Recommendation for a COUNCIL RECOMMENDATION on the 2023 National Reform Programme of Cyprus and delivering a Council opinion on the 2023 Stability Programme of Cyprus
Date: 2023-05-24
Institutions: European Commission, Secretariat-General
Subjects: Cyprus, digital transformation, economic policy, economic recovery, economic reform, energy policy, fiscal policy, green economy, stability pact, stability programme

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   EUROPEAN COMMISSION  Brussels, 24.5.2023  COM(2023) 613 final  Recommendation for a COUNCIL RECOMMENDATION on the 2023 National Reform Programme of Cyprus and delivering a Council opinion on the 2023 Stability Programme of Cyprus {SWD(2023) 613 final}  
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2023 National Reform Programme of Cyprus and delivering a Council opinion on 
the 2023 Stability Programme of Cyprus 

THE COUNCIL OF THE EUROPEAN UNION, 

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

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

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

Having regard to the recommendation of the European Commission, 

Having regard to the resolutions of the European Parliament, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

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

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

Regulation  (EU)  2021/241  of  the  European  Parliament  and  of  the  Council3,  which 
established  the  Recovery  and  Resilience  Facility,  entered  into  force  on  19  February 
2021. The Recovery and Resilience Facility provides financial support to the Member 
States  for  the  implementation  of  reforms  and  investments,  entailing  a  fiscal  impulse 
financed  by  the  EU.  In  line  with  the  European  Semester  priorities,  it  contributes  to 
economic  and  social  recovery  and  to  the  implementation  of  sustainable  reforms  and 
investments,  in  particular  to  promote  the  green  and  digital  transition  and  make  the 
Member States’ economies more resilient. It also helps strengthen public finances and 
boost  growth  and  job  creation  in  the  medium  and  long  term,  improve  territorial 
cohesion  within  the  EU  and  support  the  continued  implementation  of  the  European 
Pillar of Social Rights. The maximum financial contribution per Member State under 
the Recovery and Resilience Facility was updated on 30 June 2022, in accordance with 
Article 11(2) of Regulation (EU) 2021/241.  

1 
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3 

OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
Regulation  (EU)  2021/241  of  the  European  Parliament  and  of  the  Council  of  12  February  2021 
establishing the Recovery and Resilience Facility (OJ L 57, 18.2.2021, p. 17). 

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(2) 

On 22 November 2022, the Commission adopted the 2023 Annual Sustainable Growth 
Survey4,  marking  the  start  of  the  2023  European  Semester  for  economic  policy 
coordination. The European Council endorsed the priorities of the survey around the 
four  dimensions  of  competitive  sustainability  on  23  March  2023.  On  22  November 
2022,  on  the  basis  of  Regulation  (EU)  No  1176/2011,  the  Commission  also  adopted 
the 2023 Alert Mechanism Report, in which it identified Cyprus as one of the Member 
States that may be affected or may be at risk of being affected by imbalances, and for 
which an in-depth  review would be needed. On  the same date, the Commission also 
adopted an opinion on the 2023 draft budgetary plan of Cyprus. The Commission also 
adopted a recommendation for a Council recommendation on the economic policy of 
the euro area, which the Council adopted on 16 May 2023, as well as the proposal for 
the 2023 Joint Employment Report analysing the implementation of the Employment 
Guidelines  and  the  principles  of  the  European  Pillar  of  Social  Rights,  which  the 
Council adopted on 13 March 2023.  

(3)  While the EU economies  are showing remarkable resilience, the  geopolitical  context 
continues  to  have  a  negative  impact.  As  the  EU  stands  firmly  with  Ukraine,  the  EU 
economic  and  social  policy  agenda  is  focused  on  reducing  the  negative  impact  of 
energy shocks on both vulnerable households and companies in the short term, and on 
keeping  up  efforts  to  deliver  on  the  green  and  digital  transition,  support  sustainable 
and inclusive growth, safeguard macroeconomic stability and increase resilience in the 
medium  term.  It  also  focuses  heavily  on  increasing  the  EU’s  competitiveness  and 
productivity. 

(4) 

On  1  February  2023,  the  Commission  issued  the  Communication  A  Green  Deal 
Industrial  Plan  for  the  Net-Zero  Age5  to  boost  the  competitiveness  of  the  EU’s  net-
zero  industry  and  support  the  fast  transition  to  climate  neutrality.  The  plan 
complements  ongoing  efforts  under  the  European  Green  Deal  and  REPowerEU.  It 
aims to provide a more supportive environment for scaling up the EU’s manufacturing 
capacity  for  the  net-zero  technologies  and  products  required  to  meet  the  EU’s 
ambitious climate targets, as well as ensuring access to relevant critical raw materials, 
including  by  diversifying  sourcing,  properly  exploiting  geological  resources  in 
Member States and maximising the recycling  of raw materials. The plan  is  based on 
four pillars:  a predictable and simplified regulatory  environment,  speeding up access 
to finance, enhancing skills, and open trade for resilient supply chains. On 16 March 
2023,  the  Commission  also  issued  the  Communication  Long-term  competitiveness  of 
the EU: looking beyond 20306, structured along nine mutually reinforcing drivers with 
the objective to work towards a growth enhancing regulatory framework. It sets policy 
improvements,  well  focused 
priorities  aimed  at  actively  ensuring  structural 
investments and regulatory measures for the long-term competitiveness of the EU and 
its Member States. The recommendations below help address those priorities. 

(5) 

In 2023, the European Semester for economic policy coordination continues to evolve 
in  line  with  the  implementation  of  the  Recovery  and  Resilience  Facility.  Fully 
implementing  the  recovery  and  resilience  plans  remains  essential  for  delivering  the 
policy priorities under the European Semester, as the plans address all or a significant 
subset  of  the  relevant  country-specific  recommendations  issued  in  recent  years.  The 
2019, 2020 and 2022 country-specific recommendations remain equally relevant also 

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COM(2022) 780 final. 
COM(2023) 62 final.  
COM(2023) 168 final.  

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(6) 

(7) 

for  recovery  and  resilience  plans  revised,  updated  or  amended  in  accordance  with 
Articles 14, 18 and 21 of Regulation (EU) 2021/241.  
The REPowerEU Regulation7 adopted on 27 February 2023 aims to rapidly phase out 
the  EU’s  dependence  on  Russian  fossil  fuel  imports.  This  will  contribute  towards 
energy security and the diversification of the EU’s energy supply, while increasing the 
uptake of renewables, energy storage capacities and energy efficiency. The Regulation 
enables  Member  States  to  add  a  new  REPowerEU  chapter  to  their  national  recovery 
and  resilience  plans  in  order  to  finance  key  reforms  and  investments  that  will  help 
achieve the REPowerEU objectives. They will also help boost the competitiveness of 
the EU’s net-zero industry as outlined in the Green Deal  Industrial Plan for the Net-
Zero Age and address the energy-related country-specific recommendations issued to 
the  Member  States  in  2022  and,  where  applicable,  in  2023.  The  REPowerEU 
Regulation  introduces  a  new  category  of  non-repayable  financial  support,  made 
available  to  Member  States  to  finance  new  energy-related  reforms  and  investments 
under their recovery and resilience plans.  

On 8 March 2023, the Commission adopted a communication providing fiscal policy 
guidance for 2024. It aims to support the preparation of Member States’ stability and 
thereby  strengthen  policy  coordination8.  The 
convergence  programmes  and 
Commission recalled that the general escape clause of the Stability and Growth Pact 
will be deactivated at  the end of 2023.  It  called  for fiscal  policies in  2023-2024 that 
ensure  medium-term  debt  sustainability  as  well  as  raise  potential  growth  in  a 
sustainable manner. Member States were invited to set out in their 2023 stability and 
convergence programmes how their fiscal plans will ensure that the 3% of GDP deficit 
reference value is adhered to as well as plausible and continuous debt reduction, or for 
debt  to  be  kept  at  prudent  levels  in  the  medium  term.  The  Commission  invited 
Member States to phase out national fiscal measures introduced to protect households 
and  firms  from  the  energy  price  shock,  starting  with  the  least  targeted  ones.  It 
indicated that, if support measures needed to be extended because of renewed energy 
price  pressures,  Member  States  should  target  such  measures  much  better  than  in  the 
past  towards  vulnerable  households  and  firms.  The  Commission  proposed  that  the 
fiscal  recommendations would be  quantified and differentiated  and be  formulated on 
the basis of net primary expenditure, as proposed in its Communication on orientations 
for  a  reform  of  the  EU  economic  governance  framework9.  It  recommended  that  all 
Member States should  continue to  protect  nationally  financed investment and ensure 
the  effective  use  of  the  Recovery  and  Resilience  Facility  and  other  EU  funds,  in 
particular  in  light  of  the  green  and  digital  transition  and  resilience  objectives.  The 
Commission  indicated  that  it  will  propose  to  the  Council  to  open  deficit-based 
excessive deficit procedures in spring 2024 on the basis of the outturn data for 2023, in 
line with existing legal provisions. 

(8) 

On  26  April  2023,  the  Commission  presented  legislative  proposals  to  implement  a 
comprehensive reform of the EU’s economic governance rules. The central objective 
of the proposals is to strengthen public debt sustainability and promote sustainable and 

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Regulation  (EU)  2023/435  of  the  European  Parliament  and  of  the  Council  of  27  February  2023 
amending Regulation (EU) 2021/241 as regards REPowerEU chapters in recovery and resilience plans 
and  amending  Regulations  (EU)  No  1303/2013,  (EU)  2021/1060  and  (EU)  2021/1755,  and  Directive 
2003/87/EC (OJ L 63, 28.2.2023, p. 1). 
COM(2023) 141 final. 
COM(2022) 583 final. 

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(9) 

inclusive growth in all Member States through reforms and investments. The proposals 
aim at providing Member States with more control over the design of their medium-
term plans, while putting in place a more stringent enforcement regime to ensure that 
Member  States  deliver  on  the  commitments  undertaken  in  their  medium-term  fiscal-
structural plans. The objective is to conclude the legislative work in 2023. 

On  17  May  2021,  Cyprus  submitted  its  national  recovery  and  resilience  plan  to  the 
Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant 
to  Article  19  of  Regulation  (EU)  2021/241,  the  Commission  assessed  the  relevance, 
effectiveness,  efficiency  and  coherence  of  the  recovery  and  resilience  plan,  in 
accordance with the assessment guidelines of Annex V to that Regulation. On 28 July 
2021,  the  Council  adopted  its  Decision  on  the  approval  of  the  assessment  of  the 
recovery and resilience plan for Cyprus10. The release of instalments is conditional on 
a decision by the Commission,  taken in  accordance with  Article 24(5) of  Regulation 
(EU)  2021/241,  that  Cyprus  has  satisfactorily  fulfilled  the  relevant  milestones  and 
targets  set  out  in  the  Council  Implementing  Decision.  Satisfactory  fulfilment 
presupposes  that  the  achievement  of  preceding  milestones  and  targets  has  not  been 
reversed. 

(10)  On  9  May  2023,  Cyprus  submitted  its  2023  National  Reform  Programme  and,  on  2 
May 2023, its 2023 Stability Programme, in line with Article 4(1) of Regulation (EC) 
No  1466/97.  To  take  account  of  their  interlinkages,  the  two  programmes  have  been 
assessed  together.  In  accordance  with  Article  27  of  Regulation  (EU)  2021/241,  the 
2023  National  Reform  Programme  also  reflects  Cyprus’s  biannual  reporting  on  the 
progress made in achieving its recovery and resilience plan. 

in 

addressing 

(11)  The Commission published the 2023 country report for Cyprus11 on 24 May 2023. It 
assessed  Cyprus’s  progress 
country-specific 
recommendations  adopted by  the Council  between 2019  and  2022 and  took stock of 
Cyprus’s implementation  of the recovery and resilience plan. Based on this analysis, 
the  country  report  identified  gaps  with  respect  to  those  challenges  that  are  not 
addressed  or  only  partially  addressed  by  the  recovery  and  resilience  plan,  as  well  as 
new and emerging challenges. It also assessed Cyprus’s progress on implementing the 
European  Pillar  of  Social  Rights  and  on  achieving  the  EU  headline  targets  on 
employment, skills and poverty reduction, as well as progress in  achieving the UN’s 
Sustainable Development Goals.  

relevant 

the 

(12)  The  Commission  carried  out  an  in-depth  review  under  Article  5  of  Regulation  (EU) 
No  1176/2011  for  Cyprus  and  published  its  results  on  24  May  202312.  It  concluded 
that  Cyprus  is  experiencing  macroeconomic  imbalances.  In  particular,  vulnerabilities 
related  to  private,  government  and  external  debt  have  overall  declined  but  remain  a 
concern.  In  particular,  high  debts  including  non-performing  loans  have  decreased 
significantly  and  are  expected  to  continue  doing  so,  while  current  account  deficits 
remain an issue. Private debt has been decreasing since 2015, except in 2020 amid the 
COVID-19 crisis, and is expected to continue declining this  year and next supported 
by nominal GDP growth. Still, higher interest rates could put pressure on debt service 
though,  as  variable  interest  rate  loans  prevail.  Private  and  external  debt  stocks  are 

10 

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12 

Council Implementing Decision of 28 July 2021 on the approval of the assessment of the recovery and 
resilience plan for Cyprus (ST 10686/2021; ST 10686/2021 ADD 1). 
SWD(2023) 613 final. 
SWD(2023) 635 final. 

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affected by the presence of special purpose entities in Cyprus, which elevate the levels 
but  pose  limited  risks  to  the  economy.  Non-performing  loans  held  by  banks  have 
declined very markedly over recent years thanks to non-performing loans sales, write-
offs, cash repayments, curing and debt-to-asset swaps. The government debt has been 
steadily falling; it declined below its pre-pandemic level and is expected to fall further 
in  2023  and  2024.  Despite  the  recovery  in  tourism,  the  large  current  account  deficit 
widened in 2022, reflecting robust domestic demand as well as high energy prices; it is 
expected  to  decrease  somewhat  this  year  and  next  but  to  remain  large.  The  policy 
response has been favourable. Several measures included in the RRP are expected to 
help diversifying the economy, support export growth, and alleviate the over-reliance 
on oil imports.  As part of the RRP, a package of amending laws  on  credit-acquiring 
companies  and  credit  servicers  was  adopted  in  mid-2022,  improving  their  working 
environment  and  supporting  non-performing  loans  reduction.  Following  several 
extensions, the suspension of foreclosures came to an end this February: an effective 
foreclosure  framework  is  key  to  encourage  borrowers  to  participate  in  loan 
restructuring, further reduce non-performing loans in the economy, help reduce private 
indebtedness, and enhance payment discipline.  

(13)  Based on data validated by Eurostat,13 Cyprus’s general government balance improved 
from  a  deficit  of  2.0%  of  GDP  in  2021  to  a  surplus  of  2.1%  in  2022,  while  general 
government debt fell from 101.2% of GDP at the end of 2021 to 86.5% at the end of 
2022.  

(14)  The  general  government  balance  has  been  impacted  by  the  fiscal  policy  measures 
adopted to mitigate the economic and social impact of the increase in energy prices. In 
2022,  such  revenue-decreasing  measures  included  a  reduction  of  the  excise  duty  on 
fuel products (petrol and diesel by 7 cents per litre and heating fuel by 5.37 cents per 
litre) for all consumers, and a reduction of the VAT rate on electricity consumption for 
households,  from  19%  to  9%  (with  a  further  reduction  for  vulnerable  households  to 
5%);  while  such  expenditure-increasing  measures  included  a  subsidisation  of  the 
increase  in  the  electricity  tariffs,  covering  50%  to  100%  of  the  increase.  For  the 
implementation  of  the  latter  measure,  the  government  is  providing  payments  to  the 
Electricity Authority of Cyprus, a fully State-owned entity. The Commission estimates 
the  net  budgetary  cost  of  all  these  measures  at  0.7%  of  GDP  in  2022.  The  general 
government  balance  has  also  been  impacted  by  the  budgetary  cost  of  temporary 
protection to displaced persons from Ukraine, which is estimated at 0.1% of GDP in 
2022.  At  the  same  time,  the  estimated  cost  of  COVID-19  temporary  emergency 
measures dropped to 0.3% of GDP in 2022, from 2.9% in 2021. 

(15)  On  18  June  2021,  the  Council  recommended  that  in  2022  Cyprus14  maintain  a 
supportive  fiscal  stance,  including  from  the  impulse  provided  by  the  Recovery  and 
Resilience Facility, and preserve nationally financed investment.  

(16)  According to the Commission estimates, the fiscal stance15 in 2022 was neutral, which 
was  appropriate  in  a  context  of  high  inflation.  As  recommended  by  the  Council, 

13 

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Eurostat-Euro Indicators, 47/2023, 21.4.2023 

Council  Recommendation  of  18  June  2021  delivering  a  Council  opinion  on  the  2021  Stability 
Programme of Cyprus, OJ C 304, 29.7.2021, p. 58.  

The  fiscal  stance  is  measured  as  the  change  in  primary  expenditure  (net  of  discretionary  revenue 
measures), excluding Covid-19 crisis-related temporary emergency measures but including expenditure 
financed  by  non-repayable  support  (grants)  from  the  Recovery  and  Resilience  Facility  and  other  EU 

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Cyprus  continued  to  support  the  recovery  with  investments  to  be  financed  by  the 
Recovery  and  Resilience  Facility.  Expenditure  financed  by  Recovery  and  Resilience 
Facility grants and other EU funds amounted to 1.4% of GDP in 2022 (1.6% of GDP 
in 2021). The decrease in expenditures financed by Recovery and Resilience Facility 
grants  and  other  EU  funds  in  2022  was  due  to  the  starting  phase  of  the  new 
programming  period  for  other  EU  funds.  Nationally  financed  investment  provided  a 
contractionary  contribution  of  0.1  percentage  point  to  the  fiscal  stance.16  Cyprus 
therefore did not preserve nationally financed investment, which is not in line with the 
Council recommendation. At the same time, the growth in nationally financed primary 
current expenditure (net of new revenue measures) provided a neutral contribution to 
the  fiscal  stance.  Cyprus  therefore  sufficiently  kept  under  control  the  growth  in 
nationally financed current expenditure. 

(17)  The  macroeconomic  scenario  underpinning  the  budgetary  projections  in  the  2023 
Stability  Programme  is  optimistic  in  2023  and  realistic  thereafter.  The  government 
projects  real  GDP  to  grow  by  2.8%  in  2023  and  3.0%  in  2024.  By  comparison,  the 
Commission 2023 spring forecast projects a lower real GDP growth of 2.3% in 2023 
and  2.7%  in  2024,  mainly  due  to  a  lower  contribution  to  growth  from  domestic 
demand. 

(18) 

In its 2023 Stability Programme, the government expects that the general government 
surplus  will  decrease  marginally  from  2.1%  in  2022  to  2.0%  of  GDP  in  2023. 
According to the Programme, the general government debt-to-GDP ratio is expected to 
decrease from 86.5% at the end of 2022 to 81.1% at the end of 2023. The Commission 
2023 spring forecast projects a government surplus of 1.8% of GDP for 2023. This is 
in line with the surplus projected in the Stability Programme. The Commission 2023 
spring forecast projects a similar general government debt-to-GDP ratio, of 80.4% at 
the end of 2023.  

(19)  The government balance in 2023 is expected to continue to be impacted by the fiscal 
measures adopted to mitigate the economic and social impact of the increase in energy 
prices. They consist of measures extended from 2022 (in particular: a reduction of the 
excise duty on fuel products for all consumers, and a subsidisation of the increase in 
the electricity tariffs). The net budgetary cost of the support measures is projected in 
the  Commission  2023  spring  forecast  at  0.4%  of  GDP  in  202317.  Most  measures  in 
2023 do not appear targeted to the most vulnerable households or firms, and many of 
them  do  not  fully  preserve  the  price  signal  to  reduce  energy  demand  and  increase 
energy  efficiency.  As  a  result,  the  amount  of  targeted  support  measures,  to  be  taken 
into  account  in  the  assessment  of  compliance  with  the  recommendation  for  2023,  is 
estimated in the Commission 2023 spring forecast at 0.0% of GDP in 2023 (compared 
to 0.1% of GDP in 2022). 

funds, 
the Fiscal Statistical Tables.   

relative 

to  medium-term 

potential 

growth. For  more 

details 

see  Box 1 

in 

16 

17 

Other nationally financed capital expenditure provided an expansionary contribution of 0.2 percentage 
point of GDP.  

The  figure represents the level of annual budgetary cost of those  measures, including current revenue 
and expenditure as well as – where relevant – capital expenditure measures. 

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(20)  On  12  July  2022,  the  Council  recommended18  that  Cyprus  take  action  to  ensure  in 
2023 that the growth of nationally financed primary current expenditure is in line with 
an  overall  neutral  policy  stance19,  taking  into  account  continued  temporary  and 
targeted support to households and firms most vulnerable to energy price hikes and to 
people  fleeing  Ukraine.  Cyprus  should  stand  ready  to  adjust  current  spending  to  the 
evolving situation. Cyprus was also recommended to expand public investment for the 
green  and  digital  transitions,  and  for  energy  security  taking  into  account  the 
REPowerEU  initiative,  including  by  making  use  of  the  Recovery  and  Resilience 
Facility and other Union funds. 

(21) 

In  2023,  the  fiscal  stance  is  projected  in  the  Commission  2023  spring  forecast  to  be 
broadly neutral (-0.1% of GDP). This follows a neutral fiscal stance in 2022 (0.0% of 
GDP).  The  growth  in  nationally  financed  primary  current  expenditure  (net  of 
discretionary revenue measures) in 2023 is projected to provide a neutral contribution 
of  0.0%  of  GDP  to  the  fiscal  stance.  This  includes  the  reduced  cost  of  the  targeted 
support  measures  to  households  and  firms  most  vulnerable  to  energy  price  hikes  by 
0.1%  of  GDP.  In  sum,  the  projected  growth  of  nationally  financed  primary  current 
expenditure  is  in  line  with  the  Council  recommendation.  Expenditure  financed  by 
Recovery and Resilience Facility grants and other EU funds is projected to amount to 
0.8% of GDP in 2023, while nationally financed investment is projected to provide an 
expansionary  contribution  to  the  fiscal  stance  of  0.8  percentage  point.20  Therefore, 
Cyprus  plans  to  finance  additional  investment  through  the  Recovery  and  Resilience 
Facility  and  other  EU  funds,  and  it  is  projected  to  preserve  nationally  financed 
investment. It plans to finance public investment for the green and digital transitions, 
and  for  energy  security,  such  as  a  market  management  system  for  the  Cyprus 
electricity  market,  construction  of  new  energy  efficient  buildings  including  a  new 
mental health hospital, energy efficiency upgrading of schools and enhancing of water 
security for Nicosia and Larnaca regions through a construction of a reservoir, which 
are partly funded by the Recovery and Resilience Facility and other EU funds. 

(22)  According to the Stability Programme the general government surplus is expected to 
increase to 2.3% of GDP in 2024. The increase in 2024 mainly reflects the increase in 
social  security  contributions  as  from  1  January  2024.  The  programme  expects  the 
general government debt-to-GDP ratio to decrease to 72.9% at the end of 2024. Based 
on  policy  measures  known  at  the  cut-off  date  of  the  forecast,  the  Commission  2023 
spring forecast projects a government surplus of 2.1% of GDP in 2024. This is in line 
with  the  surplus  projected  in  the  programme.  The  Commission  2023  spring  forecast 
projects a similar general government debt-to-GDP ratio, of 72.5% at the end of 2024. 

(23)  The  Stability  Programme  envisages  the  phasing  out  of  all  of  the  energy  support 
measures in  2024. The  Commission  also  assumes full phasing out  of energy support 
measures  in  2024.  This  hinges  upon  the  assumption  of  no  renewed  energy  price 
increases. 

18 

19 

20 

Council  Recommendation  of  12  July  2022  on  the  National  Reform  Programme  of  Cyprus  and 
delivering a Council opinion on the 2022 Stability Programme of Cyprus, OJ C 334, 1.9.2022, p. 104.  

Based  on  the  Commission  spring  2023  forecast,  the  medium-term  (10-year  average)  potential  output 
growth of Cyprus, which is used to measure the fiscal stance, is estimated at 8.2% in nominal terms. 

Other  nationally  financed  capital  expenditure  is  projected  to  provide  a  neutral  contribution  of  0.0 
percentage point of GDP. 

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(24) 

In  the  programme,  Cyprus  plans  to  meet  the  medium-term  budgetary  objective  –  a 
structural budget balance of 0.0% of GDP – in 2023 and to maintain it throughout the 
rest  of  the  programme  period.  Based  on  the  Commission  2023  spring  forecast,  the 
structural  balance is  forecast  at  +0.9% of GDP in 2023 and +1.3% of GDP  in  2024, 
above  the  medium-term  budgetary  objective.  Prudent  fiscal  policy  in  2024  will  also 
contribute to strengthening the external position. 

(25)  Assuming  unchanged  policies,  the  Commission  2023  spring  forecast  projects  net 

nationally financed primary expenditure21 to grow at 3.6% in 2024.  

(26)  According  to  the  programme,  government  investment  is  expected  to  decrease  from 
3.0% of GDP in 2023 to 2.8% of GDP in 2024. The lower investment reflects constant 
nominal investment level at higher GDP.  

(27)  The Stability Programme outlines a medium-term fiscal path until 2026. According to 
the programme, the general government surplus is expected to stay constant at 2.3% of 
GDP  in  2025  and  to  increase  to  2.4%  by  2026.  The  general  government  balance  is 
therefore  planned  to  meet  the  relevant  Treaty  reference  value  over  the  programme 
horizon.  According  to  the  programme,  the  general  government  debt-to-GDP  ratio  is 
expected to decrease from 72.9% at the end of 2024 to 60.1% by the end of 2026. 

(28) 

In accordance with Article 19(3), point (b) and Annex V, criterion 2.2 of Regulation 
(EU) 2021/241, the recovery and resilience plan includes an extensive set of mutually 
reinforcing reforms and investments to be implemented by 2026. The implementation 
of  Cyprus’  recovery  and  resilience  plan  is  underway,  however,  with  risk  of  some 
delays.  Cyprus  submitted  1  payment  request,  corresponding  to  14  milestones  in  the 
plan and resulting in an overall disbursement of EUR 85 million. The Cypriot recovery 
and resilience plan is relatively large and complex in nature.  To minimise the risk of 
delays,  strong  governance  and  continuous  monitoring  of  the  recovery  and  resilience 
plan are essential. The Cypriot recovery and resilience plan is expected to be revised to 
include REPowerEU measures and take into account the decreased maximum financial 
contribution. The swift inclusion of the new REPowerEU chapter in the recovery and 
resilience plan will allow additional reforms and investments to be financed in support 
of  Cyprus’s  strategic  objectives  in  the  field  of  energy  and  the  green  transition.  The 
systematic and effective involvement of local and regional authorities, social partners 
and  other  relevant  stakeholders  remains  important  for  the  successful  implementation 
of  the  recovery  and  resilience  plan,  as  well  as  other  economic  and  employment 
policies  going  beyond  the  plan,  to  ensure  broad  ownership  of  the  overall  policy 
agenda. 

(29)  The Commission approved all of Cyprus’ cohesion policy programming documents in 
2022. Proceeding with the swift implementation of the cohesion policy programmes in 
complementarity  and  synergy  with  the  recovery  and  resilience  plan,  including  the 
REPowerEU  chapter,  is  key  to  achieving  the  green  and  digital  transition,  increasing 
economic and social resilience as well as achieving balanced territorial development in 
Cyprus. 

(30)  Beyond the economic and social challenges addressed by the recovery and resilience 
plan,  Cyprus  faces  a  number  of  additional  challenges  related  to  the  business 
environment,  in  particular  on  the  governance  of  state-owned  entities  (SOEs), 

21 

Net  primary  expenditure  is  defined  as  nationally  financed  expenditure  net  of  discretionary  revenues 
measures and excluding interest expenditure as well as cyclical unemployment expenditure. 

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deployment  of  renewables,  the  upgrade  and  modernisation  of  the  electricity  grid, 
energy interconnections, energy efficiency, sustainable transport and green skills.  

(31)  The  governance  system  shows  gaps  with  respect  to  international  standards  (e.g.  the 
OECD guidelines on corporate governance of SOEs and the World Bank Toolkit for 
Corporate  Governance  of  SOEs).  In  particular,  increased  transparency  of  and  higher 
accountability  for  financial  performance  and  public  objectives  would  increase  the 
efficiency  and  effectiveness  of  SOEs.  This  also  goes  for  the  implementation  of  best 
practices  such  as  a  merit-based  and  transparent  process  for  nominations  to  SOE 
management  bodies.  Shifting  the  SOE  ownership  function  from  the  policy-oriented 
line  ministries  to  a  dedicated  central  body  or  at  least  establishing  a  centralised 
monitoring unit in  the  Ministry of  Finance would  also  improve the current  situation. 
Improving governance would help ensure that key public investment projects by SOEs 
are  completed  in  time,  in  turn  facilitating  the  green  and  digital  transition.  Taking 
action on SOEs would make governance in Cyprus more effective and the market for 
local  and  foreign  businesses  fairer  and  more  transparent.  This  is  in  line  with  the 
objectives  of  the  long-term  strategy  for  Cyprus  and  the  action  plan  underpinning  it 
(under the ‘Modernise semi-government organisations and create the right incentives 
for  innovation  and  efficiency’  initiative  area).  Policies  aimed  at  improving  SOE 
governance can also help increase public sector efficiency.   

(32)  The full potential of renewable energy sources in Cyprus could be further unlocked, in 
particular by making further investments to upgrade and modernise the electricity grid, 
and by opting for grid-scale energy storage facilities. Power purchase agreements and 
contracts for difference can be suitable economic instruments to accelerate the rollout 
of renewables. Cyprus currently uses no gas, although oil represents 83.2% of the total 
energy supply mix. Given the widely fluctuating energy prices on global markets, it is 
crucial for the sustainability of the Cypriot economy to reduce its heavy reliance on oil 
which it imports entirely. To diversify energy supplies and reduce import dependence, 
Cyprus would benefit from additional electricity interconnections and the expansion of 
renewables, as well as new infrastructure and network investments. In addition, energy 
efficiency  policies  could  be  extended  and  accelerated  to  curb  the  growth  in  energy 
consumption,  which  is  significantly  above  the  EU  average.  Energy  efficiency 
measures are expected to also help address the energy poverty experienced by a high 
share of the population (19.4% in 2021), including by using cohesion policy funds as 
appropriate.  Cyprus  would  benefit  from  a  shift  towards  sustainable  transport.  The 
island  currently  relies  on  private  transport,  and  the  whole  transport  sector  was 
responsible  for  21%  of  total  greenhouse  gas  emissions  in  2020,  while  the  share  of 
electric vehicles in new registrations and the number of charging points per vehicle is 
the lowest in the EU. Greater ambition is needed to reduce greenhouse gas emissions 
and increase renewable energy and energy efficiency so that Cyprus is in line with the 
‘Fit for 55’ objectives. 

(33)  Labour  and  skills  shortages  in  sectors  and  occupations  key  for  the  green  transition, 
including  manufacturing,  deployment  and  maintenance  of  net-zero  technologies,  are 
creating  bottlenecks  in  the  transition  to  a  net-zero  economy.  In  2022,  several 
occupations  with  specific  skills  or  knowledge  required  for  the  green  transition  faced 
labour  shortages  and  key  sectors  (e.g.  construction,  manufacturing)  registered  an 
increasing job vacancy rate. High-quality education and training systems that respond 
to  changing  labour  market  needs  and  targeted  upskilling  and  reskilling  measures  are 
key  to  reducing  skills  shortages  and promoting labour inclusion and reallocation. To 

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(34) 

(35) 

(36) 

unlock untapped labour supply, these measures need to be accessible, in particular for 
individuals and in sectors and regions most affected by the green transition. 

In light of the Commission’s assessment, the Council has examined the 2023 Stability 
Programme and its opinion22 is reflected in recommendation (1) below.  

In view of the close interlinkages between the economies of euro area Member States 
and  their  collective  contribution  to  the  functioning  of  the  Economic  and  Monetary 
Union, the Council recommended that euro area Member States take action, including 
through  their  recovery  and  resilience  plans,  to  (i)  preserve  debt  sustainability  and 
refrain  from  broad-based  support  to  aggregate  demand  in  2023,  better  target  fiscal 
measures taken to mitigate the impact of high energy prices and reflect on appropriate 
ways to wind down support as energy price pressures diminish; (ii) sustain high public 
investment and promote private investment to support the green and digital transition; 
(iii)  support  wage  developments  that  mitigate  the  loss  in  purchasing  power  while 
limiting  second-round  effects  on  inflation,  further  improve  active  labour  market 
policies  and  address  skills  shortages;  (iv)  improve  the  business  environment  and 
ensure that energy support to companies is cost-effective, temporary, targeted to viable 
firms  and  that  it  maintains  incentives  for  the  green  transition;  and  (v)  preserve 
macro-financial  stability  and  monitor  risks  while  continuing  to  work  on  completing 
the  Banking  Union.  For  Cyprus,  recommendations  (1),  (2),  (3)  and  (4)  contribute  to 
the implementation of the first, second, third and fourth euro area recommendations.  

In  light  of  the  Commission’s  in-depth  review  and  this  assessment,  the  Council  has 
examined  the  2023  National  Reform  Programme  and  the  2023  Stability  Programme. 
Its recommendations under Article 6 of Regulation (EU)  No 1176/2011  are reflected 
in recommendation (1) below. Policies referred to in recommendation (1) help address 
vulnerabilities linked to  private,  government  and external  debt. Recommendation  (2) 
contributes to addressing recommendation (1). Policies referred to in recommendation 
(1) contribute to both addressing imbalances and implementing the recommendations 
for the euro area, in line with recital 35.  

HEREBY RECOMMENDS that Cyprus take action in 2023 and 2024 to:  

1. 

Wind  down  the  energy  support  measures  in  force  by  the  end  of  2023.  Should 
renewed  energy  price  increases  necessitate  support  measures,  ensure  that  these  are 
targeted  at  protecting  vulnerable  households  and  firms,  fiscally  affordable,  and 
preserve incentives for energy savings. While maintaining a sound fiscal position in 
2024,  preserve  nationally  financed  public  investment  and  ensure  the  effective 
absorption  of  RRF  grants  and  other  EU  funds,  in  particular  to  foster  the  green  and 
digital transitions.  

Facilitate  the  reduction  of  private  debt,  including  by  implementing  an  effective 
foreclosure framework. 

For the period beyond 2024, continue to pursue investment and reforms conducive to 
higher sustainable growth and preserve a prudent medium-term fiscal position.  

2. 

Accelerate  the  implementation  of  its  recovery  and  resilience  plan,  also  by  ensuring 
an  adequate  administrative  capacity,  and  swiftly  finalise  the  REPowerEU  chapter 
with  a  view  to  rapidly  starting  its  implementation.  Proceed  with  the  speedy 

22 

Under Articles 5(2) and 9(2) of Council Regulation (EC) No 1466/97. 

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3. 

4. 

implementation  of  cohesion  policy  programmes,  in  close  complementarity  and 
synergy with the recovery and resilience plan. 

Take  measures  to  improve  the  governance  of  the  state-owned  entities  in  line  with 
international standards. 

Reduce reliance on fossil fuels and diversify the energy supply. To better exploit all 
untapped  potential  for  renewable  energy  generation,  accelerate  renewables 
deployment by using suitable economic instruments and making further investments 
to  upgrade  and  modernise  the  electricity  grid,  including  energy  storage  facilities. 
Speed  up  the  development  of  electricity  interconnections.  Extend  and  accelerate 
energy  efficiency  measures,  also  to  address  energy  poverty,  as  well  as  the  shift 
towards  sustainable  transport.  Step  up  policy  efforts  aimed  at  the  provision  and 
acquisition of the skills needed for the green transition.  

Done at Brussels, 

For the Council 
The President 

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