major macro economic indicators*
|2016||2017||2018 (e)||2019 (f)|
|GDP growth (%)||4.8||4.2||3.9||3.5|
|Inflation (yearly average, %)||-1.2||0.7||0.8||1.5|
|Budget balance (% GDP)||0.3||1.8||2.8||2.5|
|Current account balance (% GDP)||-5.1||-8.4||-8.0||-9.0|
|Public debt (% GDP)||105.5||96.1||106.0||99.0|
(e): Estimate. (f): Forecast. *Territory controlled by Turkish Cypriots excluded.
- At the crossroads of Europe, Africa and Asia; eurozone member
- Services sector: tourism, international business and financial hub, maritime transport and transhipment
- Skilled, English-speaking workforce
- High-quality transport and telecommunication infrastructure
- Offshore gas potential
- Island divided (since 1974); strained relations with Turkey
- Small domestic market, isolated, remote and outside the centre of Europe
- Poor economic diversification (tourism, real estate, finance) and limited foreign customer base (United Kingdom and Russia)
- High levels of debt among all economic actors; dependent on external financing
- Massive and highly concentrated banking sector burdened by non-performing loans
- Slow legal process, poor enforcement of contracts
Growth remains strong but is slowing
Private consumption (69% of GDP) is contributing strongly to growth, driven by falling unemployment, more jobs, low inflation, higher wages, and the recovery in housing prices, which fell by 35% after 2010. Growth will likewise be supported by spending by the island’s three million foreign visitors (more than three times the size of the local population). The construction of tourist facilities (marinas, golf courses, ports, and luxury residences) and offices will remain on track, thanks to foreign investment encouraged by the Citizenship-by-Investment scheme. Despite sustained public investment in infrastructure, particularly for health and education, national investment will remain weak because – with household and corporate debt levels equivalent to 100% and 120% of GDP respectively (excluding offshore special purpose entities) – banks will be inclined to exercise caution. However, households, given their creditor position, will be able to draw on their savings. In addition, the export performances of tourism, shipping, and financial services could lose some of their lustre amid increased competition from alternative destinations, a decline in the number of Russian and British visitors, and a downturn in international trade. Meanwhile, imports will remain strong, in line with domestic demand. As a result, trade should again make a negative contribution to growth.
A convalescent banking sector
Efforts to restructure the Bank of Cyprus and liquidate Laiki (the number-one and number-two banks respectively) in 2013 proved insufficient, and Cyprus Co-operative Bank (CCB), the replacement number-two, was liquidated in turn in 2018, with its good assets and deposits being transferred to Hellenic Bank, now the new number-two. This time, the rescue was done at the expense of the state, which owned 77% of CCB following its bailout in 2013. The sector, which has become even more concentrated, is still a huge presence, representing 350% of GDP at the end of 2017, excluding offshore banks. Non-performing loans (NPLs) continued to make up 30% of outstanding loans and 80% of GDP at the end of September 2018. A full 90% of these loans are to households and SMEs, and one third of them have already been restructured. The authorities are hoping that 2018 amendments to insolvency and foreclosure legislation, and the 2019 launch of the ESTIA programme, through which the state will provide financial assistance for household debt restructuring, will help to process bad loans faster. Dealing with NPLs is made harder by an inaccurate land register and difficulties in valuing assets. Neither households nor developers have any incentive to repay their loans, while banks are reluctant to engage in lengthy procedures, preferring to wait for house prices to rise.
High levels of public and private debt
Vigorous economic activity will keep budgetary revenues high (40% of GDP in 2018). Moreover, despite the gradual loosening of curbs on wages, the cost of launching ESTIA and the National Health Programme, fiscal policy will remain restrictive and the budget surplus will persist. The primary surplus, i.e. excluding interest (5.5% of GDP), combined with growth and the decline in interest rates after credit rating agencies re-rated Cyprus “investment grade”, should lead to a reduction in debt, of which 73% is due to non-residents (65% public). This debt, which is still very high, has temporarily increased following the CCB rescue.
Although competitiveness remains good, the current account deficit could widen slightly, in line with the decline in the services surplus (21% of GDP in 2017) related to tourism and financial services. Poor manufacturing diversification (cheese, medicines, and electronics) generates a goods deficit (24%), while outgoing dividend and interest payments, as well as transfers from foreign workers, show a negative balance (5%). FDI in real estate, tourism, and gas exploration make it possible to finance the current account deficit, while allowing the country (especially banks) to deleverage. Gross external debt still represents five times GDP, with 45% owed by non-financial companies, 16% by banks, and 15% by the state, while 24% corresponds to intra-group FDI commitments. A full 60% of the private sector's debts correspond to commitments of Special Purpose Vehicles (SPVs) intended to finance ship-owners or companies with no real local activity. A quarter of the total is short-term, contributing to an external financing requirement equivalent to 150% of GDP.
A minority government
Although talks between the governments of the island’s Greek and Turkish communities failed to end the country's division, the economic recovery was enough for President Nicos Anastasiades of the conservative Democratic Rally Party (Disy) to be re-elected in February 2018 with 56% of the vote, beating the representative of the left-wing Progressive Workers' Party (Akel). Since the May 2016 parliamentary elections, Disy has held just 18 of the 56 seats. Given that Akel has 16 seats, the President and his government need to build majorities by working with the nine MPs of the centrist Democratic Party (Diko) and the members of five smaller parties.
Last update : February 2019
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.