countries  on  the 
EU  list  of  non-cooperative  jurisdictions  on  tax 
matters,  the  introduction  of  a  tax  residency  test 
based  on  incorporation  and  the  reviewing  of  the 
transfer  pricing  framework  to  take  into  account 
the OECD base erosion and profit shifting (BEPS) 
project 
recommendations. 
pricing 
However,  their  effectiveness  in  addressing  the 
issue  of  aggressive  tax  planning  remains  to  be 
seen.   

transfer 

Cyprus  has  made  limited  progress  in  addressing 
CSR 2 

of 

Some  progress  has  been  made  in  facilitating  the 
reduction 
by 
implementing  the  ESTIA  scheme  (for  addressing 
non-performing  loans  collateralised  by  primary 
residences)  and  by  introducing  e-auctions  for 

non-performing 

loans 

68 

and local governments. 

Address  features  of  the  tax  system  that  may 
facilitate  aggressive  tax  planning  by  individuals 
and  multinationals,  in  particular  by  means  of 
outbound payments by multinationals. 

CSR 2: Facilitate the reduction of non-performing 
loans 
including  by  setting  up  an  effective 
governance  structure  for  the  State-owned  asset 
management  company,  taking  steps  to  improve 
the 
and 
payment  discipline 
supervision 
companies. 
Strengthen supervision capacities in the  non-bank 
financial sector, including by fully integrating the 
insurance and pension-fund supervisors. 

credit-acquiring 

strengthening 

of 

Facilitate  the  reduction  of  non-performing  loans 
including  by  setting  up  an  effective  governance 
structure  for  the  State-owned  asset  management 
company, 

A. Overview Table 

taking steps to improve payment discipline 

and  strengthening 
acquiring companies. 

the  supervision  of  credit-

Strengthen supervision capacities in the  non-bank 
financial sector, including by fully integrating the 
insurance and pension-fund supervisors. 

CSR 3: Complete reforms aimed at increasing the 
effectiveness  of  the  public  employment  services 
and  reinforce  outreach  and  activation  support  for 
young  people  Deliver  on  the  reform  of  the 
education  and  training  system,  including  teacher 
evaluation,  and  increase  employers'  engagement 
and learners' participation in  vocational education 
and  training,  and  affordable  childhood  education 
and  care.  Take  measures  to  ensure  that  the 
National  Health  System  becomes  operational  in 
2020,  as  planned,  while  preserving  its  long-term 
sustainability.  

properties  subject  to  foreclosure  proceedings. 
However,  progress  is  slow  in  setting  up  the  new 
governance  structure  of  the  State-owned  asset 
management  company.  New  members  have  been 
appointed  in  its  board  of  directors.  However  the 
governance  and  organisational  structure  of  the 
company  are  not  yet  complete,  while  the  long-
term business plan is still under preparation. 

Limited  progress 
improving  payment 
in 
discipline  as  in  2019,  a  new  insolvency  service 
was  established,  which  is  expected  to  operate 
more  efficiently  and  effectively  and  to  promote 
the  insolvency  framework.  The  ESTIA  scheme 
may  help  deal  with  strategic  defaulters.  The 
foreclosure  framework  was  strengthened in 2018, 
whereas  the  amendments  adopted  in  2019  may 
undermine the framework if implemented. 

Limited progress has been made in strengthening 
the  supervision  of  credit-acquiring  companies,  as 
a  bill  for  the  strengthening  of  the  supervision  of 
Authorized  Credit  Institutions  has  been  drafted, 
but  has  not  yet  been  submitted  to  the  House  of 
Representatives. 

Limited  progress  has  been  made 
in 
strengthening  the  supervision  capacities  in  the 
non-bank  financial  sector,  with  a  bill  aiming  to 
consolidate  and  strengthen  the  supervision  of 
insurance  companies  and  pension  funds  being 
submitted  to  the  House  of  Representatives  at  the 
end of 2019. The bill has not been adopted yet. 

Cyprus  has  made  some  progress  in  addressing 
CSR 3. 

69 

A. Overview Table 

Some progress has been made, as the reforms of 
the  public  employment  services,  outreach  to 
young people and support to get them into work or 
training  are  progressing  and  their  effectiveness  is 
improving. However, the sustainability of services 
is at risk as the additional staff recruited are only 
on short-term contracts until mid-2020, and youth 
unemployment is still high. 

Limited progress has been made, as there is only 
partial progress in the area of student assessment, 
with  sizeable  deviations  from  the  original  reform 
proposal.  Stakeholder  discussions  are  ongoing  on 
the  reform  of  teacher  evaluation,  but  no  concrete 
legislative progress has been made so far. Overall, 
performance  in  basic  skills  as  measured  by  PISA 
is poor, with slight improvements in mathematics 
and  sciences,  but  a  decline  in  reading.  Levels  of 
training  and  adult 
vocational  education  and 
learning remain low. 

Limited  progress  has  been  made,  as  supporting 
measures for affordable early childhood education 
and care are  still lagging behind. The  availability 
of  affordable  and  accessible  childcare  is  an  area 
where  divergence  exists  and 
free/low  cost 
childcare  is  limited,  creating  a  disproportionate 
burden for families. 

Some  progress  has  been  made  as  the  first  phase 
of  the  reform  for  out-patient  care  has  been 
launched and the  second phase of in-patient care, 
expected  by 
in  progress. 
Sustainability  risks  and  operational  challenges 
remain. 

June  2020, 

is 

Cyprus  has  made 
addressing CSR 4. 

limited  progress (56) 

in 

reforms  aimed  at 

Complete 
the 
effectiveness  of  the  public  employment  services 
and  reinforce  outreach  and  activation  support  for 
young people 

increasing 

Deliver  on  the  reform  of  the  education  and 
training  system, including teacher evaluation, and 
increase  employers'  engagement  and  learners' 
participation in vocational education and training, 

and affordable childhood education and care. 

Take  measures to ensure that the National Health 
System  becomes  operational  in  2020,  as  planned, 
while preserving its long-term sustainability. 

sustainable 

environment, 

CSR 4: Focus investment-related economic policy 
on 
in 
transport, 
particular  waste  and  water  management,  energy 
efficiency  and  renewable  energy,  digitalisation, 
including  digital 
research  and 
territorial 
into 
innovation, 
disparities  within  Cyprus.  Adopt  legislation  to 
simplify  the  procedures  for  strategic  investors  to 

skills,  and 

account 

taking 

(56)  The assessment of the investment CSR 4 does not take into account the contribution of the EU 2021-2027 cohesion policy funds 
as  the  Regulatory  framework  underpinning  the  programming  of  the  2021-2027 EU  cohesion policy    funds, has  not  yet  been 
adopted by the co-legislator, pending inter alia an agreement on the Multiannual Financial Framework. 

70 

                                                           
A. Overview Table 

obtain  necessary  permits  and  licences.  Improve 
access  to  finance  for  SMEs,  and  resume  the 
implementation of privatisation projects. 

Focus  investment-related  economic  policy  on 
sustainable transport, 

environment, 
management, 

in  particular  waste  and  water 

energy efficiency and renewable energy, 

digitalisation, including digital skills, 

Limited  Progress  has  been  made  as 
the 
obligation  of  fuel  suppliers  for  blending  biofuels 
to conventional transport fuels was increased to at 
least  5%  in  energy  content  for  2019.  Additional 
measures,  such  as  increasing  the  obligation  up  to 
10%  and  the  introduction  of  a  grant  scheme  for 
photo-voltaic installation on residential houses for 
the charging of electric vehicles or plug-in hybrid 
electric vehicles, are still under discussion. 

Limited progress has been made, as an integrated 
environmental permitting and inspection system is 
expected  to  be  introduced  in  2020.  An  update  of 
the  National  Strategy  for  the  Management  on 
Municipal  Waste  up  to  2021  will  start  in  2020. 
Draft  rules  regulating  the  waste  management  by 
local  authorities,  including  the  introduction  of 
‘pay  as  you  through’  mechanisms,  are  under 
consultation with the stakeholders, with the aim to 
be  finalised  and  submitted  to  the  House  of 
Representatives in 2020. 

Some  progress  has  been  made  as  schemes  are 
being implemented to support energy efficiency in 
SMEs and in private and public buildings. A new 
financial  instrument  for  SMEs,  energy  efficiency 
and  RES  is  expected  to  start  implementation  in 
2020.  A  green  tax  reform  is  under  discussion. 
However, Cyprus remains well below its targets. 

Limited  progress  has  been  made  as  announced 
measures  are  still  under  implementation.  The 
establishment  of  the  new  deputy  ministry  for 
Innovation  and  Digital  Policy  as  of  1st  March 
2020  was  adopted.  The  new  National  Digital 
Strategy 
is  under  preparation.  To  foster  e-
commerce,  the  authorities  have  also  launched  a 
grant  scheme  to  incentivise  small  and  medium-
sized  enterprises  to  invest  in  relevant  equipment 
and  services.  Furthermore,  measures  to  enhance 
digital skills are under preparation. 

71 

A. Overview Table 

and  research  and  innovation,  taking  into  account 
territorial disparities within Cyprus. 

Adopt  legislation  to  simplify  the  procedures  for 
strategic investors to obtain necessary permits and 
licences. 

Improve access to finance for SMEs, 

Some  progress  has  been  made  as  the  new 
national  research  and  innovation  strategy  for 
2019-2023  has  entered  into  force.  The 
law 
allowing  universities  to  create  spin-offs  was 
adopted  as  well  as  measures 
to  stimulate 
academia-business cooperation. 

Limited progress has been made, as the relevant 
legislation  for  simplifying  and  shortening  the 
procedures  to  obtain  the  necessary  permits  for 
strategic investments has been revised, but is still 
pending enactment. 

Some progress has been  made, as grant schemes 
are  ongoing.  In  addition,  the  establishment  of  an 
equity fund was adopted for the first time, and its 
implementation is under way. 

and  resume  the  implementation  of  privatisation 
projects 

No progress has been made as a few privatisation 
projects  are  still  under  consideration  by  the 
authorities, but without any progress so far. 

and 

justice 

revising 

CSR  5:  Step  up  efforts  to  improve  the  efficiency 
of the judicial system, including the functioning of 
civil 
administrative 
procedures, increasing the specialisation of courts 
and  setting  up  an  operational  e-justice  system. 
Take measures to strengthen the legal enforcement 
of claims and ensure reliable and swift systems for 
the  issuance  and  transfer  of  title  deeds  and 
immovable  property 
rights.  Accelerate  anti-
corruption reforms, safeguard the independence of 
the prosecution and strengthen the capacity of law 
enforcement. 

justice 

Step  up  efforts  to  improve  the  efficiency  of  the 
judicial  system,  including  the  functioning  of 
administrative 
civil 
procedures, increasing the specialisation of courts 
and  setting  up  an  operational  e-justice  system. 
Take measures to strengthen the legal enforcement 
of claims 

revising 

and 

Cyprus  has  made  limited  progress  in  addressing 
CSR 5 

Limited  progress  has  been  achieved  on 
enhancing the efficiency of the judicial system, as 
several  draft  laws  regarding  the  specialisation  of 
courts are still pending for adoption. The revision 
of  the  civil  procedures  rules,  the  implementation 
of  e-justice  and  the  recruitment  of  additional 
judges  to  clear  the  backlog  are  delayed.  A  draft 
law to facilitate the enforcement of claims is also 
pending adoption. 

72 

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

Accelerate  anti-corruption  reforms,  safeguard  the 
independence  of  the  prosecution  and  strengthen 
the capacity of law enforcement. 

A. Overview Table 

Limited progress has been made, as there is still 
a  large  backlog  in  cases  of  buyers  who  paid  the 
full amount for a property and have yet to receive 
legal  ownership  documents.  A  new 
their 
transparent  and  reliable  system  is  still  under 
discussion. On the positive side, an amended law 
to facilitate the transfer of title deeds was enacted 
in 2019.  

Limited  progress  has  been  made,  as  an  action 
plan  against  corruption  is  being  implemented. 
However,  key  measures  and 
legislation  are 
pending  adoption,  notably  the  draft  Act  for  the 
enhancement  of  transparency  in  public  decision 
making  (through  the  regulation  of  lobbying),  the 
draft Act for the establishment of the Independent 
Authority  against  Corruption,  the  draft  Act  for 
reporting  corruption  and  the  draft  Act  for  the 
protection  of  whistle-blowers.  The  capacity  to 
investigate  corruption has been strengthened  with 
the  newly  established  internal  affairs  service  of 
the  Police,  which  is  fully  operational  and  some 
measures have been taken to improve the capacity 
of  the  financial  investigation  unit  and  forensics. 
The bill on telephone tapping was approved by the 
House of Representatives in January 2020.  This is 
envisaged  to  improve  the  investigative  capacity 
for  corruption-related  crimes. A  draft  Act  law 
revising the existing provisions related to the Law 
Office’s  budgetary  independence,  separation  of 
functions,  and  recruitment  procedures,  is  still 
under discussion. 

Europe 2020 (national targets and progress)  

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

The employment rate  increased to 73.9% in 2018 
from  70.8%  in  2017,  above  the  EU  average, 
making notable progress, yet remaining below the 
target. 

R&D target: 0.5% of GDP  

0.55%  in  2018  almost  unchanged  from  2017  and 
exceeding the target.  

National  greenhouse  gas  emissions 
target:  
- 5% in 2020 compared with 2005 (in sectors not 

 -4% (c.t. 2005) (2018). Greenhouse gas emissions 
in  Cyprus  continue  to  increase,  and  according  to 
preliminary  2018  data  and  the  latest  national 

73 

A. Overview Table 

included in the EU emissions trading scheme)  

2020 renewable energy target: 13%  

projections,  Cyprus  is  expected  to  miss  its  target 
with  a  significant  margin  of  around  9  percentage 
points. 

13.9% in 2018 compared to 10.5% in 2017 driven 
by  the  increased  contribution  of  renewables  for 
heating  and  cooling,  which  grew  from  26.1%  in 
2017 to 36.8% in 2018. 

Energy  efficiency,  2020  energy  consumption 
targets:  

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

2.5  Mtoe  (2018)  almost  unchanged  from  2017. 
This  poses  a  serious  challenge  in  reaching  the 
target  without 
additional  measures. 
Furthermore,  over  90%  of  Cyprus’  energy 
consumption continues to be covered by imported 
oil and oil products. 

strong 

Early school/training leaving target: 10%.  

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

The proportion of early school leavers aged 18-24 
dropped to 7.8% in 2018 from 8.5% in 2017, thus 
staying well below the target. 

increased  yet 
Tertiary  educational  attainment 
again  to  57.1%  in  2018,  compared  to  55.9%  in 
2017. A substantial gap of 20.3 percentage points 
between  the  attainment  rates  of  native-  and 
foreign-born students persists. 

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%).  

The  proportion  of  people  at  risk  of  poverty  or 
social  exclusion  is  high  at  23.9%,  but  declining. 
The overall number declined for the third year in a 
row  by  9,000  compared  to  2017,  or  28,000 
compared to 2016, or 38, 000 compared to 2015. 

74 

ANNEX B: COMMISSION DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS 

75 

General government debt projections under baseline, alternative scenarios and sensitivity tests2018201920202021202220232024202520262027202820292030Gross debt ratio100,693,887,881,877,473,870,866,962,959,155,151,448,1Changes in the ratio (-1+2+3)6,7-6,7-6,0-6,0-4,4-3,6-3,0-3,9-3,9-3,8-4,0-3,7-3,4of which(1) Primary balance (1.1+1.2+1.3)-2,06,04,64,13,52,92,42,52,62,52,82,62,5(1.1) Structural primary balance (1.1.1-1.1.2+1.1.3)4,34,02,62,22,32,32,42,52,62,52,82,62,5(1.1.1) Structural primary balance (bef. CoA)4,34,02,62,22,22,22,22,22,22,22,22,22,2(1.1.2) Cost of ageing0,0-0,1-0,2-0,3-0,4-0,3-0,6-0,4-0,3(1.1.3) Others (taxes and property incomes)0,00,00,00,00,00,00,00,00,0(1.2) Cyclical component1,72,02,01,91,30,60,00,00,00,00,00,00,0(1.3) One-off and other temporary measures-8,00,00,00,00,00,00,00,00,00,00,00,00,0(2) Snowball effect (2.1+2.2+2.3)-2,5-2,0-1,8-1,7-0,8-0,6-0,6-1,4-1,3-1,3-1,2-1,1-0,9(2.1) Interest expenditure2,42,32,01,71,61,51,41,31,21,11,01,00,9(2.2) Growth effect-3,6-2,8-2,4-2,0-1,0-0,7-0,5-1,3-1,2-1,1-1,1-0,9-0,8(2.3) Inflation effect-1,3-1,4-1,4-1,4-1,4-1,4-1,4-1,4-1,3-1,2-1,2-1,1-1,0(3) Stock-flow adjustments7,21,20,4-0,20,00,00,00,00,00,00,00,00,0Note: For further information, see the European Commission Debt Sustainability Monitor (DSM) 2019. 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). 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.[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 and the DSM 2019.[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. 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 after that) to bring the debt-to-GDP ratio to 60 % by 2034. The critical values used are 0 and 2.5 pps of GDP. The DSA classification is based on the results of five 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. 40506070809010011020172018201920202021202220232024202520262027202820292030Debt as % of GDP -CYBaselineEnhanced lower GDP growth scenarioAdverse combined scenarioEnhanced higher interest rate scenario40506070809010011020172018201920202021202220232024(% of GDP)Stochastic debt projections 2020-2024 -CYp10_p20p20_p40p40_p60p60_p80p80_p90p50Baseline40506070809010011020172018201920202021202220232024202520262027202820292030Debt as % of GDP -CYBaselineHistorical SPB scenarioSGP scenario40506070809010011020172018201920202021202220232024202520262027202820292030Debt as % of GDP -CYBaselineHigher interest rate scenarioNegative shock on the SPBLower GDP growth scenarioBaselineHistorical SPBLower GDP growthHigher interest rateNegative shock on SPBStochastic projectionsRisk categoryLOWLOWLOWLOWLOWMEDIUMDebt level (2030)48.151.551.650.855.5Debt peak year20192019201920192019Percentile rank22.0%27.0%Probability debt higher6.8%Dif. between percentiles38.2LOWLong termLOW(S2 = -0.7)S1S2Short termLOW(S0 = 0.5)DSALOWDebt sustainability analysis (detail)Medium termLOWLOW(S1 = -2.4) 
ANNEX C: STANDARD TABLES 

Table C.1: 

Financial market indicators 

(1) Latest data Q3 2019. Includes not only banks but all monetary financial institutions excluding central banks. 
(2) Latest data Q2 2019. 
(3) Quarterly values are annualized. 
* Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

76 

201420152016201720182019Total assets of the banking sector (% of GDP)(1)523,6510,6458,6401,3331,1301,4Share of assets of the five largest banks (% of total assets)63,467,565,884,286,9-Foreign ownership of banking system (% of total assets)(2)35,219,221,619,121,721,1Financial soundness indicators:(2)              - non-performing loans (% of total loans)38,636,335,430,720,219,5              - capital adequacy ratio (%)15,316,616,816,317,118,7              - return on equity (%)(3)-7,1-7,71,7-11,97,19,4Bank loans to the private sector (year-on-year % change)(1)-4,23,6-8,30,7-5,5-6,2Lending for house purchase (year-on-year % change)(1)-2,8-3,0-1,0-0,7-0,8-0,4Loan-to-deposit ratio(2)83,783,277,971,960,358,8Central bank liquidity as % of liabilities(1)12,46,91,31,61,50,0Private debt (% of GDP)352,8347,8329,5304,0282,6-Gross external debt (% of GDP)(2) - public------    - private------Long-term interest rate spread versus Bund (basis points)*483,7404,1368,3230,6177,8136,5Credit default swap spreads for sovereign securities (5-year)*423,1330,6262,5180,0117,390,4 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
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. 
(2) Unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within two weeks. 
(3) Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2019. 
(4) Reduction in percentage of the risk of poverty rate, due to social transfers (calculated comparing at-risk-of poverty rates 
before social transfers with those after transfers; pensions are not considered as social transfers in the calculation). 
(5) Average of first three quarters of 2019 for the employment rate, unemployment rate and gender employment gap. 
Source: Eurostat 

77 

201420152016201720182019 5Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)6,85,27,68,57,8:Gender employment gap (pps)7,78,39,79,510,411,7Income inequality, measured as quintile share ratio (S80/S20)5,45,24,94,64,3:At-risk-of-poverty or social exclusion rate(1) (AROPE)27,428,927,725,223,9:Young people neither in employment nor in education and training (% of population aged 15-24)17,015,316,016,113,2:Dynamic labour markets and fair working conditionsEmployment rate (20-64 years)67,667,968,770,873,975,6Unemployment rate(2) (15-74 years)16,115,013,011,18,47,3Long-term unemployment rate (as % of active population)7,76,85,84,52,72,2Gross disposable income of households in real terms per capita(3) (Index 2008=100) 78,280,185,589,390,9: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 reduction(4)41,536,235,635,936,4:Children aged less than 3 years in formal childcare25,520,824,828,131,4:Self-reported unmet need for medical care4,71,50,61,51,4:Individuals who have basic or above basic overall digital skills (% of population aged 16-74):43,043,050,0:: 
 
 
 
 
 
 
   
 
C. Standard Tables 

Table C.3: 

Labour market and education indicators 

* Non-scoreboard indicator 
(1) Long-term unemployed are people who have been unemployed for at least 12 months. 
(2) Difference between the average gross hourly earnings of male paid employees and of female paid employees as a 
percentage of average gross hourly earnings of male paid employees. It is defined as "unadjusted", as it does not correct for 
the distribution of individual characteristics (and thus gives an overall picture of gender inequalities in terms of pay). All 
employees working in firms with ten or more employees, without restrictions for age and hours worked, are included. 
(3) PISA (OECD) results for low achievement in mathematics for 15 year-olds. 
(4) Impact of socio-economic and cultural status on PISA (OECD) scores. 
(5) Average of first three quarters of 2019. Data for youth unemployment rate is seasonally adjusted. 
Source: Eurostat, OECD 

78 

Labour market indicators201420152016201720182019 5Activity rate (15-64)74,373,973,473,975,076,1Employment in current job by durationFrom 0 to 11 months18,518,119,720,020,1:From 12 to 23 months7,69,59,710,211,3:From 24 to 59 months15,714,913,713,714,7:60 months or over58,257,556,956,153,9:Employment growth* (% change from previous year)-2,01,64,75,34,13,3Employment rate of women(% of female population aged 20-64)63,964,064,166,268,969,9Employment rate of men (% of male population aged 20-64)71,672,373,875,779,381,6Employment rate of older workers* (% of population aged 55-64)46,948,552,255,360,961,0Part-time employment* (% of total employment, aged 15-64)13,513,013,412,210,810,4Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)19,018,416,515,313,813,6Transition rate from temporary to permanent employment(3-year average)20,421,726,331,230,8:Youth unemployment rate (% active population aged 15-24)36,032,829,124,720,217,1Gender gap in part-time employment6,35,44,36,66,88,3Gender pay gap(2) (in undadjusted form)14,214,013,913,7::Education and training indicators201420152016201720182019Adult participation in learning(% of people aged 25-64 participating in education and  training)7,17,56,96,96,7:Underachievement in education(3):42,6::::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)52,554,553,455,957,1:Variation in performance explained by students' socio-economic status(4):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  
(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 

79 

201320142015201620172018Expenditure on social protection benefits* (% of GDP)Sickness/healthcare3,73,33,43,43,3:Disability0,70,70,70,80,8:Old age and survivors11,011,111,110,410,1:Family/children1,51,41,41,31,2:Unemployment2,61,81,41,31,0:Housing0,40,30,40,40,3:Social exclusion n.e.c.1,11,21,31,31,3:Total20,919,819,618,918,1:of which: means-tested benefits2,72,72,82,82,7:General government expenditure by function (% of GDP)Social protection13,413,713,613,513,1:Health3,12,62,62,62,6:Education6,86,06,05,95,7:Out-of-pocket expenditure on healthcare43,144,844,345,344,6:Children at risk of poverty or social exclusion (% of people aged 0-17)*27,724,728,929,625,525,5At-risk-of-poverty  rate(1) (% of total population)15,314,416,216,115,715,4In-work at-risk-of-poverty rate (% of persons employed)8,97,89,18,27,97,4Severe material deprivation rate(2)  (% of total population)16,115,315,413,611,510,2Severe housing deprivation rate(3), by tenure statusOwner, with mortgage or loan1,11,50,02,00,70,2Tenant, rent at market price2,63,01,31,61,73,7Proportion of people living in low work intensity households(4) (% of people aged 0-59)7,99,710,910,69,48,6Poverty thresholds, expressed in national currency at constant prices*814873637072730176428031Healthy life yearsFemales8,78,87,310,38,5:Males9,510,48,411,29,5:Aggregate replacement ratio for pensions(5)0,40,40,40,40,40,4Connectivity dimension of the Digital Economy and Society Index (DESI)(6):37,740,448,254,6:GINI coefficient before taxes and transfers*43,844,847,447,145,8:GINI coefficient after taxes and transfers*32,434,833,632,130,8: 
 
 
 
 
 
 
 
  
 
C. Standard Tables 

Table C.5: 

Product market performance and policy indicators 

*While  the  indicator  values  from  2003  to  2013  are  comparable,  the  methodology  has  considerably  changed  in  2018.  As  a 
result, past vintages cannot be compared with the 2018 PMR 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 75% and above, two if received below 75%, 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)  Simple average of the indicators of regulation for lawyers, accountants, architects and engineers. 
(9) 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). 

80 

Performance indicators201320142015201620172018Labour productivity per person1 growth (t/t-1) in %Labour productivity growth in industry-2,063,666,857,85-4,450,34Labour productivity growth in construction1,20-3,69-5,2713,264,1012,23Labour productivity growth in market services-1,71-1,102,181,02-1,74-1,18Unit Labour Cost (ULC) index2 growth (t/t-1) in %ULC growth in industry-12,32-1,67-5,79-6,297,840,50ULC growth in construction-8,49-1,775,22-11,34-0,37-9,08ULC growth in market services-2,74-2,32-3,00-1,661,891,31Business environment201320142015201620172018Time needed to enforce contracts3 (days)73511001100110011001100Time needed to start a business3 (days)8,08,08,06,06,06,0Outcome of applications by SMEs for bank loans41,411,341,760,761,570,98Research and innovation201320142015201620172018R&D intensity0,490,510,480,520,550,55General government expenditure on education as % of GDP6,806,006,005,905,70:Employed people with tertiary education and/or people employed in S&T as % of total employment485049484748Population having completed tertiary education5353636383839Young people with upper secondary education6909294919092Trade balance of high technology products as % of GDP-0,23-1,26-0,33-1,86-1,55-0,62Product and service markets and competition2003200820132018*OECD product market regulation (PMR)7, overall::1,651,80OECD PMR7, retail::1,671,29OECD PMR7, professional services8::3,112,14OECD PMR7, network industries9::2,641,58 
 
 
 
 
 
 
 
 
  
 
C. Standard Tables 

Table C.6:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2010 prices) 
         Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR) 
          Carbon intensity: greenhouse gas emissions (in kg  CO₂  equivalents) divided by GDP (in EUR) 
          Resource intensity: domestic material consumption (in kg) divided by GDP (in EUR) 
          Waste intensity: waste (in kg) divided by GDP (in EUR) 
Energy balance of trade: the balance of energy exports and imports, expressed as% of GDP.  
Weighting of energy in HICP: the proportion of 'energy' items in the consumption basket used for the construction of the HICP. 
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual% 
change). 
Real unit energy cost: real energy costs as% of total value added for the economy. 
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2010 
EUR). 
Real unit energy costs for manufacturing industry excluding refining: real costs as% of value added for manufacturing sectors. 
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP. 
Electricity and gas prices for medium-sized industrial users: consumption band 500–20 00MWh and 10 000 -100 000 GJ; figures 
excl. VAT. 
Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste. 
Public R&D for energy or for the environment: government spending on R&D for these categories as% of GDP. 
Proportion of GHG emissions covered by EU emissions trading system (ETS) (excluding aviation): based on GHG emissions. 
(excl. land use, land use change and forestry) as reported by Member States to the European Environment Agency. 
Transport energy intensity: final energy consumption of transport activity including international aviation (kgoe) divided by 
gross value added in transportation and storage sector (in 2010 EUR). 
Transport carbon intensity: GHG emissions in transportation and storage sector divided by gross value added in transportation 
and storage sector (in 2010 EUR). 
Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of 
international bunker fuels. 
Aggregated supplier concentration index: Herfindahl index covering oil, gas and coal. Smaller values indicate larger 
diversification and hence lower risk. 
Diversification of the energy mix: Herfindahl index covering natural gas, total petrol products, nuclear heat, renewable 
energies and solid fuels. Smaller values indicate larger diversification. 
* European Commission and European Environment Agency - 2018 provisional data. 

Source: European Commission and European Environment Agency (Share of GHG emissions covered by ETS); European 
Commission (Environmental taxes over labour taxes and GDP); Eurostat (all other indicators). 

81 

Green growth performance201320142015201620172018MacroeconomicEnergy intensity kgoe / €0,130,130,130,130,130,13Carbon intensity kg / €0,450,480,470,460,45-Resource intensity (reciprocal of resource productivity)kg / €0,680,690,670,700,780,74Waste intensity kg / €-0,11-0,13--Energy balance of trade % GDP-6,4-5,9-4,0-3,3-4,1-4,2Weighting of energy in HICP%9,539,338,357,467,368,37Difference between energy price change and inflation p.p.-7,0-8,8-17,5-13,512,99,1Real unit of energy cost% of value added16,915,215,716,2--Ratio of environmental taxes to labour taxesratio0,250,270,250,250,24-Environmental taxes% GDP2,73,12,92,82,82,8Sectoral Industry energy intensity kgoe / € 0,100,130,120,100,100,09Real unit energy cost for manufacturing industry excl. refining% of value added37,333,235,137,1--Share of energy-intensive industries in the economy% GDP3,002,883,123,282,93-Electricity prices for medium-sized industrial users€ / kWh0,200,180,140,120,140,16Gas 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%14,616,817,917,216,1-Share of GHG emissions covered by ETS*%50,553,251,853,152,252,3Transport energy intensitykgoe / €0,760,740,740,790,810,79Transport carbon intensitykg / €0,370,290,180,220,320,31Security of energy supplyEnergy import dependency%96,393,297,796,296,3-Aggregated supplier concentration indexHHI0,00,00,00,00,1-Diversification of energy mixHHI88,087,886,186,585,381,0 
 
  
 
 
ANNEX D: INVESTMENT GUIDANCE ON JUST TRANSITION FUND 

2021-2027 FOR CYPRUS  

Building  on  the  Commission  proposal,  this  Annex (57)  presents  the  preliminary  Commission  services’ 
views on priority investment areas and framework conditions for effective delivery for the 2021-2027 Just 
Transition  Fund  investments  in  Cyprus.  These  priority  investment  areas  are  derived  from  the  broader 
analysis  of  territories  facing  serious  socio-economic  challenges  deriving  from  the  transition  process 
towards a climate-neutral economy of the Union by 2050 in Cyprus, assessed in the report. This Annex 
provides  the  basis  for  a  dialogue  between  Cyprus  and  the  Commission  services  as  well  as  the  relevant 
guidance  for  the  Member  States  in  preparing  their  territorial  just  transition  plans,  which  will  form  the 
basis for programming the Just Transition Fund. The Just Transition Fund investments complement those 
under  Cohesion  Policy  funding  for  which  guidance  in  the  form  of  Annex  D  was  given  in  the  2019 
Country Report for Cyprus (58). 

Cyprus  is  among  the  Member  States  with  higher  greenhouse  gas  (GHG)  emissions:  11.6  tons  of  CO2 
equivalent per capita in 2017, compared to 8.8 at EU level. Cyprus was also the Member State with the 
highest increase (+56%) of GHG emissions in 2017 in relation to 1990 levels. Currently, around 39% of 
CO2  equivalent  emissions  come  from  the  electricity  production  in  the  two  power  plants  located  in  the 
areas  of  Vassilikos  and  Dhekelia.  Furthermore,  in  the  area  of  Vassilikos  there  is  a  cement  plant  which 
produces some 16% of the total GHG emissions.  

Against this background, it is particularly challenging for Cyprus to meet the carbon neutrality goals and 
adapt to climate change. Its challenges are twofold: 

  First,  the  potential  need  for  a  considerable  shift  in  energy  production  and  consumption, 
increasing significantly electricity production and consumption from Renewable Energy Sources 
(RES).  These  represent  currently  around  13%  of  energy  production  in  Cyprus,  the  remaining 
87%  coming  from  heavy  oil  or  diesel  power  plants.  This  would  allow  a  phasing  out/smooth 
transformation of the highly pollutant oil power plants in Vassilikos and Dhekelia. 

  Second, the potential need to invest in cleaner technologies to make manufacturing productions 

more efficient and less pollutant, particularly for the Vassilikos cement factory. 

Based on this preliminary assessment, it appears warranted that the Just Transition Fund concentrates its 
intervention on these two areas. To make such transition effective, investment needs have therefore been 
identified  for  diversifying,  greening  and  making  the  economy  more  modern  and  competitive  and  for 
alleviating the socio-economic costs of the transition. Key actions of the Just Transition Fund could target 
in particular investment in: 

• 

the deployment of technology and infrastructures for affordable clean energy, in greenhouse gas 
emission reduction, energy efficiency and renewable energy production; 

• 

research and innovation activities fostering the transfer of advanced technologies; 

•  upskilling and reskilling of  workers; 

• 

job-search assistance to jobseekers. 

The Vassilikos industrial site, performing activity listed in Annex I to Directive 2003/87/EC, employs a 
substantial  number  of  workers  and  its  activity  their  activity  is  at  risk  due  to  its  high  greenhouse  gas 
emissions.  Support  to  investments  to  reduce  the  emissions  could  be  considered,  provided  that  they 

(57)  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 Just Transition Fund 2021-2027 (COM(2020) 22) and the EC proposal for a Regulation of the European Social 
Fund Plus, the Cohesion Fund, and the European Maritime and Fisheries Fund and financial rules for those and for the Asylum 
and Migration Fund, the Internal Security Fund and the Border Management and Visa Instrument (COM (2020) 23).  

(58) SWD(2019) 1012 final. 

82 

 
                                                           
D. Investment guidance on Just Transition Fund 2021-2027 for Cyprus  

achieve a substantial reduction of emissions (going substantially below the relevant benchmarks used for 
free  allocation  under  Directive  2003/87/EC)  and  on  the  condition  that  the  investments  are  compatible 
with the European Green Deal. 

83 

ANNEX E: PROGRESS TOWARDS THE SUSTAINABLE 

DEVELOPMENT GOALS (SDGS) 

Assessment of Cyprus’ short-term progress towards the SDGs (59) 

Table E.1 shows the data for Cyprus and the EU-28 for the indicators included in the EU SDG indicator 
set used by Eurostat for  monitoring progress towards the SDGs in an EU context (60). As the short-term 
trend at EU-level is assessed over a 5-year period, both the value at the beginning of the period and the 
latest available value is presented. The  indicators are regularly updated on the  SDI dedicated section of 
the Eurostat website. 

Table E.1: 

Indicators measuring Cyprus’ progress towards the SDGs 

(59)  Data  extracted  on  9  February  2020 

from 

the  Eurostat  database 

(official  EU  SDG 

indicator 

set; 

see 

https://ec.europa.eu/eurostat/web/sdi/main-tables).  

(60)  The EU SDG indicator set is aligned as far as appropriate with the UN list of global indicators, noting that the UN indicators are 
selected for global level reporting and are therefore not always relevant in an EU context. The EU SDG indicators have strong 
links with EU policy initiatives. 

(Continued on the next page) 

84 

 
 
                                                           
 
  
 
E. Progress towards the Sustainable Development Goals (SDGs) 

Table (continued) 

(Continued on the next page) 

85 

 
 
 
   
 
E. Progress towards the Sustainable Development Goals (SDGs) 

Table (continued) 

(Continued on the next page) 

86 

 
 
 
   
 
E. Progress towards the Sustainable Development Goals (SDGs) 

Table (continued) 

(Continued on the next page) 

87 

 
 
 
   
 
E. Progress towards the Sustainable Development Goals (SDGs) 

Table (continued) 

Source: Eurostat 

88 

 
 
   
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