Key Challenges

Reforms needed to
sustain growth
The principal challenges facing Cyprus essentially remain the same as those identified in the 2013 bailout agreement, though additional problems are emerging. While no imminent risks exist today, the current economic recovery should not create a false sense of security. To sustain growth, sectors that impact the overall policy environment must be reformed. Government expressions of willingness to proceed with reforms now require concrete actions and the adoption of policies based on sound regulation. Government must address structural and other deficiencies in the administration and expand strategic planning on all levels. This also requires mechanisms for closely monitoring and continuously reassessing policies. A review of governance values, along with respect for and enhancement of fundamental democratic practices remain essential for the rule of law.
Long-standing financial-sector challenges
Within the financial sector, the government must resolve long-standing challenges that weaken the country’s international competitiveness. Despite measures promoted since mid-2018, the effective settling of challenges related to non-performing loans is still pending. Clarifying policies on the privatization of quasi-governmental institutions also remains a necessity, so that their eventual market valuation does not suffer from the current uncertainty. Expanding the national health system (GESY) to offer a full range of services as well as securing adequate funding remain prerequisites for its survival.
Environmental damage
a serious threat
In the interest of broad-based sustainability, government policies on social and environmental challenges require radical, holistic revision. Excessive emphasis on business and financial interests – which has led, for example, to the unruly granting of permits for the construction of skyscrapers – requires urgent redress before the resulting environmental destruction becomes irreparable. Given offshore fossil fuel discoveries and that extraction is clearly a political priority, it is imperative that government policies more effectively protect the environment and place greater weight on broader social benefits. Also, the development of reliable infrastructure with expanded public transportation as well as investment in renewable energy sources would benefit the economy, environment and society. Cypriot economic activity requires differentiation and a shift to productive sectors, including tertiary education, and research and innovation, with a focus on sustainability.
Tax system contains loopholes
The European Commission stressed in 2017 that the taxation system requires revision to increase equality. Such reforms should address the challenges posed by aggressive tax planning, solve problems of tax collection and tax avoidance, and achieve the timely processing of tax declarations. The system should ensure that taxpayers are treated equitably and aim for a fairer reallocation of resources. Adequate funding of family, pension, healthcare and other social policies would enhance social equity and gradually return the country to a functioning welfare state.
Transparency needed
in policymaking
The sustainability of Cyprus’s recovery is at risk if the ample discretion and authority afforded the Council of Ministers is not limited. The public backlash from policies such as the citizenship-by-investment scheme and the disorderly granting of construction permits for skyscrapers point to the need for effective oversight through monitoring mechanisms. An urgent reform of the justice system would benefit the administration of justice, the financial sector and, more generally, democracy. There is also an urgent need for transparency in most policy decision-making, including the criteria and procedures that govern appointments to public bodies. Likewise, media relationships with the executive and politicians, and media ownership must be laid bare.
Strategic capacity would benefit reforms
The attainment of these diverse reforms will require the government to review its actions and operations at the highest level. The creation of public bodies with clear mandates for coordination and action would greatly benefit the efficiency of the state. Also, expanding strategic-planning capacities from the central government to local authorities would accelerate the reforms of structures and procedures.
Merit-based hiring must be implemented
Declared commitments by the government and political parties to favor meritocracy in appointments now require concrete actions. Meritocracy can ensure that capable public sector managers in key positions can efficiently promote reforms. Ultimately, these ambitious reforms can be achieved if the administration places service quality and the rule of law above other aspirations.

Party Polarization

Traditional cleavages
have weakened
A cleavage between right- and left-wing forces that was shaped in the 1940s persists to today, though it has been quite weakened. Under the presidential system, the impact of party polarization is mitigated. The president is in office for a term of five years and forms a government, which is not subject to a vote of confidence by the parliament. The outcome of parliamentary elections and parliamentary votes for or against legislation pursued by government have no destabilizing effect on the government or the political system.
Parties avoid issues that might reduce support
Party positions are polarized with respect to the Cyprus problem and often motivate voting patterns on matters unrelated to the Cyprus problem. The main challenges derive from precarious or circumstantial party alliances and from political expediency. Political parties generally avoid legislation which could reduce their support from powerful interest groups.
Government change increases polarization
Ideological polarization becomes more visible right before and immediately after a change of government, with those rising to power reversing the previous government’s policies. This affects, in particular, the economy and education system. (Score: 7)
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