REPORT FROM THE COMMISSION Cyprus Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union
Date: 2020-05-20
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Cyprus, budget deficit, budget policy, budgetary control, epidemic, gross domestic product, infectious disease, macroeconomics, public debt, stability pact

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 20.5.2020  COM(2020) 548 final  REPORT FROM THE COMMISSION Cyprus  Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union  
 
 
REPORT FROM THE COMMISSION 

Cyprus 

Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of 
the European Union 

1. 

INTRODUCTION  

On  20  March  2020,  the  Commission  adopted  a  Communication  on  the  activation  of  the 
general  escape  clause  of  the  Stability  and  Growth  Pact.    The  clause,  as  set  out  in  Articles 
5(1),  6(3),  9(1)  and  10(3)  of  Regulation  (EC)  1466/97  and  Articles  3(5)  and  5(2)  of 
Regulation (EC) 1467/97, facilitates the coordination of budgetary policies in times of severe 
economic downturn. In its Communication, the Commission shared with the Council its view 
that, given the expected severe economic downturn resulting from the COVID-19 outbreak, 
the  current  conditions  permit  activation  of  the  clause.  On  23  March  2020,  the  Ministers  of 
Finance of the Member States agreed with the assessment of the Commission. The activation 
of  the  general  escape  clause  allows  for  a  temporary  departure  from  the  adjustment  path 
towards  the  medium-term  budgetary  objective,  provided  that  this  does  not  endanger  fiscal 
sustainability in the medium term. For the corrective arm, the Council may also decide, on a 
recommendation  from  the  Commission,  to  adopt  a  revised  fiscal  trajectory.  The  general 
escape  clause  does  not  suspend  the  procedures  of  the  Stability  and  Growth  Pact.  It  allows 
Member States to depart from the budgetary requirements that would normally apply while 
enabling  the  Commission  and  the  Council  to  undertake  the  necessary  policy  coordination 
measures within the framework of the Pact. 

Data  notified  by  the  Cypriot  authorities  on  31  March  2020  and  subsequently  validated  by 
Eurostat1 show that the general government surplus in Cyprus reached 1.7% of GDP in 2019, 
while  general  government  gross  debt  stood  at  95.5%  of  GDP2.  According  to  the  2020 
Stability Programme, Cyprus plans a deficit of 4.3% of GDP in 2020, while debt is planned at 
116.8% of GDP. 

The planned deficit for 2020 provides prima facie evidence of the existence of an excessive 
deficit as defined by the Stability and Growth Pact. 

Moreover,  the  data  for  2019  imply  a  lack  of  compliance  with  the  debt  reduction 
benchmark,which also provides prima facie evidence of the existence of an excessive deficit 
as defined by the Stability and Growth Pact. 

1 

https://ec.europa.eu/eurostat/documents/2995521/10294648/2-22042020-AP-EN.pdf/6c8f0ef4-6221-1094-

fef7-a07764b0369f 

2 The debt-to-GDP ratio increased in 2018, to 100.6% of GDP, due one-off operations to support the banking 

sector. 

1 

 
 
 
 
 
                                                           
Against this background, the Commission has therefore prepared this report, which analyses 
Cyprus’  compliance  with  the  deficit  and  debt  criteria  of  the  Treaty.  It  assesses  all  relevant 
factors  and  gives  due  consideration  to  the  major  economic  shock  linked  to  the  COVID-19 
pandemic.  

Table 1. General government deficit and debt (% of GDP)  

2016 

2017 

2018 

2019 

0.3% 

2% 

-3.7 

1.7 

2020 
COM 

-7% 

2021 
COM 

-1.8% 

103.4% 

93.9% 

100.6 

95.5 

115.7% 

105% 

0.1 

3.0% 

-0.4% 

Deficit 
criterion 

Debt 
criterion 

General 
government 
balance 
General 
government 
gross debt 
Gap to the 
debt 
reduction 
benchmark 

Note Source: Eurostat, Commission 2020 spring forecast 

2. 

DEFICIT CRITERION  

Based  on  the  2020  Stability  Programme,  Cyprus’  general  government  deficit  in  2020  is 
expected to reach 4.3% of GDP, well above and not close to the Treaty reference value of 3% 
of GDP. The deficit is expected to be primarily due to the deficit-increasing fiscal impact of 
the measures adopted by the government to fight the pandemic (estimated at 4.4% of GDP) 
and  the  assumed  contraction  of  tax  revenue  in  the  wake  of  to  the  deterioration  of  the 
macroeconomic situation.   

The planned excess over the Treaty reference value in 2020 is exceptional, as it results from a 
severe economic downturn. Taking into account the impact of the COVID-19 pandemic, the 
Commission 2020 spring forecast projects a contraction of real GDP growth in 2020 by 7.4%.  

The  planned  excess  over  the  Treaty  reference  value  would  be  temporary,  based  on  the 
Commission 2020 spring forecast, which projects the deficit to decline below 3% of GDP in 
2021.  However,  those  projections  are  surrounded  by  an  exceptionnally  high  degree  of 
uncertainty. 

In  sum,  the  planned  deficit  for  2020  is  above  and  not  close  to  the  3%-of-GDP  Treaty 
reference value. The excess is considered to be exceptional as defined by the Treaty and the 
Stability and Growth Pact, while the nature of the excess is currently considered temporary. 
Hence, the analysis suggests that prima facie the deficit criterion as defined by the Treaty and 
Regulation (EC) No 1467/97 is not fulfilled. 

3. 

DEBT CRITERION  

After decreasing substantially to 93.9% of GDP in 2017, the government debt-to-GDP ratio 
increased  to  100.6%  in  2018.  The  increase  was  mainly  due  to  the  issuing  of  a  series  of 
government  bonds (EUR 3.2 billion, over 15% of GDP) to  finance the one-off  government 
support for the sale and orderly winding down of the Cyprus Cooperative Bank (CCB).  

2 

 
 
 
 
 
 
 
 
The government debt-to-GDP ratio decreased substantially to 95.5% in 2019 from 100.6% of 
GDP in 2018. Debt reduction was due to a comfortable headline budgetary surplus combined 
with nominal GDP growth. It was partially offset by the debt-increasing impact of stock-flow 
adjustments  in  2019  (+0.4%  of  GDP),  which  reflected  increased  cash  reserves  held  by  the 
government.  

The  notified  data  show  that  Cyprus  did  not  comply  with  the  debt  reduction  benchmark  in 
2019 (see Table 1), as the gap to the benchmark is 0.1% of GDP.  

The  analysis  thus  suggests  that  prima  facie  the  debt  criterion  is  not  fulfilled  based  on  the 
2019 outturn data. 

4. 

RELEVANT FACTORS 

Article 126(3) of the Treaty provides that, if a Member State does not fulfil the requirements 
under one or both of those criteria, the Commission has to prepare a report. That report must 
also  “take  into  account  whether  the  government  deficit  exceeds  government  investment 
expenditure  and  take  into  account  all  other  relevant  factors,  including  the  medium-term 
economic and budgetary position of the Member State”.  

Those factors are further clarified in Article 2(3) of Regulation (EC) No 1467/97, which also 
provides  that  “any  other  factors  which,  in  the  opinion  of  the  Member  State  concerned,  are 
relevant in order to comprehensively assess compliance with the deficit and debt criteria and 
which the Member State has put forward to the Council and to the Commission” need to be 
given due consideration.  

For the apparent breach of the debt criterion, the analysis of the relevant factors is particularly 
warranted  given  that  debt  dynamics  are  to  a  larger  extent  influenced  by  factors  outside  the 
control of the government than is the case for the deficit. This is recognised in Article 2(4) of 
Regulation  (EC)  No  1467/97,  which  provides  that  the  relevant  factors  shall  be  taken  into 
account when assessing compliance on the basis of the debt criterion irrespective of the size 
of the breach. In that respect, at least the following three main aspects need to be considered 
when assessing compliance with the debt criterion given their impact on the debt dynamics 
and  sustainability:  (i)  adherence  to  the  MTO  or  the  adjustment  path  towards  it,  (ii)  the 
implementation of structural reforms, and (iii) the prevailing economic conditions. 

As specified in Article 2(4) of Regulation (EC) No 1467/97, as regards compliance with the 
deficit criterion in 2020, since the government debt-to-GDP ratio exceeds the 60% reference 
value and the double condition is not met - i.e. that the deficit remains close to the reference 
value and that its excess over the reference value is temporary - those relevant factors cannot 
be  taken  into  account  in  the  steps  leading  to  the  decision  on  the  existence  of  an  excessive 
deficit on the basis of the deficit criterion for Cyprus. In the current situation, a key additional 
factor  to  take  into  consideration  regarding  2020  is  the  economic  impact  of  the  COVID-19 
pandemic,  which  has  a  very  substantial  impact  on  the  budgetary  situation  and  results  in  a 
highly uncertain outlook. The pandemic has also led to the activation of the general  escape 
clause. 

4.1. 

 COVID-19 pandemic  

The  COVID-19  pandemic  has  led  to  a  major  economic  shock  that  is  having  a  significant 
negative  impact  throughout  the  European  Union.  The  consequences  for  GDP  growth  will 

3 

 
 
depend  on  the  duration  of  both  the  pandemic  and  of  the  measures  taken  by  national 
authorities and at European and global level to slow its spread, protect production capacities 
and  support  aggregate  demand.  Member  States  have  already  adopted  or  are  adopting 
budgetary  measures  to  increase  the  capacity  of  health  systems  and  provide  relief  to  those 
individuals  and  sectors  that  are  particularly  affected.  Significant  liquidity  support  measures 
and  other  guarantees  have  also  been  adopted.  Subject  to  more  detailed  information,  the 
competent statistical authorities are to examine whether those measures entail an immediate 
impact on the general government balance. Together with the fall in economic activity, these 
measures will contribute to substantially higher government deficit and debt positions. 

4.2  Medium-term economic position including structural reforms 

Since  2016,  real  GDP  growth  has  been  growing  increasingly  above  potential,  driven  by 
consumption.  Nominal  growth  has  also  been  very  strong  since  2016.  Hence,  it  cannot  be 
argued that macroeconomic conditions are a mitigating factor in explaining Cyprus’ lack of 
sufficient progress towards meeting the debt reduction benchmark in 2019.  

As a result of the COVID-19 pandemic, the Commission 2020 spring forecast projects GDP 
to decline by almost 7½% in 2020, reflecting the disruption in economic activity caused by 
the  travel  restrictions  and  lockdown  measures,  as  well  as  an  expected  significant  fall  in 
external  demand  for  services,  and  in  particular  for  tourism.  The  macroeconomic  outlook  is 
marked by a significant degree of uncertainty related to the duration of the pandemic and its 
economic impact.This is a mitigating factor in the assessment of Cyprus’ compliance with the 
deficit criterion in 2020. 
In its 2020 Country Report3, the Commission assessed that Cyprus has made overall limited 
progress  in  addressing  the  2019  Country  Specific  Recommendations.  More  specifically, 
Cyprus  has  made  some  progress  notably  in  improving  the  governance  of  State-owned 
enterprises; 
the 
effectiveness  of  the  public  employment  services  and  outreach  to  young  people;  improving 
R&D ;  easing  the  access  to  finance  for  the  SMEs,  and  implementing  the  first  phase  of  the 
reform of the National Health Insurance System. Only limited progress has been made in (i) 
reforming the public administration and local  governments; (ii) focusing investment-related 
economic  policy  on  sustainable  transport,  waste  and  water  management,  digitalisation  and 
digital skills; (iii) improving the effectiveness of the justice system and payment discipline; 
(iv) setting up a reliable system to issue and transfer immovable property rights. No progress 
has been made on implementing privatisation projects.  

reduction  of  non-performing 

loans;  strengthening 

facilitating 

the 

4.3 

 Medium-term budgetary position, including government investment 

The headline budgetary position improved from a deficit of 3.7% of GDP in 2018 to a surplus 
of 1.7% in 2019. The improvement of the headline balance in 2019 compared to 2018 mainly 
reflects  the  temporary  nature  of  the  deficit  in  2018,  which  was  due  to  one-off  government 
support to the banking sector in 2018 (7.4% of GDP). Public investment has fallen from 5.7% 
of  GDP  in  2018  to  1.7%  in  2019  due  to  the  one-off  impact  on  public  investment  of  the 
financial support measures to CCB in 2018. 

3 See Commission Staff Working Document SWD (2020) 512 final, 26.2.2020, "Country Report Cyprus 2020. 

Including an In-Depth Review on the prevention and correction of macroeconomic imbalances".   

4 

 
 
                                                           
Based  on  outturn  data  and  the  Commission  forecast,  Cyprus’  structural  balance  was  in  a 
surplus of 0.1% of GDP in 2019, thus complying with its medium-term bugdetary objective 
of a balanced structural budget in 2019. Compliance with the preventive arm requirements is 
a  mitigating  factor  for  the  assessment  of  Member  State’s  prima  facie  non-compliance  with 
the debt criterion in 2019. 

The  2020  Stability  Programme  provides  information  on  the  expected  temporary  impact  on 
public finances of the package of deficit-increasing measures adopted by the government to 
fight  the  pandemic  (estimated  at  4.4%  of  GDP).  The  medium-term  fiscal  outlook  is 
characterised  by  an  exceptional  degree  of  uncertainty  concerning  both  the  duration  of  the 
pandemic and its economic impact.  

4.4.  Medium-term government debt position  

After declining considerably from 103.4% in 2016 to 93.9% of GDP in 2017, the public debt-
to-GDP  ratio  increased  to  100.6%  of  GDP  in  2018.  That  increase  was  due  to  the  one-off 
government support measures for the sale and orderly winding down of the CCB in 2018.  

In  2019,  the  public  debt-to-GDP  ratio  decreased  substantially,  to  95.5%,  driven  by  a 
comfortable primary budget surplus as well as by a favourable snowball effect. Those debt-
reducing factors were partially offset by the debt-increasing impact of stock-flow adjustments 
(+0.4% of GDP). 

According to the Commission 2020 spring forecast, general government debt is expected to 
rise from 95.5% of GDP in 2019 to 115.7% by 2020. 

The debt sustainability analysis has been updated with the Commission 2020 spring forecast. 
This analysis confirms that, notwithstanding risks, the debt position remain sustainable over 
the  medium-term,  also  given  important  mitigating  factors  (including  the  debt  profile).  In 
particular, while the government debt position has deteriorated as a result of the COVID-19 
crisis,  the  debt-to-GDP  ratio  in  the  baseline  is  expected  to  be  on  a  sustainable  (declining) 
trajectory over the medium term4.  

4 The baseline is based on the Commission Spring 2020 forecast. Beyond 2021, a gradual adjustment of fiscal 
policy is assumed, consistent with the EU economic and fiscal coordination and surveillance frameworks. Real 
GDP growth is projected according to the so-called EPC/OGWG T+10 methodology. In particular, (real) actual 
GDP  growth  is  driven  by  its  potential  growth  and  affected  by  any  additional  fiscal  adjustment  considered 
(through the fiscal multiplier). Inflation is assumed to converge gradually to 2%. Interest rates assumptions are 
set in line with financial market expectations. Under the adverse scenario, higher interest rates (by 500 bps.) and 
lower GDP growth (by -0.5 pp.), with respect to the baseline, are assumed (throughout the projection horizon). 

5 

 
 
 
 
 
 
 
 
 
 
                                                           
Graph 1: Government debt-to-GDP ratio, Cyprus, % of GDP 

Source: Commission services 

4.5 

Other factors put forward by the Member State 

On  11  May  2020,  the  Cypriot  authorities  transmitted  a  letter  with  relevant  factors  in 
accordance with Article 2(3) of Regulation (EC) No 1467/97. The analysis  presented in the 
previous  sections  already  broadly  covers  the  key  factors  put  forward  by  the  authorities.  In 
their letter, the Cypriot authorities also stressed the positive evolution of  public finances in 
recent years, as reflected in the general government headline balance surpluses achieved over 
the  last  four  years  (2016-2019),  exlcuding  one-off  impacts  related  to  the  CCB.  The 
authorities also note that the cash buffer has marked an increase equivalent to approximately 
2% of GDP at the end of 2019, compared to 2018, notably in view of the planned repayment 
of the IMF loan in early 2020. 

 5. 

CONCLUSIONS 

According to the Stability Programme, Cyprus’ headline general government deficit in 2020 
is  planned  to  increase  to  4.3%  of  GDP,  above  and  not  close  to  the  3%  of  GDP  Treaty 
reference value. The planned excess over the reference value is considered to be exceptional, 
and currently considered to be temporary.  

The general government gross debt stood at 95.5% of GDP at the end of 2019, well above the 
60%  of  GDP  Treaty  reference  value.  Cyprus  did  not  comply  with  the  debt  reduction 
benchmark in 2019.  

In line with the Treaty and the Stability and Growth Pact, this report also examined relevant 
factors. As specified in Article 2(4) of Regulation (EC) No 1467/97, as  regards compliance 
with the deficit criterion in 2020,  since the government debt-to-GDP ratio exceeds the 60% 
reference value and the double condition is not met - i.e. that the deficit remains close to the 
reference  value  and  that  its  excess  over  the  reference  value  is  temporary  -  those  relevant 
factors cannot be taken into account in the steps leading to the decision on the existence of an 
excessive deficit on the basis of the deficit criterion for Cyprus. Overall, the analysis suggests 
that the deficit criterion as defined in the Treaty and in Regulation (EC) No 1467/1997 is not 
fullfilled.  

6 

 
 
 
 
 
As regards compliance with  the debt  criterion  in 2019, the relevant  factors, in  particular (i) 
the observed macroeconomic conditions; (ii) the limited progress with the implementation of 
growth enhancing structural reforms in past years, and (iii) the compliance with the medium 
term  budgetary  objective,  lead  to  the  conclusion  that  the  debt  criterion  as  defined  in  the 
Treaty and in Regulation (EC) No 1467/1997 is complied with.  

7