COMMISSION STAFF WORKING DOCUMENT In-depth review for Cyprus in accordance with Article 5 of Regulation (EU) No. 2011/1176 on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK 2022 European Semester – Spring Package
Date: 2022-07-22
Institutions: European Commission, Secretariat-General
Subjects: Cyprus, European Semester, credit policy, economic policy, economic recovery, economic reform, energy policy, indebtedness, macroeconomics, public debt, tourism

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 22.7.2022  SWD(2022) 628 final/2  CORRIGENDUM  This document corrects document SWD(2022) 628 final of 23.05.2022. Correction of figures in table 2.1.  The text shall read as follows:  COMMISSION STAFF WORKING DOCUMENT In-depth review for Cyprus                  in accordance with Article 5 of Regulation (EU) No. 2011/1176 on the prevention and correction of macroeconomic imbalances           Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK 2022 European Semester – Spring Package {COM(2022) 600 final} - {SWD(2022) 629 final} - {SWD(2022) 630 final} - {SWD(2022) 631 final} - {SWD(2022) 632 final} - {SWD(2022) 633 final} - {SWD(2022) 634 final} - {SWD(2022) 635 final} - {SWD(2022) 636 final} - {SWD(2022) 637 final} - {SWD(2022) 638 final} - {SWD(2022) 639 final}  
 
 
 
 
On the basis of this in-depth review for Cyprus undertaken under Regulation (EU) No 
1176/2011  on  the  prevention  and  correction  of  macroeconomic  imbalances,  the 
Commission has considered in its Communication “European Semester – 2022 Spring 
Package” (COM(2022)600 final) that: 

Cyprus  is  experiencing  excessive  imbalances.  Vulnerabilities  relate  to  high  government 
and private debt, large current account deficits and a still high stock of non-performing loans. 
The government and private debt-to-GDP ratios declined again thanks to a strong economic 
rebound in 2021. Non-performing loans of the banking sector declined substantially thanks 
to  large  sales  of  such  loans  to  credit  acquiring  companies  but  remain  high.  The  current 
account deficit is large despite an improvement in 2021, and moreover is projected to widen 
in 2022 and only slowly narrow thereafter, thereby not ensuring a prudent net international 
investment position over the medium term. Government and private debt-to-GDP ratios are 
expected  to  further  improve,  in  part  on  the  back  of  economic  growth.  However,  the 
economic outlook for 2022 is surrounded by heightened uncertainty related to the impact of 
Russia’s invasion of Ukraine in view of particularly sizeable trade of services exposures. If 
implemented timely and effectively, the RRP has the potential to contribute to a significant 
reduction of vulnerabilities, but additional policy action is warranted. 

 
 
 
 
 
 
CONTENTS 

1.  Introduction 

2.  Assessment of macroeconomic imbalances 

3.  Thematic chapter: Private debt 

4.  Thematic chapter: External Imbalances 

LIST OF TABLES 

Table b.1.1:   Selected exposures 

Table 2.1: 

Selected economic and financial indicators (Part 1), Cyprus 

Table 2.2: 

Selected economic and financial indicators (Part 2), Cyprus 

Table 3.1: 

Private debt indicators, Cyprus 

LIST OF GRAPHS 

Graph b.1.1:  Sectoral distribution of energy use and of energy imported from Russia 

Graph b.1.2:  Cyprus goods and service trade balance and air passenger arrivals 

Graph b.1.3:    International investment position, asset and liabilities vs direct counterparts 

Graph 3.1: 

Household debt and balance sheets 

Graph 3.2: 

NFC debt and investment financing 

Graph 4.1: 

Thematic graphs: External imbalances 

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5 

14 

23 

10 

12 

13 

22 

9 

10 

11 

15 

20 

25 

3 

 
 
 
 
 
 
 
1.  INTRODUCTION 

In  2021,  over  the  previous  annual  cycle  of  surveillance  under  the  Macroeconomic  Imbalances 
Procedure (MIP), the Commission identified “excessive macroeconomic imbalances” in Cyprus. (1) 
These imbalances were related to high private-sector, government and external debt, and a high share of 
non-performing  loans  that  burden  the  financial  sector,  in  a  context  of  moderate  potential  growth.  The 
2022  Alert  Mechanism  Report  concluded  that  a  new  in-depth  review  (IDR)  should  be  undertaken  for 
Cyprus with a view to assessing the persistence or unwinding of imbalances. (2) 

Cyprus experienced a strong economic recovery in 2021, but the economic fallout from the Russian 
war  of  aggression  against  Ukraine  is  set  to  negatively  impact  economic  activity. (3)  The  economy 
grew by 5.5% in 2021, surpassing its 2019 GDP level. This was driven by strong domestic demand, lifted 
by government support measures and by pent-up demand built up during the pandemic year of 2020, as 
well as external demand for financial, ICT and professional services. Employment increased by 1.2%, as 
the  situation  in  the  tourism  sector  gradually  improved.  Most  businesses  continued  repaying  their  loans 
after  the  moratoria  were  lifted.  When  Cyprus  entered  2022,  the  overall  economic  situation  showed 
promising  signs  of  continued  improvement.  Russia’s  unprovoked  invasion  of  Ukraine  and  the  related 
sanctions,  however,  are  expected  to  slow  economic  growth  to  around  2.3%  of  GDP,  mostly  due  to 
missing Russian tourist arrivals and lower exports of professional and financial services. Inflation, which 
started rising in 2021, is expected to further pick up, and reach 5.2% in 2022, mainly due to significantly 
higher oil prices as well as secondary effects of exceptionally global energy prices. The assessment of this 
year’s IDR is surrounded by uncertainties around the evolution of the war, the related sanctions and the 
ability of the economy to adapt and contain their impact, with initial signs pointing to a relatively strong 
resilience of the Cypriot economy.  

This in-depth review presents the main findings for the assessment of imbalances. The assessment is 
backed  by  thematic  sections  on  developments  of  private  debt  and  external  imbalances.  Spillovers  and 
systemic cross-border implications of imbalances are also taken into account. In addition, assessments of 
structural  issues  made  in  previous  IDRs  and  in  the  context  of  fiscal  assessments  are  also  considered  if 
relevant. The MIP assessment matrix is published in the 2022 Country Report for Cyprus. (4) 

(1)  European Commission (2021), European Semester Spring Package 2021, COM(2021) 500 final. 
(2)  European Commission (2021), Alert Mechanism Report 2022, COM (2021) 741 final. 
(3)  Forecast data are from European Commission (2022), European Economic Forecast: Spring 2022, Institutional Paper 172. 
(4)  European Commission (2022), Country Report Cyprus 2022, SWD(2022) 604 final. 

4 

 
 
 
 
                                                           
2.  ASSESSMENT OF MACROECONOMIC IMBALANCES 

Assessment of gravity, evolution and prospects of macroeconomic imbalances 

The  stock  of  legacy  non-performing  loans  (NPLs)  in  the  banking  sector  has  been  significantly 
reduced,  although  the  majority  remains  on  the  balance  sheets  of  the  credit-acquiring  companies, 
and  thus  weighs  on  the  real  economy  as  private  sector  indebtedness  remains  high.  The  non-
performing loans ratio continued its downward trend and recorded a single digit level  for the first time 
since 2014. The total stock of non-performing loans (9) held by the banks stood at 8.1% of gross loans in 
2021  (2021Q3),  down  from  11%  of  gross  loans  a  year  earlier  (Table  2.2). The  decline  was  mainly  the 
result of NPL sales (EUR 1.6 billion) and write-offs (EUR 0.4 billion) made by the main banks (Bank of 
Cyprus  and  Hellenic  Bank)  as  well  as  repayments  (EUR  0.4  billion).  The  coverage  ratio of  non-
performing loans and advances decreased from 46% in December 2020 to 43% in December 2021, as the 
majority  of  the  NPLs  sold  or  written  off  were  more  heavily  provisioned,  driving  the  average 
downwards. (10) Credit risk remains elevated and it is the  most immediate  challenge  for the banks. The 
effects from the pandemic are visible through a deterioration of the credit quality of financial instruments. 
Russia’s unprovoked invasion of Ukraine is expected to have a negative impact on tourists’ arrivals and 
on  exports  of  services  and  may  thus  have  an  indirect  negative  spillover  effect  on  banks  through  their 
exposure to these sectors. Despite the significant reduction of the NPLs held by the banks, they continue 
to weigh on the real economy as they are now on the balance sheets of credit-acquiring companies. With 
this,  the risks have  shifted  from the banks to the credit acquiring companies  in  the  non-banking  sector. 
With the exception of KEDIPES, the credit acquiring companies are privately owned. 

Private debt has declined, but remains at a high level. The private debt-to-GDP ratio declined to 241% 
of  GDP  at  the  end  of  2021  after  its  peak  of  352%  of  GDP  in  2014,  reflecting  strong  GDP  growth  and 
nominal  debt  reduction  through  write-offs  of  bad  loans,  cash  repayments  and  debt-to-asset  swaps.  The 
decrease in 2021 was primarily driven by GDP developments (denominator effect). The household debt-
to-GDP  ratio  decreased  to  88%  of  GDP  in  2021  from  91%  of  GDP  in  2020  (see  Table  2.1),  despite 
positive net credit flows, also driven by significantly increased mortgage lending flows (about a quarter 
higher than in 2019) (11) supported by a government interest rate subsidisation scheme. This is still well 
above  the  estimated  prudential  benchmark  of  46%  for  household  debt,  even  though  close  to  the 
fundamentals-based benchmark (see also the thematic section on household debt). (12) The non-financial 
corporation  (NFC)  debt-to-GDP  ratio  stood  at  154%  of  GDP  in  2021  or  91%  of  GDP  excluding  non-
financial  special  purpose  entities  (SPEs) (13),  remaining  above  the  prudential  benchmark  of  81%,  even 
when accounting  for non-financial SPEs  foreign debt (see  also the  thematic  chapter on  NFC debt). Net 
credit flows to NFCs turned back positive in 2021 (1.4% of GDP), reflecting a range of policy measures 
to support the liquidity position of firms during the pandemic, including short-time working schemes, tax 
deferral, direct support to small businesses and a moratorium on loan payments that expired by end-2020, 
while an interest rate subsidisation scheme has supported credit also in 2021. These measures have been 
essentially phased out by end-2021. 

Despite  an  overall  reduction  of  non-performing  loans  in  the  private  sector,  several  economically 
important  sectors  remain  vulnerable  due  to  a  persisting  high  share  of  NPLs.  For  NFCs,  non-
performing  loans  declined  across  all  sectors  of  economic  activity,  but  remain  high  in  construction,  real 

(9)  The aggregate NPLs figures referred to in this report, unless otherwise indicated, are based on ECBs’ data and thus they differ 
from the figures referred to in the Post-Programme Surveillance Report Cyprus, Spring 2022, that are based on Central Bank of 
Cyprus’ data. 

(10)  Post-Programme Surveillance Report Cyprus. European Commission SWD (2022) 703. 
(11)  Monetary and Financial Statistics. Central Bank of Cyprus. April 2022. 
(12)  In the case of Cyprus, the fundamentals-based benchmark is likely biased upward due to the already high level of debt in the 

base year (1995). See thematic chapter for further details. 

(13)  In Cyprus, the non-financial corporate debt-to-GDP ratio is heavily influenced by non-financial Special Purpose Entities (SPE), 
which  mainly  have  foreign  debt.  They  are  legal  entities  registered  and  tax  resident in  Cyprus  with  few  employees  and/or no 
production, which are controlled by non-resident entities. Excluding SPEs allows a better picture of NFC indebtedness which is 
nevertheless high. Data on SPEs derived from Central Bank of Cyprus. 

5 

 
                                                           
2. Assessment of macroeconomic imbalances 

estate,  wholesale and retail trade, transport and professional business services. The default rate of loans 
exiting from moratoria has been low, but a significant percentage of these loans has been restructured and 
should continue to be monitored, particularly in the sectors of accommodation and construction. (14)  

The  government  debt-to-GDP  ratio  decreased  since  the  peak  of  the  pandemic  and  is  expected  to 
further decline but to remain nevertheless at a high level. In 2021, Cyprus reduced its public debt ratio 
to  103.6%  of  GDP  (from  115.0%  in  2020),  thanks  to  nominal  GDP  growth,  the  use  of  excess  cash 
reserves accumulated since the beginning of the pandemic through borrowing above financing needs, and 
an  improved  primary  balance.  These  factors,  combined  with  the  phasing  out  of  pandemic  support 
measures,  should  also  lead  to  a  further  decrease  in  public  debt  to  88.8%  of  GDP  by  end-2023.  The 
Commission’s  fiscal  sustainability  assessment  shows  that  Cyprus  overall  faces  medium  fiscal 
sustainability risks over the medium and long term. (15) When tapping the international markets in 2021-
2022, Cyprus has been supported by favourable financing conditions, bringing down its weighted average 
cost of debt closer to the EU average, and a high degree of oversubscription. Cyprus continues to benefit 
from an ‘investment grade’ ranking by three major rating agencies, with a positive or stable outlook. In 
July 2021, the fourth agency – Moody’s – changed Cyprus’ rating upward by one-notch to Ba1, one notch 
below investment grade. However, even though the immediate effects of the pandemic on public finances 
have subsided, the fiscal sustainability of the NHS in the aftermath of the reform poses a downside risk to 
the public finances. Moreover, uncertainty related to the impact of the invasion of Ukraine by Russia and 
related sanctions also poses significant risks to the budget. 

The  current  account  dynamics  are  not  conducive  to  maintaining  the  net  international  investment 
position (NIIP) at prudent levels in the medium-term. The NIIP deteriorated from -116.1% of GDP in 
2019  to  -136.2%  of  the  GDP  in  2020  and  partly  corrected  to  -122.8%  in  2021  (see  Table  2.1).  The 
deterioration of the NIIP between 2019 and 2021 is mostly due to the negative current account balances in 
2020 and 2021, as real GDP recovered to its 2019 level in 2021 and valuation effects were limited. SPEs, 
mostly  ship-owning,  contributed  significantly  to  the  negative  headline  NIIP  with  roughly  -80  pp.  The 
impact  risks  of  SPEs  for  the  real  domestic  economy  are  reportedly  limited,  as  ship-owning  SPEs  are 
mostly  funded  by  foreign  financial  institutions  or  other  related  non-resident  entities  and  own  assets 
located  outside  Cyprus. (16)  Therefore,  excluding  SPEs,  the  NIIP (17)  stood  at  -43.3%  of  GDP  in  2021, 
which is close to fundamental NIIP benchmark, and above, but close to, the prudential benchmark. The 
government sector also contributed negatively to the NIIP, with a net position of about  -87% of GDP in 
2021, as most government debt is held by foreigners. At the same time though, short-term risks related to 
this  are  contained  as  a  large  part  still  corresponds  to  loans  granted  by  official  creditors  at  favourable 
interest rates.  

The  current  account  deficit  widened  significantly  due  the  collapse  of  tourism  linked  to  the 
pandemic and a decrease in net primary income. The current account deficit deteriorated from 5.7% of 
GDP  in  2019  to  10.1%  of  GDP  in  2020  as  exports  of  travel  services,  mainly  tourism,  plummeted  by 
around  79%  in  2020  (travel  services  account  for  around  20%  of  total  exports  of  services).  In  2021,  it 
narrowed to 7.2% of GDP, reflecting also the recovery of the tourism sector. However, this balance is still 
well  below  the  balance  required  to  maintain  the  NIIP  at  prudent  levels. (18)  Since  2016,  the  primary 
income account has been posting relatively high deficits, contributing significantly to the overall current 
account deficit. The primary income deficit (19) increased from almost 6% of the GDP in 2020 to 7.4% in 
2021. The elevated primary income account deficits can be explained  in part by the growing activity of 
foreign-owned resident companies selling in the domestic market (e.g. investment firms, ICT companies), 
whose  profits  are  repatriated  in  the  form  of  dividends  or  recorded  as  retained  earnings  (see  also  the 
subsection on sectoral developments and external sustainability in the thematic chapter). In addition, the 

(14)  Post-Programme Surveillance Report Cyprus. European Commission SWD (2022) 703. 
(15)  See  European  Commission  Country  Report  on  Cyprus  for  the  latest  results  and  the    ‘Fiscal  Sustainability  Report  2021’, 

Institutional Paper 171, 25 April 2022 for methodological details... 

(16)  For more information see Country Report 2018.  
(17)  When  excluding  non-defaultable  instruments  such  as  portfolio  equity  from  the  NIIP,  the  remainder  (i.e.  NENDI),  shows  a 
positive value of 44% of GDP in 2021, reflecting a high stock of FDI in the private sector, of which a large part is related to the 
real estate sector. 

(18)  A current account balance of about -2% of GDP would be required to maintain the NIIP, excluding SPEs, at the current level, 

close to its fundamentals benchmark (and above prudential), according to simulations. 

(19)  Excluding SPEs, it deteriorated from 3.4% of GDP in 2019 to 5.2% of GDP in 2020 and 7.0% of GDP in 2021  

6 

                                                           
2. Assessment of macroeconomic imbalances 

interest  payments  of  credit  acquiring  companies  registered  in  Cyprus  on  their  foreign  debt  have  also 
contributed, to some extent, to the deterioration in the primary income account. 

Cyprus’ economy will be impacted by Russia’s invasion of Ukraine via a number of channels with 
consequences for the unwinding of the excessive macroeconomic imbalances (see also box 2.1). The 
Russian  aggression  against  Ukraine  and  related  sanctions  appear  to  have  a  limited  direct  impact  on  the 
Cypriot  financial  sector. (20)  However,  exports  of  services,  i.e.  tourism,  ICT,  business  and  financial 
services are expected to be negatively affected. In addition, Cyprus depends heavily on imported  oil. All 
of these are expected to have a negative impact on GDP growth, trade balance, and increase inflation. In 
the spring 2022 forecast, the Commission revised the GDP growth for Cyprus for 2022 down to 2.3% of 
GDP (from 4.1% in the winter forecast) and the current account deficit was forecast to widen to 8.8% of 
GDP. The less positive economic outlook carries downside risks on Cyprus’ fiscal position and the debt-
servicing  capacities  of  households  and  businesses.  Furthermore,  the  majority  of  loans  in  Cyprus  has 
variable interest rates, representing a vulnerability to interest rate increases. The European Systemic Risk 
Board has highlighted Cyprus as one of five countries at risk with regards to the household debt servicing 
ratio. (21)   

Assessment of MIP relevant policies 

The Cypriot recovery and resilience plan (RRP) includes a framework and action plan to continue 
reducing  NPLs.  In  the  banking  sector,  the  banks  are  still  working  on  additional  NPLs  portfolio  sales. 
However, the majority of the remaining stock of NPLs are either dominated by terminated accounts, are 
small tickets, or concern SME and household loans collateralised by primary residences and thus making 
future  sale  of  NPLs  increasingly  difficult.  Outside  the  banking  sector,  the  government  is  designing  the 
transformation  of  KEDIPES (22),  into  a  national  asset  management  company,  an  initiative  that  has  the 
potential to reduce legacy NPLs collateralised by primary residences in the banking sector. A number of 
legislative  initiatives  in  the  Cypriot  RRP  are  expected  to  improve  the  working  environment  of  credit 
acquirers  and  credit  servicers  and  result  in  better  NPL  management.  In  addition,  the  ongoing  justice 
system  reform  will  help  reduce  the  currently  very  long  duration  of  court  proceedings  and  help  resolve 
NPL-related cases.    

Several long-standing reforms and measures to address excessive private debt are included in the 
RRP. It includes a reform to reinforce the insolvency framework,  which  would significantly  help debt-
workouts by promoting the use of insolvency schemes and tools, digitalisation of the systems and training 
the practitioners. A significant effort will be also spent on reviewing the insolvency proceedings for legal 
entities  under  the  modernisation  of  the  Companies  Law.  Further  measures  aim  to  prevent  excessive 
private borrowing, such as the creation of a liabilities monitoring register encompassing liabilities other 
than  banking  loans,  including  tax  liabilities  and  contributions  to  social  insurance,  and  the  creation  of  a 
System  of  Exchange  of  Data  and  Credit  Bureaus.  The  latter  is  expected  to  improve  the  assessment  of 
credit  risk  for  new  lending  by  the  provision  of  credit  scoring  and  better  information  for  new  lending 
regarding  the  debtor’s  financial  profile.  The  RRP  also  foresees  the  implementation  of  a  strategy  to 
enhance  financial  education  within  the  general  population  to  avoid  excess  borrowing.  In  parallel,  the 
ongoing improvements in the property transaction system are expected to support deleveraging by helping 
to  liquidate  collateral  by  the  private  sector  and  strengthen  payment  discipline  going  forward.  For  the 
latter,  it  is  also  important  to  improve  the  legal  framework  of  the  enforcement  of  claims  and  court 
decisions.  Beyond  the  measures  foreseen  in  the  RRP,  safeguarding  an  operational  and  effective 
foreclosure framework is key to enhance payment discipline. 

Policy  measures  are  also  in  place  to  support  the  reduction  of  the  government  debt-to-GDP  ratio. 
First,  the  authorities  have  almost  phased  out  all  pandemic  support  measures.  The  newly  introduced 
consumer support measures to face increased energy prices are limited in scale and time, and should have 
only  a  very  limited  negative  effect  on  outstanding  gross  debt  in  2022-2023.  In  addition,  the 
implementation  of  RRP  measures  –  aiming  at  improving  tax  collection,  addressing  aggressive  tax 

(20)  For more information see Post-Programme Surveillance Report Spring 2022. European Commission SWD (2022) 703. 
(21)  ESRB (2022), “Vulnerabilities in the residential real estate sectors of the EEA countries”, Report, February. 
(22)  KEDIPES is the state-owned asset management company established in 2018 as the residual entity of the former state-owned 

Cyprus Cooperative Bank whose performing part was sold to Hellenic Bank. 

7 

                                                           
2. Assessment of macroeconomic imbalances 

planning  practices  and  shoring  up  healthcare  system  sustainability  –  should  facilitate  public  debt 
reduction and its long-term sustainability. 

A  number  of  measures,  already  implemented  or  planned,  should  support  external  rebalancing. 
Measures to strengthen productivity growth, to diversify the economy and to lower oil dependence with 
the roll out of renewables and interconnection with partner countries  – which are included in the RRP – 
should  also  help  to  improve  the  external  balance  and  its  resilience  to  shocks.  Measures  to  enhance 
payment discipline, as described above, are key to encourage private sector savings and limit excessive 
borrowing. The post-pandemic phasing out of the government support measures is expected to improve 
the general government net borrowing position and thus contribute positively to the NIIP.  

Conclusion 

Cyprus  entered  the  COVID-19  crisis  with  vulnerabilities  linked  to  high  government  and  private 
debt, external sustainability and a relatively high, albeit declining, stock of non-performing loans. 
The  pandemic  and  the  resulting  sharp  drop  in  GDP  have  led  to  an  increase  in  government  and  private 
debt-to-GDP ratios and a deterioration of the current account balance in 2020, while improving again in 
2021 thanks to a strong economic rebound. The current account deficit is above prudential levels, despite 
the noticeable improvement in 2021. Private debt stocks declined even during the crisis but much of it is 
concentrated in sectors with high non-performing loans ratios of which many were sold by banks to credit 
acquiring  companies.  Such  sales  led  to  a  substantial  reduction  of  non-performing  loans  in  the  banking 
system during the pandemic, achieving a single digit ratio. The NPLs sold to credit-acquiring companies, 
however, remain in the real economy. The large current account deficit is projected to widen in 2022 and 
only slowly narrow in the medium-term and is expected to remain below what would be needed to ensure 
a prudent  net international investment position over the  medium term. Government and private debt-to-
GDP ratios are expected to resume their decline from 2021, supported by the recovery of nominal GDP 
and phasing out of government support measures, but some deleveraging needs remain. The outlook for 
2022 is surrounded by uncertainty related to the impact of Russia’s military aggression against Ukraine 
and  the  related  sanctions,  in  view  of  trade  of  services  exposures,  a  weaker  economic  environment  and 
higher  inflation.  Possible  higher  interest  rates  could  impact  the  debt-servicing  capacity  of  households 
having mostly mortgage loans with variable interest rates (see also box 2.1). 

The  adopted  policy  agenda  has  the  potential  to  significantly  reduce  Cyprus’  current 
macroeconomic vulnerabilities.  Cyprus has phased out most of its government support measures put in 
place  as  a  response  to  the  COVID-19  shock.  These  measures  supported  employment  and  household 
income  and  have  successfully  averted  an  immediate  wave  of  bankruptcies  and  non-performing  debt. 
Addressing  long-standing  structural  issues,  the  Cypriot  RRP  includes  a  number  of  important  reforms 
aiming to boost the sustainability of government debt in the medium term, to limit excess borrowing by 
the private  sector, to diversify the Cypriot economy  – also diversifying exports  – and to further resolve 
non-performing loans in and outside the banking sector. The timely implementation of adopted measures 
and the continuation of efforts to close the remaining policy gaps will contribute to a clear reduction of 
the macroeconomic vulnerabilities faced by Cyprus. 

Based  on  the  findings  in  this  in-depth  review,  the  Communication  “European  Semester  –  2022 
Spring  Package” (23)  sets  out  the  Commission’s  assessment  as  to  the  existence  of  imbalances  or 
excessive imbalances in Cyprus, in line with Regulation 1176/2011. 

(23)  European Commission (2022), European Semester Spring Package 2022, COM(2022)600 final. 

8 

 
 
 
 
 
                                                           
2. Assessment of macroeconomic imbalances 

Box 2.1: Exposures to the commodity price surge, and to Russia 

This  box  summarizes  risks  and  exposures  regarding  the  commodity  price  surge,  and  the 
importance of direct links with the Russian economy. The surge of commodity prices since 2021 
had  been  aggravated  by  the  Russian  military  aggression  against  Ukraine.  This  box  shows  the 
exposures of Cyprus to energy imports from Russia, to gas and oil price shocks and to sanctions on 
Russia. Exposure to sanctions on Russia are the highest in the EU. Cyprus’ energy dependency on 
imports from Russia is minimal (Table b.1.1). Trade and financial links to Russia and the commodity 
price  surge  are  expected  to  affect  external  balances  in  the  short  run.  They  may  also  lead  to 
uncertainty  and  repercussions  for  the  Cypriot  economy  over  the  medium  term,  as  around  3%  of 
Cyprus  value-added  is estimated  to  derive  from  Russian  final  demand,  related  to  tourism,  financial 
and business services (see Table b.1.1).   

 Graph b.1.1: 

Sectoral distribution of energy use and of energy imported from Russia  

Notes: The left panel displays the distribution of primary energy usage in Cyprus according to Eurostat energy balances. The horizontal axis displays the 
relative importance of energy-consuming sectors. The vertical axis displays the importance of energy from Russia in satisfying that need. Note that this 
dependence on Russia differs according to sector’s use of natural gas vs oil and coal. For comparison, the right-hand panel displays the same concept for the 
EU aggregate. Russian imports include oil and petroleum products,natural gas and solid fossil fuels. 
Sources: Eurostat and European Commission services calculations 

The Cyprus energy mix is dominated by petroleum products, which account  for 86% of its 
primary energy usage. Cyprus has a service-oriented economy, and thus devotes less energy to the 
industry sector than the EU average, with construction and construction materials accounting for the 
most  energy-intensive  part  of  its  industry  sector  (Graph  b.1.1).  Available  data  suggests  that 
production destined to satisfy domestic demand, mainly transport, seems more energy-intensive than 
production  to  generate  export  revenue  (ICT,  financial  and  business  services,  and  tourism).  The 
transport sector thus accounts for a significantly larger share of inland energy consumption than in 
most other EU economies. (1) 

The oil price and Russia’s invasion of Ukraine with related sanctions are likely to weigh on 
the current account deficit during 2022 and 2023. Oil and other fossil fuel imports are one of the 
major items of  the Cyprus trade balance, and normally account for ca. 4% of GDP each year (and 
12% of imports destined for home consumption)(see Graph b.1.2). This exposes external balances to 
the current terms-of-trade shock. Due to increased oil prices, importing the same amount of oil as in 
previous  years,  which  has  been  rather  stable,  may  cost  Cyprus  an  additional  3  pp  of  GDP  on 
aggregate during 2022. Some of  this may be partially offset by an expansion  of  exports of services 
(tourism  and  non-tourism)  expected  for  2022  (see  the  forecast  for  the  non-fossil  trade  balance  in 
Graph  b.1.2).  It  is  important  to  note  that  the  expansion  forecast  for  travel and  non-travel  services 
exports has been revised down since the introduction of sanctions related to the invasion of Ukraine 
by Russia, which are expected to significantly  affect tourism from Russia and also, to some  extent, 
non-travel services to Russia.  

9 

 
 
 
 
 
 
 
 
 
 Graph b.1.2: 

Cyprus goods and service trade balance and air passenger arrivals 

2. Assessment of macroeconomic imbalances 

Notes: (1) The graph displays the trade balance as % of GDP, and highlights net trade of petroleum products, natural gas and solid fossil fuels (mainly coal), 
in 2015 import prices. The ‘fossil price impact’ component details the impact of price changes on the (also changing) real trade balance. 2022 and 2023 
figures reflect central assumptions of the Commission spring forecast, notably combining the forecasted fossil price evolution with broadly forecasted import 
quantities of fossil energy sources. 
(2) The graph displays the trade balance as % of GDP, and highlights net trade of petroleum products, natural gas and solid fossil fuels (mainly coal), in 
2015 import prices. The ‘fossil price impact’ component details the impact of price changes on the (also changing) real trade balance. 2022 and 2023 figures 
reflect central assumptions of the Commission spring forecast, notably combining the forecasted fossil price evolution with broadly forecasted import 
quantities of fossil energy sources. 

The  direct  exposures  towards  Russia  are  characterised  by  substantial  “reverse”  direct 
investment of Russian-owned entities.  Due to reporting asymmetries, sources differ somewhat in 
detailing  the  exact  amount  of  financial  links  between  Cyprus  and  Russia  (Graph  b.1.3  shows  a 
significant  share  of  unallocated  exposures  –  ROW  residual).  Among  assets  identified,  Cypriot  FDI 
liabilities towards Russia accounted for 475% of GDP in 2020 (Table b.1.1). Available data suggests 
that  a  significant  part  of  these  cross-border  equity  holdings  are  related  to  financial  special purpose 
entities  (SPEs)  and  are  insulated  from  the  domestic  economy,  and  that  their  potential  disruption 
should  have  limited  effect  for  the  Cypriot  economy.  Russian  residents  also  account  for  significant 
non-FDI assets in Cyprus, estimated at 71% of GDP in 2020. Total exposures towards Russia grew 
significantly since 2004 (Graph b.1.3). Real estate assets held by Russian residents form an important 
part of these net liabilities (2) vis-à-vis Russia and are estimated to amount to ca. 18 pp of  GDP. (3) 
As regards the domestic banking sector, exposures to Russia are of minor importance. (4)   

Table b.1.1:  

Selected exposures 

Notes: data source Eurostat for commodity exposures, European Commission Figaro for value-added exposures, BIS for consolidated banking exposures, 
European Commission FinFlows for other financial exposures. Energy gross inland consumption excludes net imports of electricity and derived heat. 

10 

Trade & financial exposuresunitCYEUEnergy mixunitCYEUDomestic value added embodied in exports to Russia% of GDP2.8%0.4%Solids fossil fuels (incl. peat)% of Gross inland consumption 20200.6%10.8%Non-energy Russian import content in final demand% of GDP2.2%0.4%Oil and petroleum products% of Gross inland consumption 202085.6%32.7%Russian tourist nights spent% of total 201923.7%2.7%Natural gas% of Gross inland consumption 20200.0%24.4%FDI assets held in Russia% of 2020 GDP685.9%2.5%Renewables and waste% of Gross inland consumption 202013.8%19.0%Portfolio & other inv. assets held in Russia% of 2020 GDP27.4%0.9%Nuclear% of Gross inland consumption 20200.0%13.1%FDI liabilities towards Russia% of 2020 GDP475.8%1.2%Commodity exposuresunitCYEUPortfolio & other inv. liabilities towards Russia% of 2020 GDP76.5%1.1%Net petroleum imports from all countries% of GDP 20210.9%1.2%Consolidated banking exposures towards Russia% of 2021 GDP0.5%Crude oil imports from Russia '20% of oil imports-25.7%Net gas imports from all countries% of GDP 20210.1%0.6%Gas imports from Russia '20% of gas imports0.0%43.6% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Graph b.1.3: International investment position, asset and liabilities vs direct counterparts 

2. Assessment of macroeconomic imbalances 

Notes: The graph displays total Cypriot external assets and liabilities excl. financial derivatives, as reported by Eurostat, and their repartition with respect to 
direct counterparts as reported by the FinFlows database. ‘Offshore economies’ represents the group defined as ‘offshore’ by Eurostat, plus several other 
non-EU economies (see Nardo et al., 2017, Finflows: database for bilateral financial investment stocks and flows : manual for a joint database DG-ECFIN & 
DG-JRC).  

(1)  Note that energy destined for ‘maritime bunkers’, i.e. international shipping, is not a part of gross inland consumption, 
and is thus not represented in the transport sector usage above. In the case of Cyprus, the usage of maritime bunkers 
accounted for 12% of all oil imports in 2020.   

(2)  According  to  Balance  of  Payments  guidelines  (BPM6  manual),  real  estate  property  held  by  foreign  residents  is 

accounted for in direct investment. 

(3)  See  Cyprus  Post-Programme  Surveillance  Report,  Spring  2022.  The  weight  of  Russian  property  buyers  in  total  real 
estate sales has declined since the end of the  Cyprus citizenship for investment programme (CIP). Non-EU property 
sales  accounted  for  18%  property  transactions  in  Cyprus  in  2021  (data  source:  Cyprus  DLS).  Non-EU  buyers  have 
been mostly British and Russian residents. 

(4)  The  Cyprus  banking  sector  also  comprised  RCB bank,  which  had been  a subsidiary  of  the  sanctioned  Russian  VTB 
bank.  Yet  RCB  bank  had  been  of  minor  importance  for  external  assets  and  liabilities  in  2020,  and  its  exit  from  the 
banking  sector  is  unlikely  to  affect  aggregate  exposure  figures.  See  Cyprus  Post-Programme  Surveillance  Report, 
Spring 2022.  

11 

0500100015002000250030000405060708091011121314151617181920% GDPAssets, All instruments, CYeuro areaOffshore economiesRussia, identified exp.Rest of EU27RoW/residualTotal reported, Estat0500100015002000250030000405060708091011121314151617181920% GDPLiabilities, All instruments, CYeuro areaOffshore economiesRussia, identified exp.Rest of EU27RoW/residualTotal reported, Estat 
 
 
 
 
 
 
 
 
 
Table 2.1: 

Selected economic and financial indicators (Part 1), Cyprus 

2. Assessment of macroeconomic imbalances 

(e) estimate based on ECB quarterly data 
(1) Potential output is the highest level of production that an economy can reach without generating inflationary pressures. 
The methodology to compute the potential output is based on K. Havik, K. Mc Morrow, F. Orlandi, C. Planas, R. Raciborski, W. 
Roeger, A. Rossi, A. Thum-Thysen, V. Vandermeulen, The Production Function Methodology for Calculating Potential Growth 
Rates & Output Gaps, COM, European Economy, Economic Papers 535, November 2014. 
(2) Deviation of actual output from potential output as % of potential GDP. 
(3) Current accounts in line with fundamentals ("current account norms") are derived from reduced-form regressions 
capturing the main determinants of the saving-investment balance, including fundamental determinants, policy factors and 
global financial conditions. See L. Coutinho et al. (2018), "Methodologies for the assessment of current account benchmarks", 
European Economy, Discussion Paper 86/2018, for details.  
(4) This benchmark is defined as the average current account required to reach and stabilise the NIIP at -35% of GDP over the 
next 20 years. Calculations make use of Commission’s T+10 projections. 
(5) NENDI is a subset of the NIIP that abstracts from its pure equity-related components, i.e. foreign direct investment (FDI) 
equity and equity shares, and from intracompany cross-border FDI debt, and represents the NIIP excluding instruments that 
cannot be subject to default. 
(6) Fundamentals-based benchmarks are derived from regressions capturing the main determinants of credit growth and 
taking into account a given initial stock of debt. Prudential thresholds represent the debt threshold beyond which the 
probability of a banking crisis is relatively high, minimising the probability of missed crisis and that of false alerts. Methodology 
to compute the fundamentals-based and the prudential benchmarks based on Bricongne, J. C., Coutinho, L., Turrini, A., 
Zeugner, S. (2019), “Is Private Debt Excessive?”, Open Economies Review, 1- 42. 
Source: Eurostat and ECB as of 2022-05-02, where available; European Commission for forecast figures (Spring forecast 2022) 

12 

all variables y-o-y % change, unless otherwise stated2003-072008-122013-17201820192020202120222023Real GDP 4.50.11.35.75.3-5.05.52.33.5Potential growth  (1)3.72.00.33.23.32.82.42.62.7Contribution to GDP growth:Domestic demand 6.0-1.11.62.94.3-0.82.72.92.8Inventories -0.20.4-0.20.71.5-2.3-0.60.00.0Net exports -1.40.5-0.22.2-0.5-1.93.4-0.60.7Contribution to potential GDP growth (1):Total Labour (hours) 1.30.9-0.11.31.10.70.60.90.9Capital accumulation 1.91.40.41.01.01.00.70.80.9Total factor productivity 0.5-0.40.00.91.11.11.11.01.0Output gap (2)3.10.4-4.83.75.6-2.30.60.31.1Unemployment rate4.67.014.28.47.17.67.57.87.3Harmonised index of consumer prices (HICP)2.52.7-0.40.80.5-1.12.35.22.7GDP deflator 3.02.0-0.51.01.1-1.12.74.53.2External positionCurrent account balance (% of GDP), balance of payments-6.2-7.7-3.1-4.0-5.7-10.1-7.2-8.8-7.2Trade balance (% of GDP), balance of payments-2.2-6.41.31.30.2-2.51.1..Primary income balance (% of GDP)-4.7-0.3-2.3-3.6-4.7-5.9-7.4..Secondary income balance (% of GDP)0.7-1.0-2.0-1.7-1.2-1.6-0.9..Current account explained by fundamentals (CA norm, % of GDP) (3)-2.0-2.6-1.9-1.8-1.8-1.9-2.1-2.0-2.1Required current account to stabilise NIIP above -35% of GDP over 20Y (% of GDP) (4)0.33.01.1-0.10.00.1-0.6-0.30.1Capital account balance (% of GDP)0.10.30.40.60.10.10.7..Net international investment position (% of GDP)-68.2-123.6-150.0-125.6-116.1-136.2-122.8..NENDI - NIIP excluding non-defaultable instruments (% of GDP) (5).-69.2-208.9-181.4-167.0-169.8-141.2..Net FDI flows (% of GDP).9.128.6-25.60.4-17.9...CompetitivenessUnit labour costs (ULC, whole economy)2.32.8-2.61.12.91.40.42.72.8Nominal compensation per employee 4.52.7-2.01.54.4-3.24.74.14.5Labour productivity (real, hours worked)1.60.10.91.01.41.61.6-0.81.6Real effective exchange rate (ULC)0.50.6-2.81.3-0.6....Real effective exchange rate (HICP)-0.1-0.4-1.21.7-2.20.5-0.3..Export performance vs. advanced countries (% change over 5 years)-13.8-7.5-0.619.221.029.1...Private sector debtPrivate sector debt, consolidated (% of GDP)247.1308.6334.4282.9249.9259.7241.3e..Household debt, consolidated (% of GDP)84.7117.1121.996.486.090.787.6e..Household  debt, fundamental benchmark (% of GDP) (6)69.078.598.890.588.097.093.1..Household  debt, prudential threshold (% of GDP) (6)40.941.239.543.047.144.945.6..Non-financial corporate debt, consolidated (% of GDP)162.5191.5212.5186.5163.8169.0153.7e..Corporate debt, fundamental benchmark (% of GDP) (6)155.6141.1160.9141.1134.4145.7137.2..Corporate debt, prudential threshold (% of GDP) (6)64.363.468.575.282.680.581.2..Private credit flow, consolidated (% of GDP) 22.618.82.111.51.7-2.53.5e..Corporations, net lending (+) or net borrowing (-) (% of GDP)-5.92.35.15.4-2.1-1.2-0.7-1.5-1.0Households, net lending (+) or net borrowing (-) (% of GDP)-7.5-5.5-5.1-5.3-4.7-3.1-4.8-7.0-6.0Net savings rate of households (% of net disposable income)0.7-0.5-7.5-3.0-0.31.8...forecast 
 
 
 
 
   
 
Table 2.2: 

Selected economic and financial indicators (Part 2), Cyprus 

2. Assessment of macroeconomic imbalances 

(7) Unweighted average of price-to-income, price-to-rent and model valuation gaps. The model valuation gap is estimated 
in a cointegration framework using a system of five fundamental variables; total population, real housing stock, real 
disposable income per capita, real long-term interest rate and price deflator of final consumption expenditure, based on 
Philiponnet, N., Turrini, A. (2017), "Assessing House Price Developments in the EU," European Economy - Discussion Papers 2015 - 
048, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission. Price-to-income and price-to-
rent gaps are measured as the deviation to the long term average (from 1995 to the latest available year). 
(8) Price-to-income overvaluation gap measured as the deviation to the long term average (from 1995 to the latest available 
year). 
(9) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 

Source: Eurostat and ECB as of 2022-05-02, where available; European Commission for forecast figures (Spring forecast 2022) 

13 

all variables y-o-y % change unless otherwise stated2003-072008-122013-17201820192020202120222023Housing marketHouse price index, nominal8.2-2.4-1.01.83.7-0.2-3.5..House price index, deflated5.2-4.9-0.10.52.60.7-5.5..Overvaluation gap (%) (7)3.34.9-1.7-6.7-7.1-6.2-13.6..Price-to-income overvaluation gap  (%) (8)6.31.4-1.3-9.6-12.2-8.4-14.2..Residential investment (% of GDP)10.38.24.26.57.67.66.6..Government debtGeneral government balance (% of GDP)-1.9-4.1-2.6-3.61.3-5.8-1.7-0.3-0.2General government gross debt (% of GDP)61.160.5103.298.491.1115.0103.693.988.8Banking sectorReturn on equity (%).-48.2-34.98.22.9-3.2...Common Equity Tier 1 ratio.7.714.115.418.318.4...Gross non-performing debt (% of total debt instruments and total loans and advances) (9).8.934.017.415.49.1...Gross non-performing loans (% of gross loans) (9)..35.220.218.111.08.1..Cost of borrowing for corporations (%).6.74.83.53.33.22.9..Cost of borrowing for households for house purchase (%).5.33.62.12.12.22.2..forecast 
   
 
 
3.  THEMATIC CHAPTER: PRIVATE DEBT 

Households 

Household non-performing loans in the banking sector have declined further despite the pandemic, 
but  remain  at  a  relatively  high  level.  Households  reduced  their  domestic  bank  liabilities,  which 
represented about 58% of total household liabilities at the  end of 2021. Total household debt liabilities 
amounted  to  88%  of  GDP  in  2021  (Table  3.1).  The  reduction  of  household  non-performing  loans  in 
banks’ balance  sheets  from 35% of total  household loans in 2019 to 24% in 2020 and 20% in 2021Q3 
(Graph 3.1(d)) has been achieved mostly through the sale of loans to credit acquiring companies. Some 
NPL reduction has also been achieved through a combination of debt-write-offs, collateral sales and other 
organic  reductions.  There  has  been  no  significant  restructuring  of  household  loans  that  exited  from  the 
2020 moratorium (about 3% only by end-2021) and loans at least one day past due amounted to 6.3% of 
the moratorium portfolio, by end-2021.  The share of household loans in stage 2 increased temporarily to 
14% in December 2020, but declined again to the pre-pandemic ratio (9%) by end-2021. (39) Outside the 
banking  sector,  other  financial  and  domestic  institutions  hold  42%  of  household  debt  liabilities.  This 
includes  notably  the  KEDIPES  public  asset  management  company  and  other  private  credit  acquiring 
companies  (see  Graph  3.1(a)).  The  majority  of  the  loans  held  by  credit-acquiring  companies,  including 
KEDIPES,  is  non-performing  and  about  half  of  banks’  total  non-performing  loans  in  2021Q3 (40) 
originates  from  households.  Resolving  all  household  non-performing  debt,  not  only  within  the  banking 
sector, would bring the household debt stock to close to its prudential threshold of 46% of GDP. 

Net  credit  flows  to  household  were  positive  in  2020,  supported  by  government  measures,  and 
remained positive in 2021. After showing negative net credit flows in 2019, households borrowed again 
more  than  they  repaid  in  2020  and  2021. These  positive  net  credit  flows  were  supported  by  a  range  of 
policy measures, most of which have been phased out by March 2022 (see Box 3.1) and have remained 
moderate. Household credit flows amounted to 1.3% of GDP in 2020 and around 2.1% of GDP in 2021, 
below the fundamental benchmark for flows (see Graph 3.1(b) and Table 3.1). The increase is likely to be 
linked to boosted mortgage lending. 

New  mortgage  lending  accelerated  in  2021  compared  to  recent  years,  but  the  effect  could  be 
temporary. Pure new loans for housing purposes reached around 5% of GDP in 2021, the highest level 
for the available data (Graph 3.1(c)), and could be a result of the government interest rate subsidisation 
scheme with applications open from March 2020 to December 2021. In 2020, 48% of loans, and in 2021, 
even  60%,  benefitted  from  the  scheme  (EUR  296  million  and  EUR  668  million  respectively).  The 
significant  increase  in  mortgage  loans  in  2021  could  be  linked  to  buyers  anticipating  their  purchase  in 
order  to  benefit  from  the  scheme,  but  close  monitoring  of  further  developments  in  2022  is  warranted. 
Other policy measures which incentivise demand for mortgages include low property transfer fees and the 
abolition  of  the  immovable  property  tax  in  2017.  Even  though  the  increase  in  the  overall  house  price 
index has been contained and house prices are not assessed as overvalued, these policies drive up demand 
and prices, which have increased faster in coastal areas. Banks in Cyprus are particularly exposed to the 
property market, directly via their exposure to real estate, acquired through debt-to-asset swaps and by the 
foreclosure  process,  but  also  indirectly  through  mortgage  lending,  which  combined  for  NFCs  and 
households amounted to 77% of GDP in 2021Q3, well above the level 53% for the euro area. (41)  

(39)  Figures on the performance of exposures that exited the moratoria schemes, the asset quality and volumes of loans under the 
government interest rate subsidisation scheme were obtained in the Post-Programme Surveillance Mission March 2022. Central 
Bank of Cyprus. 

(40)  Banking  figures  quote  here  and  in  Chapter  2  refer  to  ECB  consolidated  banking  data  for  banking  groups  including  foreign 
controlled subsidiaries and branches, unless stated otherwise. See also Bank of Cyprus, Aggregate Cyprus banking sector data 
on NPLs, December 2021. 

(41)  ECB and European Commission calculations. 

14 

 
 
                                                           
Graph 3.1:  Household debt and balance sheets 

3. Thematic chapter: Private debt 

Source: European Commission services 

The already weak financial position of indebted households in Cyprus could be put under pressure 
by  higher  interest  rates.  On  aggregate,  the  ratio  of  total  household  debt  to  unconsolidated  household 
financial assets declined to 34.7% in 2021 (Table 3.1) and currency and deposits represent a significant 
share  of  aggregate  household  assets.  Compared  to  the  EU  average,  the  median  Cypriot  household  with 
mortgage debt possesses less financial assets and the median indebted Cypriot household has less liquid 
assets but significantly more debt, which is amongst the highest ratio in the EU. In addition, they require a 
higher  share  of  income  to  repay  their  mortgage  debt. (42)  Confirming  these  vulnerabilities,  the  ESRB 
highlighted  Cyprus  in  February  2022  as  one  of  five  countries  at  risk  with  regards  to  the  debt  servicing 

(42)  According to the third wave (2017) of the ECB household finance and consumption survey, the ratio between median financial 
assets of households with mortgage debt and median outstanding mortgages was 15% (below the EU ratio of 21%). According 
to the same survey, the median ratio of net liquid assets to income for indebted households was 1.7%, compared to 17% for the 
same ratio for the euro area. In addition, the median debt to income ratio of indebted households in Cyprus, according to the 
survey, was 209%, above the same ratio for the euro area (71%) and the highest among euro area countries. In the survey, the 
mortgage debt service to income ratio of households with  mortgage debt was 26%] in Cyprus compared to 15% for the same 
ratio 
2017,  Table  F1, 
https://www.ecb.europa.eu/home/pdf/research/hfcn/HFCS_Statistical_tables_Wave_2017_May2021.zip?078368a4438f4d9471
2367f6615445aa. 

area.  Source:  Household  Finance 

and  Consumption  Survey 

euro 

the 

for 

15 

020406080100120140% of GDP(a) Debt Liabilities, Households, ConsolidatedLong-term bank loansshort-term bank loansloans by OFIsOther domestic debt liab.Foreigntotal consolidatedSource: ECB, Eurostat and European Commission calculations-15-10-50510150809101112131415161718192021'y-o-y change(b) Decomposition of y-o-y changes in debt-to-GDP ratios, households, non consolidatedCredit flowReal growthInflationOther changesD/GDP, changeSource: Eurostat and European Commission calculations010203040506018Q118Q218Q318Q419Q119Q219Q319Q420Q120Q220Q320Q421Q121Q221Q3(d) Households non-performing loans% of household loans and advancesSource: ECB data andEuropean Commission calculations02000400060008000100001200014000020406080100120140160180200Jan.Apr.Jul.Oct.Jan.Apr.JulyOct.Jan.Apr.JulyOct.Jan.Apr.JulyOct.Jan.Apr.JulyOct.Jan.201720182019202020212022millions EUR(c) Bank loans to households for house purchasePure new loansRenegotiated loansTotal new business loansOutstanding amount (rhs)  
                                                           
ratio (43),  stemming  from  a  possible  rise  in  interest  rates  affecting  floating-rate  mortgages,  which 
accounted for =more than  90% of new mortgages since 2014 (see Table 3.1). 

(43)  ESRB (2022), “Vulnerabilities in the residential real estate sectors of the EEA countries”, Report, February. 

3. Thematic chapter: Private debt 

16 

                                                           
3. Thematic chapter: Private debt 

Box 3.1: Policy support to Households and NFCs 

Moratoria on loan payments: The most significant loan moratorium run from March to December 2020 and 
covered  about  EUR 11.8  billion  or  43%  of  all  loans  and  advances.  The  moratoria  was  applicable  to  a 
maximum  of  9  months  for  each  borrower  and  borrowers  in  principle  had  to  be  performing  prior  to  the 
pandemic. A second loan moratorium, with considerably stricter eligibility requirements, ran from January to 
June 2021, with a very small uptake (covering only EUR 59 million of loans). 

Interest  rate  subsidies:  Applied  to  new  housing  from  March  2020  to  December  2021  (deadline  for  last 
applications).  It  covered  around  EUR  1  billion  in  new  mortgage  loans  from  March  2020  -December  2021. 
Applications may be processed until March 2022. 

Subsidies: One-off subsidies to micro and small enterprises and self-employed persons to cover part of their 
operating costs in 2020. 

Short-time  work  (wage  subsidies)  scheme:  Wage  compensation  to  employees  of  firms  forced  to  suspend 
their operations, provided the firm has not dismissed any employee as from 1 March 2020, for the period that 
the company is in the scheme plus one month. 

Tax deferrals: VAT payments could be delayed by few months on a rolling basis. 

Suspension  of  insolvency  and  foreclosures:  In  March  2020,  foreclosure  actions  were  suspended  for  three 
months, subsequently extended until the end of August. Foreclosures resumed in September, but in December 
2020 an act of parliament suspended them again. In May 2021, Parliament voted for a further suspension until 
31 July 2021. This was subsequently extended until the end of October 2021 with a narrower scope, but did 
not enter into force, as it was referred by the President to the Supreme Court (a hearing took place on January 
2022). 

Non-Financial Corporations 

The pandemic interrupted the deleveraging process of non-financial corporations (NFC) in Cyprus. 
In 2020, NFC’ debt as a share of GDP rose for the first time since 2014, mostly due to the sharp drop in 
real GDP, despite negative credit flows (-3.8% of GDP). However, it is expected to resume its previous 
declining trend in 2021 thanks to a recovery of nominal GDP growth, while credit flows turned positive 
(Graphs  3.2(a)  and  3.2(b)).  The  NFC  debt  stock  at  154%  of  GDP  at  the  end  of  2021  (and  about  91% 
excluding non-financial SPEs) is expected to remain above, but much closer since its peak in 2014, to its 
prudential  benchmark  of  81%  (which  is  unaffected  by  the  presence  of  SPEs)  and  to  its  fundamentals 
benchmark  (137%  of  GDP  and,  excluding  SPEs,  80%  of  GDP).  These  developments  indicate  much 
reduced, but still remaining, deleveraging needs. (44)  

Net credit flows to NFCs have been positive but moderate in 2021, supported by pandemic-related 
government measures. In 2020, net credit flows to NFCs were negative, but turned positive in 2021 to 
around 1.4% of GDP (Table 3.2). This is below the  fundamentals-based benchmark  for flows (2.3% of 
GDP),  and  new  bank  credit  to  NFCs  (pure  new  loans)  in  2021  was  below  the  levels  observed  in  2019 
(EUR 1.5 billion in 2021 versus EUR 2 billion in 2019). (45) In 2020 and 2021, net credit flows to NFCs 
have been supported by a range of policy measures, most of which have been phased out by 2022Q1 (see 
Box 2.1). Interest payments continue to weigh significantly on the expenses of NFCs (see Table 3.1 and 
Graph 3.2(c)). 

(44)  Fundamentals-based  benchmarks  are  influenced  by  the  initial  stock  of  debt  (1995  in  this  case).  For  details  on  the 
methodologies,  see  Bricongne,  J.  C.,  Coutinho,  L.,  Turrini,  A.,  Zeugner,  S.  (2019),  “Is  Private  Debt  Excessive?”,  Open 
Economies Review, 1- 42 and European Commission (2018), “Fundamentals-based private debt benchmarks: enhanced sample 
and robustness checks”, note to LIME June. To adjust the fundamentals-based benchmark of 2021 for SPEs, the SPE debt in 
1995 as a share of 2021 GDP (about 57%) needs to be deducted for the benchmark. Prudential benchmarks are not affected by 
the presence of SPE debt. 

(45)  Figures reflect Central Bank of Cyprus Monetary and Financial Statistics. 

17 

 
 
                                                           
3. Thematic chapter: Private debt 

loans  continued  to  decline  during  the  pandemic  but  monitoring 
NFCs’  non-performing 
developments is warranted. Following the lifting of the 2020 moratorium, the adverse effects on asset 
quality  have  been  contained,  with  the  ratio  of  NFC  exposures  at  least  one  day  past  due  at  the  end  of 
December 2021 being 3.1%. The  share  of bad loans as a share  of total NFCs loans even declined from 
25% in December 2019 to 12% by 2021Q3, of which a substantial part of the decline in banking sector 
NPLs  has  been  achieved  through  the  sale  of  loans.  The  situation,  however,  warrants  continuous 
monitoring,  as  22%  of  NFCs  moratorium  loans  have  been  renegotiated  between  March  2020  and 
December 2021 (independently of whether this was due to distress or not) and stage 2 NFCs loans have 
increased from 10% in 2019 to 21% in 2021. (46)  

Domestic NFC bank debt is concentrated in a few sectors, some with still relatively high NPL ratios. 
NFC debt in 2021 was concentrated in the  sectors of construction and real estate (25%), manufacturing 
(19%),  accommodation  and  food  services  (17%),  wholesale  and  retail  trade  (16%)  and  transport  and 
storage (10%) (Graph 3.2(d)). Among these sectors, the highest NPL ratios registered in December 2021 
were in the construction and real estate sector (24.7%), in the wholesale and retail trade sector (12.5%) 
and in transport and storage (14.7%). In the manufacturing and in the accommodation and food services 
sectors  NPLs  are  comparatively  lower,  and  stood  at  2.1%  and  2.3%,  respectively,  in  2021Q4.  In 
particular, sectors with high NFC debt and NPL ratios, such as tourism and construction, are vital to the 
Cypriot economy, and have been and continue to be negatively affected by the pandemic, exacerbated by 
uncertainties  related  to  Russia’s  invasion  of  Ukraine  and  associated  sanctions  (for  exposures  to  Russia, 
see also Box 2.1).  It is therefore worth taking a closer look at developments in these key sectors in the 
two following sub-parts.  

Developments in the tourism sector 

The tourism sector, which is associated with a substantial share of NFC debt, has been significantly 
affected  by  the  pandemic.  The  sharp  reduction  in  international  tourism  led  to  a  drop  in  revenue  and 
profit of the accommodation and food services sector by 63% in 2020, with the real value added declining 
by 44% in 2020. The sector represents 17% of domestic bank credit to NFCs. Besides the tourism sector 
itself, it has also significant effects on the wholesale and retail trade sector, the transport sector and the 
construction sector.  

Government support measures helped firms to withstand the pandemic and to partially recover in 
2021. In addition to the loan moratoria and tax deferral, the government provided support to the tourism 
sector mainly in the form of short-time work schemes. Moreover, to support all the hotels heavily affected 
by the pandemic, the regular scheme running every winter in support of employment in hotels in coastal 
areas was extended. The government measures also included state aid to tourist operators under the state 
aid  temporary  framework.  In  2021,  foreign  tourist  arrivals  reached  almost  49%  of  2019  levels,  while 
revenues recovered to 56.4% of its 2019 level, performing relatively well compared to other EU tourist 
destinations and given the reliance on aviation for tourist arrivals. The real value added of the food and 
accommodation sector increased by 38% in 2021, recovering a significant share of the 44% loss in 2020, 
and the bankruptcy filings in the sector have been limited. (47) In addition, the sector NPL ratio in 2021Q4 
was  lower  than  prior  to  the  pandemic,  due  to  a  decline  in  the  stocks  of  NPLs  (by  73%  or  EUR  153 
million)  combined  with  an  increase  in  the  stock  of  loans  (by  16%  or  EUR  344  million)  relative  to  end 
2019. (48) About 37% of bank exposures to the sector of accommodation and food services exiting from 
moratoria  have  been  renegotiated  between  March  2020  and  December  2021  (irrespective  of  distress 
status) and are worth monitoring. (49) 

The  expected impact  of  Russia’s  unprovoked  invasion  of  Ukraine  and  related  sanctions  on  the 
Cypriot  economy  increase  the  risks  to  the  debt-servicing  capacity  of  NFCs,  in  particular  in  the 
tourism  sector.  Russia  is  the  second  biggest  tourism  market  of  Cyprus,  making  up  about  20%  of  total 
tourist arrivals and revenues each year, with Ukrainian arrivals previously accounting for around 5% (see 
Box 2.1). Despite significant  government efforts to redirect those  shares from other  markets, the  sector 
will most likely be negatively affected. Furthermore, a prolongation of current high energy prices is likely 

(46)  See footnote 20. 
(47)  Post-Programme Surveillance Report Cyprus. European Commission SWD (2022) 703. 
(48)  Bank of Cyprus, Aggregate Cyprus banking sector data on NPLs, December 2021. 
(49)  One reason being that for 18% of exposures the repayment schedule had not begun by end-2021. 

18 

                                                           
3. Thematic chapter: Private debt 

to also negatively affect demand for holidays  from other markets and to  squeeze profits of firms in the 
sector. 

Developments in construction and other key sectors 

In 2021, the construction sector recovered almost fully from the pandemic hit. Construction, which 
represents  above  6%  of  total  gross  value  added,  remains  a  key  sector  in  the  Cypriot  economy,  even 
though it lost much importance since the peak in 2007. In 2021, construction accounted for around 63% 
of total gross fixed capital formation, and residential construction (dwellings) represented 63.1% of total 
construction activity (or 6.6% of GDP) in 2021, among the highest shares in the EU. The sectors’ gross 
value added (GVA) had been recovering since its trough in 2015, before the pandemic hit, affecting it due 
to lockdown  measures and supply bottlenecks, resulting in  a  decline of its real value added by 6.4% in 
2020. However, the sector recovered by 6.3% in 2021, attaining a real value added very close to its 2019 
level.   

Construction and real estate combined represent a large share of bank credit to NFCs in Cyprus 
and still have the highest NPL ratio. The stock of bank credit to the construction and real estate sector 
was  25%  of  total  NFC  credit  in  2021Q3  (10%  for  construction  and  15%  for  real  estate) (50).  The  NPL 
loan ratio amounted to 16.2% in the construction sector  and 8.5% in the real estate sector. These ratios, 
however, have declined since the  start of the  pandemic, reflecting  mostly NPL sales to credit-acquiring 
companies. Despite this progress, it should be noted that 44% of exposures under the moratorium in the 
construction  sector  and  15%  in  the  real  estate  sector  have  been  renegotiated  from  March  2020  to 
end-2021 (independent of distress status) and warrant further monitoring.  

Contracts  of  property  sales  recovered  to  2019  levels,  despite  the  end  of  the  citizenship  for 
investment scheme in October 2020. Contracts of sale declined significantly in 2020 (by 23%) due to 
lockdown measures. In 2021, there has been a significant drop in sales to non-EU citizens after the end of 
the Cyprus citizenship for investment programme (CIP). This drop had been more than compensated by 
sales to  Cypriot  nationals and EU citizens,  which increased above their 2019 levels (by  13% and 20%, 
respectively). (51) As a result, total sales  in 2021 recovered to close to 2019 levels. Market shares  have 
changed,  with  Cypriot  nationals  representing  64%  of  the  market  in  2021  (up  from  57%  in  2019),  EU 
nationals representing 18% of the market (up from 15% in 2019) and non-EU nationals representing 18% 
of the market (down from 28% in 2019). (52) 

The impact of Russia’s invasion of Ukraine may not affect the real estate market but soaring prices 
for  construction  material  may  affect the  construction  sector.  Over  the  last  ten  years,  Russians  have 
been active in the real estate sector in Cyprus, however, showing a decreasing trend. In 2021, the share of 
FDI in real estate from Russia accounted for around 6% of the total value of transactions of immovable 
property in Cyprus. At the same time, the domestic market for real estate has grown in 2021 as a result of 
the  mortgage  subsidisation  scheme.  In  addition,  the  loss  of  Russian  buyers  could  be  substituted  by  the 
increasing trend of the demand over the last years from other markets. However, the construction sector is 
expected  to  be  negatively  affected  by  the  exceptionally  high  prices  of  construction  material,  which 
already increased by almost 18% in the first quarter of 2022 y-o-y. (53)  

The sector of professional, scientific and technical activities accounts for a non-negligible amount of 
NPLs  and  could  also  be  affected  by  the  consequences  of  the  Russian  invasion  of  Ukraine.  The 
sectors  of  professional,  scientific  and  technical  activities,  and  administrative  services,  combined, 
represent  about  11%  of  the  total  gross  value  added  and  about  15%  of  NFC  bank  deposits (54).  At  16% 
combined, the NPL ratios are relatively high in these sectors. Sanctions following the invasion of Ukraine 
by  Russia  could  impact  in  particular  the  turnover  in  the  sector  of  professional,  scientific  and  technical 

(50)  According to Central Bank of Cyprus aggregate banking sector data on NPLs, December 2021. 
(51)  Accordingly, FDI inflows related to construction declined from about EUR 500 m. to EUR 130 m. after the end of the CIP.  
(52)  Calculation  from  statistics  on  registrations  of  contracts  of  sale  available  from  the  department  of  land  surveys 
https://portal.dls.moi.gov.cy/en-us/data-files/Pages/default.aspx.  The  foreign  market  is  concentrated  in  coastal  areas,  with  the 
highest share in Paphos for Europeans (37% of sales to foreign EU nationals in 2021) and in Limassol for non-EU nationals 
(36% of sales to non-EU nationals in 2021). Prior to 2021, Paphos  had a slightly higher market share than Limassol also for 
non-EU nationals. 

(53)  Post-Programme Surveillance Report Cyprus. European Commission SWD (2022) 703. 
(54)  The sector of professional activities alone accounts for 11% of NFC bank deposits. 

19 

                                                           
3. Thematic chapter: Private debt 

activities. Overall, around 3% of Cyprus value-added is estimated to derive from Russian final demand, 
related  to  tourism,  financial  and  business  services  (see  Box  2.1).  There  are,  however,  indications  of 
demand  from  Russian,  Ukrainian  and  Belarusian  companies  for  relocating  to  Cyprus  with  their 
employees,  in  order  to  continue  their  business  from  a  safer  business  environment.  This  could  support 
professional services in the next couple of years.    

Graph 3.2:  NFC debt and investment financing 

Source: European Commission services 

Policy  measures  to  resolve  and  prevent  private  sector  excess  borrowing  and  facilitate 
deleverage  

The Cypriot recovery and resilience plan includes measures that are expected to facilitate a further 
reduction  of  private  indebtedness.  Cyprus  underwent  a  significant  overhaul  of  its  corporate  and 
personal  insolvency  regime  in  2015,  but  the  use  of  the  various  procedures  has  been  limited  to  support 
deleveraging  and  to  serve  as  an  early  warning  against  excessive  borrowing.  Work  to  amend  the 
Companies Law (which may include a reform of restructuring procedures) and the reorganisation of the 
Department  of  Insolvency  (necessary  for  improving  its  operations  and  increase  its  efficiency)  are  now 
included  in  Cyprus’s  recovery  and  resilience  plan.  The  modernisation  of  the  Companies  Law,  which 
includes  a  law  review  of  the  insolvency  proceedings (55),  and  the  strengthening  of  the  insolvency 

(55)  The reform consists of modernising the Cyprus Companies Law by (i) using best practices from other common law jurisdictions 
to provide a foundation of knowledge and clarity in the form of case law and literature, to assist in interpreting and applying the 

20 

0.050.0100.0150.0200.0250.00506070809101112131415161718192021*% of GDP(a) Consolidated non-financial corporations debt liabilities as % of GDPForeign loan liabilities:  FDI loans & unalloc  Foreign arms-length loans:   of which other arms-length   of which RoEA bank loansUnallocated loansDebt security liabilities:   foreign bond holders   domestic bond holdersDomestic loans from gov't & HHDomestic loans from other fin.Domestic loans from banksDebt assets, F2-F4 ex FDI debtDebt assets incl FDI debtGross debt liabilities (cons.,Estat)Source:ECFIN calculation based on Eurostat and ECB data11%2%13%2%15%16%8%20%22%16%14%7%4%0%1%1%00.050.10.150.20.25051015202530% of sector loan stock% of total NFC loan stock(d) Bank credit to non-financial corporations (stocks), 2021 Q4% creditNPL ratio (rhs)Source: Central Bank of Cyprus, Aggregate Cyprus Banking sector data on NPLs. All banks ona consolidated basis (all operations).-15-10-5051015202505060708091011121314151617181920%of GDP(c) Non financial corporations net investment financingnet equity paymentsother current transactionsdirect taxes & contribnet other incomenet interest paymentscapital transfersnet lending/borrowingnet investmentnet operating surplusretained profits (=NLB + inv)Source:Eurostat-30-20-10010203040080910111213141516171819202121Q3y-o-y change(b) Decomposition of y-o-y changes in debt-to-GDP ratios, NFC, consolidatedCredit flowReal growthInflationOther changesD/GDP, changeSource:Eurostat   
                                                           
3. Thematic chapter: Private debt 

framework (56)  aiming  at  the  effective  functioning  of  the  Department  of  Insolvency (57)  could  help  a 
higher  participation  of  borrowers  in  the  insolvency  framework  and  facilitate  debt  workouts.  However, 
delays in the legislative process risk a potential breach of the obligation to transpose into Cypriot law the 
Directive (EU) 2019/1023 on preventive restructuring by its deadline of 17 July 2022.  

Implementation of planned reforms and preventing excess borrowing will be key, and needs to be 
combined  with  measures  that  strengthen  contract  enforcement.  In  addition  to  strengthening  the 
conditions  for  efficiently  resolving  existing  debt,  the  RRP  foresees  a  number  of  measures  expected  to 
help  preventing  excess  borrowing.  This  includes  the  creation  of  a  liabilities  monitoring  register 
encompassing liabilities beyond the debt owed in the form of loans, including liabilities and arrears such 
as  tax  liabilities  and  contributions  to  social  insurance. (58) To  improve  the  assessment  of  credit  risk  for 
new  lending  by  providing  better  information  regarding  the  debtor’s  financial  profile,  a  System  of 
Exchange of Data and Credit Bureaus is to be set up by end-2024. (59). In addition, the RRP includes a 
strategy for combating financial illiteracy, which aims at enhancing financial education within the general 
population. This reform shall improve financial decision making, correct wrong attitudes and biases and 
support  more informed and  financially responsible decisions. (60) To improve the payment discipline in 
Cyprus,  these  measures  need  to  be  complemented  by  measures  that  enhance  contract  enforcement, 
including  the  revision  of  the  Civil  Procedure  Law  and  the  effective  application  of  the  foreclosure 
framework. 

The timely implementation of the reform of the system for issuance and transfer of property rights 
will further facilitate the liquidation of collaterals and support contract enforcement. Cyprus’s RRP 
includes  a  reform  in  the  system  of  issuance  and  transfer  of  property  titles.  The  current  system  has 
important  weaknesses  (see  Cyprus  Country  reports  2016-2019)  and  has  thus  contributed  to  the  over 
indebtedness of the construction and real estate sectors. Until now, irregularities, such as final buyers with 
mortgages not possessing property titles and vendors maintaining mortgages on properties already sold, 
have  hampered  the  application  of  the  foreclosure  and  insolvency  legislations  and  exposed  the  Cypriot 
housing  market  to  risks  related  to  money  laundering. (61)  It  is  essential  to  implement  the  reforms, 
expected by end-2023, for guaranteeing an efficient and transparent system for the issuance and transfer 
or property titles in order to improve the Cypriot business environment and enable a good functioning of 
the foreclosure and insolvency legislation. (62) 

law  in  practice,  (ii)  reviewing  the  accompanying  Companies  Rules,  (iii)  assigning  a  team  of  legal  experts  to  undertake  the 
project  for  advisory  and  drafting  services  of  the  new  Companies  Law  and  Regulations,  and  (iv)  reviewing  the  insolvency 
proceedings under the Companies Law,  which are Liquidations, Receivership and Examinership, all to be completed by end-
2025. Reform C3.3R3 in the RRP. 

(56)  Reform C3.5R6 in the RRP. 
(57)  This reform shall include actions such as digitalisation of systems (enhancement of existing systems and introduction of new 
ones),  training delivered  to  the  staff of  the  Department  of  Insolvency,  implementation  of  a Customer  Service  line  and a  web 
portal for customers, and full implementation of the regulatory framework for Insolvency Practitioners, all to be completed by 
mid-2025. 

(58)  Reform C3.5R5 in the RRP, to be completed by end-2024. 
(59)  Reform C3.5R4 in the RRP. 
(60)  This reform consists of (i) identifying the pockets of financial illiteracy, (ii) reviewing the international literature on the topic, 
(iii)  providing  a  detailed  action  plan  for  implementation,  and  (iv)  the  full  implementation  of  the  short-term  measures  of  the 
strategy, all to be completed by end-2023. Reform C3.5R7 in the RRP. 

(61)  See MoneyVal (2029), “Cyprus Fifth Round Mutual Evaluation Report”, Council of Europe. The report highlights a number of 
weaknesses related to the prevention of money laundering in real estate transactions, and calls for significantly enhancing the 
supervision of the real estate sector and for increasing the level of compliance of real estate agents with preventive measures. 
(62)  Reform measures include: (i) the examination and issuance of property titles that are still pending; (ii) the extension of the new 
planning and building permit policy; (iii) the review of the Streets and Buildings Regulation Law to introduce incentives for the 
supervising engineer to prevent any irregularities that may block the issuance of the title deed; and (iv) the amendment of the 
Sale  of  Property  (Specific  Performance)  Law.  The  amendment  of  the  Sale  of  Property  (Specific  Performance)  Law  aim  to 
ensure  that  any  mortgage  that  the  vendor  has  on  the  property  is  cleared  before  the  contract  of  sale  is  registered  in  the  land 
department and the transfer of the property title is made as soon as the buyer fulfils all his/her contractual obligations. This will 
be achieved by having the buyer pay the purchase price to the “project account”, where any prior mortgages on the property are 
linked to, to ensure that the bank will release these prior mortgages. The deadline for the implementation of the reform is end-
2023. Reform C3.5R3 in the RRP. 

21 

                                                                                                                                                                          
Table 3.1: 

Private debt indicators, Cyprus 

3. Thematic chapter: Private debt 

(f) European Commission forecast, . (1) Quarterly data is non-consolidated. (2) Gross non-performing bank loans and 
advances to Households and non profit institutions serving households (% of total gross bank loans and advances to 
Households and non profit institutions serving households). (3) Gross non-performing bank loans and advances to Non-
financial corporations (% of total gross bank loans and advances to Non-financial corporations). (4) Quarterly data is 
annualized. 
Source: (a) Eurostat, (b) Ameco, (c) European Commission calculations, (d) ECB. 

22 

2003-072008-122013-18201920202021f|21Q121Q221Q321Q4SourceStocksPrivate debt level (% of GDP)(1)(a,d)247.1308.6325.8249.9259.7241.3|260.7252.6248.8241.3Private debt level (% of potential GDP)(1)(a,b,d)255.0309.4313.5263.9253.6242.8|250.4248.4246.3242.8Prudential threshold (% of GDP)(c)105.0104.7109.7129.7125.4126.8|Fundamental benchmark (% of GDP)(c)228.8219.6255.0222.4242.7230.3|FlowsPrivate credit flows (transactions, % of GDP)(4)(a)22.618.83.71.7-2.53.5|7.00.07.20.4Private credit flows (transactions, % of potential GDP)(4)(a,b)23.619.23.91.8-2.53.5|6.70.07.10.4Benchmark for flows (% of GDP)(c)|Households (HH)StocksHH debt level (% of GDP)(a,d)84.7117.1117.686.090.787.6|91.389.187.985.8HH debt level (% of potential GDP)(a,b,d)87.5117.3113.090.988.588.2|87.787.687.186.3Prudential threshold (% of GDP)(c)40.841.240.147.144.945.6|Fundamental benchmark (% of GDP)(c)69.078.597.588.097.093.1|Debt (% of gross disposable income)(a,b,d)129.4169.7176.0129.5132.5135.0|131.9132.5132.5132.1Interest paid (% of gross disposable income)(a,b)1.42.02.01.71.6|Debt (% of gross financial assets)(a,d)36.345.846.939.436.7|35.134.734.734.7Share of variable rate loans for house purchase (%)(d)75.193.393.592.297.8|Domestic  loans in forex (% of dom. loans)(d)2.64.03.23.02.21.9|FlowsHH credit flows (transactions, % of GDP)(4)(a)10.37.6-1.7-1.71.32.1|1.21.83.62.2HH credit flows (transactions, % of potential GDP)(4)(a,b)10.77.8-1.5-1.81.22.1|1.11.83.62.2Benchmark for flows (% of GDP)(c)5.05.22.32.93.13.2|Savings rate (% gross disposable income)(b)6.15.40.45.78.05.3|Investment rate (% gross disposable income)(b)17.814.09.713.212.711.7|p.m. Bank HH NPLs (% of HH loans)(2)(d)50.40.00.00.0|Non-financial corporations (NFC)StocksNFC debt (% of GDP)(1)(a,d)162.5191.5208.2163.8169.0153.7|169.4163.5160.8155.5NFC debt (% of potential GDP)(1)(a,b,d)167.5192.0200.5173.0165.1154.6|162.7160.8159.2156.5Prudential threshold (% of GDP)(c)64.263.469.682.680.581.2|Fundamental benchmark (% of GDP)(c)159.8141.1157.6134.4145.7137.2|Debt (% of value added)(a,b,d)310.9377.7407.5319.6331.3302.7|324.4318.5313.5306.3Interest paid (% of gross operating surplus)(a,b)36.732.025.622.718.8|Debt (% of gross financial assets)(a,d)152.3129.8159.5122.6116.2|Domestic  loans in forex (% dom. Loans)(d)19.016.47.65.64.85.6|5.05.05.25.6FlowsNFC credit flows (transactions, % of GDP)(4)(a)12.311.15.43.4-3.81.4|5.8-1.73.6-1.8NFC credit flows (transactions, % of potential GDP)(4)(a,b)12.811.55.43.5-3.71.4|5.6-1.73.5-1.8Benchmark for flows (% of GDP)(c)|Investment (% of value added)(b)13.317.315.417.914.212.4|Savings (% of value added)(b)13.821.019.610.911.610.8|p.m. Banks NFC NPLs (% of NFC loans)(3)(d)49.924.814.6|Total private sector (Households and Non-financial corporations) 
 
 
 
 
 
   
 
4.  THEMATIC CHAPTER: EXTERNAL IMBALANCES 

External sustainability 

Restrictions in international travel linked to the pandemic had a significant negative impact on the 
Cypriot current account in 2020 and 2021. The collapse of tourism exports (exports of travel services 
fell by 79% in 2020) in combination with a lower decline in imports, contributed to the deterioration of 
the  current  account  to  -10.1%  in  2020,  from  -5.7%  in  2019  (Graph  4.1(a)).  In  2021,  tourism  receipts 
recovered  to  56.4%  of  the  2019-level, (87)  but  a  further  deterioration  in  the  primary  income  deficit 
resulted  in  the  current  account  deficit  remaining  considerable  at  7.2%  of  GDP  in  2021.  Net  exports  of 
services  other  than  tourism  and  travel,  have  increased  in  recent  years  and  contributed  positively  to  the 
current  account  balance  also  throughout  the  pandemic,  as  these  were  only  partly  offset  by  any  primary 
income  outflows  they  generate.  Excluding  SPEs,  the  overall  current  account  developments  are 
similar; (88) a widening from -5.8% of GDP in 2019 to -9.7% of GDP in 2020, followed by -8.6% of GDP 
in 2021. 

Current  account  deficits  over  the  last  few  years  have  been  increasingly  driven  by  deficits  in  the 
primary income account. Excluding SPEs, which reportedly have limited links to the real economy, the 
primary  income  account  deteriorated  from  -3.4%  of  GDP  in  2019  to  -7.0%  of  GDP  in  2021. 
Credit-acquiring  companies  in  Cyprus  have  been  affecting  the  current  account  negatively  from  2019 
onwards, mostly through the payment of interest on their foreign debt. In addition, other foreign-owned 
companies in Cyprus (e.g. investment firms, ICT companies) also have a negative impact on the current 
account,  through  the  repatriation  of  profits  in  the  form  of  dividends  or  retained  earnings.  For  some  of 
these service companies, such as ICT, profits have not been significantly affected by the pandemic. The 
future developments of these flows are likely linked to the evolution of gross value added in the services 
sectors other than tourism in Cyprus.  

The  very  negative  current  account  balance  also  reflects  the  low  savings  rate  of  the  domestic 
economy and is expected to persist. The government sector moved into sizeable deficit in 2020, but its 
net borrowing is expected to narrow by 2023 (Graph 4.1(b)). The net lending position of corporations has 
been  relatively  volatile  up  to  the  pandemic,  improved  with  the  pandemic  and  is  forecast  to  be  slightly 
negative in 2022 and 2023. The household savings rate increased mildly after the pandemic to 8% in 2020 
(from 6% in 2019), but is still considerably below the euro area rate, which increased to 19% in 2020 and 
is forecast to converge to 13% in 2023 (Graph 4.1(c)).  

The impact of Russia’s invasion of Ukraine and the increase in energy prices are expected to weigh 
on  the  current  account  deficit  and  the  NIIP.  Although  surrounded  by  uncertainty,  the  sanctions  on 
Russia  are  expected  to  decrease  exports  of  tourism  and  other  services,  in  particular  financial  and 
professional  services  to  Russia  (for  developments  in  tourism  and  professional  services  see  thematic 
chapter: private debt on sectoral developments). Concerning exports of financial services, these are set to 
be  negatively  affected,  as  the  sanctions  are  expected  to  impact  the  Russian  SPEs  and  their  transactions 
through  Cyprus,  affecting  the  volume  of  associated  services  provided.  As  for  trade  in  goods,  soaring 
energy prices are expected to affect the  current account balance negatively in 2022 and 2023, given the 
strong  dependence  of  Cyprus  on  imports  of  oil.  The  current  account  deficit  is  expected  to  increase  to 
around 8.8% of GDP in 2022 up from 7.2% in 2021 and to narrow again in 2023, to around 7.2%. 

On the financing side, currently Cyprus is a net investor in Russia. FDI outflows amounted to 13.3% 
of  GDP on average between 2018 and 2020 and inflows from Russia have also been significant at 8.1% 
of    GDP  on  average  for  the  same  period,  the  latter  split  between:  (i)  real  estate  purchased  in  Cyprus 
(which declined subsequently with the end of the citizenship for investment programme), (ii) transfer of 

(87)  Post-Programme Surveillance Report Cyprus, Spring 2022. European Commission SWD (2022) 703. 
(88)  The  activities  of  non-financial  SPEs  (ship-owning)  affect  the  current  account  to  the  extent  that  net  ship  registrations  do  not 

cover depreciation. 

23 

 
                                                           
4. Thematic chapter: External Imbalances 

funds  by  special  purpose  entities  (SPEs)  and  (iii)  transactions  of  non-SPE  financial  firms. (89)  There  is 
significant uncertainty on how these flows will be affected. The overall stock of Cypriot assets in Russia 
amounted to 713% of GDP in 2020 (of which FDI accounts for 686 pp), while the stock of its liabilities to 
Russia amount to 552% of GDP (most of  which are  FDI  liabilities at 476% of  GD). The vast  majority 
(above 90%) of external assets holdings with Russia are related to SPEs. (90) 

The  current  and  projected  current  account  balance  is  not  conducive  to  maintaining  the  Cypriot 
NIIP  at  prudent  levels.  Simulations  of  the  NIIP  evolution  show  that,  under  plausible  assumptions, 
current  account  balances  for  Cyprus,  actual  and  forecast,  are  not  conducive  of  maintaining  the  NIIP 
within prudent levels over the next ten years (Graph 4.1(d)). The current account deficit currently forecast 
for  2023  is  still  7.2%.  This  is  considerably  below  the  current  account  balance  of  around  -2%  of  GDP, 
required to maintain the NIIP, adjusted for SPEs, at the current level, close to its fundamentals benchmark 
(and  above  the  prudential  threshold).  Similarly,  to  stabilize  the  NIIP  above  the  MIP  scoreboard 
benchmark of -35% over 20 years, a current account balance, adjusted for SPEs, of -1.6% of GDP would 
be  needed.  Given  primary  income  account  developments,  this  would  require  a  trade  surplus  of  slightly 
over 4% of GDP. 

Policy measures to strengthen competitiveness  

The  Cyprus  RRP  includes  measures  to  strengthen  the  tourism  sector,  lower  energy  import  dependency, 
further  diversify  the  economy  and  prevent  excessive  borrowing.  Cyprus  implements  a  tourism  strategy 
with  a  shift  towards  more  sustainable  tourism,  developing  strong  agri-tourism,  sustainable  hospitality 
infrastructure  and  attracting  health  and  wellness  tourists  through  several  grant  schemes  included  in  the 
RRP.  Furthermore,  the  authorities  are  continuing  efforts  to  increase  demand  for  tourism  during  low 
seasons and to broaden their tourist markets reducing over dependence on a small number of markets. The 
long-term growth strategy aims to further diversify the economy into other export-oriented services, such 
as  professional  services,  tertiary  education,  health  and  fintech,  as  well  as  light  manufacturing  and 
agriculture.  The  targeted  expansion  of  renewables  should  further  alleviate  the  over-reliance  of  the 
economy  on  oil  imports.   Measures  to  strengthen  the  enforcement  of  contracts  and  court  judgments, 
related in particular to the seizure of mobile property, complemented by RRP measures aiming to prevent 
over borrowing by the private sector, explained in detail in chapter 3, combined with effective insolvency 
and  foreclosure  frameworks,  are  key  to  enhance  domestic  savings  and  ensure  the  sustainability  of  the 
external debt.     

(89)  See also the Cyprus Post Programme Surveillance Report, Spring 2022. European Commission SWD (2022) 703. 
(90)  FinFlows  database  updated  and  maintained  by  the  European  Commission  (JRC  and  DG  ECFIN).  For  more  information  see: 
https://data.jrc.ec.europa.eu/dataset/807d5d4f-2d73-4f17-81db-7ba2171bab83. If these positions with Russia were to be written 
down on both sides of the balance sheet, the Cypriot NIIP would deteriorate by around -160 pps. of 2020 GDP, but the NENDI 
(NIIP excluding instruments that cannot be subject to default) would improve by 56 pps of GDP. However, if write-downs are 
one-sided, the NENDI could deteriorate by up to 216 pps. of GDP. 

24 

                                                           
Graph 4.1: 

Thematic graphs: External imbalances 

4. Thematic chapter: External Imbalances 

Source: European Commission services 

25 

-40-30-20-100102030141516171819202121*22*23*% of GDP(a) Decomposition of External Position (Current and Capital Accounts)Goods, fcastServices, fcastGoods excl energyEnergy balanceServices excl travelTravel balancePrimary inc. bal.Second. inc. bal.Current accountNet lending/borrowingSource: EuropeanCommission calculations based on Eurostat and Comext. * EC forecast.-8.0-6.0-4.0-2.00.02.04.06.08.0-50510152025050709111315171921'23'y-o-y                  % change%(c ) Households saving rateGross household saving rate Euro Area 19 (lhs)Gross household saving rate Cyprus (lhs)Real GDI Cyprus (y-o-y %) (rhs)sourcSource:Eurostat sectoral accounts. ' EC forecast.-25-20-15-10-5051015200809101112131415161718192021*22*23*(b) Net lending position by sectorHouseholdsGeneral governmentFinancial corporationsNon-financ. corporationsCorporations, fcstTotal economySource: Eurostat and Ameco. * EC forecast.-200-180-160-140-120-100-80-60-40-20021222324*25*26*27*28*29*30*31*% of GDP(d) NIIP scenariosBaselineScenario 1No SPEs baselineNo SPEs scenario 1source: European Commission calculationsNotes: Scenario 1: higher trade balance on account of fiscal consolidation and increased export competitiveness driven by the RRP. Scenario 2: lower trade balance amid higher fiscal deficits combined with lower exports competitiveness due to lower RRP absorption.