major macro economic indicators*
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(e): Estimate (f): Forecast
- Central geographical location between Europe, the Middle East and Africa favours the transhipment industry
- Offshore finance business services, and trans-shipping hub
- Rich, unexploited offshore natural gas deposits
- Skilled, English-speaking workforce
- Island divided between the EU-aligned Republic of Cyprus and Turkey-aligned Turkish Republic of Northern Cyprus
- Strong links to Russia, Ukraine and the UK through financial and trade interdependence (tourism, finance, professional services)
- Slow legal process, poor enforcement of contracts
- Heavy debt load for the state, banks, companies, and households
- Weak industrial diversification (tourism, construction, natural gas, finance)
Sharp slowdown, but tourism and European funds provide resilience
Driven by resurging tourism and buoyant household consumption (boosted by pandemic-inherited excess savings), the Cypriot economy has surpassed pre-pandemic output levels. Tourism and EU-backed investment will remain reliable pillars of growth into 2024. However, global inflationary headwinds, above-average exposure to the Russian economy and diminishing European demand have induced a slowdown. Although Cyprus has low direct exposures to Russian energy supply, the island country depends overwhelmingly on imported oil, and therefore remains vulnerable to global energy shocks. Domestic demand growth will be eroded by diminishing purchasing power and tightening financial conditions. The professional services and financial sectors are strongly dependent on subsidiaries of Russian and Ukrainian companies exposed to sanctions. The tourism sector has managed to weather the losses of the Russian and Ukrainian markets with increased visitors from Western Europe (mainly the UK). In total, services exposure to Russia is estimated at 10% of GDP, thereby constituting a source of substantial downside risk. That said, inflation is expected to moderate in 2024, barring a stronger-than-expected impact of China’s reopening onto global energy and commodity markets. The investment outlook will continue to be dampened by the abolition of the citizenship-by-investment scheme, which constitutes a durable negative shock to FDI inflows. Though the country is set to benefit from substantial European support in the form of NGEU funds (6% of 2019 GDP), in practice the disbursement schedule for these funds has been slowed by a failure to implement reforms in time. Due to slowing service exports and increasingly costly imports (energy, capital goods and construction materials), the growth contribution of net exports will be close to zero.
Decreasing sovereign and banking risk
The strong post-pandemic rebound and associated rising tourism revenues have allowed the country to post surprisingly good fiscal results, with a strong surplus in 2022. The progressive withdrawal of pandemic-era and energy crisis support measures, combined with rising revenue from taxes on private-sector wages and corporate earnings, will allow for sustained surpluses over the forecast horizon. This is expected despite the increases in public sector wages and pension hikes of around 7.5%. The compounded effect of strong nominal GDP growth and budget surpluses will result in a rapid decrease of the debt ratio. With manageable financing needs (estimated at 5-6% of GDP per year), robust cash buffers standing at 10% of GDP and over two-thirds of the debt stock in fixed interest rates, sovereign risk is reasonably contained. The main risk to the fiscal outlook stems from uncertainty over the cost-of-living allowance, an inflation-indexed wage subsidy scheme the costs of which could spill over should the government yield to trade union pressure. The health of the banking system, albeit still bearing some of the scars of the eurozone crisis, is also on a positive trajectory. This is true of the asset side, where the NPL ratio has decreased to 9.3% (as at Q1 2023), as well as liabilities, with an average CET-1 capital ratio of 17.7% (end-2022). The country’s structurally large current-account deficit is only partially worrying, as it is overwhelmingly funded by FDI related to holdings of foreign multinationals. Part of it is due to the country’s dependence on imports for manufactured goods and basic commodities, which is manifested by the 18% of GDP goods balance deficit. However, a large amount is also due to the activity of Special Purpose Entities domiciled in Cyprus, through which global corporations active in maritime trade register their vessels, thus inflating imports. The undiversified industrial structure of the country leaves it vulnerable to global supply shocks.
Despite signs of easing, ongoing tensions with Turkey are prevalent and pertinent
The island of Cyprus is divided between the Greece-aligned Republic of Cyprus (RC), a eurozone member state controlling the southern half of the island, and the Turkish Republic of Northern Cyprus (TNRC), which controls the north and is recognised only by Turkey. While a peaceful stalemate has existed since the 1970s, rising geopolitical tensions between Greece, Cyprus and the EU on the one hand and Turkey on the other have further strained this relationship. President Nicos Christodoulides, an independent, is forced to govern with a fragmented parliament, with legislation passing on a case-by-case basis in the absence of a majority. Embattled by these governance challenges, Cyprus has lagged in its capacity to capitalise on EU funds due to delays in the implementation of reform objectives (tax collection, energy, health, education and transport infrastructure) necessary to access its allocated share. The escalating stand-off with Turkey and the TRNC over maritime claims including potential gas deposits is a crucial sticking point. Since 2018, Turkey has repeatedly sent exploration vessels escorted by military ships into contested waters. While there have recently been some signs of détente, the path to a durable solution is not obvious or likely at the moment. Cyprus remains a key member of the EastMed Gas Forum, an alliance with Egypt, Greece, Israel, Italy, Jordan, and Palestine, aimed at fostering a regional gas industry.
Last update : September 2023
Bills of exchange are used by Cypriot companies in both 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.
Although cheques are still widely used in international transactions, in the domestic business environment they 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 it to the debtor via a private bailiff. A writ of summons cannot be in force for more than 12 months from the day of its issue, unless renewed by a court order.
On service of the writ of summons, the defendant has ten days to file an appearance, and then a defence must be filed within 14 days. If the defendant fails to file an appearance within the prescribed period, the claimant can apply for and obtain a default judgment. A defendant can file an appearance outside the prescribed time limit to block the issue of a judgment in default.
If the defendant files an appearance but not a defence, the claimant can file an application for issuance of judgment without a full hearing being conducted. Additionally, where the defendant files an appearance or a defence to a specially endorsed writ of summons, the claimant can, where appropriate, apply for a summary judgment on the grounds that there is no defence to the action.
When a defence is filed, the claimant can file a reply to the defence within seven days from its service. If the defendant submits a counterclaim, the claimant must file a reply to the defence and a defence to the counterclaim within 14 days from its service.
Once the pleadings are closed, the claimant has 90 days to issue and file a summons for directions together and in accordance with form 25 requesting the issuing of specific directions by the court (order 30, rule 1 (a) and (b), CPR).
Once all procedures are concluded, the case will be set for hearing and, depending on the court schedule, it may take more than three years from the date of filing to be heard. At the hearing, the claimant must prove its case on the balance of probabilities by adducing sufficient and admissible evidence regarding all allegations that are not admitted by the defendant. The same applies for the counterclaimant. Following the conclusion of the hearing and the advocates' final addresses, a judgment is issued.
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.
The judgment creditor has several options on how to proceed with execution of the judgment debt. Under the Civil Procedure Law, every court's decision ordering the payment of money can be enforced through many methods such as:
- A writ of execution for the sale of movables.
- A writ for sale of immovable property or registration of a charging order over the property.
- A writ of sequestration of immovable property.
- An order to the judgment debtor to make payments over the debt on a monthly basis. The amount and dates of the payments will be determined by the court according to the financial position of the judgment debtor etc.
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.