The small Mediterranean island of Cyprus could witness “unprecedented” change thanks to an ambitious six-year plan to transform the country’s fortunes. 

The fabled birthplace of the goddess Aphrodite, Cyprus has applied for €1bn in EU recovery grants to build healthcare capacity, modernise education, reform the judicial system, digitalise government services and increase energy efficiency, among other modernising projects. 

According to documents seen by the island’s national English-speaking newspaper The Cyprus Mail the funds and plans are already in place. The only stumbling block is finding a collective political will among the island’s famously quarrelsome politicians. 

The huge EU handout is dependent on certain structural reforms, and for those reforms to take place, a change in legislation will need to pass through parliament. 

On Thursday, the Finance Minister Constantinos Petrides met with the main opposition party Akel to help secure a smooth passage for the economic future of the country. Given the devastating blow of the coronavirus on the island’s GDP, insiders remain hopeful. 

The coronavirus hit the island’s fortunes hard this year with the economy shrinking 11.9 percent year-on-year in the second quarter of 2020. It was the sharpest contraction on record with the negative GDP mainly attributed to the pandemic’s impact on the tourism industry. 

Little surprise then, that the island has been working to diversify its economy, aggressively courting foreign investment as politicians sets their sights on becoming a regional hub for education and business. Compared to the other powerhouses within Europe it might seem that the Republic of Cyprus – population 1.189 million – is punching well above its weight, but the country is holding its own in relative terms. 

In the 2020 Index of Economic Freedom published by The Heritage Foundation this month, Cyprus scored a respectable 7.84 out of 10, placing it 22nd out of a list of 162 countries. This was an overall score increase on the previous year by 2 points, primarily thanks to improvements in government integrity, the American conservative think tank said. 

Within Europe, Cyprus is ranked 20th among 45 countries in the Europe region, creeping ahead of seemingly bigger players such as The Netherlands, Austria, Finland and Spain. The island’s overall score is also well above the world average. 

Although the rankings for the 2020 Index come from 2018 statistics, it is not GDP that has pushed Cyprus into the top ‘mostly free’ category, but rather the significant reforms that have taken place since the financial crisis of 2013. They included a new insolvency and foreclosure framework, a reformed supervisory and regulatory banking framework, reforms to boost the efficiency and liquidity of banks and initial steps to fix a dysfunctional title-deeds transfer mechanism. 

Marios Christou, who heads the Centre of Economic Studies at the University of Nicosia, said: “The Cyprus economy, along with the country's political and legal system have undergone seismic reforms over the past seven years, which are well reflected in its index score.  

“It is important to mention that during the same period, the economy benefitted greatly from these reforms, improving its efficiency in large part on account of the resultant reduced bureaucracy, which was previously one of the main obstacles to the effectiveness of investments, especially FDIs. In parallel, the banking system regulatory framework improved and strengthened substantially.  

“Coupled with the reduced volume of NPLs, this strengthening helped uplift the indexes of the sector, palpably reflected in the upgrades by the rating agencies both of the major domestic systemic banks and the economy as a whole.” 

Despite recent gains, additional reforms are still needed to improve the speed and efficiency of the judicial system, according to the Index report – and that is also one of the areas the €1bn in EU recovery grants is dependent on. 

At this stage, the finance ministry’s Directorate General for European Programmes is finalising the details of the six-year business plan that will include proposals for projects from every ministry. This preliminary draft will then go to Brussels in November, and discussions will begin with the Commission. The final deadline for this process is April 30, 2021. 

Most of the funds are mandated to the EU’s Green Deal and digital transition with at least 37 per cent of expenditure directed towards environmental and energy-saving projects, and 20 per cent going towards the digital transformation of Cyprus’s business and industry. 

In return, terms demanded by the EU are expected to include the reform of the judicial system, digitalisation of public services, and the modernisation of the education system. 

Once these foundations are set, the Cypriot government and the private sector will collaborate on the completion of projects. All projects must be signed by contractors by December 31, 2023 and all payments must be concluded by June 30, 2026. 

George Campanellas, CEO of Invest Cyprus, welcomed news of the EU recovery grant. He said: “This is a great opportunity for Cyprus to capitalise on the huge gains already made in the transformation of its banking, financial and regulatory structures that saw the island become one of the fastest-growing economies in the euro zone prior to the Covid pandemic. Cyprus's standing in the Index of Economic Freedom is further proof of the country’s commitment to the promotion of economic opportunity.”