Cyprus

major macro economic indicators*

(e): Estimate (f): Forecast

RISK ASSESSMENT

Consumption and Investment fuel a vibrant recovery

Emergency support measures deployed in 2020 and extended in 2021 succeeded in insulating the economy from permanent damage during the pandemic. As a result, activity has recovered to its pre-pandemic levels and is set to pursue a rapid expansion in 2022. Employment has been largely protected thanks to the temporary work suspension scheme, which covered up to 65% of the workforce during the worst of the pandemic. Given this protection of employment and accumulation of savings, household consumption (64% of GDP) will continue booming and remain the main driver of growth. The recovery of investment (20% of GDP), both public and private, will be strongly supported by NGEU  funds, which will amount to 6% of GDP over the 2021-2027 period. The tourism industry, which directly and indirectly accounts for 20% of GDP, performed surprisingly well in 2021 and will keep improving in 2022. Still, it will not recover to pre-pandemic levels before the end of 2023.  The progressive recoveries in tourism, shipping and professional services will allow for a positive contribution of net exports. Though the corporate sector has shown impressive resilience under the support schemes, underlying vulnerabilities remain. Indeed, many SMEs in the hospitality and passenger transport sector have relied on loan repayment moratoria to remain solvent. Loan restructurings jumped 400% YoY in H1 2021 after the first instalment expired. In the long-run, successful diversification of the economy will depend to a large extent on the development of a natural gas industry, which, despite its potential, faces important geopolitical and environmental challenges.

Fiscal and banking vulnerabilities still loom

With tax revenue rising on the back of the recovery and a slowdown in the growth of expenditure, the budget deficit is set to improve substantially . Still, expenditure growth will remain high (+7%), driven mainly by the structural strengthening of the healthcare system. The favourable economic performance, combined with still low interest rates , will allow for a fast correction of the public debt ratio, which will nonetheless remain high. On the longer term, two items weigh on the sustainability of public finances: contingent liabilities to the banking sector (6% of GDP) and the structural tax revenue gap left by the now abolished Citizenship Investment Program (CIP) scheme. The banking sector still suffers from the scars of the Euro crisis , with an NPL ratio close to 18%, and is exposed to as-of-yet unmaterialized pandemic-related defaults. The CIP is estimated to have generated around EUR 10 million in revenue and investment between 2013 and 2020, an average of 1.4% of GDP per year. Furthermore, the end of the CIP program will imply a smaller flow of reliable FDI (14% of GDP). With a modest exporting goods sector (recreational boats, refined oil, food products), the services surplus is not enough to avoid chronic current account deficits . Therefore, in the absence of investment-friendly reforms (gas exploitation has been slowed down by bureaucracy), a larger share of the current account deficit will be funded by less dependable capital flows. This is worrying given the country’s large negative international investment position (-52% of GDP) and external debt (984%  of GDP, mostly reflecting offshore financial exposures).  

Contested waters at the heart of a fragile geopolitical equilibrium

The island of Cyprus is divided between the Greece-aligned Republic of Cyprus (RC), an Eurozone member state controlling the southern half of the island, and the Turkish Republic of Northern Cyprus (TNRC), which controls the north and is recognized only by Turkey. While a peaceful stalemate has been maintained since the 1970s, rising geopolitical tensions between Greece, Cyprus and the EU on one side and Turkey on the other have further strained this relationship. The 2021 parliamentary elections in the RC weakened the minority government of President Nicos Anastasiades, with his liberal conservative party (Disy) still ahead of communist Akel and his centrist nationalist former coalition partner Diko, the first two losing seats to far-right Elam. The RC’s presidential system means he will stay in office at least until the 2023 presidential election. The escalating confrontation with Turkey and the TRNC over maritime claims with potential gas deposits remains a crucial challenge. Since 2018, Turkey has repeatedly sent exploration vessels escorted by military ships into contested waters. The RC is supported by the EU and Greece, but diplomatic efforts to alleviate tensions have mostly failed. 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. However, in the wake of the EU’s green agenda, critical doubts have emerged concerning the economic and environmental viability of the EastMed pipeline project, reducing Cypriot influence in the group.

Last update :  February 2022

Payment

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.

Debt Collection

Amicable phase

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.

Legal proceedings

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.

Insolvency Proceedings

Restructuring proceedings

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.

Liquidation

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.