COMMISSION STAFF WORKING DOCUMENT In-depth review for Cyprus 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 2023 European Semester - Spring Package
Date: 2023-05-24
Institutions: European Commission, Secretariat-General
Subjects: Cyprus, European Semester, credit policy, economic policy, household consumption, indebtedness, investment, macroeconomics, public debt, savings

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 24.5.2023  SWD(2023) 635 final  COMMISSION STAFF WORKING DOCUMENT In-depth review for Cyprus 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 2023 European Semester - Spring Package  {COM(2023) 600 final} - {SWD(2023) 628 final} - {SWD(2023) 629 final} - {SWD(2023) 630 final} - {SWD(2023) 631 final} - {SWD(2023) 632 final} - {SWD(2023) 633 final} - {SWD(2023) 634 final} - {SWD(2023) 636 final} - {SWD(2023) 637 final} - {SWD(2023) 638 final} - {SWD(2023) 639 final} - {SWD(2023) 640 final} - {SWD(2023) 641 final} - {SWD(2023) 642 final} - {SWD(2023) 643 final} - {SWD(2023) 644 final}  
 
 
Cyprus 

In-Depth Review 2023 

 
 
 
 
 
 
 
 
 
 
 
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 – 2023 Spring Package” (COM(2023) 
600 final) that: 

is  experiencing 

Cyprus 
identified  with  excessive 
imbalances  after  being 
imbalances until 2022. 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  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. 

 
 
 
 
 
 
 
CONTENTS 

1.  Introduction 

2.  Assessment of macroeconomic vulnerabilities 

3.  Thematic chapter: savings-investment gap and household savings 

LIST OF TABLES 

Selected economic and financial indicators (Part 1), Cyprus 
Table 2.1: 
Table 2.2: 
Selected economic and financial indicators (Part 2), Cyprus 
Table 3.1:  Disposable income and consumption indicators, CY and EU 
Table 3.2: 

Selected household debt indicators, Cyprus 

LIST OF GRAPHS 

Graph 2.1:  Selected graphs, Cyprus 

Graph 2.2:  Components of gross fixed capital formation deflator growth and consumer price inflation 

Graph 3.1:  Selected graphs, Cyprus 

4 

5 

16 

14 
15 
23 
24 

12 

13 

22 

 
 
 
 
 
 
 
1. 

INTRODUCTION 

In  2022,  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 government and private debt, 
large  current  account  deficits  and  a  still  high  stock  of  non-performing  loans.  The  2023  Alert 
Mechanism Report published in November 2022 concluded that an in-depth review (IDR) should be 
undertaken  also  this  year  for  Cyprus  with  a  view  to  assess  the  persistence  or  unwinding  of 
imbalances. (2) The AMR concluded that in Cyprus, concerns related to household and non-financial 
corporate,  government  and  external  debt-to-GDP  ratios  remained,  although  they  resumed  their 
declining  path  after  the  COVID-19  crisis.  Despite  improvements,  non-financial  corporate  and 
household  debt-to-GDP  ratios  continued  to  be  among  the  highest  in  the  EU.  The  large  current 
account  deficit  narrowed,  but  was  forecast  to  increase  again,  amid  the  worsening  external 
environment.  The  banking  sector  proved  resilient,  although  risks  remained,  including  those 
associated with non-performing loans. 

The Cypriot economy experienced a continued solid growth momentum in 2022, but high 
inflation, tightening monetary policy and a weaker external environment are expected to 
slow  down  growth  in  2023. (3)  Real  GDP  grew  by  5.6%  in  2022,  following  a  6.6%  increase  in 
2021.  Despite  rising  inflation,  private  consumption  remained  robust,  supported  by  increased 
employment  and  wages.  Tourism  continued  its  rebound  after  the  COVID-19  crisis  and  an  active 
diversification strategy to compensate for the loss of the Russian market. GDP growth is forecast 
at 2.3% in 2023 and 2.7% in 2024. The anticipated slowdown is due to the deterioration of global 
growth  prospects,  prolonged  elevated  inflation  and  increasing  interest  rates  adversely  impacting 
demand and in particular investments. Inflation picked up to 8.1% in 2022 fuelled by high energy 
prices  and  supply  bottlenecks.  Inflation  is  projected  to  decelerate  to  3.8%  in  2023  and  2.5%  in 
2024,  as  pressures  from  energy  inflation  and  supply  disruptions  are  easing,  however,  wage 
indexation  is  expected  to  a  certain  extent  push  prices  up.  The  forecast  is  surrounded  by 
uncertainties in particular around the turbulence in the global financial market and the evolution of 
the Russia’s war on Ukraine. 

This  in-depth  review  presents  the  main  findings  of  the  assessment  of  macroeconomic 
vulnerabilities  for  Cyprus.  The  assessment  is  backed  by  a  thematic  section  on  household 
savings.  Vulnerabilities  related  to  external  balances  in  Cyprus  are  also  discussed  in  a  horizontal 
thematic note that was recently published. (4) The MIP assessment matrix is published in the 2023 
Country Report for Cyprus. (5) 

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

(2)  European Commission (2022), Alert Mechanism Report 2023, COM (2022) 381 final. 

(3)  European Commission (2023), European Economic Forecast: Spring 2023, Institutional Paper 200. 

(4)  European Commission (2023), External Sustainability Analysis: Thematic Note to Support In-Depth Reviews, European 

Economy: Institutional Papers, 196. 

(5)  European Commission (2023), Country Report Cyprus 2023, SWD(2023) 613 final. 

4 

 
 
                                                 
 
2.  ASSESSMENT OF MACROECONOMIC 
VULNERABILITIES 

Gravity, evolution and prospects 

On  5  April  2023,  the  Commission  published  a  horizontal  thematic  note  on  external 
balances  based  on  data  up  until  Q3  2022,  which  also  covers  Cyprus.  It  showed  that  the 
energy  crisis  had  a  significant  impact  on  the  current  account  deficit  in  2022  reversing  the 
improvement of 2021. Following a solid improvement in 2021 (by over 3 pps. to 6.8% of GDP) as 
tourism recovered from the slump inflicted by the pandemic, the current account deficit widened to 
9.1% (6) of GDP in 2022 linked to strong increases in energy prices, and robust domestic demand. 
As a result, the goods balance recorded a deficit of 21.8% of GDP. The surplus in trade of services 
recovered to around pre-pandemic levels, recording 20.9% of GDP in 2021, and further expanding 
to 21.4% of GDP in 2022, on the back of the recovery of tourism and the on-going expansion of 
exports of financial, shipping, ICT and professional services. 

As  a  small  open  economy,  Cyprus  is  highly  dependent  on  imports.  Imports  of  consumer 
goods dominate, followed by intermediate goods, notably for manufacturing and construction. The 
high  propensity  to  consume  and  consequently  to  import  also  reflects  the  low  savings  rate in  the 
household  sector.  The  large  current  account  deficit  is  thus  mirrored  in  savings  falling  short  of 
domestic investment notably in the household sector (see Section 3). In addition, Cyprus relies on 
imports of oil, and has a 89.5% energy import dependency compared to 55.5% for the EU in 2021. 
As a result, the negative energy balance is one of the largest in the EU, and it worsened from -4.4% 
of GDP in 2021 to -8.8% of GDP in 2022 because of higher oil prices.  

Foreign  companies  operating  in  Cyprus  have  a  positive  impact  on  the  current  account, 
but  repatriations  of  profits  increase  primary  income  deficits.  Since  2016  the  primary 
income  account  deficits  have  increased  mainly  driven  by  the  credit-acquiring  companies  and  the 
government  through  the  payment  of  interest  on  foreign  debt.  Furthermore,  foreign-owned 
companies active in the domestic retail trade sector have added to the deficit through imports of 
goods for consumption and the repatriation of profits in the form of dividends or retained earnings. 
Foreign-owned  companies  in  the  sectors  of  professional  services,  transport  and  ICT  contributed 
positively  to  the  current  account  when  including  the  corresponding  exports  of  services  of  these 
sectors.  

The  current  account  deficit  is  expected  to  gradually  improve  as  energy  price  levels 
decrease, and exports of services continue to expand. The current account deficit is projected 
at  -7.3%  in  2023,  and  -6.9%  in  2024.  However,  this  is  considerably  below  the  current  account 
balance  required  to  bring  the  NIIP  above  the  prudential  threshold  in  the  medium  term,  which  is 
estimated to be around zero. Similarly, to stabilise the NIIP above the benchmark of -35% over 20 
years, a current account balance of above -0.9% of GDP would be needed.  

The current account deficit is mainly financed by foreign direct investments (FDI), but so 
far with limited impact on the potential output of the country. FDI are concentrated in real 

(6)  While the data in the horizontal note go up to Q3 2022, here they are updated with the numbers for the whole 2022. 

5 

 
                                                 
 
2. 

Assessment of macroeconomic vulnerabilities 

estate  and  transactions  of  special  purpose  entities  (SPEs),  76.5%  of  the  inflows  in  2022,  thus 
having  a  limited  positive  impact  on  the  potential  output  of  the  country.  FDI  inflows  from  Russia 
have stopped since the outbreak of the Russian invasion of Ukraine, while investments by the EU 
countries, the UK, Israel and Lebanon are on the rise.  

The  net  international  investment  position  (NIIP)  has  improved  but  remains  highly 
negative. In 2022, the NIIP improved to -105.3%, some 10 pps. above its 2019 level and some 30 
pps. above the pandemic induced multi-year through in 2020, mainly on account of strong nominal 
GDP growth and positive valuation effects. The NIIP excluding non-defaultable instruments (NENDI) 
was  more  favourable,  at  around  -21.7%  of  GDP,  in  2022.  The  NIIP  excluding  SPEs (7)  stood  at 
40.9%  of  GDP  at  the  end  of  2022,  around  the  fundamental  and  somewhat  above  prudential 
benchmarks, while NENDI excluding SPEs was positive at around 64% of the GDP. Hence, the risks 
to the external position of the economy are limited. The government sector contributes negatively 
to  the  NIIP,  as  most  government  debt  is  held  by  foreigners.  Baseline  projections  show,  however, 
that  the  headline  NIIP  is  set  to  worsen  to  -118%  of  GDP  by  2032  under  the  baseline  scenario 
(Graph  2.1  e).  As  for  the  NIIP  projections  excluding  SPEs,  the  NIIP  is  expected  to  worsen  more 
steeply  under  the  baseline,  reaching  the  level  of  around  -84%  of  GDP  over  the  same  period. (8) 
Sensitivity checks using two alternative scenarios show that the headline NIIP would improve only 
slightly under the optimistic assumptions of scenario 1. Conversely, the NIIP excluding the SPEs is 
projected  to  worsen  also  under  the  optimistic  scenario  1,  to  close  to  -70%  of  GDP.  Adverse 
scenarios would lead to a headline NIIP of around -134% of GDP, while the NIIP excluding the SPEs 
would amount to nearly -100% of GDP. (9)  

Private sector debt continues to decline. The private debt-to-GDP ratio resumed its declining 
trend,  which  started  in  2015,  after  an  increase  in  2020  as  a  result  of  the  COVID-19  pandemic. 
Private debt stood at around 217% of GDP, at the end of 2022, down from almost 250% of GDP at 
the end of 2021. The reduction was driven by growth in nominal GDP (see Graph 2.1). Despite the 
decreases,  private  debt  is  still  significantly  above  the  MIP  threshold  of  133%.  Household 
indebtedness accounted for 75% of GDP, while the debt of non-financial corporations was 142% of 
GDP.  Overall,  the  private  debt-to-GDP  ratio  is  expected  to  decrease  further  in  2023-2024 
supported by economic growth.  

Private debt in Cyprus is inflated by the debt of special purpose entities,  which have a 
limited impact on the functioning of the economy. A significant portion of the private debt is 
due to the operations of special purpose entities, which are mainly ship-owning entities. The SPEs 
are  perceived  to  have  limited  links  to  the  real  economy  because  they  have  no  or  little  physical 
presence,  employment,  or  production  in  the  country.  Furthermore,  their  debt  is  overwhelmingly 
funded  by  foreign  banks  or  other  non-resident  entities.  Such  set-up  of  special  purpose  entities 
reduces the risk to the domestic economy, nevertheless their debt inflates the private sector debt 
ratio.  Overall,  the  debt  stock  of  special  purpose  entities  increased  from  2015  to  2022  by 
approximately  17%.  As  a  share  of  GDP,  SPEs  debt  stood  at  54%  by  the  end  of  2022.  When 

(7)  Special purpose Entities (SPEs), mostly ship-owning, contribute significantly to the negative headline NIIP by around -80 pp 
of GDP. The risks of SPEs for the real domestic economy notably the banking syatem 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. (Cyprus IDR 2022 and Country Report 2018). Furthermore, the impact of SPEs on the current account 
balance is limited. 

(8)  Note that the projections assume constant primary income balances due to difficulties in projecting the very sizeable 

reinvested earnings in case of the headline NIIP projections, i.e. because of less detailed data available for the projections 
of the NIIP excluding the SPEs. 

(9)  The optimistic alternative scenario (scenario 1) assumes higher trade balances in 2025 and thereafter by 2 pp of GDP, and 
higher real GDP growth in 2025 by 2 pp, than in the baseline scenario. It illustrates a case of a more positive trade balance 
evolution amid lower energy prices and better export performance than under the baseline. The pessimistic alternative 
scenario (scenario 2) describes a corresponding adverse shock in which it assumes the same timing and the magnitude of 
deviations from the baseline, but with the opposite sign. 

6 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

excluding SPEs’ debt, the private debt ratio is reduced to 163% of GDP at the end of 2022, but still 
remains higher than the EU average. 

The  household  debt-to-GDP  ratio  decreased  in  2022,  but  vulnerabilities  remain.  The 
household  debt-to-GDP  ratio  decreased  to  75%  of  GDP  in  2022  from  83%  of  GDP  in  2021.  The 
household  debt  ratio  is  below  the  fundamental  benchmark (10),  but  above  the  prudential  one (11), 
estimated  at  91%  of  GDP  and  41%  of  GDP,  respectively.  In  2022,  new  lending  to  the  domestic 
economy  surpassed  the  levels  of  previous  years  –  with  all  major  segments  registering  higher 
volumes.  Lending  for  housing  purposes  exceeded  pre-pandemic  levels,  reaching  historic  highs (of 
about  EUR  1.2  bn),  while  lending  for  consumer  loans  remained  stable  (at  EUR  155  mn) (12). 
Although the household debt-to-GDP ratio decreased, supported by nominal GDP growth, the stock 
of debt slightly increased in 2022 (13). Debt-service to income ratios are expected to increase amid 
rising interest rates and in view of the share of loans with variable rates (about 95%). Therefore, 
rising  interest  rates  could  present  challenges  to  households,  particularly  to  those  in  the  lower 
income quintiles. At the same time, the pass through of monetary policy has been rather moderate 
as  a  large  share  of  the  lending  portfolio  is  linked  to  bank  base  rates  rather  than  Euribor  or  ECB 
rates (14). About 34% of the household debt relates to legacy non-performing loans (NPLs) held by 
the  credit  acquiring  companies  (CACs) (15).  While  this  part  of  the  debt  is  not  expected  to  be 
impacted  by  the  rising  rates,  the  bad  household  loans  are  affecting  the  overall  speed  of  debt 
deleveraging.  Furthermore,  resolving  the  residential  segment  of  NPLs  has  been  even  more 
challenging  due  to  the  numerous  subsequent  suspensions  of  foreclosures  in  the  last  years.  GDP 
growth  is  expected  to  have  a  positive  effect  on  driving  down  household  debt  to  GDP  ratio  over 
2023-2024,  and  furthermore,  a  deceleration  in  the  credit  growth  is  expected  in  the  future  amid 
rising interest rates. 

Non-financial  corporations  (NFCs)  continued  deleveraging  in  2022.  The  debt  of  the 
corporate sector decreased from 165% of GDP at the end of 2021 to 142% of GDP in 2022. Still, 
the  NFC  debt  exceeds  the  fundamental  and  prudential  thresholds  of  132%  and  64%  of  GDP, 
respectively. The debt overhang of non-financial corporations is reduced when excluding the debt of 
the special purpose entities. Without the SPEs, the non-financial corporations debt ratio is reduced 
to 89% of GDP for 2022. Net credit flows to NFCs turned negative in 2022, around -1.7% of GDP. 
The  corporate  sector’s  stock  of  liabilities  (excluding  special  purpose  entities)  comprises  mainly 
domestic bank loans. December 2022 data on the breakdown of outstanding loans to NFCs shows 
that a large proportion of the stock of bank loans is in accommodation and food services (19.4% of 
total loans), wholesale and retail trade (18.0% of total loans); real estate activities (17.7% of total 
loans); manufacturing (10.3% of total loans); transport and storage (11.3% of total loans) and in 
construction (9.2% of total loans). As with the household sector, part of non-financial sector debt 
(about  20%)  is  held  by  the  credit  acquiring  companies  and  mainly  consists  of  legacy  NPLs. (16) 
Overall, corporations proved to be resilient to the shocks stemming from Russia’s war on Ukraine 
and  the  energy  crisis,  with  sectors  such  as  transport  and  storage,  manufacturing,  mining  and 

(10)  Fundamental-based benchmarks are derived from regressions capturing the main determinants of credit growth and take 

into account a given initial stock of debt (from 1995).  

(11)  Prudential thresholds represent the debt threshold beyond which the probability of a banking crisis is relatively high, based 

on a signalling approach. Methodologies are described in European Commission, 2017a and updates to the methodology 
have been subsequently proposed in European Commission, 2018b. 

(12)  In 2021 mortgages recorded about EUR 1.1 bn, while households consumer loans stood at EUR 150 mn. 

(13)  The stock of household debt increased also in 2021. 

(14)  Based on preliminary analysis of the Central Bank of Cyprus, lending based on ECB and Euribor rates recorded a much 

larger pass through of monetary policy, in contrast to lending based on bank base rates. About 35% of the lending portfolio 
as of December 2022 was linked to bank base rates. 

(15)  According to Central Bank of Cyprus, Financial Stability Department calculations. 

(16)  According to Central Bank of Cyprus, Financial Stability Department calculations. 

7 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

quarrying,  and  professional,  scientific  and  technical  activities,  registering  positive  real  growth  in 
gross  value  added  in  2022.  In  the  medium  term,  rising  interest  rates  may  pose  debt  repayment 
challenges  also to  NFCs. Mitigating  factors  for  this  risk  are  expected to  be  economic  growth  and 
high  levels  of  deposits  in  a  number  of  sectors. (17)  The  NFC  debt-to-GDP  ratio  is  expected  to 
continue declining in 2023-2024 supported by nominal GDP growth.  

The stock of non-performing loans in the banking sector has declined significantly since 
its  peak  in  2014.  Starting  in  2018,  banks  have  made  significant  progress  in  reducing  NPLs  by 
offloading them to credit acquiring companies and the state-owned asset management company, 
KEDIPES. Furthermore, the decline in the stock of NPLs held by banks over the last years was also 
the  result  of  write-offs,  cash  repayments,  debt-to-asset  swaps  and  curings  (migration  of  non-
performing loans into performing categories). In 2021, the NPL ratio in the banking sector recorded 
a  single  digit  level  following  many  years  of  double  digits  levels.  Thereafter,  the  downward  trend 
continued  in  2022,  with  the  NPL  ratio  reaching  5.2%  in  the  third  quarter  of  2022,  which  is  well 
below the 2014 peak of 38.6%. Nevertheless, with the NPL transfers to the CACs in the last years, 
particularly in 2018, 2020 and 2021, CACs now hold the majority of bad loans in the economy. At 
aggregate  level,  as  of  December  2022,  CACs  held  a  portfolio  of  EUR  19.7  bn  of  non-performing 
loans,  whereas  banks  had  about  EUR  2.3  bn  of  NPLs.  The  pandemic,  and  the  subsequent 
suspensions of foreclosures significantly slowed the resolution of NPLs  held by CACs by delaying 
loan  restructurings  and  rendering  the  conditions  for  NPL  sales  more  complicated.  Nevertheless, 
provided a well functioning foreclosure framework in place, NPL work-outs should accelerate in the 
future as credit-acquiring companies are specialised in managing and maximising loan recoveries. 
Inherently, NPL resolution is expected to support further private debt reduction.  

The public debt-to-GDP ratio decreased significantly in 2022 and is projected to continue 
on a downward path in the coming years. In 2022, the public debt ratio fell by 14.5 percentage 
points to 86.5% of GDP on account of strong nominal growth and a budget surplus. For 2023 and 
2024, the debt-to-GDP ratio is forecast to continue declining, to 80.4% and 72.5% respectively. The 
reduction  is  mainly  driven  by  the  projected  economic  growth  and  fiscal  surpluses.  The  general 
government  balance  is  expected  to  remain  in  surplus  of  around  2%  of  GDP  in  2023  and  2024. 
Against  the  background  of  increasing interest  rates and  yields,  Cyprus  is  facing  higher  borrowing 
costs when tapping the markets in the future. In April 2023, the Cypriot government issued its first 
sustainable bond worth of EUR 1 billion, with a maturity of 10-years and a coupon of 4.1%. The 
government  has  a  large  cash  buffer  while  the  gross  financing  needs  for  2023  and  2024  are 
expected  to  be  low,  on  the  back  of  significant  primary  surpluses.  According  to  the  Commission’s 
assessment, Cyprus faces medium fiscal sustainability risks over the medium-term, and low risks in 
the short-term and in the long run. (18) Cyprus continues to enjoy a favourable market perception as 
its debt rating continued to be upgraded over the past year. 

Assessment of MIP relevant policies  

Timely  and  full  implementation of  the  reforms  and  investment of  the  Cyprus  Recovery 
and  Resilience  Plan  (RRP)  and  its  long-term  growth  strategy  is  expected  to  support 
external rebalancing. The on-going implementation of measures such as enhancement of digital 

(17)  Such sectors include: i) water supply, sewerage, waste management; ii) professional, scientific and technical activities; iii) 

electricity, gas, steam and air conditioning supply iv) Information and communication v) Administrative and support service 
activities 

(18)  See the DSA in the Commission Country Report 2023 for the latest risk classification and Debt Sustainability Report 2022 

(April 2023) for methodological details. 

8 

                                                 
 
2. 

Assessment of macroeconomic vulnerabilities 

skills  and public  services are  facilitating the  digital  transition  and thus  strengthening  productivity 
growth. Furthermore, several measures are being implemented to promote export-oriented sectors 
such  as  professional  services,  tertiary  education,  health  and  fintech,  light  manufacturing  and 
agriculture,  which  are  expected  to  help  diversify  the  economy  and  support  export  growth  in  the 
medium-term. Efforts are on-going for greening the economic model of Cyprus and alleviating its 
over-reliance  on  oil  imports  with  the  introduction  of  several  grant  schemes  encouraging 
investments in  photovoltaics.  In  parallel,  measures  to  increase  energy  efficiency  of  buildings  and 
make transport more sustainable are also under implementation. In addition, competitiveness gains 
are  expected  from  the  digital  transition  and  an  increase  of  labour  productivity  supported  by  the 
RRP.  Furthermore,  measures  to  strengthen  the  payment  discipline  as  described  below  are  key  to 
limit borrowing by the household sector, while expanding savings options would moderate private 
consumption  and  an  over-dependence  on  imports,  essential  for  correcting  the  current  account 
deficit (see Section 3).    

Foreclosure  proceedings  resumed  in  February  2023.  Following  several  extensions  since  the 
start  of  the  pandemic,  the  suspension  of  foreclosures  expired  on  31  January  2023.    The  recent 
suspensions,  including  the  ones  from  2022,  had  a  more  limited  scope,  applying  to  primary 
residences  up  to  EUR  350,000,  agricultural  land  with  market  value  below  EUR  100,000  and 
business  premises  of  companies  with  up  to  EUR  750,000  in  annual  revenue.  Nevertheless,  the 
frequency and length of suspensions of the framework during the last years have been weighing 
on  NPL  resolution.  Implementing  an  effective  foreclosure  framework  is  essential  for  encouraging 
borrowers  to  participate  in  loan  restructuring,  maintain  payment  discipline  and  reduce  NPLs  and 
private debt. In addition, the foreclosure tool is important for the viability and implementation of 
the  recently  approved  mortgage  to  rent  scheme  which  aims  to  protect  the  primary  homes  of 
vulnerable households.  

As  part  of  the  RRP,  a  package  of  amending  laws  on  credit-acquiring  companies  and 
credit  servicers  was  adopted  in  July  2022,  improving  their  working  environment  and 
supporting NPL reduction. The package put loan servicers under the Central Bank's licensing and 
supervision, and gave credit acquiring companies digital access to the Land Registry. Furthermore, 
the legal amendments grant credit servicers unrestricted access to the data of debtors held in the 
Artemis Database and in the e-services of the Land Registry. Moreover, credit servicers are granted 
indirect  access  (through  credit  institutions/CACs)  to  the  data  of  guarantors  held  in  the  Artemis 
Database  and  in  the  e-services  of  the  Land  Registry.  The  package  is  expected  to  strengthen  the 
working  environment  for  servicing  of  loans  by  providing  CACs  and  credit  servicers  with  the  tools 
they  need  to  better  work  out  legacy  non-performing  loans.  This  is  expected  to  result  in  a  more 
effective  and  efficient  management  of  non-performing  loans,  compared  to  the  previous  legal 
framework. 

Several  reforms  and  measures  initiated  in  2022  can  help  address  private  over-
indebtedness.  Last  year  the  authorities  started  to  work  on  developing  an  action  plan  for  the 
development  of  a  liability  monitoring  register  under  the  RRP.  The  full  implementation  and 
establishment of the liability monitoring register is planned to be completed by the end of 2024. 
The objective of the measure is to improve the ability of the authorities to design and implement 
targeted policies to prevent and manage private indebtedness. Another measure linked to private 
indebtedness  is  on  preparing  a  strategy  for  improving  financial  literacy.  It  aims  at  enhancing 
financial  education  within  the  general  population,  to  improve  financial  decision  making  and 
ultimately help improve debt repayment discipline and prevent future unsustainable borrowing. The 
strategy is envisioned to be finalized by the end of 2023. (19) 

(19)  In general, improving financial literacy could also reduce under-savings for retirement and shift household investments 

from lower to more productive investments (see Section 3). 

9 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

The  government  is  also  working  on  strengthening  the  insolvency  framework  and 
promoting  the  use  of  insolvency  tools,  but  progress  is  slow.  Borrowers’  participation  in 
insolvency  proceedings  should  facilitate  debt-workouts,  but  so  far,  examinership  and  personal 
insolvency  arrangements  continue  to  be  scarcely  used.  A  broader  use  of  insolvency  tools  would 
further help viable businesses in financial difficulties. In 2022, the government worked on recruiting 
and filling the organisational structure of the Department of Insolvency (DoI). The new Director of 
the DoI was appointed and took over as of mid-April 2023. The managerial and officers’ positions 
of the DoI were expected to be filled in by the end of 2022 but the process has not been completed 
yet.  The  plans  to  set-up  a  customer  service  and  a  communication  plan  for insolvency  are  stalled 
until  all  officers  within  the  DoI  are  appointed.  The  implementation  of  continuous  professional 
development and the licensing for insolvency practitioners were expected to start before the end of 
2022, but instead were implemented in Q1 2023. The training sessions for insolvency practitioners, 
in cooperation with the Academy for public servants were also expected to start still in 2022, but 
instead  they  have  been  postponed  for  2023.  Importantly,  the  transposition  of  the  Directive  (EU) 
2019/1023 on preventive restructuring into Cypriot law was completed in December 2022.    

The  digitalisation  of  insolvency  procedures  in  Cyprus,  including  the  digitalisation  and 
modernisation  of  the  DoI’s  operations,  is  expected  to  be  implemented  by  2025.  The 
digitalisation  of  the  DoI  will  take place  by  setting  up  an  automated  system  to  handle  insolvency 
cases  electronically.  The  current  website  of  the  DoI  (online  since  3Q  2021)  will  increase  its 
capabilities  in  2023  (mostly,  the  development  of  new  e-tools),  plus  adapting  its  layout  to  all 
government official websites.  In February 2023 there was the launch of the project for creating a 
digital  archive  /  repository  of  insolvency  files  enhancing  the  organisation  of  the  Department  of 
Insolvency’s filing system and the digitalisation of files. 

Limited scope of fiscal measures as well as policy measures under the RRP support the 
reduction of the government debt-to-GDP ratio. The measures to mitigate the economic and 
social impact of high energy prices on household energy bills are limited in scale and time, which 
should  have  only  a  very  limited  negative  effect  on  outstanding  gross  debt  in  2023.  They  are 
projected to be phased out in 2024. In addition, the implementation of RRP measures – aiming at 
improving  tax  collection,  addressing  aggressive  tax  planning  practices  and  shoring  up  healthcare 
system sustainability – should facilitate public debt reduction and its long-term sustainability. 

Conclusion  

In  Cyprus,  vulnerabilities  relating  to  private,  public  and  external  debt  remain  high,  but 
continue  to  recede  and  are  heavily  influenced  by  SPEs.  The  private  debt-to-GDP  ratio  has 
been  on  a  declining  trend  since  2015,  except  for  a  one-off  increase  in  2020  as  a  result  of  the 
COVID-19 pandemic. Both household and non-financial corporate debt-to-GDP ratios decreased in 
2022, but remain high. Nevertheless, private debt is inflated by the debt of special purpose entities, 
which  pose  limited  risks  to  the  economy.  Increased  interest  rates  could  put  pressure  on  the  debt 
servicing  capacity  of households and NFCs, as variable interest rate loans prevail,  although there 
are no signs of this yet. The decline in the stock of NPLs held by banks over the last years has been 
significant  due  to  NPL  sales,  write-offs,  cash  repayments,  curing  and  debt-to-asset  swaps.  NPL 
resolution by the credit acquiring companies is expected to support further private debt reduction. 
Mitigating  factors  that  reduce  vulnerabilities  include  projected  economic  growth,  limited  credit 
expansion  due  to  increasing  interest  rates  and  furthermore,  the  debt  overhang  is  reduced  when 
excluding the debt of the special purpose entities. Private debt-to-GDP ratio is expected to continue 
declining in 2023-2024 supported by nominal GDP growth. The public debt ratio fell below the pre-
pandemic level and is projected to continue a downward path over 2023-2024. The current account 
deficit  is  expected  to  narrow  somewhat,  albeit  still  not  conducive  to  further  decrease  the  net 

10 

2. 

Assessment of macroeconomic vulnerabilities 

international  investment  position  over  the  medium  term,  even  though  the  latter  entails  limited 
risks.  The  current  account  deficit  is mostly  financed  by  foreign  direct  investments.  Potential  risks 
affecting  the  ongoing  consolidation  process  and  unwinding  of  vulnerabilities  relate  mainly  to 
uncertainty  in  the  current  macroeconomic  context  and  the  evolution  of  the  Russian  invasion  of 
Ukraine. 

Cyprus  made  progress  on  the  policy  side.  Cyprus  took  measures  to  facilitate  the  NPL 
management.  Following  several  extensions  since  the  start  of  the  COVID-19  pandemic  in  March 
2020, the suspension of foreclosures came to an end as of February 2023. The full implementation 
of  an  effective  foreclosure  framework  is  key  to  encourage  borrowers  to  participate  in  loan 
restructuring,  further  reduce  the  stock  of  NPLs  in  the  economy,  help  reduce private  indebtedness 
and  enhance  payment  discipline  in  Cyprus.  As  part  of  the  RRP,  a  package  of  amending  laws  on 
credit-acquiring companies and credit servicers was adopted in July 2022, improving their working 
environment  and  supporting  NPL  reduction.  Furthermore,  the  transposition  of  the  Directive  (EU) 
2019/1023  on  preventive  restructuring  into  Cypriot  law  was  completed  in  December  2022, 
significantly strengthening the insolvency framework. The authorities started to work on a financial 
literacy  strategy  and  on  a  liability  monitoring  register  that  help  address  excessive  private  debt. 
Several  measures  included  in  the  Recovery  and  Resilience  Plan,  which  are  being  implemented, 
promote  export-oriented  sectors  such  as  professional  services,  tertiary  education,  health  and 
fintech,  light  manufacturing  and  agriculture.  These  measures  are  expected  to  help  diversify  the 
economy  and  support  export  growth  in  the  medium-term.  Efforts  are  on-going  for  greening  the 
economic model of Cyprus and alleviating its over-reliance on oil imports with the introduction of 
several grant schemes encouraging investments in photovoltaics.   

Based on the findings in this in-depth review, the Communication “European Semester – 
2023 Spring Package” sets out the Commission’s assessment as to the existence of 
imbalances or excessive imbalances in Cyprus, in line with Regulation 1176/2011. (20)  

(20) European Commission (2023), European Semester Spring Package 2023, COM(2023) 600 final. 

11 

 
 
                                                 
Graph 2.1: Selected graphs, Cyprus 

2. 

Assessment of macroeconomic vulnerabilities 

Source: European Commission services 

12 

-50-40-30-20-1001020304012Q413Q414Q415Q416Q417Q418Q419Q420Q421Q422Q4Y-o-y changef) Decomposition of y-o-y changes in private debt-to-GDP ratios, non-consolidated Credit flowReal growthInflationOther changesD/GDP, change-250-5015017Q318Q319Q320Q321Q322Q3% of GDPb) NIIP by sectorGeneral governmentPrivate sector incl MFIPrivate sectorMFI (excl central bank)Central bank (incl reserves)Net int'l investment position (NIIP)051015202530354019Q120Q121Q122Q1% of sectoral loans and advancesd) Non-performing loans rate, by sector of exposureOverall NPL rateNFCHHOthers01002003004005000910111213141516171819202122% of GDPe) Decomposition of debt, consolidatedGovernmentHouseholdNon financial corporationsPrivate sector-160-140-120-100-80-60-40-2002122232425*26*27*28*29*30*31*32*% of GDPc) NIIP projectionsBaselineBaseline excl SPEsScenario 1Scenario 1 excl SPEsScenario 2Scenario 2 excl SPEs-40-200204015161718192021222223*24*% of GDPa) Decomposition of current accountGoods, fcastServices, fcastGoods excl energyEnergy balanceServices excl travelTravel balancePrimary inc. bal.Second. inc. bal.Current accountNet lending/borrowing   
 
2. 

Assessment of macroeconomic vulnerabilities 

Box 1: Inflation exposures and cross-border pass-through 

This  box  sheds  light  on  the  sources  of  inflation  in  Cyprus  and  its  spill-overs  with  EU 
partners.  The  period  since  2021  has  been  characterized  by  pandemic  aftershocks  and  global 
supply  chain  disruptions  compounding  global  inflationary  pressures  and  a  surge  in  commodity 
prices  triggered  by  Russia’s  war  of  aggression  against  Ukraine.  As  a  result,  inflation  in  Cyprus 
surged to unprecedented levels. In response, wages and profits also picked up across the EU, which 
further  added  to  price  pressures  in  Cyprus.  With  input-output  data,  domestic  inflation  can  be 
decomposed  into  the  contributions  from  key  cost  factors.  Taking  into  account  some  data 
limitations, the framework can be  used to attribute consumer and investment price changes to i) 
extra-EU import price changes, which include both directly imported inflation and inflation passed 
through from EU partners import costs ii) domestic unit labour cost changes iii) domestic unit profit 
changes, including indirect taxation changes and iv) rest-of-EU value added price changes. (21) 

Data suggests that much of inflation in Cyprus in 2022 reflected surging import prices, 
which  are  projected  to  continue  driving  inflation  over  the  forecast  horizon.  In  2022,  as 
shown  in  Graph  2.2,  energy  inflation  contributed  substantially  to  the  increase  in  consumer  and 
investment  inflation.  In  addition,  price  changes  in  extra-EU  non-energy  imports  and  costs  passed 
through  EU  partners  further  lifted  consumer  and  investment  prices  in  Cyprus.  Domestic  factors, 
wages and profits, did not contribute materially. Going forward, consumer and investment inflation 
is expected to be sustained mainly by non-energy imports from outside the EU this year and next. 
The  contribution  from  domestic  wages  and  profits  is  set  to  increase,  but  their  overall  impact  is 
expected to remain subdued. 

Graph 2.2: Components of gross fixed capital formation deflator growth and consumer price 
inflation 

Source: European Commission services 

(21) The graphs below are based on national accounts data and the Commission’s Spring 2023 forecast, which are combined 

through a ‘Ghosh’ matrix based on Eurostat’s Figaro input-output available for 2015-2020. HICP is taken as the measure of 
the price of private consumption, including non-residents. Energy import prices from extra-EU reflect realised median prices 
until 2022, and energy price assumptions underlying the Spring forecast thereafter. Other goods prices reflect median 
European prices per industry until 2022, and forecast non-energy goods and service trade prices for 2023-2024. Value 
added deflators are assumed to affect all industries within a country to the same degree. Changes in import prices and 
value added deflators are assumed to affect demand prices with a delay of 5 and 6 months for consumption and 
investment inflation, respectively. For a similar analysis using an input-output-based methodology, see “Inflation 
Differentials in Europe and Implications for Competitiveness: Thematic Note to Support In-Depth Reviews” European 
Commission 2023, Institutional paper 198. 

13 

 
  
 
                                                 
2. 

Assessment of macroeconomic vulnerabilities 

Table 2.1: Selected economic and financial indicators (Part 1), Cyprus 

(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 halve the gap between the NIIP and the 
indicative MIP benchmark of -35% of GDP over the next ten years, or to stabilise the NIIP at the current level if it is 
already above the indicative MIP benchmark. 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 2023-04-28, where available; European Commission for forecast figures (Spring forecast 
2023) 

14 

all variables y-o-y % change, unless otherwise stated2003-072008-122013-18201920202021202220232024Real GDP 4.50.12.15.5-4.46.65.62.32.7Potential growth  (1)3.72.10.83.63.33.03.53.23.0Contribution to GDP growth:Domestic demand 6.0-1.11.85.5-1.63.65.91.71.9Inventories -0.20.40.00.5-2.0-0.63.70.00.0Net exports -1.40.60.2-0.5-0.73.6-3.90.70.8Contribution to potential GDP growth (1):Total Labour (hours) 1.30.90.21.41.00.91.41.41.3Capital accumulation 1.91.40.51.11.21.11.21.11.1Total factor productivity 0.5-0.30.11.11.11.10.90.80.7Output gap (2)3.10.3-3.75.1-2.70.72.71.81.5Unemployment rate4.67.013.37.17.67.56.86.96.4Harmonised index of consumer prices (HICP)2.52.7-0.20.5-1.12.38.13.82.5GDP deflator 3.52.0-0.11.3-1.22.96.45.02.8External positionCurrent account balance (% of GDP), balance of payments-6.2-7.7-3.2-5.6-10.1-6.8-9.1-7.3-6.9Trade balance (% of GDP), balance of payments-2.2-6.41.31.0-1.42.9-0.4..Primary income balance (% of GDP)-4.7-0.3-2.5-5.4-7.0-8.4-7.9..Secondary income balance (% of GDP)0.7-0.9-2.0-1.2-1.6-1.3-0.8..Current account explained by fundamentals (CA norm, % of GDP) (3)-1.6-2.5-1.6-1.6-1.6-1.8-1.8-1.7-1.7Required current account to stabilise NIIP above -35% of GDP over 20Y (% of GDP) (4)0.32.8-1.0-1.1-1.9-1.5-0.9-0.6-0.3Capital account balance (% of GDP)0.10.30.4-0.1-0.10.40.2..Net international investment position (% of GDP)-68.2-123.4-145.5-115.4-134.5-117.8-105.3..NENDI - NIIP excluding non-defaultable instruments (% of GDP) (5).-69.0-203.6-155.3-111.4-76.4-21.7..Net FDI flows (% of GDP).9.019.5-3.5-34.0-18.2-30.2..CompetitivenessUnit labour costs (ULC, whole economy)3.62.8-2.42.72.8-1.41.05.63.2Nominal compensation per employee 4.52.8-1.44.4-0.53.83.86.34.0Labour productivity (real, hours worked)1.60.20.90.92.11.71.5-0.4-0.4Real effective exchange rate (ULC)1.60.5-3.10.6-1.8-1.5-2.10.4-0.2Real effective exchange rate (HICP)1.30.2-0.4-2.3-0.30.0-1.8..Export performance vs. advanced countries (% change over 5 years)-13.8-7.13.523.239.730.6...Private sector debtPrivate sector debt, consolidated (% of GDP)247.1308.0324.8265.5269.7248.4217.2..Household debt, consolidated (% of GDP)84.7116.9117.286.189.483.074.8..Household  debt, fundamental benchmark (% of GDP) (6)69.078.697.588.097.093.191.1..Household  debt, prudential threshold (% of GDP) (6)41.741.640.746.744.743.940.7..Non-financial corporate debt, consolidated (% of GDP)162.5191.1207.6179.4180.4165.4142.4..Corporate debt, fundamental benchmark (% of GDP) (6)159.8141.3157.6134.4145.7137.2132.0..Corporate debt, prudential threshold (% of GDP) (6)65.365.364.369.268.968.264.3..Private credit flow, consolidated (% of GDP) 22.618.73.7-0.5-1.24.3-0.8e..Corporations, net lending (+) or net borrowing (-) (% of GDP)-5.92.35.2-2.2-3.9-3.2-6.0-5.4-5.8Households, net lending (+) or net borrowing (-) (% of GDP)-7.5-5.5-5.1-4.7-0.4-1.5-4.8-3.3-2.6Net savings rate of households (% of net disposable income)0.7-0.5-6.7-0.16.85.0...forecast 
 
 
      
 
 
Table 2.2: Selected economic and financial indicators (Part 2), Cyprus 

2. 

Assessment of macroeconomic vulnerabilities 

(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 2023-04-28, where available; European Commission for forecast figures (Spring forecast 
2023) 

15 

all variables y-o-y % change, unless otherwise stated2003-072008-122013-18201920202021202220232024Housing marketHouse price index, nominal8.2-2.4-0.53.7-0.2-3.43.2..House price index, deflated5.2-4.90.03.40.7-4.3-4.4..Overvaluation gap (%) (7)4.26.1-1.9-5.5-6.2-12.5-15.7..Price-to-income overvaluation gap  (%) (8)7.72.5-1.8-11.1-9.9-15.4-18.4..Residential investment (% of GDP)10.38.24.67.68.17.67.6..Government debtGeneral government balance (% of GDP)-1.9-4.1-2.81.3-5.8-2.02.11.82.1General government gross debt (% of GDP)61.160.4102.190.8113.8101.286.580.472.5Banking sectorReturn on equity (%).-48.2-27.72.9-3.21.4...Common Equity Tier 1 ratio.7.714.318.318.418.9...Gross non-performing debt (% of total debt instruments and total loans and advances) (9).8.931.315.49.14.7...Gross non-performing loans (% of gross loans) (9)..32.218.111.05.65.2..Cost of borrowing for corporations (%).6.74.63.33.22.93.9..Cost of borrowing for households for house purchase (%).5.33.32.12.22.23.4..forecast 
 
      
 
3.  THEMATIC CHAPTER: SAVINGS-INVESTMENT GAP 
AND HOUSEHOLD SAVINGS 

Savings-investment gap 

Savings  falling  short  of  domestic  investment,  particularly  in  the  household  sector,  is 
reflected  in  current  account  deficits.  Cyprus  has  had  a  positive  government  savings  and 
investment gap (22) since 2014. By contrast, corporate savings, which were previously higher than 
corporate  investment,  fell  sharply  following  the  financial  crisis  of  2013,  leading  to  a  negative 
savings-investment gap of around 3-4 percentage points (see graph 3.1 c, d). Moreover, this gap is 
not  compensated  for  by  the  household  sector,  as  is  usually  the  case,  given  that  the  household 
sector  in  Cyprus  historically  invests  considerably  more  than  it  saves.  That  reflects  mainly 
traditionally  high  investments  into  housing,  which  are  financed  mostly  by  borrowing  and  a 
reduction of financial assets. Cyprus is one of the few EU countries where the household savings-
investment gap has been negative throughout the last decade, driven primarily by the historically 
very  low  household  savings  rate.  The  principal  cause  for  this  is  a  relatively  high  propensity  to 
consume, which, together with high real estate investments, can be linked in part to comparatively 
lower levels of public individualised expenditure (health, education, pension) and to inefficiencies in 
the  legal  framework  (in  particular  past  repeated  suspensions  of  the  foreclosure  framework) 
weakening  the  natural  household  budget  constraint,  which  may  lead  to  higher  consumption  and 
investment. 

Household savings rate and disposable income 

The  gross  household  savings (23)  rate  has  been  historically  well  below  the  EU  average, 
since  at  least  the  beginning  of  the  millennium.  The  savings  rate  has  fluctuated  widely  over 
the  last  two  decades  and was  even  negative  during  the  crisis in  2013-2015. On  the  back  of  the 
gradual  recovery  from  the  financial  crisis,  the  savings  rate  has  increased  slowly,  driven  by  the 
growth  of  disposable  income  outpacing  the  growth  of  consumption  (see  graph  3.1d).  While  real 
wages  fell  markedly  during  the  economic  crisis  of  2010-2014,  being  the  major  force  behind  the 
negative  household  savings  rate  in  that  period,  they  subsequently  hardly  recovered  ground.  The 
decomposition  of  the  changes  in  savings  therefore  reveals  that  the  pre-COVID-19  rise  in  the 
savings  rate,  albeit  slow,  largely  resulted  from  higher  employment.  In  2020,  the  households 
savings rate jumped to 12.5% due to COVID-19 related constrained spending opportunities (from 
5.7% in 2019) before slightly decreasing to 10.9% in 2021 (compared to an EU average of 17%), 

(22)  The savings-investment gap for all three sectors is defined as gross savings less gross capital formation as a share of GDP. 

It therefore equals the net lending/borrowing excluding net capital transfers of each respective sector. 

(23)  The gross household savings rate is calculated as disposable income less final consumption expenditure, as a share of 

disposable income, with the latter being adjusted for the change in the net equity of households in pension funds reserves. 
The latter, however, are negligible in size and largely cancel each other out over the years, which is why they do not receive 
any special attention here. 

16 

 
                                                 
 
3. 

Thematic chapter: savings-investment gap and household savings 

reflecting the reopening of the economy. Following a decline to 4.8% in 2022, the savings rate is 
expected to slowly increase over the forecast horizon. (24) 

Gross  disposable  income  is  comparatively  high  as  a  share  of  GDP  and  may  be  even 
underestimated because of underreporting. The level of disposable income as a share of GDP 
has been above the EU average in the past years (see Table 3.1), and is likely even higher in reality 
due  to  an  estimated  large  informal  economy  in  Cyprus.  A  study  by  the  European  Parliament 
estimated the size of the shadow economy at 23.9% of GDP in 2022, well above the EU average of 
17.3%. (25) Despite challenges in clearly identifying individuals involved in undeclared work and in 
particular  their  number,  the  European  Labour  Authority  listed  three  major  sources  of  undeclared 
work  in  Cyprus. (26)  Apart  from  illegal  immigrants  working  legal  jobs,  some  income  of  the  self-
employed may be not reported or underreported. In addition, some legal jobs may not be declared 
as they are illegal per contract (e.g. public employees working illegally on private account). Cyprus' 
economy  is  largely  driven  by  sectors  in  which  undeclared  work  is  common,  for  instance 
construction, accommodation and food services, agriculture, retail trade as well  as wide range of 
vocational and professional services. The impact of the shadow economy on the household savings 
rate  depends  heavily  on  how  much  of  unreported  income  is  saved  and  on  the  magnitude  of 
unreported  or  “hidden”  consumption.  A  lack  of  conclusive  information  therefore  complicates  the 
interpretation of the household savings rate. 

The  high  stock  of  debt  weighs  on  the  saving  capacity  of  households.  The  gross  debt-to-
income ratio of households steadily decreased from its peak of 197% (2013) to 125% (2021) but 
still lies well above the euro area average of 96%. (27) The high stock of debt, consisting mainly of 
mortgage  loans,  constitutes  a  high  financial  burden  for  households.  Interest  payments  on 
household debt alone reduced the disposable income of Cypriot households by 1.6-2.7% annually 
in the years between the financial and COVID-19 crises, with the euro area average ratio ranging 
from 0.7-1%. (28) Gross disposable income would have been lowered by a further 3% on average in 
the event that all household debt had performed between the years 2014-2017. (29) Debt and, in 
particular, mortgage payments weigh on the financial capacity of households with debt (equalling 
57% of households in 2017), which were reportedly spending on average almost a quarter of their 
gross  household  income  on  it,  compared  to  13%  in  the  euro  area. (30)  Households  in  Cyprus  are 
under  risk  of  an  increasing  interest  burden,  as  their  mortgage  loans  have  almost  exclusively 
variable interest rates facing recent increases. 

(24)  European Commission (2023). European Economic Forecast. Spring 2023. 

(25)  European Parliament (2022). Taxation of the Informal Economy in the EU. 

https://www.europarl.europa.eu/RegData/etudes/STUD/2022/734007/IPOL_STU(2022)734007_EN.pdf. Other studies have 
also estimated the longstanding existence of a sizeable informal economy, one of the largest in the EU. These include, for 
example, the IMF's estimate of 28-31% for the period 2001-2016 using the MIMIC model (Kelmanson et al. (2019). 
Explaining the shadow economy in Europe: Size, Causes and Policy Options. IMF Working Paper), or the University of Cyprus' 
estimate in the ranges of 11-18% (currency demand method) or 26-34% (energy consumption method) for the period 
1995-2018 (Christoforos Andreou & Elena Andreou & Stephanie Michael & George Syrichas, 2021. "The Shadow Economy 
in Cyprus: Evidence from the Electricity Consumption and Currency Demand Methods," Cyprus Economic Policy Review, 
University of Cyprus, Economics Research Centre, vol. 15(1), pages 46-74, June.). 

(26)  European Labour Authority (ELA). Factsheet on Undeclared Work – CYPRUS. 2017.  

https://www.ela.europa.eu/sites/default/files/2021-09/CY%20UDW%20Factsheet%202017%20-%20Cyprus.pdf  

(27)  Eurostat. The ECB Household Finance and Consumption Survey 2017 (3rd wave) indicates much higher debt-to-income 

ratios for Cyprus. 

(28)  Own calculation based on Eurostat data. 

(29)  Own calculation based on Eurostat and ECB data. An implicit interest rate was calculated, used to arrive at an estimate of 
interest payments on non-performing debt not made. No estimate was made for the period from 2018 onwards, as the 
data on the exact household NPL stock in a given year is limited due to the transfer of large parts of the NPLs from the 
banks to CACs. 

(30)  ECB HFCS (3rd Wave). 2017. 

17 

                                                 
3. 

Thematic chapter: savings-investment gap and household savings 

Consumption 

The high propensity of Cypriot households to consume contributes significantly to their 
low  savings  rate.  Real  consumption  expenditure  per  capita,  adjusted  for  purchasing  power,  is 
generally well  above EU  average, confirming the important role  of consumption in explaining low 
household  savings.  While  real  expenditure  per  capita  was  29%  above  EU  average  in  2018,  it 
decreased  to  10%  above  the  EU  average  in  2019  (and  3.8%  above  EA  level).  However,  even  in 
2013,  at  the  peak  of  the  crisis  in  Cyprus,  Cypriots  spent  3%  more  than  the  EU  average. (31) 
Interestingly,  in  Cyprus,  the  above-average  consumption  expenditure  of  the  higher  income 
households seems to be in part behind the low savings rate. The above-average overall propensity 
to consume in Cyprus in the two years with available  data, 2010 and 2015, seems to be mainly 
attributable  to  the  upper  two  income  quintiles. (32)  The  lowest  income  quintile  on  the  other  hand 
exhibits propensities to consume well  below the EU average. For instance, in 2015 households in 
this  quintile  consumed  111%  of  their  disposable  income,  while  households  in  EU  average  spent 
140% of their disposable income on consumption. 

Cypriot  households  typically  spend  significantly  less  on  housing  compared  to  the  euro 
area  average,  but  significantly  more  on  hotels  and  restaurants,  and  transport,  with 
these  three  categories  constituting  their  largest  consumption  expenditure  items.  In 
contrast  to  the  euro  area  average,  as  well  as  peer  countries  such  as  Greece,  Ireland  or  Spain,  a 
noticeably smaller share of consumption expenditure (15%)  was directed towards housing (rents, 
maintenance and repair, dwelling-related services) in Cyprus (euro area: 24%) (33), indicating more 
affordable  housing  in  Cyprus.  Cypriots  spent  per  capita  17.8%  more  on  transport  than  the  euro 
area. (34)  As  one  of  the  EU  countries  with  the  highest  number  of  passenger  cars  per  capita 
registered  (0.645)  in  2020 (35),  ownership  of  a  private  car  is  the  norm  in  Cyprus  and  linked  to 
insufficient  provision  of  functioning  public  transport  infrastructure.  Compared  to  the  EU  average, 
Cypriots spent per capita twice as much on restaurants and hotels, which is mainly driven by the 
use of accommodation services, i.e. tourism.  

Cypriot  households  have  had  higher  expenditure  on  health  and  education  compared  to 
the  EU  average,  possibly  linked  to  lower  public  spending  on  those  items.  While  final 
consumption  expenditure  is  elevated,  actual  individual  consumption  (which  takes  all  goods  and 
services  purchased  by  households  into  account,  irrelevant  if paid by the  household,  NPISH  or  the 
government) is below the EU average (97% in 2019). (36) Responsible for this is the low individual 
consumption  expenditure  of  the  government.    It  has  hovered  at  50%  of  the  EU  average  since 
Cyprus’ EU accession and remained the lowest in the EU in 2021, despite a small increase to 58% 
most  recently.  Important examples  for  this  individualised  government  expenditure  are  health  and 
education.  Cypriot  households  have  spent  a  more  than  three  times  larger  share  of  their  total 
consumption  expenditure  on  education  than  the  euro  area  average  (3.1%  vs  0.9%  of  respective 
total consumption expenditure) which is reflected in one of the highest rates of tertiary education 

(31)  Eurostat. 

(32)  Eurostat – Income, consumption and wealth statistics. This data is computed by Eurostat through the statistical matching 

of three data sources: the EU Statistics on Income and Living Conditions (EU-SILC), the Household Budget Survey (HBS) and 
the Household Finance and Consumption Survey (HFCS). Propensity to consume calculated as the household consumption 
divided by disposable income.  

(33)  Eurostat. COICOP 04 which includes actual and imputed rents for housing, maintenance and repair of the dwelling, water 

supply and miscellaneous services relating to the dwelling.  

(34)  Adjusted for the overall higher consumption level in Cyprus. 

(35)  Eurostat. 

(36)  Eurostat. 

18 

                                                 
3. 

Thematic chapter: savings-investment gap and household savings 

attainment  in  the  euro  area.  This  share  has  slowly  increased  since  2008  and  reflects  mostly 
expenses  on  secondary  (e.g.,  out-of-school  secondary  education)  and  tertiary  education  (e.g., 
private  universities  or  tuitions  for  universities  abroad). Health  expenditure  shares  used  to  be  well 
above euro area shares for a long time before the reform of the National Health System in 2018. It 
increased  the  coverage  to  all  legal  residents  and  reduced  previously  common  out-of-pocket 
payments  significantly,  resulting  in  a  continuous  drop  of  health  expenditure  as  a  share  of  total 
consumption  expenditure  from  5.5%  in  2019  to  only  2%  in  2021.  While  this  contributes  to  the 
better  understanding  of  high  household  consumption  expenditure,  it  is  unlikely  to  drive  the 
consumption behaviour and can explain only partially the overall above EU consumption levels.  

Investment rate 

While  the  Cypriot  economy  suffers  from  low  total  investment,  household  investment, 
primarily  in  real  estate,  is  high.  In  the  wake  of  the  financial  crisis  a  decade  ago,  the  total 
investment  rate in  Cyprus  fell  well  below  the  EU  level,  reaching  a low  of  12.8%  of  GDP in  2015 
(20.6%  in  the  EU),  recovering  afterwards  but  not  yet  reaching  its  pre-crisis  level  (2021:  19.5% 
against 22.4% in the EU). At the same time, the household investment rate in Cyprus has generally 
been,  with  the  exception  of  the  period  2013-2015,  significantly  above  the  EU  average (37),  while 
government investment and in particular corporate investment have typically been (well) below. For 
example, household investment has accounted for more than 35% of total investment in almost all 
years since 2010, and even around 45% since 2019, while this share ranges between 23-28% in 
the EU. (38) The strong household investment is partially reflected in comparatively high ownership 
of real estate. (39) In 2017, almost 94% of Cypriot households reported to own real assets and 75% 
had real estate property (the household’s main residence plus other real estate property), the latter 
well above the euro area average of 65%. (40) Home ownership, however, decreased from 74.1% in 
2007 to 69.8% in 2021 and is thus at same levels as the EU average (69.9%), while still above the 
euro  area  average  (65.8%). (41)  The  main  driver  of  this  decline  is  households  with  dependent 
children, who have increasingly turned to renting in recent years due to the rising cost of living.  

Cypriot  households  finance  their  real  estate  investment  only  to  a  small  extent  by 
current  savings,  relying  instead  on  borrowing  and  reduction  of  financial  assets.  While 
non-financial investments (mostly purchase and renovation of real estate) stood at 14% of GDP in 
2008, this ratio fell to 5% in 2015 and has since increased to 9% in 2019. Until the financial crisis 
in  2013,  households  financed  their  financial  and  non-financial  investments  mainly  by  taking  on 
new  liabilities.  Savings  which  typically  finance  investments  in  the  euro  area  almost  entirely  play 
only  a  secondary  role  in  Cyprus. (42)  Since  2013,  net  borrowing  by  the  household  sector  has 
continued, but this time financed through a winding down of their financial investments (see graph 
3.1b).  Cypriot  households  reduced  their  financial  asset-to-GDP  ratio  by  19.8%  (or  54  pps)  from 
their peak in 2013 to 2019, before savings and financial investments temporarily rose again due to 
COVID-19-related restrictions. The change in the source of financing can also be seen in the steep 

(37)  The path of the Cypriot household investment rate resembles a U-shape from 2007-2020 with its low point in 2015. A 

contributor to its rise after the financial crisis was the citizenship-by-investment scheme (abolished in 2020) and renewed 
foreign demand for holiday homes in Cyprus. 

(38)  Eurostat. 

(39)  According to the ECB Household Finance and Consumption Survey, Cypriot households had a reported median wealth of 

€196,000 in 2017, ranking fourth in the euro area (euro area €99,000). 

(40)  ECB Household Finance and Consumption Survey (HFCS) 2017.  

(41)  Eurostat. EU-SILC survey. 

(42)  ECB HH sector report 2021Q4 

19 

                                                 
3. 

Thematic chapter: savings-investment gap and household savings 

decline in  net  mortgage  lending  growth  from  2010-2014,  which  has  only  slowly  increased  again 
since then and only temporarily rose more strongly in 2021 due to the government interest subsidy 
scheme. (43)  Lending  activity  for  house  purchase  is  expected  to  decline  due  to  rising  construction 
costs (+30% from 2020 to 2022) and interest rates, and general economic uncertainty. However, 
continued  net  borrowing  by  the  household  sector  over  the  past  two  decades  to  invest  in  low-
productivity fixed assets, whether by new loans or reductions in their financial resources, raises the 
question about the sustainability of this practice. 

Investment in and ownership of real estate may be linked to their use as a complement 
to  income  and  a  safeguard  for  retirement,  and  the  lack  of  attractive  alternative 
investment  options.  Almost  half  of  households  in  Cyprus  (45%)  reported  owning  real  estate 
property  that  is  not  their  main  residence,  compared  to  25%  in  the  euro  area. (44)  In  particular, 
apartments  with  their  higher  rental  yields  than  houses,  in  the  context  of  falling  interest  rates 
especially  in  the  second  half  of  the  last  decade,  have  become  more  attractive  for  buy-to-let 
schemes.  Investments  in  such  schemes  may  be  considered  more  attractive  than  investments  in 
deposits  and  bonds,  and  in  the  absence  of  a  mature  stock  market  in  Cyprus.  In  addition,  local 
demand for holiday homes has contributed to residential investment in the past, in particular prior 
to  the  financial  crisis.  With  regards  to  the  household  main  residence,  it  could  be  seen  as  a 
safeguard against low pensions in old age. Equivalent to 8.8% of GDP in 2019, Cyprus spent much 
less on pensions compared to the EU and euro area averages of 12.7% and 13.1% respectively. In 
the same year, the purchasing power of the average Cypriot pension stood at only 61% of the EU 
average  level. (45)  While  a  significant  portion  of  household  financial  investments  in  the  euro  area 
relate  to  life  insurance  and  pensions,  the  overall  figure  was  often  only  slightly  positive  or  even 
negative  for  Cyprus.  At  the  end  of  2021,  total  financial  wealth  per  capita  in  this  position  thus 
ranked at the bottom end of the EU. (46) In addition to low pensions of the Cypriot PAYG-financed 
system,  the  Voluntary  Provident  Funds  (Pillar  2)  also  show  serious  weaknesses,  ultimately 
translating into above-average at-risk-of-poverty figures for pensioners (20.2% vs 15.6% in the EU 
in  2021 (47).  For  both  the  primary  and  secondary  real  estate,  perceived  general  resilience  of  real 
assets  during  economic  distress  may  contribute  to  the  high,  historically  steady  household  non-
financial investment. 

The households’ budget constraint 

Inefficiencies  in  the  legal  framework,  in  particular  the  repeated  suspensions  of  the 
foreclosure  framework,  have  hindered  the  effective  management  of  non-performing 
loans.  Legacy  NPLs,  dating  back  largely  to  overborrowing  for  consumption  and  house  purchase 
from  the  period  prior  to  the  financial  crisis,  are  primarily  in  the  hands  of  CACs  and  can  only  be 
reduced  slowly.  Repeated  suspensions  of  the  foreclosure  framework,  weak  contract  enforcement 
and  backlogs  of  pending  cases  related  to  financial  disputes  have  created  legal  uncertainty 
hindering  a  faster  NPL  resolution.  While  some  improvements  are  ongoing  supported  also  by  the 
RRP,  addressing  remaining  inefficiencies  in  the  judicial  system,  such  as  expediting  court 
proceedings in financial matters, improving the legal framework for movable property seizures and 
providing  certainty  on  the  foreclosure  framework,  would  help  ease  the  household  debt  burden  in 

(43)  https://www.pwc.com.cy/en/industries/assets/real-estate-market-year-review-2022.pdf  

(44)  ECB Household Finance and Consumption Survey (HFCS) 2017. 

(45)  Eurostat 

(46)  ECB HH sector report, p. 12. 

(47)  Eurostat. 

20 

                                                 
3. 

Thematic chapter: savings-investment gap and household savings 

the  medium  term,  create  financial  predictability  for  households  and  help  assert  the  budget 
constraint of the households thus avoiding over-consumption.   

Improving financial literacy and creating attractive savings options could help raise both 
the savings rate and the low investment rate in financial assets. In the past two decades, 
around  60%  of  the  financial  assets  of  Cypriot  households  consisted  of  currency  and  deposits,  a 
figure  that,  together  with  Greece,  has  consistently  been  at  the  top  of  the  EU  comparison.  At  the 
same  time,  they  held  only  about  20%  in  equity  and  investment  fund  shares, consistently  among 
the  lowest  in  the  EU,  while  the  share  of  insurance  and  pensions  was  broadly  comparable (in  the 
range 10-16%). (48) Lack of trust in financial institutions due to the deep financial crisis in Cyprus 
and the haircut in 2013 may have contributed to the net disinvestment into equity and shares (with 
the sole exception of 2019) since then. Savings seem to be invested instead mostly into real estate 
and kept in currency and deposits, for which the deposit guarantee scheme of the EU may act as a 
risk  mitigation  system (49),  in  particular  in  the  context  of  relatively  lower  wealth  per  capita.  In 
Cyprus, the average financial knowledge score of individuals is below the benchmark score, set by 
the OECD, for an individual to be considered as financially knowledgeable. (50) Moreover, according 
to the scientific literature, the proportion of financially knowledgeable individuals in Cyprus ranges 
between 35% and 37%, one of the lowest ratios in the EU. (51) This is a reflection of individuals in 
Cyprus having an insufficient level of understanding of a number of financial matters, such as the 
consequences  of  over  indebtedness,  the  importance  of  saving  for  a  rainy  day  and  saving  for 
retirement.  Improving financial literacy could address under-saving for retirement and diversify the 
households' investments thus reducing risks. Moreover, it would have a positive impact on reducing 
the high level of household debt and help prevent excessive and unsustainable future borrowing.  

(48)  Eurostat. Financial balance sheet data. 

(49)  European Fund and Asset Management Association (2020). Household Participation in Capital Markets. 

https://www.efama.org/newsroom/news/household-participation-capital-markets. 

(50)  According to the OECD /INFE methodology a person is classified as financially knowledgeable if he/she answers correctly at 

least of 5 out of 7 financial knowledge questions (score 5 out of 7 or higher). 

(51)  S&P Global FinLit Survey (2014). 3313-Finlit_Report_FINAL-5.11.16.pdf (gflec.org); Andreou, Panayiotis C., and Sofia 

Anyfantaki (2021). Financial literacy and its influence on internet banking behaviour, European Management Journal 39, 
658–674; Andreou, Panayiotis C., Sofia Anyfantaki, and Adele Atkinson (2023). Financial Literacy for Financial Resilience: 
Evidence From Cyprus During the Pandemic Period, Cyprus University of Technology, Central Bank of Cyprus; Results from 
the Central Bank of Cyprus Survey for Financial Literacy in Cyprus, Central Bank of Cyprus Working Paper (to be published) 

21 

 
 
                                                 
3. 

Thematic chapter: savings-investment gap and household savings 

Graph 3.1: Selected graphs, Cyprus 

Source: Ameco, Eurostat, European Commission services 

22 

-15-10-50510091011121314151617181920212223*24*ppsa) Savings investment gap per sectorGovernment S-ICorporations S-IHouseholds S-ITotal S-I-5051015202530091011121314151617181920212223*24*% of GDPc) Savings and investmentGovernment savingGovernment investmentCorporations savingCorporations investmentHouseholds savingHouseholds investment-2020082009201020112012201320142015201620172018201920202021% of GDPb) Net acquisition of financial assetsOther accounts receivable / payableInsurance, pensions and standardised guaranteesEquity and investment fund sharesDebt securitiesCurrency and depositsNet acquisition of financial assets/ Net incurrence of liabilities-2-1.5-1-0.500.511.52200420052006200720082009201020112012201320142015201620172018201920202021d) Decomposition of changes in gross savings d in net equity in pension fund reservesd final consumption expenditure (-)d Gross disposable incomed gross saving 
        
 
 
3. 

Thematic chapter: savings-investment gap and household savings 

Table 3.1:  Disposable income and consumption indicators, CY and EU 

Source: Eurostat and European Commission calculations 

Table 3.2:  Selected household debt indicators, Cyprus 

(f) European Commission forecast. (1) 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). (2)  Quarterly data is annualized.    
Sources: (a) Eurostat, (b) Ameco, (c) European Commission calculations, (d) ECB. 

23 

Disposable income Final consumption expenditure HH & NPISH Individual consumption expenditure of the general government Actual individual consumption CY201766%8%65%73%201865%7%65%72%201966%8%63%71%202070%11%62%73%202166%11%59%70%EU201760%13%54%67%201860%13%54%67%201960%13%53%66%202063%14%52%66%202161%14%51%65%