Recommendation for a COUNCIL RECOMMENDATION on the 2020 National Reform Programme of Cyprus and delivering a Council opinion on the 2020 Stability Programme of Cyprus
Date: 2020-05-20
Institutions: European Commission, Secretariat-General
Subjects: Cyprus, aid to undertakings, economic policy, economic recovery, economic reform, epidemic, infectious disease, investment, social security, stability pact, stability programme

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   EUROPEAN COMMISSION  Brussels, 20.5.2020  COM(2020) 513 final  Recommendation for a COUNCIL RECOMMENDATION on the 2020 National Reform Programme of Cyprus and delivering a Council opinion on the 2020 Stability Programme of Cyprus  
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2020 National Reform Programme of Cyprus and delivering a Council opinion on 
the 2020 Stability Programme of Cyprus 

THE COUNCIL OF THE EUROPEAN UNION, 

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

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

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

Having regard to the recommendation of the European Commission, 

Having regard to the resolutions of the European Parliament, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

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

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

(2) 

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On  17  December  2019,  the  Commission  adopted  the  Annual  Sustainable  Growth 
Strategy,  marking  the  start  of  the  2020  European  Semester  for  economic  policy 
coordination. It took due account of the European Pillar of Social Rights, proclaimed 
by the European Parliament, the Council and the Commission on 17 November 2017. 
On  17  December  2019,  on  the  basis  of  Regulation  (EU)  No  1176/2011,  the 
Commission also adopted the Alert Mechanism Report, in which it identified Cyprus 
as one of the Member States for which an in-depth review would be carried out. On 
the  same  date,  the  Commission  also  adopted  a  recommendation  for  a  Council 
recommendation on the economic policy of the euro area. 
The 2020 country report for Cyprus3 was published on 26 February 2020. It assessed 
Cyprus’s progress in addressing the country-specific recommendations adopted by the 

OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
SWD(2020) 512 final. 

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(4) 

(5) 

Council  on  9  July  20194,  the  follow-up  given  to  the  recommendations  adopted  in 
previous years and Cyprus's progress towards its national Europe 2020 targets. It also 
included  an  in-depth  review  under  Article  5  of  Regulation  (EU)  No  1176/2011,  the 
results of which were also published on 26 February 2020. The Commission’s analysis 
led it to  conclude that Cyprus is  experiencing  excessive macroeconomic  imbalances. 
In  particular,  a  very  high  share  of  non-performing  loans  burdens  the  financial  sector 
and high stocks of private, public, and external debt hang on the economy, in a context 
of moderate potential growth. 

On 11 March 2020, the World Health Organization officially declared the COVID-19 
outbreak  a  global  pandemic.  It  is  a  severe  public  health  emergency  for  citizens, 
societies  and  economies.  It  is  putting  national  health  systems  under  severe  strain, 
disrupting  global  supply  chains,  causing  volatility  in  financial  markets,  triggering 
consumer  demand  shocks  and  having  negative  effects  across  various  sectors.  It  is 
threatening  people’s  jobs,  their  incomes  and  companies’  business.  It  has  delivered  a 
major  economic  shock  that  is  already  having  serious  repercussions  in  the  European 
Union. On 13 March 2020, the Commission adopted a Communication5 calling for a 
coordinated economic response to the crisis, involving all actors at national and Union 
level. 

Several  Member States have declared a state of  emergency or introduced emergency 
measures.  Any  emergency  measures  should  be  strictly  proportionate,  necessary, 
limited in time, and in line with European and international standards. They should be 
subject to democratic oversight and independent judicial review. 

On  20  March  2020,  the  Commission  adopted  a  Communication  on  the  activation  of 
the general escape clause of the Stability and Growth Pact6. 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. 

(6) 

Continued  action  is  required  to  limit  and  control  the  spread  of  the  pandemic, 
strengthen  the  resilience  of  the  national  health  systems,  mitigate  the  socio-economic 
consequences through supportive measures for business and households and to ensure 
adequate  health  and  safety  conditions  at  the  workplace  with  a  view  to  resuming 
economic  activity.  The  Union  should  fully  use  the  various  tools  at  its  disposal  to 
support  Member  States’  efforts  in  those  areas.  In  parallel,  Member  States  and  the 

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OJ C 301, 5.9.2019, p. 117. 
COM(2020) 112 final. 
COM(2020) 123 final. 

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(8) 

(9) 

Union should work together to prepare the measures necessary to get back to a normal 
functioning of our societies and economies and to sustainable growth, integrating inter 
alia  the  green  transition  and  the  digital  transformation,  and  drawing  all  lessons  from 
the crisis. 

The  COVID-19  crisis  has  highlighted  the  flexibility  that  the  single  market  offers  to 
adapt  to  extraordinary  situations.  However,  in  order  to  ensure  a  swift  and  smooth 
transition to the recovery phase and the free movement of goods, services and workers, 
exceptional  measures that prevent  the single market  from  functioning  normally must 
be removed as soon as they are no longer indispensable. The current crisis has shown 
the need for crisis preparedness plans in the health sector, which include in particular 
improved  purchasing  strategies,  diversified  supply  chains  and  strategic  reserves  of 
essential  supplies.  They  are  key  elements  for  developing  broader  crisis  preparedness 
plans. 
The  Union  legislator  has  already  amended  the  relevant  legislative  frameworks7  to 
allow  Member  States  to  mobilise  all  unused  resources  from  the  European  Structural 
and  Investment  Funds  so  they  can  address  the  exceptional  effects  of  the  COVID-19 
pandemic. Those amendments will provide additional flexibility, as well as simplified 
and streamlined procedures. To alleviate cash flow pressures, Member States can also 
benefit  from  a  100%  co-financing  rate  from  the  Union  budget  in  the  2020-2021 
accounting  year. Cyprus is encouraged to make full use of those possibilities to help 
the individuals and sectors most affected by the challenges. 

The  socio-economic  consequences  of  the  pandemic  are  likely  to  be  unevenly 
distributed across the country due to  different  specialisation patterns, in  particular in 
areas  markedly  relying  on  tourism  and  more  generally  on  face-to-face  business  to 
consumers.  This  entails  a  risk  of  widening  territorial  disparities  within  Cyprus. 
Combined  with  the  risk  of  a  temporary  unravelling  of  the  convergence  process 
between Member States, the current situation calls for targeted policy responses. 

(10)  On 7 May 2020, Cyprus submitted its 2020 National Reform Programme and its 2020 
Stability  Programme.  In  order  to  take  account  of  their  interlinkages,  the  two 
programmes have been assessed at the same time. 

(11)  Cyprus is currently in the preventive arm of the Stability and Growth Pact and subject 

to the debt rule. 

(12) 

In  its  2020  Stability  Programme,  the  government  plans  the  headline  balance  to 
deteriorate  from  a  surplus  of  1,7%  of  GDP  in  2019  to  a  deficit  of  4,3%  of  GDP  in 
2020. The deficit is projected to decline to 0.4% of GDP in 2021. After decreasing to 
95,5%  of  GDP  in  2019,  the  general  government  debt-to-GDP  ratio  is  expected  to 
increase  to  116,8%  in  2020  according  to  the  2020  Stability  Programme.  The 
macroeconomic and fiscal outlook is affected by high uncertainty due to the COVID-
19  pandemic.  In  addition,  there  are  country-specific  risks  underlying  the  budgetary 

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Regulation (EU) 2020/460 of the European Parliament and of the Council of 30 March 2020 amending 
Regulations  (EU)  No  1301/2013,  (EU)  No  1303/2013  and  (EU)  No  508/2014  as  regards  specific  measures  to 
mobilise  investments  in  the  healthcare  systems  of  Member  States  and  in  other  sectors  of  their  economies  in 
response to the COVID-19 outbreak (Coronavirus Response Investment Initiative) (OJ L 99, 31.3.2020, p. 5) and 
Regulation  (EU)  2020/558  of  the  European  Parliament  and  of  the  Council  of  23  April  2020  amending 
Regulations  (EU)  No  1301/2013  and  (EU)  No  1303/2013 as  regards  specific  measures  to  provide  exceptional 
flexibility for the use of the European Structural and Investments Funds in response to the COVID-19 outbreak 
(OJ L 130, 24.4.2020, p. 1). 

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projections,  namely  explicit  contingent  liabilities  and  potential  financing  needs  of 
public  hospitals  during  the  first  years  of  the  implementation  of  the  National  Health 
Insurance System.  

In response to the COVID-19 pandemic, and as part of a coordinated Union approach, 
Cyprus has adopted budgetary measures to increase the capacity of its health system, 
contain  the  pandemic,  and  provide  relief  to  those  individuals  and  sectors  that  have 
been  particularly  affected.  According  to  the  2020  Stability  Programme,  those 
budgetary  measures  amount  to  4,4%  of  GDP.  The  measures  include  strengthening 
health care services with an extra budget of up to 0,5% of GDP, subsidised wages to 
keep  employees  on  the  payroll  in  case  of  suspended  business  operations  (2,7%  of 
GDP)  and  income  support  for  the  small  businesses  and  the  self-employed  (0,3%  of 
GDP).  In  addition,  Cyprus  has  announced  measures  that,  while  not  having  a  direct 
budgetary  impact,  will  contribute  to  support  liquidity  to  businesses,  including  for 
example  the  deferral  of  VAT  payment  for  a  period  of  two  months.  Overall,  the 
measures  taken  by  Cyprus  are  in  line  with  the  guidelines  set  out  in  the Commission 
Communication on a coordinated economic response to the COVID-19 outbreak. The 
full  implementation  of  those  measures,  followed  by  a  refocusing  of  fiscal  policies 
towards  achieving  prudent  medium-term  fiscal  positions  when  economic  conditions 
allow, will contribute to preserving fiscal sustainability in the medium term.  

(14)  Based  on  the  Commission  2020  spring  forecast  under  unchanged  policies,  Cyprus’ 
general government balance is forecast at -7% of GDP in 2020 and -1,8% in 2021. The 
general government debt ratio is projected to reach 115,7% of GDP in 2020 and 105% 
in 2021. 

(15)  On 20 May 2020, the Commission issued a report prepared in accordance with Article 
126(3) of the Treaty due to Cyprus’ non-compliance with the debt rule in 2019 and the 
planned  breach  of  the  3%  of  GDP  deficit  threshold  in  2020.  Overall,  the  analysis 
suggests  that  the  debt  criterion  as  defined  in  the  Treaty  and  in  Regulation  (EC)  No 
1467/1997 is complied with, while the deficit criterion is not fulfilled. 

(16)  Cyprus  reacted  to  the  COVID-19  outbreak  with  a  range  of  measures  to  mitigate  the 
economic  impacts  of  the  crisis.  On  15  March  2020  the  government  put  forward  a 
financial  support  programme  to  safeguard  public  health  and  ensure  the  economic 
survival of businesses and employers. The programme earmarks EUR 100 million for 
financial  support  to  the  health  sector  to  combat  the  pandemic,  including  for  the 
recruitment  of  additional  medical,  nursing  and  support  staff,  and  for  equipment  and 
infrastructure.  It  sets  out  a  series  of  measures  to  support  enterprises  by  enhancing 
liquidity,  e.g.  support  schemes  for  businesses  and  the  self-employed,  and  temporary 
suspension  of  VAT  payments  for  companies.  The  package  also  includes  dedicated 
support of EUR 11 million to help the tourism sector recover.  

(17)  The  COVID-19  crisis  demonstrates  the  need  to  channel  investments  to  improve  and 
modernise  public  health  care,  restore  capacity  and  implement  the  healthcare  reform. 
The  new  healthcare  system  offers  better  access  to  primary  care  services,  appropriate 
guidance  and  treatments  based  on  clinical  protocols.  It  also  provides  for  universal 
entitlement  to  affordable  health  services  in  the  context  of  the  COVID-19  outbreak. 
Cyprus  has  an  established  emergency  pandemic  plan  and  allocated  additional 
resources  to  prevent  and  manage  the  impact  of  infection  and  contagion.  In  the 
medium-term,  Cyprus  needs  to  steer  investments  towards  increasing  the  health 
system’s  effectiveness,  accessibility  and  overall  resilience.  Additional  resources  for 
the  health  system  shall  prevent  future  shortages  of  medical  staff,  critical  medical 

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supplies  and  infrastructure.  The  smooth  implementation  of  the  healthcare  reform,  as 
planned,  is  central  to  ensuring  access  to  healthcare  and  universal  coverage.  Digital 
health solutions and new applications would contribute to stepping-up the deployment 
of  e-health  services  and  improving  teleconsultations  and  alert  mechanisms.  Policies 
that improve the hospital capacity, health workers’ working conditions and ensure the 
use of personal protective equipment, testing, medicines and medical devices are vital. 
Integration with the long-term care and primary and community care is crucial in light 
of  demographic  change,  and  to  support  the  most  vulnerable,  including  people  with 
disabilities. 

(18)  After consistent positive labour market developments in recent years, Cyprus will now 
be  facing  challenges  in  terms  of  employment  levels  due  to  the  health  crisis.  Further 
efforts  are  needed  to  minimise  the  socio-economic  impact  of  the  crisis.  Cyprus  has 
already  adopted  emergency  measures  including  short-time  work  schemes  and  the 
extension  of  unemployment  benefits  to  the  self-employed.  It  will  be  important  to 
retain  employment  and  ensure  the  implementation  of  announced  measures,  in  close 
consultation  with  the  social  partners.  Strengthening  the  capacity  of  the  public 
employment  services  with  permanent  staff  will  be  key,  notably  by  safeguarding  the 
continuation  of  services  of  the  employment  counsellors  under  temporary  contracts 
expiring in the second half of 2020. This will avoid putting the services under further 
strain and to provide efficient support to the newly unemployed and other vulnerable 
groups,  such  as  young  people  not  in  education,  employment  or  training,  long-term 
unemployed  and  persons  with  disabilities.  Support  for  school-to-work  transition  and 
outreach  to  young  people  in  particular  require  further  attention,  as  recent  graduates 
might face additional difficulties in finding a job. 

(19)  The outbreak of COVID-19 requires appropriate  measures  to  mitigate social impacts 
and  to  support  households’  income  and  sustain  a  prompt  recovery  of  the  economy. 
According to the Commission forecast, unemployment is expected to rise to 8,6% in 
2020  and  recover  to  7,5%  in  2021.  External  demand  for  services  is  set  to  dip 
significantly, as the tourism sector is expected to be particularly hard hit by the crisis. 
Adequate  income  replacement  should  be  ensured  for  all  affected  workers  and  self-
employed people, including those facing gaps in terms of access to social protection. 
Social protection schemes need to protect those in employment, self-employment and 
unemployment. There is scope for strengthening the overall social protection system in 
order to prevent increases in poverty and inequality levels, notably by reaching out to 
the  most  vulnerable,  including  children,  inactive  people,  undeclared  workers,  and 
people with a migrant background.  

(20)  The  promotion  of  flexible  working  arrangements  with  the  involvement  of  social 
partners,  particularly  in  the  form  of  teleworking,  is  of  high  importance.  In  the  short 
term  these  will  support  workers  with  unforeseen  caring  responsibilities  for  children 
and other dependants, while in the long term they will facilitate labour market re-entry 
of  the  high  share  of  inactive  women  due  to  caring  responsibilities.  Since  the  elderly 
and  people  with  chronic  diseases  have  increased  risks  of  severe  illness  due  to  the 
virus, investing in quality long-term care services is of high importance to ensure their 
continued provision and efficiency in the short and medium term.  

(21) 

Improving  the  quality,  efficiency  and  labour  market  relevance  of  education  and 
training  is  crucial  in  this  crisis  context  and  to  ensure  a  fast  labour  market  recovery. 
Equipping people with the right skills is even more important in times where increased 
numbers might lose their jobs and need to be ready for job transitions thereafter. The 
mobility restrictions highlighted the challenges related to the low digital skills levels in 

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Cyprus.  This  negatively  affects  online  activities,  such  as  teleworking,  distance 
learning,  and  the  use  of  e-health  services.  Equal  access  to  IT  infrastructure  and 
internet,  including  for  disadvantaged  learners,  along  with  well-trained  teachers,  are 
key  for  quality  digital  education  and  distance  learning.  To  address  low  overall 
educational  and training outcomes and improve skills more broadly, it is essential to 
continue  with  the  education  reform,  while  investing  in  solutions  for  digital  learning, 
work-based  learning  and  apprenticeship  training,  and  in  developing  teachers’  and 
trainers’  competences  to  use  IT  tools  effectively.  There  is  scope  to  address 
underachievement  in  basic  skills,  as  well  as  raise  participation  in  adult  learning.  To 
accelerate  application,  retraining  programmes  could,  to  the  extent  possible,  be 
designed for online use  and then, once the pandemic is  contained, integrate physical 
presence, as appropriate. 

(22)  For the duration of the crisis and its aftermath, significant funds are and will be needed 
to  support  businesses.  Securing  adequate  access  to  finance  and  liquidity  is  essential, 
especially  for  small-  and  medium-sized  enterprises  (SMEs),  in  order  to  keep 
companies  in  business  and  people  at  work.  In  the  process  of  designing  and 
implementing  these  measures  the  resilience  of  the  banking  sector  needs  to  be  taken 
into account. Cyprus has implemented a specific Small Business Support Scheme that 
subsidises  the  salary  payments  of  businesses  with  up  to  five  employees.  In  addition, 
the  suspension  of  the  increased  contributions  to  the  national  health  system  and  the 
postponement  of  tax  payments  (e.g.  VAT)  will  ease  the  immediate  pressure.  Swift 
administrative  coordination,  practical  support  and  effective  communication  on  the 
backing  available  to  SMEs,  in  co-operation  with  the  SME  support  structures  and 
business  organisations,  are  essential.  Speeding  up  of  contractual  payments  by  public 
authorities can also help improve the cash flow of SMEs. Newly founded start-ups and 
scale-ups  may  need  specific  support,  e.g.  in  the  form  of  equity  stakes  by  public 
institutions  and  incentives  for  venture  capital  funds  to  increase  their  investments  in 
these firms.  It remains important to implement the equity support measures prepared 
before the crisis (Cyprus Energy Fund, co-investment equity fund). 

(23)  To  foster  the  economic  recovery,  it  will  be  important  to  front-load  mature  public 
investment  projects  and  promote  private  investment,  including  through  relevant 
reforms.  Protecting  and  using  the  country’s  natural  resources  efficiently  is  of 
paramount importance to  ensure a sustainable economic recovery  and future  growth. 
To  maintain  the  country’s  appeal  to  tourists,  it  is  necessary  to  address  challenges 
related to the green energy transition, effective waste and water management and the 
protection  of  nature  and  biodiversity.  While  significant  investments  have  already 
started,  more  investments  in  these  areas  need  to  be  frontloaded.  Cyprus  faces 
important  challenges  in  reaching  its  2030  target  for  greenhouse  gas  emissions  not 
covered by the EU emissions trading system. These challenges  need to  be addressed 
by planning and adopting additional measures in a timely manner in accordance with 
the  country’s  National  Energy  and  Climate  Plan.  Such  measures  will  require 
investments,  in  particular  in  areas  like  renewable  energy,  energy  efficiency  and 
sustainable transport, which can also help to provide a robust green stimulus. Cyprus 
also needs to improve its waste management system and the circular economy. Waste 
generation  remains  significantly  higher  than  the  EU  average,  while  recycling  rates 
remain  significantly  lower  than  the  EU  average.  Landfilling  rate  is  also  very  high. 
Water  and  waste  water  management,  notably  in  urban  areas,  is  characterised  by 
inefficiencies.  Droughts  and  water  scarcity  are  major  concerns  and  an  insufficient 
policy  response  might  affect  the  country’s  rural  economy  and  tourism.  The 
programming of the Just Transition Fund for the period 2021-2027 could help Cyprus 

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to  address  some  of  the  challenges  posed  by  the  transition  to  a  climate  neutral 
economy,  in  particular  in  the  territories  covered  by  Annex  D  to  the  country  report. 
This would allow Cyprus to make the best use of that fund. 

(24)  The  importance  of  a  modern  digital  infrastructure,  universal  internet  access  and 
availability  of  digital  services  were  highlighted  by  the  COVID-19  mobility 
restrictions.  Investing  in  the  digital  economy  is  essential  for  bolstering  productivity 
and boosting the economic recovery after the crisis. Cyprus ranks in the low end in the 
Commission’s  Digital  Economy  and  Society  Index  (DESI)  2020.  Only  45%  of 
Cypriots between 16 and 74 years have at least basic digital skills and ICT specialists 
still represent a lower proportion of the workforce compared to the EU average (2,7% 
vs  3,9%),  hampering  the  potential  of  the  digital  economy.  There  is  a  low  level  of 
online interaction between public authorities and citizens, with only 51% of Cypriots 
interacting  online.  The  level  of  e-commerce  (i.e.  SMEs  selling  online,  e-commerce 
turnover  and  online  cross-border  sales)  is  improving  (31,8  in  2019  against  29,4  in 
2018) but it is still below the EU average of 40,1 (out of 100). 

(25)  Cyprus can further improve its research and innovation system to support productivity 
growth  and  the  required  digital  and  environmental  transition  in  a  postpandemia 
scenario.  Firms’  low  research  and  innovation  absorption  capacity  hamper  Cyprus’s 
competitiveness.  Improved  academia-business  cooperation  and  commercialisation  of 
research  results  remain  a  key  bottleneck  and  require  urgent  action.  However,  recent 
measures  such  as  the  creation  of  a  new  department  for  research  and  innovation,  the 
appointment of a new Deputy Ministry for Research, Innovation and Digital Policy as 
well as the new National Strategy for Research and Innovation 2019-2023, which sets 
a higher research and innovation intensity target of 1,5% of GDP by 2023 (up from the 
current 0,56%) are promising steps. 

(26)  Tackling aggressive tax planning is key to improving the efficiency and fairness of tax 
systems, as acknowledged in the 2020 euro area recommendation. Spill-over effects of 
taxpayers'  aggressive  tax  planning  strategies  call  for  coordinated  national  action  to 
complement Union legislation. The economic evidence suggests that Cyprus' tax rules 
are used for aggressive tax planning purposes. Cyprus has taken steps to address this 
by  implementing  international  and  European  initiatives  and  taking  some  additional 
national measures. However, features of the system such as the absence of withholding 
taxes  on  outbound  dividend,  interest  and  royalty  payments  by  Cyprus-based 
companies  to  third  country  residents,  and  the  corporate  tax  residency  rules,  may 
continue to facilitate aggressive tax planning. The Notional Interest Deduction scheme 
needs to be closely monitored. Finally, the ‘Scheme for Naturalisation of Investors in 
Cyprus by Exception’ and the ‘Residence by Investment Scheme’ have been listed by 
the OECD as having a potentially high risk for being misused. 

(27)  An  effective  justice  system  remains  a  key  factor  for  an  attractive,  investment-  and 
business-friendly  economy  and  will  be  crucial  in  the  recovery  process.  Serious 
inefficiencies  in  the  justice  system  continue  to  undermine  contract  enforcement  and 
prevent  the  swift  resolution  of  civil  and  commercial  cases.  A  series  of  reforms  have 
been announced to address the most critical problems in the justice system in Cyprus, 
in  particular  the  outdated  civil  procedures  rules  and  digitalisation  of  the  courts,  the 
clearance of the large backlog of cases and the lack of lifelong training for judges, but 
progress remains slow.  

(28)  Strengthening  the  resilience  and  efficiency  of  the  public  administration  is  key  to 
ensuring the swift and effective implementation of the COVID-19 recovery measures 

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in  Cyprus.  Improving  the  coordination  between  central  and  local  government  and 
tackling the fragmentation and inefficiencies at local level are necessary to remove the 
bottlenecks  for  coherent  implementation,  investments  and  service  delivery  in  the 
country. Pushing forward the digitalisation of public administration is key to ensuring 
its  own  business  continuity,  as  well  as  the  continued  and  effective  access  to  public 
services for citizens and the businesses. 

to  address  medium- 

(29)  While the present recommendations focus on tackling the socio-economic impacts of 
the  pandemic  and  facilitating  the  economic  recovery,  the  2019  country-specific 
recommendations adopted by the Council on 9 July 2019 also covered reforms that are 
essential 
structural  challenges.  Those 
recommendations remain pertinent and will continue to be monitored throughout next 
year’s  European  Semester  annual  cycle.  That  also  applies  to  recommendations 
regarding investment-related economic policies. The latter recommendations should be 
taken  into  account  for  the  strategic  programming  of  cohesion  policy  funding  post-
2020, including for mitigating measures and exit strategies with regard to the current 
crisis. 

long-term 

to 

(30)  Safeguarding  the  overall  soundness  of  the  banking  system  and  managing  financial 
stability  risks  are  essential  for  weathering  the  COVID-19  crisis  and  supporting  the 
economy.  While  the  stability  of  the  banking  sector  improved  significantly  in  recent 
years, the pandemic is posing strains on banks, through an increase in credit risk and 
pressures on profitability and capitalisation.  Vulnerabilities and challenges stem from 
an  over-indebted  private  sector  and  a  high  stock  of  non-performing  loans  (NPLs), 
which  limit  the  scope  of  credit  support.  The  Cypriot  banking  sector  has  the  second 
highest  NPL  ratio  in  the  euro  area.  Therefore,  efforts  to  reduce  NPLs  remains  a 
priority, in particular addressing ‘legacy NPLs’ that are long overdue before the onset 
of  the  COVID-19  crisis.  For  achieving  this  aim,  progress  on  the  state-owned  asset 
management company (KEDIPES), including on its organisational model and strategy, 
is  essential.  The  ESTIA  scheme  importantly  seeks  to  support  and  protect  vulnerable 
borrowers,  but  it  is  remains  essential  to  balance  this  aim  with  improving  payment 
culture. In this respect, strengthening the enforcement of claims and promoting the use 
of  insolvency  framework  would  help  underpin  a  sustainable  workout  of  bad  loans. 
Moreover,  reducing  the  backlog  in  the  issuance  of  title  deeds  by  implementing  a 
structural solution to address the inadequacies of the property transaction system (i.e. 
the issuance and transfer of title deeds) remains an important task. 

(31)  Continuing efforts  to  strengthen the framework to  prevent  and sanction corruption is 
key  to  ensuring  recovery  in  the  aftermath  of  the  COVID-19  crisis  and  achieving  an 
efficient,  accountable  and  transparent  allocation  and  distribution  of  funds  and 
resources.  While  an  action  plan  against  corruption  is  being  implemented,  key 
measures  and  legislation  are  still  pending  adoption,  notably  the  draft  Acts  for  the 
enhancement  of  transparency  in  public  decision  making,  the  establishment  of  the 
independent  authority  against  corruption,  reporting  corruption  and  the  protection  of 
whistle-blowers.  The  provisions  related  to  the  law  Office’s  budgetary  independence, 
separation of functions and recruitment procedures are still pending completion. 

(32)  The  European  Semester  provides  the  framework  for  continuous  economic  and 
employment  policy  coordination  in  the  Union,  which  can  contribute  to  a  sustainable 
economy.  Member  States  have  taken  stock  of  progress  regarding United  Nations’ 
Sustainable  Development  Goals  (SDGs)  implementation  in  their  2020  National 
Reform  Programmes.  By  ensuring  the  full  implementation  of  the  recommendations 

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below, Cyprus will  contribute  to  the  progress  towards  the SDGs and  to  the  common 
effort of ensuring competitive sustainability in the Union.  

(33)  Close coordination between economies in the economic and monetary union is key to 
achieve a swift recovery from the economic impact of the COVID-19. Cyprus should, 
as  a  Member  State  whose  currency  is  the  euro  –  and  taking  into  account  political 
guidance by the Eurogroup – ensure its policies remain consistent with the euro area 
recommendations and coordinated with those of the other euro area Member States. 

(34) 

(35) 

(36) 

In  the  context  of  the  2020  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Cyprus’s  economic  policy  and  published  it  in  the  2020 
country  report.  It  has  also  assessed  the  2020  Stability  Programme  and  the  2020 
National  Reform  Programme  and  the  follow-up  given  to  the  recommendations 
addressed  to  Cyprus  in  previous  years.  It  has  taken  into  account  not  only  their 
relevance  for  sustainable  fiscal  and  socioeconomic  policy  in  Cyprus,  but  also  their 
compliance with Union rules and guidance, given the need to strengthen the Union’s 
overall  economic  governance  by  providing  Union-level  input  into  future  national 
decisions.  

In  the  light  of  that  assessment,  the  Council  has  examined  the  2020  Stability 
Programme and its opinion8 is reflected in particular in recommendation (1) below.  

In the light of the Commission’s in-depth review and this assessment, the Council has 
examined  the  2020  National  Reform  Programme  and  the  2020  Stability  Programme. 
The present  recommendations take into  account the need to  tackle the pandemic and 
facilitate  the  economic  recovery  as  a  first  necessary  step  to  permit  an  adjustment  of 
imbalances.  Recommendations  directly  addressing  the  macroeconomic  imbalances 
identified by the Commission  under Article 6 of  Regulation  (EU) No 1176/2011  are 
reflected in recommendations (1), (3) and (4), 

HEREBY RECOMMENDS that Cyprus take action in 2020 and 2021 to: 

1. 

2. 

3. 

In  line  with  the  general  escape  clause,  take  all  necessary  measures  to  effectively 
address the pandemic, sustain the economy and support the ensuing recovery. When 
economic  conditions  allow,  pursue  fiscal  policies  aimed  at  achieving  prudent 
medium-term  fiscal  positions  and  ensuring  debt  sustainability,  while  enhancing 
investment.  Strengthen  the  resilience  and  capacity  of  the  health  system  to  ensure 
quality  and  affordable  services,  including  by  improving  health  workers’  working 
conditions.  

Provide  adequate  income  replacement  and  access  to  social  protection  for  all. 
Strengthen public employment services, promote flexible working arrangements and 
improve labour market relevance of education and training. 

Secure  adequate  access  to  finance  and  liquidity,  especially  for  small  and  medium-
sized enterprises. Front-load mature public investment projects and promote  private 
investment  to  foster  the  economic  recovery.  Focus  investment  on  the  green  and 
digital transition, in particular on clean and efficient production and use of  energy, 
waste  and  water  management,  sustainable  transport,  digitalisation,  research  and 
innovation.  

8 

Under Article 5(2) of Council Regulation (EC) No 1466/97. 

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4. 

Step  up  action  to  address  features  of  the  tax  system  that  facilitate  aggressive  tax 
planning by individuals and multinationals. Improve the efficiency and digitalisation 
of the judicial system and the public sector.  

Done at Brussels, 

For the Council 
The President 

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