Executive Summary

Growth continues,
but decelerates
Cyprus sustained a course of economic growth in 2019, albeit with visible signs of deceleration. The Cypriot tourism and construction sectors continued to be the leading benefactors. The primary catalysts of the 2013 economic crisis appear to have retreated, but risks for the economy remain. Deficiencies in the economic environment (especially within the financial sector) resulted in investors’ and creditors’ low level of trust in the economy and weak international competitiveness. Also, it is unclear if currently strong tax revenue performance can be sustained.
Governance gains, but quality concerns persist
Greater government attention addressing the broadly recognized need for stronger strategic-planning and policy-implementation capacities appear to be bearing fruit. Notwithstanding, government policies that pose serious threats to an effective legal order and the fight against corruption have persisted. These policies, along with the non-meritocratic recruitment system, negatively affect the quality of government services as well as citizens’ trust.
Fiscal discipline and targeted policies
The Cypriot government responded to its commitments under the 2013 Memorandum of Understanding (MoU) with its creditors with fiscal discipline and targeted policies. This has sustained better than forecast performance in recent years. In 2019, the government revived important reforms that had hitherto stalled. Troubles with some policies, such as the granting of permanent residency or citizenship for real estate investment (“golden visa” programs), have led to the revision of some rules. Notwithstanding, unruly large-scale construction projects continued to undermine city planning and sustainability efforts.
Functioning system
despite weaknesses
Democratic institutions and processes continued to function satisfactorily, though serious weaknesses remain. The extremely slow administration of justice broadly stymies the smooth functioning of democratic processes and the market as well as damages public trust in the justice system. Overall, the administrative system has remained inefficient and slow. Clientelistic relationships and expediency persisted in politics due to the pervasive power and control of political parties, challenging the generally accepted principle of a state operating for all citizens. Audits of party accounts between 2016 and 2018 demonstrated that current legislation on political party funding has serious deficiencies. Despite anti-corruption and accountability rhetoric, some government actions, including the early release from prison of convicted politicians, led to a rise in the public’s perception of corruption in 2018.
Improvements in bank oversight, labor market
New legal instruments, including rules on banking system oversight and handling non-performing loans (NPLs) have led to a decline in NPLs. Nonetheless, their rate was the second-highest in the EU in 2019 and remains a risk for the economy. The labor market witnessed improvements, with the unemployment rate further declining to below 7%. The partial implementation since June 2019 of a national health system has been an important step toward providing universal healthcare. To reduce expenditures, the government decided to maintain cuts on public servants’ benefits through January 2023, but recent court decisions declaring the cuts unconstitutional may pose a threat to the country’s fiscal stability.
Migration stressing
social system
The overall share of persons at risk of poverty and social exclusion further declined in 2018. Nonetheless, immigrants (from both the European Union and third countries) remain highly vulnerable. While social inclusion programs for migrants, asylum-seekers and other groups have continued, pressures from increased immigration in 2019 have made it more difficult for Cyprus to meet international standards. Environmental policy remains highly problematic, with the country failing to transpose EU directives into national law, and to adopt and implement rules for effectively protecting the environment. Experts’ warnings have been clear: the government’s insistence on favoring land development, even over existing environmental protection rules, will yield environmental disasters; the lack of impact assessments only conceals the risks.
Political tensions diminish, but risks remain
In 2019, relations between the executive and parliament improved. Notwithstanding, disagreements on the privatization of quasi-governmental institutions make their future unclear. In the fall of 2019, the government sought closer coordination with political parties on the adoption of structural and other administration reforms.
Lack of effective administrative culture
Governance shortages, favoritism in political appointments and politically motivated interference in institutional functions and decisions also persisted in 2019. Overall, though, public sector reforms aimed at developing strategic-planning capacities, fiscal responsibility and stronger regulations, though slow, have started to yield results. Yet, the reluctance to comply with adopted rules and the absence of a body coordinating reforms pose some risks to these efforts. Generally, the lack of an effective administrative culture has remained a serious obstacle to achieving sustainable results.
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