Executive Summary

Dangers have receded,
but risks remain
Nearly three years after Cyprus successfully exited the bailout agreement, post-program surveillance praised sustained economic growth at rates far higher than predicted. A sustained increase in tourism and growth in the construction sector increased state revenue. Dangers that led to the economic collapse in 2013 appear to have receded, but considerable risks for the economy remain. Deficiencies in the financial system persist, resulting in low trust in the economy and weak competitiveness. Attention toward the broadly recognized need for greater strategic-planning and policy-implementation capacities remains low. Government policies occasionally posed serious threats to efforts for better regulation and greater legality. These, along with a failure to end the non-meritocratic recruitment system, undermine the state’s potential and the quality of government services.
Structural reforms
remain slow
There are two sides to the government’s response to commitments take on under the 2013 memorandum of understanding (MoU) with creditors. While fiscal discipline and other policies sustained better than forecast performance in 2018, the pace of systemic and structural reforms remained very slow. Also, political expediency guided some policy decisions, including in granting “golden visas” (i.e., the citizenship-by-investment scheme) and in the construction of skyscrapers, undermining basic rules of strategic planning and sustainability (e.g., without impact assessments).
Political system functioning despite
Democratic processes and institutions continued to function satisfactorily, though some weaknesses pose serious risks for democracy. One is the extremely slow administration of justice despite the establishment of an administrative court in 2016. This broadly impacts the functioning of democracy and public perceptions of justice. Overall, the administrative system remains inefficient and slow. Clientelistic relationships persist in politics, challenging the notion of “a state operating for all citizens.” Legislation on political party funding appears to be ineffective, judging by the scrutiny of party accounts in elections between 2016 and 2018. Despite anti-corruption rhetoric and agendas, several politicians convicted of corruption were released without completing even half of their sentences.
Some banking risks
Progress on implementing new legal frameworks, including rules on banking system oversight, was achieved with the adoption of laws on non-performing loans (NPLs) and foreclosures. Notwithstanding, the high NPLs ratio remains a risk for the economy. The unemployment rate in September 2018 was 7.4%, down from 10.3% in 2017. After the government canceled a special contribution tax for employees in 2017, it decided to gradually increase salaries and pensions for public servants by January 2023.
Risk of poverty
The overall share of persons at risk of poverty and social exclusion declined again slightly in 2017. Nonetheless, immigrants (from both European Union and third countries) remain highly vulnerable. Despite improvements, measures and policies for the social inclusion of migrants and asylum-seekers remain below international standards. Environmental policy is a field where the EU observed that Cyprus has failed to transpose directives into national law and implement rules and policies in compliance with EU regulations. According to experts, the government’s insistent favoring of land development without proper rules or impact assessments may cause environmental disasters.
Tension between branches of government
In 2018, relations between the executive and the parliament featured disagreements and confrontations when the latter rejected the establishment of a coordinating sub-ministry for development. Due to further disagreements, the future of quasi-governmental institutions pending privatization remains unclear. There was, however, some coordination in dealing with the aftermath of the Cooperative Bank’s collapse.
Administrative inefficiencies pose obstacles
Favoritism in political appointments and politically motivated interference in institutional functions and decisions remain major challenges. At the same time, public sector reforms aimed at developing strategic-planning capacity, fiscal responsibility and stronger regulation appear to have slowed or stalled. These deficits are made worse by the reluctance to comply with adopted rules and the absence of a body coordinating reforms. Also, the absence of an effective administrative culture remains a persistent obstacle to achieving sustainable results.
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