major macro economic indicators*
|GDP growth (%)||2.0||3.4||3.9||3.4|
|Inflation (yearly average, %)||-1.5||-1.2||0.7||1.0|
|Budget balance (% GDP)||-1.3||0.3||1.8||1.2|
|Current account balance (% GDP)||-1.4||-4.9||-8.1||-5.0|
|Public debt (% GDP)||108.0||107.0||98||103.0|
* Turkish Cypriot controlled territory excluded (f): forecast
- At the crossroads of Europe, Africa and Asia
- Eurozone membership
- Tertiary sector: tourism, business and international finance hub, maritime transport and transhipment
- Skilled, English-speaking workforce
- Good quality transport and telecommunications infrastructure
- Offshore gas potential
- Island divided (since 1974) and tense relations with Turkey
- Small domestic market, isolated, remote and outside the centre of Europe
- Poor economic diversification (tourism, property, finance) and limited foreign customer base, with the United Kingdom and Russia providing 36% and 24% of visitors (2016).
- Regional geopolitical instability
- High levels of debt of all economic actors and dependent on external finance
- Huge banking sector, hyper-concentrated and burdened by non-performing loans
- Slow legal process
Growth driven by internal demand and tourism
Private consumption (69% of GDP) is contributing strongly to growth, encouraged by lower unemployment, more jobs and higher wages, low inflation as well as the recovery in house prices (after a 30% slump in the aftermath of the 2010 crisis). It will also be sustained by spending by three million tourist visitors to the Island, namely three times the local population. The construction of tourism facilities (marina, golf courses, ports and luxury residences) and offices will remain buoyant, thanks to external finance encouraged by the Citizenship-by-Investment scheme. National investment will remain hesitant because of household and corporate debt levels equivalent to 123% and 150% of GDP respectively (excluding Special Purpose Vehicles engaged in offshore activity) which does not encourage the banks to get credit flowing again. Against this, public investment will return thanks to the relaxation of budgetary constraints. Meanwhile, despite good performances by tourism, maritime transport, financial services and other sectors, trade's contribution to growth will remain negative due to robust imports associated with internal demand.
A convalescent banking sector
Following Cyprus's EU accession in 2004, the Cypriot banking sector swelled to six times GDP. The contraction in the local property market in late 2008 and the collapse of the Greek economy in early 2010, in which was heavily invested, were fatal resulting in the insolvency of its main players. Incapable of rescuing the sector alone, given the severe degradation of the public and external accounts and under pressure from the European Commission, the ECB and the IMF whose financial assistance was on condition that the sector is restructured, the authorities carried out a restructuring mainly paid for by creditors and depositors whom the authorities are planning to indemnify. Despite the bankruptcy of one of the largest banks, the sector, currently highly concentrated with three major institutions, is still very large (3.5 times GDP in June 2017, excluding offshore banks). With the gradual implementation of insolvency and foreclosure legislation approved in 2015, the scale of non-performing loans ratio is declining but still represents 40% of bank portfolios nd 115% of GDP (end 2017). Dealing with these is made arduous by poor registering, immunity for the main residence and the difficulty in valuing assets. Given this mess, neither households nor developers have an incentive to repay their loans, while banks are reluctant to commit to long procedures in respect of households and SMEs who are liable for 4/5 of these loans, preferring to wait until property prices rise. With the agreement of the European Commission, the State will liquidate the Cyprus Co-operative Bank (CCB), the second largest bank in the country, of which it owns 77% following its rescue in 2013. It will sell its good assets and deposits, as well as a good part of the staff and branches, with its guarantee, to Hellenic Bank, so far number three. The transfer of non-performing loans to a public hive-off vehicle will be accompanied by an injection of €1 billion in addition to the €2.5 billion of public funds already disbursed in April 2018 to CCB, whose activity will be considerably reduced. Mechanically, this will reduce the percentage of non-performing loans in the banking system.
High levels of public and external debt
The low gas exploration royalties linked to the difficulties encountered at sea with Turkey do not allow the small government surplus to be increased. Despite the primary surplus (i.e. excluding interest) and growth, the heavy burden of debt, with 50% due to public-sector creditors (EU, Russia...), mainly in euro and with medium to long-term maturities is expected to increase as a result of the cost of liquidating the CCB. The reduced influence of European institutions and the IMF since the end of the assistance programme in 2016 could lead to a relaxation of efforts in what is a long-haul struggle. So, while administrative reform (promotion, wage structure, mobility) is progressing, that of the management of public-sector entities and local authorities, as well as privatisations (telecommunications, electricity) is falling behind.
Poor manufacturing diversification (cheese, medications and electronics) explains the trade deficit (20% of GDP). Despite the services surplus (22%), the current account balance is negative because of outgoing dividends and interest payments. The current account is financed by FDIs in property and tourism and through bond issues. Meanwhile, significant sums come in from abroad (especially from Russia), but in the main only transit the country. Gross external debt represents 7 times GDP. 89% is held by the private sector, of which 60% corresponds to commitments from the Special Purpose Vehicles intended to finance ship-owners or businesses without any real local activity. Nonetheless, the share owed by local borrowers still accounts for more than 3 times GDP.
A minority government
The May 2016 parliamentary elections confirmed the President's conservative Democratic Rally Party (Disy) as the largest party in parliament with 18 seats out of 56. With 16 MPs from the Progressive Party of Working People (Akel, left-wing) on the opposition benches, President Anastasiades and his government need to find circumstantial majorities with the nine centrist members of the Democratic Party (Diko) and members of the five small parties by combining fiscal restructuring measures with social measures, such as the introduction of a national health system in 2019. Despite the failure of negotiations between the governments of the Island's Greek and Turkish communities aimed at ending the division of the country, the economic recovery was enough to ensure the President's re-election in February 2018 with 56% of the votes against the representative of Akel.
Last update : June 2018
Bills of exchange are used by Cypriot companies in domestic and international transactions. In the event of payment default, a protest certifying the dishonoured bill must be drawn up by a public notary within two working days of the due date.
Similarly, cheques are still widely used in international transactions. In the domestic business environment, however, cheques are customarily used less as an instrument of payment, and more as a credit instrument, making it possible to create successive payment due dates. It is therefore a common and widespread practice for post-dated cheques to be endorsed by several creditors. Furthermore, issuers of dishonoured cheques may be liable to prosecution provided a complaint is lodged under both Civil and Criminal procedures.
Instead of promissory letters or notes, which are not usually used as a security or payment method in Cyprus, a written acknowledgement of debt may be obtained, which can be used as essential evidence during the Hearing trials in a later stage to the Court.
SWIFT bank transfers, well-established in Cypriot banking circles, are used to settle a growing proportion of transactions, and offer a quick and secure method of payment. In addition, SEPA bank transfers are becoming more popular as they are fast, secure, and supported by a more developed banking network.
Before initiating proceedings in front of the competent court, an alternative method to recover a debt is to try to agree with the debtor on a settlement plan. Reaching the most beneficial arrangement is usually achieved by means of a negotiating process.
The recovery process commences with the debtor being sent a final demand for payment by recorded delivery mail, reminding him of his payment obligations, including any interest penalties as may have been contractually agreed – or, failing this, those accruing at the legal rate of interest.
Interest is due from the day following the date of payment stipulated in the invoice or commercial agreement at a rate, unless the parties agree otherwise, equal to the European Central Bank’s refinancing rate, plus seven percentage points.
Introduced in 2015, cases with small claims (no more than EUR 3,000) can follow a simplified and faster procedure. To engage such a procedure, the creditor must possess a written document substantiating the claim underlying his lawsuit, such as a Statement of Account, an acknowledgement of debt established by private deed, the original invoice summarising the goods sold and bearing the buyer’s signature and stamp certifying receipt of delivery, or the original delivery slip signed by the buyer.
For all other claims, the usual procedure is followed. The creditor files a claim with the court, who serves the debtor within twelve months. The hearing would be set at least eighteen months later. Cypriot law allows the court to render a default judgment if the respondent fails to file a defence. The ruling issued by the judge allows immediate execution subject to the right granted to the defendant to lodge an objection. To obtain suspension of execution, the debtor must petition the court accordingly.
Enforcement of a legal decision
Enforcement of a domestic decision may begin once the final judgment is made. If the debtor fails to satisfy the judgment, the latter is enforceable directly through the attachment of the debtor’s assets.
For foreign awards rendered in a European Union member-state, Cyprus has adopted advantageous enforcement conditions, such as EU Payment Orders or the European Enforcement Order. For decisions rendered by non EU countries, they will be automatically enforced according to reciprocal enforcement treaties. In the absence of an agreement, exequatur proceedings will take place.
This procedure aims to help debtors restore their credibility and viability, and continue their operations beyond bankruptcy, by aiming to negotiate an agreement between the relevant debtors and creditors. During this procedure, claims and enforcement actions against the debtor may be stayed, but the court will appoint an administrator to control the debtor’s assets and performances. The reorganization process starts with the debtor’s submission of a plan to the court, which conducts a judicial review of the proposed plan, while a court-appointed mediator assesses the creditors’ expectations.
The procedure commences with an insolvency petition either by the debtor or its creditors. The court appoints an administrator as soon as the debts are verified. In addition, a Pool of Creditors (three members representing each class of creditors) will be given the responsibility of overseeing the proceedings, which terminate once the proceeds of the sale of the business’ assets are distributed.