Executive Summary

Previous growth eased pandemic management
The sustained course of Cyprus’s economic growth was abruptly interrupted by the COVID-19 crisis, which had a significant impact on the country’s main sectors, tourism and construction, among others. Recovery started at the beginning of and continued through 2021. The strengthening of the economy prior to 2020 contributed to the relatively good management of the pandemic. However, uncertainty about the evolution of the pandemic continues to pose a major risk. Sources of concern include higher costs for the General Health System (GESY), and deficiencies in the general environment that affect investor and creditor trust in the economy.
Governance flaws
Improvements in strategic planning started bearing fruits, but budgeted development projects are only partially executed. Analysis of regulatory impacts do not seem to be sufficiently taken into account. Policies and actions that threaten the effectiveness of the legal order and negate measures to fight corruption have continued. A non-meritocratic recruitment system impedes efforts to improve the quality of public services and gain public trust.
Serious gaps in
green policies
Cyprus benefited from the Recovery and Resilience Fund, and designed a plan that promotes a green economy, improves education and the social welfare system, and assists digitalization. At the same time, it upgraded R&I goals and mechanisms. Beyond these projects, a strategy to align the economy with green policies is missing, with unruly construction undermining both city planning and the environment. Efforts to reform local government and the justice system have progressed, but remain incomplete. Disclosures about large-scale corruption and the violation of laws in a “passport for real estate investment” scheme (“Golden Visa”) forced the government to cancel it.
Questionable rule-of-law decisions; “Golden passport” policy concerns
Democratic institutions and processes continued to function satisfactorily. However, interference with fundamental rights and blanket bans in connection to the pandemic were questionable. More serious was the suspension of local government and other elections, against the rule of law and the sovereignty of the people. While some reform measures were adopted, the main project for the extremely slow justice system is awaiting a parliamentary vote. Overall, the state administration has remained inefficient and slow. Clientelistic relationships, and expediency by the government and political parties challenge the generally accepted principle of a state operating for all citizens. The efficiency of legislation on political party funding is questioned in audit reports because of serious loopholes. The government publicized anti-corruption measures and denied any wrongdoing in the “golden passports” affair, while the inquiry committee found that 53% of 7,000 passports were granted against the law.
Cost overruns in new health system
The problem of non-performing loans (NPLs) seems smaller for the banks, but remains a risk for the economy. The labor market faces shortages in some sectors, with unemployment falling below 7%, after a surge in 2020. Full implementation of the General Health System (GESY), providing universal healthcare, was accompanied by worries about inflated costs. The lifting of cuts on benefits for public servants continued and will be completed by January 2023.
Racist measures
and rhetoric
The pandemic had an uneven impact on various groups, with migrants (from both the European Union and third countries) and others remaining extremely vulnerable. While EU-funded social inclusion programs for migrants, asylum-seekers and others continued, government officials often resorted to racist measures and rhetoric instead of focusing on respect for international protections and standards. Some green projects were included in Cyprus’s Recovery and Resilience Plan, but the need for effective environmental policy remains a pressing concern. Cyprus must provide answers for the years-long failure to adopt EU directives and effectively implement environmental protection rules.
Deteriorating political relationships
In 2020 and 2021, relations between the executive and parliament deteriorated. This was not an obstacle to progress on reforming the justice system and local government. Relations between the executive and auditor general were marked by tensions and confrontation, with the government attempting to limit his auditing activities.
Lack of compliance
with rule of law
Governance failings, favoritism in political appointments, and politically motivated interference in institutional functions and decision-making have persisted. Progress in efforts to develop strategic planning capacities have started to yield results, albeit insufficient results. Overall, the main problems include the failure of the government to fully comply with the principles of rule of law and, on another level, the lack of an effective administrative culture. These are serious obstacles to achieving sustainable results.
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