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Europaudvalget 2001-02 (1. samling)
EUU Alm.del Bilag 181
Offentligt

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 13.11.2001

SEC(2001) 1745

2001

REGULAR REPORT

CYPRUS'

PROGRESS TOWARDS ACCESSION

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2001

REGULAR REPORT

CYPRUS’

PROGRESS TOWARDS ACCESSION

***********************

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Table of contents

A. Introduction.................................................................................... 6

Preface

Relations between the European Union and Cyprus ....................................... 8

Recent developments under the Association Agreement (including bilateral trade)............ 8

Accession Partnership / National Programme for the Adoption of the Acquis .................. 9

Community aid .............................................................................................................. 9

Twinning ..................................................................................................................... 10

Negotiations / screening............................................................................................... 10

B. Criteria for membership.............................................................11

1. Political criteria ............................................................................. 11

Introduction................................................................................................................. 11

Recent developments................................................................................................... 11

1.1. Democracy and the rule of law ...........................................................................12

The parliament............................................................................................................. 12

The executive .............................................................................................................. 12

The judicial system...................................................................................................... 13

Anti-corruption measures............................................................................................. 14

1.2. Human rights and the protection of minorities .............................................14

Civil and political rights................................................................................................ 15

Economic, social and cultural rights.............................................................................. 17

Minority rights and the protection of minorities.............................................................. 18

1.3. General evaluation ...............................................................................................18

2. Prospects for a political settlement ............................................... 19

The UN process.......................................................................................................... 19

EU position................................................................................................................. 20

The situation in the northern part of the island ............................................................... 20

A political settlement and EU accession........................................................................ 23

3. Economic Criteria ......................................................................... 25

3.1. Introduction ...........................................................................................................25

3.2. Economic Developments .....................................................................................25

3.3. Assessment in terms of the Copenhagen criteria...........................................28

The existence of a functioning market economy ............................................................ 28

The capacity to cope with competitive pressures and market forces within the union...... 32

3.4. General evaluation ...............................................................................................34

4. Ability to assume the obligations of membership.......................... 36

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Introduction................................................................................................................. 36

4.1. The chapters of the

acquis....................................................................................38

Chapter 1: Free movement of goods....................................................................38

Overall assessment ...................................................................................................... 39

Chapter 2: Free movement of persons ................................................................40

Overall assessment ...................................................................................................... 41

Chapter 3: Freedom to provide services.............................................................42

Overall assessment ...................................................................................................... 42

Chapter 4: Free movement of capital .................................................................44

Overall assessment ...................................................................................................... 45

Chapter 5: Company law.......................................................................................46

Overall assessment ...................................................................................................... 47

Chapter 6: Competition policy..............................................................................48

Overall assessment ...................................................................................................... 48

Chapter 7: Agriculture..........................................................................................49

Overall assessment ...................................................................................................... 51

Chapter 8: Fisheries..............................................................................................53

Overall assessment ...................................................................................................... 54

Chapter 9: Transport policy .................................................................................55

Overall assessment ...................................................................................................... 57

Chapter 10: Taxation ............................................................................................58

Overall assessment ...................................................................................................... 58

Chapter 11: Economic and monetary union.......................................................59

Overall assessment ...................................................................................................... 60

Chapter 12: Statistics ............................................................................................60

Overall assessment ...................................................................................................... 61

Chapter 13: Social policy and employment ........................................................62

Overall assessment ...................................................................................................... 63

Chapter 14: Energy................................................................................................65

Overall assessment ...................................................................................................... 65

Chapter 15: Industrial policy...............................................................................66

Overall assessment ...................................................................................................... 67

Chapter 16: Small and medium-sized enterprises............................................67

Overall assessment ...................................................................................................... 68

Chapter 17: Science and research......................................................................68

Overall assessment ...................................................................................................... 69

Chapter 18: Education and training ...................................................................69

Overall assessment ...................................................................................................... 70

Chapter 19: Telecommunications and information technologies...................70

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Overall assessment ...................................................................................................... 71

Chapter 20: Culture and audio-visual policy.....................................................72

Overall assessment ...................................................................................................... 72

Chapter 21: Regional policy and co-ordination of structural instruments...73

Overall assessment ...................................................................................................... 73

Chapter 22: Environment......................................................................................75

Overall assessment ...................................................................................................... 77

Chapter 23: Consumers and health protection..................................................78

Overall assessment ...................................................................................................... 78

Chapter 24: Co-operation in the field of justice and home affairs ................79

Overall assessment ...................................................................................................... 81

Chapter 25: Customs union ..................................................................................83

Overall assessment ...................................................................................................... 84

Chapter 26: External relations ............................................................................85

Overall assessment ...................................................................................................... 85

Chapter 27: Common foreign and security policy.............................................86

Overall assessment ...................................................................................................... 87

Chapter 28: Financial control .............................................................................87

Overall assessment ...................................................................................................... 88

Chapter 29: Financial and budgetary provisions .............................................88

Overall assessment ...................................................................................................... 89

4.2. General evaluation ...............................................................................................90

C. Conclusion....................................................................................93

D. Accession Partnership and National Programmes for the

Adoption of the

Acquis:

Global assessment ............................96

1. Accession Partnership ................................................................... 96

Short-term priorities (2000)......................................................................................... 96

Medium-term priorities................................................................................................ 99

2. National Programme for the Adoption of the Acquis ................. 102

Annexes.............................................................................................103

Human Rights Conventions ratified by the Candidate Countries, 30

September 2001............................................................................................104

Statistical data......................................................................................................105

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A. Introduction

Preface

In Agenda 2000, the Commission said it would report regularly to the European Council on

progress made by each of the candidate countries of Central and Eastern Europe in

preparations for membership, and that it would submit its first Report at the end of 1998.

The European Council in Luxembourg decided that

“From the end of 1998, the Commission will make Regular Reports to the Council, together

with any necessary recommendations for opening bilateral intergovernmental conferences,

reviewing the progress of each Central and Eastern European applicant State towards

accession in the light of the Copenhagen criteria, in particular the rate at which it is adopting the

Union

acquis”

… “The Commission’s reports will serve as the basis for taking, in the Council

context, the necessary decisions on the conduct of the accession negotiations or their extension

to other applicants. In that context, the Commission will continue to follow the method adopted

by Agenda 2000 in evaluating applicant States’ ability to meet the economic criteria and fulfil

the obligations deriving from accession.”

On this basis, the Commission presented a first series of Regular Reports in October 1998, a

second series in October 1999, and a third in November 2000. The Commission has prepared

this fourth series of Regular Reports with a view to the Laeken European Council in December

2001.

The structure followed for this Regular Report is the same as that used for the 2000 Regular

Report. In line with previous Regular Reports, the present Report:

describes the relations between Cyprus and the Union, in particular in the framework of the

Association Agreement;

analyses the situation in respect of the political criteria set by the 1993 Copenhagen

European Council (democracy, rule of law, human rights, protection of minorities);

assesses Cyprus’ situation and prospects in respect of the economic criteria defined by the

Copenhagen European Council (a functioning market economy and the capacity to cope

with competitive pressures and market forces within the Union);

addresses the question of Cyprus’ capacity to assume the obligations of membership, that

is, the

acquis

as expressed in the Treaties, the secondary legislation, and the policies of the

Union. This part gives special attention to nuclear safety standards, as underlined by the

Cologne and Helsinki European Councils. It encompasses not only the alignment of

legislation, but also the development of the judicial and administrative capacity necessary to

implement and enforce the

acquis,

as emphasised by the Madrid European Council in

December 1995, and confirmed by the Gothenburg European Council in June 2001. At

Madrid, the European Council underlined the necessity for the candidate countries to adjust

their administrative structures, so as to create the conditions for the harmonious integration

of those States. The Gothenburg European Council emphasised the vital importance of the

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candidate countries’ capacity to effectively implement and enforce the

acquis,

and added

that this required important efforts by the candidates in strengthening and reforming their

administrative and judicial structures.

This Report takes into consideration progress since the 2000 Regular Report. It covers the

period until 30 September 2001. In some particular cases, however, measures taken after that

date are mentioned. It looks at whether intended reforms referred to in the 2000 Regular

Report have been carried out, and examines new initiatives. In addition, this Report provides

also an overall assessment of the global situation for each of the aspects under consideration,

setting out for each of them the main steps which remain to be taken by Cyprus in preparing for

accession.

In accordance with this approach, the assessment of progress in meeting the political and

acquis

criteria (including Cyprus’ administrative capacity to implement the

acquis)

focuses on

what has been accomplished since the last Regular Report, complemented with a view of the

global situation for each of the aspects discussed. The economic assessment, for its part,

provides, besides an assessment of progress made over the reference period, also a dynamic,

forward-looking evaluation of Cyprus’ economic performance.

The Report contains a separate section examining the extent to which Cyprus has addressed the

Accession Partnership priorities.

As has been the case in previous Reports, “progress” has been measured on the basis of

decisions actually taken, legislation actually adopted, international conventions actually ratified

(with due attention being given to implementation), and measures actually implemented. As a

matter of principle, legislation or measures which are in various stages of either preparation or

Parliamentary approval have not been taken into account. This approach ensures equal

treatment for all the candidate countries and permits an objective assessment of each country in

terms of its concrete progress in preparing for accession.

The Report draws on numerous sources of information. The candidate countries have been

invited to provide information on progress made in preparations for membership since the

publication of the last Regular Report. The National Programmes for the Adoption of the

Acquis

of each of the candidate countries, as well as the information they have provided in the

framework of the Association Agreement and in the context of the analytical examination of the

acquis

(screening) and the negotiations

, have served as additional sources. Council

deliberations and European Parliament reports and resolutions

have been taken into account in

the preparations. The Commission has also drawn on assessments made by various international

organisations, and in particular the contributions of the Council of Europe, the OSCE and the

International Financial Institutions, as well as that of non-governmental organisations.

As in previous years, the Report does not mention any commitments undertaken or requests made in the context of the

accession negotiations.

For the European Parliament the

rapporteur

is Mr. Jacques Poos.

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Relations between the European Union and Cyprus

Relations between the EU and Cyprus are based on the Association Agreement of 1973 and

the Accession Partnership (AP) of April 2000

. Cyprus has continued to implement the

Association Agreement correctly.

Recent developments under the Association Agreement (including bilateral

trade)

Cyprus and the European Community have been linked since 1973 by an Association

Agreement, which was intended to lead to a customs union by the year 2003. The Agreement

contains arrangements on trade and customs matters. It was supplemented by four Financial

Protocols concerning financial and technical co-operation. Full liberalisation of trade, due to

take place as the next stage, has not been completed because of the start of the accession

negotiations.

In December 2000, the

meeting of the EU-Cyprus Association Committee

took place in

Nicosia. The EU and Cyprus assessed the progress as regards the implementation of the

Accession Partnership and the enhancement of Cyprus' administrative capacity as well as its

participation in Community programmes. It was agreed that a few outstanding trade issues

under discussion (see below) would continue to be negotiated.

The

EU-Cyprus Association Council met for the 19th time in May 2001

in Brussels. The

country's preparation for EU accession and on the result of the enhanced pre-accession strategy

were discussed and financial co-operation was reviewed. International issues of common

interest concerning the situation in the Balkans and in the Middle East were also raised.

The 19

meeting of the

EU/Cyprus Joint Parliamentary Committee,

which took place in

Limassol in March 2001, focused on the progress of Cyprus’ accession course and laid special

emphasis on the implementation of the environmental

acquis.

In the context of the envisaged second round of negotiations on reciprocal concessions for

agricultural products with the countries of Central and Eastern Europe, the Commission is

presently preparing for negotiations with Cyprus, aiming at further trade liberalisation concerning

agricultural products.

The Council approved a mandate for the Commission to negotiate bilateral trade concessions in

the field of fish and fishery products with Cyprus. A derogation from the rules of origin for

certain textile products has been agreed between the Commission and Cyprus. The increase of

two import quotas (on canned grapes and table wine in bulk) is currently considered.

In general, trade relations between the EU and Cyprus developed well. In 2000 EC imports

from Cyprus stood at € 999 million (compared to € 607million in 1999), while during the same

period, EC exports to Cyprus were valued at € 3109 million (compared to € 2368million in

1999).

Council Decision (EC) No. 248/2000 of 20 March 2000 on the principles, priorities, intermediate objectives and

conditions contained in the Accession Partnership with the Republic of Cyprus, which entered into force on 1 April

2000.

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Accession Partnership / National Programme for the Adoption of the Acquis

The first Accession Partnership with Cyprus entered into force in March 2000. Its

implementation is reviewed in Part D. This Regular Report is accompanied by a proposal from

the Commission to update the Accession Partnership.

In August 2001, Cyprus presented a revised National Programme for the Adoption of the

acquis

(NPAA), in which it outlined the strategy for accession, including how to achieve the

priorities of the Accession Partnership (see Part D).

Community aid

After the expiry of the 4

Financial Protocol at the end of 1999, the Council adopted the

Accession Partnership in May 2000. The total pre-accession budget allocated to Cyprus for the

period 2000-2004 adds up to € 57 million. These pre-accession funds will finance co-operation

projects and activities which are a priority to prepare for accession. One third of the funds

should be used to finance bi-communal projects (activities to contribute to the reconciliation of

the two Cypriot communities).

The

2000

pre-accession allocation (€ 9 million) has been programmed to support activities in

the following sectors: taxation, customs, Schengen Information System, administrative

cooperation, bi-comunnal projects, and participation in the Community programmes in the

sector of education (Socrates, Leonardo, Youth).

The main projects foreseen under the

2001

allocation ( 11.5 million) include the following

€

activities: bi-communal projects, VAT and customs harmonisation, upgrading of the state

laboratories, urban wastewater, and participation in Community programmes. The

implementation of these projects is expected to start in 2002.

As mentioned above, several

bi-communal projects

have been programmed under the 2000

and 2001 budget. The EU will contribute € 6.3 million to the urban revitalisation schemes and

historical preservation as part of the Nicosia Master Plan. This Plan is aiming to preserve the

cultural and historical heritage of the walled city, so as to provide a new impetus for private

investments and to improve the urban fabric. The EU project will be implemented through the

executing agency of the United Nations Development Programme called UNOPS (United

Nations Office for Project Services), which has been active with the Nicosia Master Plan since

1998. The EU is also providing € 0.3 million of support for Trade Unions to improve the links

between Greek Cypriot and Turkish Cypriot unions and to develop shared interests in the light

of accession to the EU. A Communication Strategy (€ 0.2 million) is designed to increase public

awareness and interest in the EU for both Greek and Turkish Cypriot communities.

As regards participation in

Community Programmes,

Cyprus is currently participating in

Media II, Life II, the 5

Programme for R&D, Socrates, Leonardo,Youth, and the 3

Multi-

annual Programme for SMEs. In order to streamline Community legal procedures and thereby

facilitate future participation of Cyprus in Community programmes, an Agreement is in the

process of being concluded between the European Community and Cyprus establishing the

general principles for such participation.

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Twinning

One of the main challenges the candidate countries continue to face is the need to strengthen

their administrative capacity to implement and enforce the

acquis.

As of 1998, the European

Commission proposed to mobilise significant human and financial resources to help them in this

respect, through the process of twinning of administrations and agencies. The vast body of

Member States’ expertise is now being made available to the candidate countries through the

long-term secondment of civil servants and accompanying short-term expert missions.

For Cyprus several twinning projects will take place in 2001 and 2002, particularly in the fields

of structural funds, state aids, metrology, insurance and asylum.

Negotiations / screening

The analytical examination of the

acquis

(screening) for Cyprus started in April 1998 and was

concluded in 2000, covering the new

acquis

up to 1 January 2000. Since that time, screening

takes place in the framework of the accession negotiations.

Since the opening of the accession negotiations, substantial discussions on the individual

chapters of the

acquis

have started, and negotiations on all chapters (with the exception of

chapter 30 - Institutions and chapter 31 – Other) have been opened. It is to be recalled that

President Clerides reiterated his invitation to the Turkish Cypriot community to nominate its

representatives in the negotiating team.

By the end of September 2001, the following 23 chapters had been provisionally closed: Free

Movement of Goods; Free Movement of Persons; Freedom to Provide Services; Free

Movement of Capital; Company Law; Fisheries; Transport; Economic and Monetary Union;

Statistics, Employment and Social Affairs; Energy; Industrial Policy; Small and Medium-Sized

Undertakings; Science and Research; Education and Training; Telecommunication and

Information Technologies; Culture and Audio-Visual Policy; Environment; Consumer and

Health Protection; Customs Union; External Relations; Common Foreign and Security Policy as

well as Financial Control.

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B. Criteria for membership

1. Political criteria

Introduction

The political criteria for accession to be met by the candidate countries, as laid down by the

Copenhagen European Council in June 1993, stipulate that they must have achieved “stability of

institutions guaranteeing democracy, the rule of law, human rights and respect for and protection

of minorities.”

In its 2000 Regular Report on Cyprus’ progress towards accession, the Commission concluded

that:

“Cyprus continues to fulfil the Copenhagen political criteria. The predominant political problem

is the continued division of the island, but over the last year important efforts have been made in

the search for a political settlement in line with the Accession Partnership. From the fourth round

of proximity talks held in September there were encouraging signs that the two sides were

engaging in substantive discussion.”

The section below provides an assessment of developments in Cyprus since the 2000 Regular

Report, notably from the perspective of the Copenhagen political criteria, including the

functioning of the executive and the judicial system. This is closely linked to Cyprus’ ability to

implement the

acquis,

in particular in the field of justice and home affairs. More detailed

information on this can be found in the relevant section (Chapter

24 – Co-operation in the

field of justice and home affairs)

of part

B.3.1.

of this Report.

Recent developments

Parliamentary elections were held on 28 May 2001, in line with international standards, and

were contested by eight parties. While the Progressive Party of the Working People now has

the most seats in Parliament, the results brought no change to the coalition government

consisting of the Democratic Rally and the United Democrats. Three new parties won seats for

the first time and are now represented in the National Council (advisory body to the President

on the Cyprus issue).

The European Court of Human Rights (ECtHR) has delivered three rulings in cases of relevance

to Cyprus: “Cyprus vs Turkey” (10 May 2001)

, “Egmez vs Cyprus” (20 December 2000) and

“Denizci and others vs Cyprus” (23 May 2001).

These principles have been emphasized in the Charter of Fundamental Rights of the European Union, that was

proclaimed at the Nice European Council in December 2000.

This ruling is addressed in Part B. 1.3. Prospects for a political settlement.

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1.1.

Democracy and the rule of law

As mentioned in the previous Regular Reports, Cyprus has achieved stability of institutions

guaranteeing democracy and the rule of law. This section focuses on the most significant

developments of the past year.

The parliament

The House of Representatives has eighty seats and the term of office is five years. Fifty-six

representatives are elected by the Greek Cypriot community while twenty-four seats are

allocated to the Turkish Cypriot community.

The House has continued to function smoothly and has made considerable progress with

legislation. A large number of bills regarding alignment with the

acquis

have been adopted over

the past year. The House applies a fast-track procedure for adopting EU-relevant bills and

regulations which have been examined by the Committee on Foreign and European Affairs.

The new parliament held its inaugural session on 7 June. The leader of the Progressive Party of

the Working People was elected President (Speaker) of the House. One notable change in the

working of the current Parliament is the division of the Foreign and European Affairs Committee

into two committees, for Foreign Affairs and European Affairs respectively, in view of the

amount of legislation still to be adopted in the context of EU accession.

The executive

Executive power is vested in the President of the Republic who is elected for a five-year term.

He appoints a Council of Ministers. Each Minister heads a Ministry (of which there are eleven)

which exercises executive power in its domain as defined in the Constitution. The Public Service

Commission, appointed by the President, is responsible for appointing, promoting, retiring and

exercising disciplinary control over officials.

The Chief Negotiator and Coordinator of the harmonisation process has overall responsibility

for the negotiations. He is supported by the Ministry of Foreign Affairs, the Law Office and the

Planning Bureau. The latter is responsible for inter-ministerial technical co-ordination on the

harmonisation process and the implementation of the pre-accession strategy. Each Ministry has

appointed one or two co-ordinators for the harmonisation process and the pre-accession

strategy.

Public administration reform is an ongoing process aiming at increased effectiveness and

preparing for future participation in EU structures. During the last year the Public Administration

and Personnel Service has undertaken a number of studies in order to re-examine current

organisational structures, including staff numbers, grades and levels of responsibility. As a result

of these studies a supplementary budget for 2001 (including 185 additional posts) was

approved.

Efforts have been made to emphasise merit and transparency in the appointment and promotion

of staff, for instance, by clearly defining the boundaries within which the Public Service

Commission and advisory committees can exercise discretionary power. During the last year

there were 309 appeals to the Supreme Court against decisions of the Public Service

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Commission (245 in 1999). A law was adopted by the House of Representatives on 1 March

2001 which makes it illegal to intervene in the appointment or promotion of any person within

the Public Service or semi-governmental organisations. During the last year, 10 disciplinary

procedures have been brought before the Public Service Commission and six have been

concluded, some cases leading to dismissal.

The Cyprus Academy of Public Administration provides training for the civil service. It has

undertaken activities in the fields of management training, information technology and EU issues.

On the latter, training has been organised through the European Institute of Public

Administration at Maastricht and the National Centre of Public Administration of Greece.

Technical assistance has also been financed through TAIEX.

In line with requirements of the European Charter of Local Self Government, local government

in Cyprus is recognised by the Municipalities Law of 1985 and the 1999 Communities Law.

Cyprus is divided into 6 districts and two types of local government, i.e. Municipalities (33) and

Community Councils (576). The Union of Municipalities of Cyprus participates in special

sessions of the Committee of the Regions. The main financial resources of the Municipalities and

the Community Councils are government subsidies, and professional and local taxes. The

Council of Ministers has decided on the establishment of two programming regions that will

allow for a more coherent development policy. A Citizen´s Charter assists citizens in exercising

their rights vis-à-vis the administration.

The judicial system

There continues to be a high standard of justice. Independence and impartiality of the judiciary

is ensured. Through a two-tier system (first instance courts and Supreme Court), the right to fair

trial is guaranteed.

The Supreme Court is the final appellate court, determining

inter alia

the constitutionality of

laws and the legality of administrative acts. Supreme Court judges are appointed by the

President of the Republic.

There are currently 84 judges - 55 in the District Courts, 13 in the Supreme Court, and the

remainder in the Family, Industrial Disputes, Rent Control and Military Courts. The judiciary

has requested the creation of 10 new posts for this year. Adequate budgetary support and

appropriate remuneration for judges is ensured. First instance judges are appointed by the

Supreme Council of the Judicature. The tenure of judges is predetermined by the constitution in

the case of Supreme Court judges, and by law in the case of first instance judiciary. In addition,

a Tax Tribunal made up of arbitrators continue to decide in cases between the Inland Revenue

Department and individual taxpayers.

Cases are generally concluded within a reasonable time. According to a Supreme Court

regulation, all Court judgements must be delivered within 6 months from the conclusion of the

hearing of the case. However, twice in 2000 Cyprus was ordered by the European Court of

Human Rights to pay damages for unreasonable delays in civil proceedings before the Supreme

Court. Cyprus is addressing these shortcomings through a series of legislative amendments,

aiming at expediting the administration of justice at first instance. These include the expansion of

powers of District Court judges, and changes in the rules of civil and criminal procedure. In first

instance jurisdiction (civil, criminal, family, rent control, labour disputes and military courts), the

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number of cases pending has decreased in recent years. Judgements seem also to be enforced

more speedily. For example, out of 106 195 writs of movables issued between 1996 - 2000

(inclusive), 105 998 were executed in that period.

The training programme for judges includes human rights law with particular reference to the

European Convention on Human Rights, EC law, and civil and criminal procedure with special

emphasis on arrest and detention. Five seminars on European Law were organised during

2000.

The development of a Courts' administration system to facilitate the monitoring of all civil and

criminal cases and automation of the Courts' processes has continued. In addition, a

comprehensive legal information data bank is being prepared.

Criminal proceedings for any offence against any person in the Republic are conducted under

the instructions of the Attorney-General, an Independent Officer who holds office on the same

terms and conditions as the Supreme Court judges. The Attorney-General exercises his powers

in person or through officers of the Law Office who are qualified lawyers appointed by the

Public Service Commission. Prosecution may also be initiated by police officers or other

governmental officials such as District Administrations, Social Insurance Department, Customs

and Excise Department and Inland Revenue, under the direction of the Attorney General. 50

new posts for prosecutors will be created at the Law Office of the Republic, thus changing the

current system. In addition, following the Egmez vs. Cyprus case (see

below),

the Attorney-

General can now appoint criminal investigators in any case concerning alleged use of criminal

force by the the police forces which may come to his notice.

Anti-corruption measures

Cypriot legislation contains extensive provisions to prevent and combat fraud and corruption.

The Criminal Code defines a series of offences of official corruption, such as extortion by public

officers, abuse of office, or neglect of official duty.

As regards the harmonisation process and the ratification of international conventions, Cyprus

ratified the Council of Europe Criminal Law Convention on Corruption in January 2001, but has

not yet ratified the Civil Law Convention on Corruption that it signed in November 1999. It has

submitted an application to join the OECD Convention on Combating Bribery of Foreign

Public Officials in International Business Transactions (for further details see chapter 24 –

Justice and Home Affairs – of Part B. 3.1).

Cyprus is a member of the Group of States against Corruption (GRECO) of the Council of

Europe which monitors the implementation measures against corruption in each member state.

The evaluation mission for Cyprus took place in December 2000 but the report has not yet

been published.

1.2.

Human rights and the protection of minorities

As mentioned in the previous Regular Reports, Cyprus continues to respect human rights and

freedoms. The following section concentrates on major developments since the last Regular

Report.

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Cyprus has ratified all major human rights conventions (see Annex) and signed Protocol 12 to

the European Convention on Human Rights on 4 November 2000 prohibiting discrimination on

any grounds.

Whereas Art. 28 (2) of the Constitution prohibits any direct or indirect discrimination against

any person on the grounds of his community, race, religion, language, sex, political or other

convictions, national or social descent, birth, colour, wealth, social class, or any ground

whatsoever, there is no specific implementation legislation for the EC non-discrimination

directives adopted in 2000 (see in detail Chapter 13 – Social and Employment Policy of Part B.

3.1).

The Office of the Ombudsman, whose task is to investigate, report on and recommend acts or

omissions of the administration, including local authorities, as well as alleged ill-treatment by

members of the police, continues to function well. During 2000, the Ombudsman dealt with

1 121 cases, a considerable number of which were filed against the Immigration Services.

Civil and political rights

The situation as regards the respect for civil and political rights continues to be generally

satisfactory. Several further positive developments can be reported, while some specific issues

that exist due to the Cyprus problem remain a matter of concern.

Art. 7(2) of the 1960 constitution allows for the

death penalty

in cases of premeditated

murder, high treason, piracy

jure gentium

and capital offences under military law provided that

a law exists to that effect. Under the revised Military Criminal Code of 1995 six military

offences are punishable with death only if committed in times of war. With the entry into force of

Protocol 6 to the ECHR in February 2000 Cyprus committed itself internationally not to

reintroduce the death penalty in times of peace.

Cypriot law prohibits

torture and inhuman or degrading treatment.

The Council of Ministers

has delegated to the Attorney General the power to appoint special investigators to look into

alleged criminal offences by the police force. Several times he has exercised this right and, in

some cases, criminal charges against police officers have been brought.

In two cases

, relating to events in 1995 and 1994 respectively, the European Court of Human

Rights found that policemen had gone beyond reasonable use of force against suspects who

were Turkish Cypriots. In the latter case the Court also found a violation of the right to liberty

and security, since no legal basis for the applicants’ arrest and detention could be shown. The

government promptly paid the compensation awarded to the applicant in the first case and has

announced its intention to pay shortly in the second. However, in the Denizci case, the

perpetrators have not yet been sanctioned.

As regards

trafficking in human beings

Cyprus signed the two Protocols to the UN

Convention against Transnational Crime on trafficking in women and children and the smuggling

of would-be immigrants in December 2000 (for more details, see Part B. 3.1. Chapter 24).

Pre-trial detention

is strictly regulated. Any person arrested must be brought before a judge

Egmez v. Cyprus of 20 December 2000 and Denizci vs. Cyprus of 23 May 2001.

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within 24 hours. Any person deprived of his liberty has the right to institute proceedings

challenging the validity of detention. He can also apply to the Supreme Court for the issue of a

writ of Habeas Corpus ordering his release. In April 2001, the Government proposed a bill

providing for payment of just and reasonable compensation to persons having partially served a

term of imprisonment following conviction for a criminal offence, when their conviction is

quashed or their sentence reduced on appeal to the Supreme Court.

In March 2001, a group of some 150 Turkish Cypriots of Roma origin crossed from north to

south. It appears that initially the Ministry of Interior was unable to offer housing and some of

this group were held at detention centres to determine their origin. Finally, the Attorney General

ordered and secured the immediate release of 43 Roma detained in violation of the law.

Prison conditions

in Cyprus respect international standards. During the last year two new

detention-centres have been created and two other wards are being upgraded. These measures

should alleviate overpopulation and allow for the separation of prisoners according to their age

and the severity of punishment, a principle that is currently not fully respected in practice. In

2001, 48 new posts were created to meet the needs of the Prisons Department.

Free

legal aid

is currently available only in criminal cases. A bill providing for legal aid in civil

proceedings is pending.

According to statistics of the UN High Commissioner for Refugees, Cyprus received 651

applications for

refugee

status in 2000, followed by another 676 applications in the period up

to 1 August 2001, mainly from Yugoslav and Iranian nationals. Although this constitutes a sharp

increase compared with the average number of applications up until 1998, for the most part the

system operates satisfactorily, and the number of applicants kept in detention decreased in

2000. However, cases of forced return at the border have been reported this year.

Immigrants face incidents of

racism

and discrimination according to the report of the European

Commission on Racism and Intolerance of 15 December 2000 and statements made by an

association for the rights of migrant workers, an association of foreign workers in Cyprus.

Following a recommendation of the Ombudsman, all complaints by foreign workers against their

employers about sexual harrassment of women, mistreatment, non-payment of wages and threat

of deportation are now dealt with by the District Labour Offices of the Ministry of Labour and

Social Insurance.

A difference in age as regards consent, depending on sexual orientation, remains in Cypriot

penal law.

Freedom of religion

and

freedom of speech

are guaranteed under Art. 18 and 19 of the

constitution and continue to be generally respected.

The constitution affords to every person the right of

freedom of peaceful assembly and of

association

with others, including the right to form and join trade unions for the protection of his

interests. The right of association also applies to the formation of companies, societies and other

associations functioning for profit.

Some specific issues in relation to various civil and political rights exist due to the Cyprus

problem.

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The exact state of

missing persons,

including children, is still uncertain since the UN Committee

involving both communities has not made any progress. However, the government has

unilaterally proceeded to exhume and identify remains bringing the original number of 1619

listed missing to 1 482 in July 2001. The Ministry of Foreign Affairs requested the assistance of

Turkish Cypriot relatives in the northern part in the DNA testing process.

The

right to marry

is restricted

de facto

for Turkish Cypriots living in the south since there are

no proper institutions to carry out the relevant law on marriages adopted by the Turkish Cypriot

Communal Chamber at the beginning of the 1960’s. Therefore inter-communal marriages are

impossible. A bill aimed at remedying this situation is pending.

The

right to vote

of Turkish Cypriots living in the south is restricted by the fact that the Turkish

Cypriot Community does not hold elections in accordance with the 1960 constitution. The

application by a Turkish Cypriot living in the south and holding a Cypriot passport to be

enrolled in the voters list of the Greek Cypriot Community for the national elections was

dismissed by the Supreme Court on 23 May 2001 on constitutional grounds. Two days later,

he filed an application before the ECHR for an alleged breach of his right to free elections.

A small number of the approximately 300-400 Turkish Cypriots residing in the south

complained to UNFICYP

of being subject to unlawful surveillance by members of the security

forces.

Economic, social and cultural rights

As regards

equal opportunities

Cypriot women have the same legal status as men. Measures

are being undertaken in order to implement equality between men and women in the field of

social security. There is an advisory body to the Council of Ministers on gender policies (for

further detail see Part B. 3.1., chapter 13: Social policy and employment). Despite the recent

increase in the number of women elected to the House of Representatives (of the 454

candidates for the House there were 86 women, compared to 55 in 1996; 6 were elected, 3

more than in the previous legislature), women are still under-represented in political life.

The minimum age for employment of

children

in the industrial sector is 16 years. The

application of this legislation is checked by Labour Inspectors. Laws prohibiting forced child

labour are effectively enforced. In February 2001 Cyprus signed the May 2000 Protocol to the

UN Convention on the Rights of the Child on the sale of children, child protection and child

pornography.

Legislation provides incentives for employment of

disabled persons.

When applying for a

public sector position they are entitled to preference as long as their qualifications are the same

as those of the other applicants and they are considered able to perform the required duties.

There are also provisions that new buildings and tourist facilities should allow access for the

disabled, although they are not always enforced.

The

right to form and join trade unions

is guaranteed by the Constitution. More than 70% of

the workforce belong to trade unions. These unions are independent, and the right to strike is

Aziz vs. Cyprus, ref. number 69949/01.

United Nations Peace Keeping Force in Cyprus.

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granted. They are free to organise and bargain collectively, and most wages and benefits are the

result of such agreements.

Cyprus is a party to the

European Social Charter

as well as its revised version. It has

accepted the system of collective complaints under the Additional Protocol. Between June and

December 2000, the European Committee of Social Rights examined the report submitted by

Cyprus. It concluded that most of the provisions of the Charter are respected, but that Article 1

para. 2 on the prohibition of forced labour was not fully complied with.

Minority rights and the protection of minorities

Cyprus has ratified the Framework Convention for the Protection of National Minorities.

According to Art. 2 of the constitution, all Cypriot citizens are deemed to belong to either the

Greek Community or the Turkish Community. The three religious groups - Armenians (0.4%),

Maronites (0.6%) and Latins [Roman Catholics] (0.1 - which were given the option of

becoming members of either the Greek or the Turkish Community, opted as a group to belong

to the Greek Community. It appears that this constitutional provision may not be compatible

with Art. 3 of the Framework Convention under which every person belonging to a national

minority shall have the right freely to choose whether to be treated as such.

However, in addition to their normal voting rights, the Armenian, Maronite and Latin groups

elect non-voting representatives to the House of Representatives from their respective groups.

These advise on religious affairs.

The five major religious groups receive government subsidies and are exempt from taxes. The

right of religious groups and communities to set up and operate their own schools is safeguarded

and financially assisted by the State. The State thus covers fees and expenses of,

inter alia,

Turkish Cypriot pupils whose families reside in the south and who attend private schools, both

at elementary and secondary levels. The government has recently decided to establish an

elementary school for Maronites.

1.3.

General evaluation

Cyprus continues to fulfil the Copenhagen political criteria. Further efforts have been made to

prepare the administration for operation within the EU, and the authorities’ record on

democratic and human rights remains generally good.

See "Making a success of enlargement: Strategy Paper and Report of the European Commission on the progress towards

accession by each of the candidate countries", COM (2001) 700.

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2. Prospects for a political settlement

The UN process

Since the last regular report, the fifth round of proximity talks took place in Geneva in

November 2000. At the end of that round, the UN Secretary-General (UNSG), Mr. Kofi

Annan, presented orally to both parties ideas for a comprehensive settlement with regard to the

four core issues – constitution, security, territory and property. He referred to two component

states, each with its own basic law, forming a common state. The component states should be

largely self-governing. He indicated that “a comprehensive settlement would commit Cyprus to

EU membership”. He expressed the hope that “the EU would be prepared to address special

and legitimate concerns in regard to accession”. Mr. Annan added that “a comprehensive

settlement negotiated by the UN should not present an obstacle for EU membership nor need to

be re-negotiated when the terms of accession are established”. It is to be noted that the Greek

Cypriot side expressed its readiness to continue the talks on the basis of the relevant UNSC

Resolutions and the UNSG’s ideas.

In December 2000 the UNSG invited the leaders of the two sides to attend a sixth round of

proximity talks in Geneva in late January 2001. The Turkish Cypriot leader, Mr. Denktash,

asked that no date for proximity talks be set, and since then the talks have not been resumed.

The UN continued to hold consultations with a number of governments and organisations. In

that context officials of the UN and the Commission have discussed (in March 2001 in Geneva

and in June 2001 in Brussels) aspects of the EC

acquis.

In late August 2001 Commissioner Verheugen and Mr. Denktash met in Zurich. They

exchanged views on the Cyprus issue, the enlargement process and discussed how Turkish

Cypriot concerns could be taken into account.

A renewed invitation to resume the search for a comprehensive settlement was made by the UN

following the visit of the UN Secretary-General’s Special Adviser for Cyprus, Mr. Alvaro de

Soto, to the island in early September. While President Clerides accepted the invitation, Mr.

Denktash declined the invitation, claiming that the ground had not been sufficiently prepared.

Following this development, on 26 September, the President of the UNSC expressed in a

statement its disappointment. This statement was supported by the EU Presidency.

The UN Security Council adopted resolutions in December 2000 and June 2001 for the six-

month extension of the mandate of the UN Peacekeeping Force in Cyprus (UNFICYP).

UNFICYP has assisted in organising activities involving both Greek and Turkish Cypriots at

Ledra Palace: meetings of political party representatives; an information technology conference;

gatherings of businessmen and non-governmental organisations; and a large public event

involving approximately 3,000 young people, organised by the youth branches of political

parties.

The UN Development Program (UNDP), through the UN Office for Project Services

(UNOPS), has continued to implement its bi-communal programmes in areas of mutual

concern, notably public health, environment, sanitation, water, urban renovation, preservation of

cultural heritage, natural resources and education.

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EU position

The Helsinki European Council of December 1999 underlined that

“…a political settlement

will facilitate the accession of Cyprus to the European Union. If no settlement has been

reached by the completion of the accession negotiations, the Council’s decision on

accession will be taken without the above being a precondition. In this the Council will

take account of all relevant factors.”

The EU Summit in Nice in December 2000 welcomed and strongly supported the efforts of the

UNSG to achieve an overall settlement of the Cyprus problem consistent with the UN Security

Council Resolutions and to arrive at a positive conclusion of the process initiated in December

1999. It appealed to all the parties concerned to contribute to the efforts made to this effect.

The European Parliament has frequently addressed various issues arising from the political

situation.

The Cyprus problem was discussed at meetings of the EU-Cyprus Association Committee

(December 2000) and Association Council (May 2001), and efforts for a settlement were

identified as a short-term priority in the Accession Partnership with Cyprus, published in

November 2000. As laid down in the Accession Partnership with Turkey of March 2001, it is

also a short-term priority for this country to strongly support the UN Secretary General’s efforts

to bring to a successful conclusion the process of finding a comprehensive settlement. The issue

was raised in the enhanced political dialogue and in the Association Council with Turkey in June

2001, and has also been discussed in bilateral contacts with certain third countries.

EU representatives expressed disappointment at Mr. Denktash’s unwillingness to continue to

participate in the UN proximity talks and his decision to decline the invitation of the UN

Secretary-General in early September referred to above. In this respect, the EU considers that

Turkey has an important role to play in ensuring that the efforts undertaken by UNSG lead to

positive results in the months ahead.

As requested by the General Affairs Council in 1995, the Commission promotes bi-communal

projects, partly in cooperation with the UN, and provides information about the EU to the

Turkish Cypriot community. These efforts include the opening of an information center,

supported by the Commission's Delegation in Nicosia, within the premises of the Turkish

Cypriot Chamber of Commerce. As part of the Commission’s information campaign, lectures

on Community policies are given to Turkish Cypriot businesspeople and other interested

persons through the framework of the Chamber of Commerce. Bi-communal activities could be

developed more effectively by the removal of restrictions imposed by the Turkish Cypriot

leadership on crossing the “green line” to take part in such events.

The situation in the northern part of the island

In last year’s Regular Report information was provided on the situation in the northern part of

Cyprus. The overall political situation remains essentially unchanged in the period covered by

the present report. Nonetheless a number of developments have occurred which are reported

below. This section also contains an analysis of the economic situation.

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The European Court of Human Rights (ECtHR), in a Decision of 10 May 2001

highlighting the

situation between 1974 and 1994 established

inter alia

that Turkey is obliged to secure all

human rights set out in the European Convention on Human Rights (ECHR) in northern Cyprus.

The Court found that “having effective overall control over northern Cyprus, its (Turkey’s)

responsibility cannot be confined to the acts of its own soldiers or officials in northern Cyprus

but must also be engaged by virtue of the acts of the local administration which survives by

virtue of Turkish military and other support”.

The Court also held that the refusal to allow the return of Greek-Cypriot displaced persons to

their homes in northern Cyprus constitutes a continuing violation of the ECHR.

Furthermore, the ECtHR found that Turkey has failed to conduct an effective investigation into

the fate of Greek Cypriot missing persons who disappeared after July 1974, which amounted to

a violation of the right to life and the right to personal liberty. Finally, it held that “there is a

functioning court system for the settlement of disputes (…) which is available to the Greek-

Cypriot population”.

The Committee of Ministers of the Council of Europe, in its third interim resolution in the case

Loizidou vs Turkey on 26 June 2001, deplored the fact that Turkey has still not complied with

its obligations under this judgement to pay compensation for the unlawful interference with the

property rights of Mrs. Loizidou.

In other developments, a Greek Cypriot, Mr. Tsiakourmas, was abducted from a UK

Sovereign Base Area (SBA) on 12 December 2000. On 26 April 2001, he was sentenced for

possessing 1.1 kilos of cannabis to six months in prison, but was released the same day because

of time already served in prison. During the trial, SBA police presented statements to the effect

that there had been an abduction and that no trace of drugs had been found in Mr.

Tsiakourmas's car. This case, and the circumstances in which it was brought, pose a number of

questions concerning due process of law in the northern part of the island.

More encouragingly, proceedings against a journalist, who had written a critical article on the

quality of justice, were dismissed on the grounds that he had exercised the right of free speech.

A new organisation calling itself the National People’s Movement and professing extreme

nationalist views, was established on 19 May 2001.

On 24 May 2001, a bomb destroyed the printing materials of the newspaper AVRUPA, which

frequently expresses critical views. There is no evidence of proper investigation of this attack.

On 11 July 2001, four teachers of the Turkish Teachers Trade Union KTOS were prevented

from flying to Greece to attend the Children’s Olympics with 17 children from Famagusta.

KTOS, which has expressed dissatisfaction with the Turkish military presence on the island, has

been the subject of repressive measures.

Restrictions have been placed on bi-communal activities and non-governmental organisations

have been warned not to contact embassies.

Cyprus vs. Turkey, Application No. 25781/94.

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On 12 July 2001, forty one associations, opposition parties and trade unions organised a rally

with 3000-4000 participants under the slogan “This Country is Ours!”. The demonstrators

protested against the economic situation and called for a more positive attitude to the EU and to

bi-communal activities.

In terms of the

economic situation,

per capita income in the northern part of Cyprus continues

to lag far behind. Estimates put income at some €5000 per head in 2000. The northern part of

the island faces severe shortages of capital, skills and business opportunities. The public sector

is the largest employer and has a pervasive presence in the economy, with many branches of the

economy in public ownership.

The financial and economic crisis in Turkey in early 2001, following the crisis in 2000, further

aggravated the economic situation and the difficulties in the financial sector. Turkish currency is

in use in the northern part of the island, which has no independent monetary policy. High

inflation, currently over 50 per cent on an annual basis, coupled with large trade and budget

deficits, have produced an economic situation which is only sustained by transfers from Turkey.

Trade is heavily dependent on the Turkish market. The large tourism potential remains largely

undeveloped.

Real growth in output fell from 7.4 per cent in 1999 to just 0.8 per cent in 2000. Although data

for 2001 are mostly lacking, it is clear that the northern part of Cyprus is facing an economic

crisis. Public-sector wages were raised by only 8 per cent for 2001, implying a substantial

decline in purchasing power. The loss of purchasing power by private-sector workers is of a

similar order of magnitude. Since February 2001, 76 companies in northern Cyprus have

declared bankruptcy, with the textile industry among the most affected. Eight banks have

collapsed since late 1999.

The northern part of Cyprus remains heavily dependent on fiscal transfers from Turkey. On an

annual equivalent basis, Turkey provides at least €100-200 million in economic and financial

support, in the form of direct aid, loans, subsidies and other grants. However, a protocol signed

in January 2000 effectively reduced annual economic support by at least 40 per cent for the

period 2001-2003.

Output in the agricultural sector, the largest sector in terms of employment after public services,

has increased so far this year. Rainfall has been sufficient, following severe droughts in recent

years. However, the increase in the local supply of agricultural products has led to a decline in

prices. Plans to end intervention in agricultural markets, in line with the economic and social

package, have been abandoned and a minimum price maintained.

Educational establishments have become an important source of earnings, generating around

fifteen per cent of gross income in the northern part of the island.

Turkey has indicated that it may pursue a greater level of integration of the northern part of

Cyprus with the Turkish economy; in January 2001, a programme along these lines was

approved in Ankara covering transport and trade.

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A political settlement and EU accession

It is the preference of the European Union that a settlement under UN auspices be reached

before Cyprus’s accession, although, in line with the Helsinki European Council conclusions,

this is not a pre-condition for Cyprus’s accession.

EU membership, in the context of a political settlement, will enable all Cypriots to enjoy the

guarantee of fundamental democratic and human rights including the respect of cultural, religious

and linguistic diversity. In the context of EU membership, the principles of democracy and the

rule of law will be safeguarded throughout the island. Both Greek and Turkish Cypriots will

participate in the work of EU institutions.

EU membership, in the framework of a settlement, will provide the most effective means for the

northern part of the island to catch up in terms of economic modernisation, growth and

development. The economic reforms associated with EU accession will reduce disparities in

incomes and in living standards on the island.

Structural adjustments will be needed to prepare for the implementation of the

acquis

and for

economic actors to cope with competitive pressure. With a view to accession, priority

objectives will include the establishment of a supportive and stable financial environment, and a

high level of public and private investment, leading to the improvement of physical infrastructure.

Trade and investment, in particular with EU partners, will expand rapidly, subject to any

conditions which may be included in a settlement. The EU’s customs union with Turkey will

ensure that no new barriers are created in trade with that country.

Many sectors, such as agriculture and tourism, will develop rapidly in the course of accession.

Efforts in the north to develop a market economy with the capacity to cope with competitive

pressure and market forces within the single market will be supported, in the context of

accession, through the structural funds and other EU programmes and networks.

There is a window of opportunity for reaching a settlement, reflecting the concerns of the

respective parties, before the end of the accession negotiations. This will allow the Turkish

Cypriots to be part of the accession process and to enjoy the benefits of accession.

The Commission considers that matters arising from a settlement, which have implications for

the

acquis,

can be accommodated in the accession framework in line with the principles on

which the European Union is founded. In the pursuit of a settlement it should be borne in mind

that a Member State is free to determine its own constitutional arrangements provided that it is

able to speak with one voice in the EU decision-making process and to ensure fulfilment of its

EU obligations.

Member States of the European Union are entitled to decide on their own security

arrangements. Therefore security arrangements agreed by the parties in the framework of a

settlement of the Cyprus problem would not be affected by EU accession.

A majority of Cypriots throughout the island appreciate the economic and political benefits of

EU membership. Opinion polls show that more than 90 per cent of Turkish Cypriots favour EU

accession following a settlement.

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The efforts of the United Nations to find a solution to the Cyprus problem and the EU accession

process are mutually reinforcing. There is now an opportunity for the successful conclusion of

both processes. This will bring reconciliation, higher living standards and greater stability in the

region.

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3. Economic Criteria

3.1.

Introduction

In its 1993 Opinion on the application of the Republic of Cyprus for EU membership, the

Commission concluded:

“The

economy of the southern part of the island has demonstrated an ability to adapt and

seems ready to face integration provided that the work already started on reforms and

on opening up to the outside world is maintained, notably in the context of the customs

union.”

This finding was confirmed in the 1998 and 1999 Regular Reports. In its 2000 Regular Report

the Commission found that:

“Cyprus

is a functioning market economy and should be able to cope with the

competitive pressures and market forces within the Union.”

In examining the economic developments in Cyprus since the Opinion, the Commission’s

approach was guided by the conclusions of the European Council in Copenhagen in June 1993,

which stated that membership of the Union requires;

the existence of a functioning market economy; and

the capacity to cope with competitive pressure and market forces within the Union.

In the analysis below, the Commission has followed the methodology applied in the Opinion and

in the previous annual Regular Reports.

3.2.

Economic Developments

During the last 12 months, the macroeconomic environment has improved.

Economic

growth has continued to be strong, largely as a result of strong tourism receipts. Consumer

demand has proven to be very resilient, despite the significant reduction in private sector wealth

in the wake of the stock market crash of 2000. The fiscal deficit, which has caused some

concern in recent regular reports, narrowed significantly. Inflation, which rose sharply during the

first half of 2000, began to fall quickly after the summer. Recently, strong consumption-related

import growth has led to a substantial current account deterioration.

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Main economic trends

Cyprus

Real GDP growth rate

Inflation rate

- annual average

- December-on-December

Unemployment rate, end-year

- ILO definition

per cent

1996

1.9

1997

2.5

1998

5.0

1999

4.5

2000

4.8

2001 latest

per cent

3.0

2.5

3.3

3.8

2.3

0.8

1.1

3.5

4.9

3.7

3.0

July

2.2 Sept.

per cent

3.1

3.4

3.6

4.9

General government budget

balance

Current account balance

per cent of

GDP

per cent of

GDP

million

ECU/euro

-3.3

-5.2

-3.7

-4.0

-3.2

-5.3

-4.0

-6.6

-2.4

-5.2

-370

-299

-538

-204

-495

Foreign debt

- debt export ratio

- gross foreign debt

Per cent

million

ECU/euro

258.3

8,495

312.9

11,030

312.8

11,056

360.7

13,736

377.9

16,570

Foreign direct investment in

flow

- balance of payments data

per cent of

GDP

million

ECU/euro

0.6

0.9

0.8

1.3

1.8

114

174

Over the last year, Cyprus has also made progress towards resolving a number of

structural policy challenges, most notably within the financial sector, the environment,

and healthcare.

Both the financial sector and the capital account took major steps towards

greater liberalisation. In January 2001, the nine-percent interest rate ceiling was abolished. At

the same time, a further round of capital account liberalisation was completed. These measures

pose new challenges to the economy which need to be addressed. The supply of water - the

PROXY HICP since 1998 (see methodological notes).

Moving 12 month average rate of change

Unemployment rate until 1999 based on registered unemployed, as from 2000 based on LFS methodology\

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most pressing environmental challenge - was greatly improved with the completion of a new

desalination plant. The health sector reform process moved decisively into the implementation

stage when the enabling legislation was approved by Parliament.

Main Indicators of Economic Structure in 2000

Population (average)

GDP per head

thousand

PPS

per cent of EU

average

Share of agriculture

in:

- gross value added

- employment

Investment-to-GDP ratio

Gross foreign debt/GDP

Exports of goods & services/GDP

757

18,500

per cent

million euro

euro per head

3.8

9.2 P

18.7

174.3

46.1

Stock of foreign direct investment

In recent years, GDP per capita has converged quickly towards the EU average.

In 2000,

GDP per capita in purchasing power standard (PPS) as a percentage of the EU average stood

at almost 83%, compared to just over 79% in 1995. The situation in the labour market is

favourable. The employment rate, at 65.5% in 2000, is high, especially for males. The overall

unemployment rate stood at 4.9% in 2000

. The unemployment rate for young people (under

25) was relatively high at 10.5% . The gap between male and female unemployment continued

to be wide, with 3.6% for males and 7.5 % for females in 2000. There is only limited long-term

unemployment, estimated at 28.6 % of all unemployed in 2000. There is a comprehensive social

security system, buttressed by a powerful informal social safety net based upon the family.

Figures have been calculated using the population figures from National Accounts, which may differ from those used in

demographic statistics.

Agriculture, hunting, forestry and fishing.

Data refer to Gross capital formation as % of GDP.

Estimated.

Figures have been calculated using the population figures from National Accounts, which may differ from those used in

demographic statistics.

The unemployment rate until 1999 was based on registered unemployment, while from 2000 onward it is based on

labour force survey (LFS) methodology.

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3.3.

Assessment in terms of the Copenhagen criteria

The existence of a functioning market economy

The existence of a functioning market economy requires that prices, as well as trade, are

liberalised and that an enforceable legal system, including property rights, is in place.

Macroeconomic stability and consensus about economic policy enhance the performance of a

market economy. A well-developed financial sector and the absence of any significant barriers

to market entry and exit improve the efficiency of the economy.

There is broad consensus about the key objectives of economic policy.

Accession to the

European Union enjoys wide support among all political parties. In May 2000, the Cypriot

authorities presented their pre-accession economic programme (PEP) to the European

Commission. The programme was adopted by the Council of Ministers in July 2001, and a

summary presented to Parliament. There was a high degree of inter-institutional co-operation

during the elaboration of the PEP, particularly between the fiscal and monetary authorities. In

addition, relevant line ministries provided strong contributions to the structural reforms chapter.

Cyprus has enjoyed many years of robust economic growth.

Between 1996 and 2000, the

Cypriot economy grew by an average 4% per year. The external sector, and in particular the

tourism sector, has been the primary source of this impressive economic performance. In 2000

the economy is estimated to have grown by 4.8%. More recent data suggests that domestic

demand has become an increasingly important source of GDP growth. Private sector

consumption and investment grew rapidly, while government consumption growth was much

more subdued. Data for the first half year of 2001 suggest that growth has been slowing down

somewhat.

In 2000, the inflation rate increased relative to 1999.

The inflation rate based on the EU’s

harmonised index of consumer prices (HICP) was 4.9%, while the authorities’ estimate of

consumer price inflation (CPI) was 4.3%. Higher world oil prices increased local energy prices.

A drought in early 2000 reduced local agricultural production and so pushed up prices of

domestically produced food. An increase in the standard VAT rate from 8 to 10% in July 2000

also placed upward pressures on prices. More recently, these transitory effects have subsided

and the inflation rate has fallen considerably. The year-on-year HICP inflation rate for

September stood at 2.2%

The labour market is operating close to full employment.

For 2000, the registered

unemployment rate was estimated at 3.4%

. Due to the rapid expansion of economic activity

during the first six months of 2001, registered unemployment fell to below 3%. In 2000, labour

productivity growth was 3.4%, unit labour costs increased by 3.5%, and real wages increased

by 2.7%.

The central government consolidated deficit declined significantly.

Following the

slowdown in economic activity in 1996, the fiscal deficit increased to unsustainable levels in

1998 and 1999. In response to the deteriorating fiscal position, in 1999 the authorities

introduced the Strategic Fiscal Consolidation Plan (SFCP). The SFCP has proved to be very

The labour force survey (LFS) methodology gives an unemployment rate of 4.9%; for 2001 no data are yet available

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successful. Subsequently, the consolidated central government deficit fell sharply, particularly

after July 2000, when VAT rates were increased by 2 percentage points. For 2000 as a whole,

the central government consolidated deficit was 2.7% of GDP, down from 4% in 1999, while

the primary surplus (the government budget balance corrected for interest payments) was 2.4%

of GDP. Despite the relatively low deficit, conditions in the domestic financial markets have

necessitated the renewed use of central bank advances to finance the deficit. The government’s

overdraft with the central bank accounted for the full deficit financing. General government gross

debt as a percentage of GDP increased marginally to 63%.

In 2000, the general government deficit according to harmonised EU standards (ESA95)

was 3.2% of GDP.

However, this estimate of the deficit is provisional and it does not include

the significant downward revisions of the data, which the Ministry of Finance has recently

included in the central government consolidated deficit.

Fiscal performance during the first half of 2001 has been slipping somewhat and it is

increasingly unlikely that the government will be able to meet its deficit objective of 2.2%

of GDP.

Although government revenues are enjoying the full impact of the 2% VAT increase,

introduced in July 2000, the revenue increase of 10% in January-May 2001 is far less than in

2000. Simultaneously, expenditures increased by 14.5% effectively doubling the government

deficit, compared to the same period of 2000.

Already in 1980 Cyprus introduced a full three-tier pension system.

All Cypriot workers

make an earnings-related contribution to the pension system. All pensioners are guaranteed a

minimum level of income, while those who made significant contributions to the system receive

higher pension levels. Furthermore, there is extensive private sector provision.

While the pension system is well financed, some adjustments are needed to ensure its

long-term sustainability.

While population demographics will deteriorate, the situation is not as

severe as in other European economies. At present, there are 24 pensioners for every 100

contributors to the pension system. This ratio is unlikely to deteriorate significantly in the next 20

years. However, population projections suggest that over the longer term the ratio of pensioners

to contributors will significantly rise. The authorities are considering a number of initiatives,

including raising the pension age slightly, and linking pensions more directly to the financial

performance of the pension fund.

The health sector reform process is proceeding well.

In April 2001, Parliament passed

enabling legislation, and now Cyprus has entered the implementation phase. The core ideas of

the reform remain unchanged – a) universal and free provision of healthcare, b) a general

practitioner-based referrals system, c) mandatory insurance based financing, and d) greater

emphasis on cost control mechanisms. Nonetheless, the parliamentary approval process

encountered some difficulties. The Legislature has requested the Health Ministry to re-estimate

the costs of the new system.

Over the last two years, the tourism sector has grown very rapidly.

In 2000, almost 2.7

million tourists visited the southern part of the island; an increase of over 10% compared to

1999. Tourism receipts account for 22% of GDP. Cyprus benefited from favourable exchange

rate developments, particularly with respect to the pound sterling.

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Despite increased tourist receipts, the current account worsened substantially.

The current

account deficit has increased from 2.4% of GDP in 1999 to 5.2% of GDP in 2000. Strong

private-sector consumption led to a sharp rise in imports, which led to a deterioration in the

external sector accounts. Exports of goods and services also enjoyed rapid growth, but imports

grew more strongly. In 2000, exports increased by 9%, but imports of goods and services

increased by 12.5%. In 2000, foreign direct investment (FDI) inflows were 1.8% of GDP,

suggesting that the difference with current account deficit was largely financed by debt creating

inflows.

On 1 January 2001, the authorities finally abolished the 9% interest rate ceiling.

Interest

rates on certain high-risk loans have now broken the 9% ceiling. Additional charges, which

were endemic under the old regime, and essentially substituted for higher interest rates, have

now disappeared. Monetary policy has now entered a transitional phase. For the next twelve

months, a central bank policy determined rate – the Lombard rate – will be the base rate for

lending by the commercial banks. However, banks are now free to apply the spreads on their

lending according to their assessment of risk and the credit rating of the client. As part of the

abolition of the interest rate ceiling, the central bank introduced a number of provisions that

would provide temporary protection to vulnerable borrowers such as students and mortgage

holders. Due to the comparatively low level of interest rates, these initiatives have not yet had

any significant financial implications.

Recent strong capital inflows have exposed potential inconsistencies in the overall

macroeconomic policy framework.

The authorities are trying to combine a fixed exchange

rate with an independent monetary policy as the capital account becomes increasingly

liberalised. In January this year, capital account liberalisation took a major step forward. The

Central Bank of Cyprus abolished all restrictions on medium-term and long-term borrowing

with maturities over two years by residents. One practical implication of this change is that both

the banks and private individuals are now allowed to borrow in foreign currency. In an effort to

restrain domestic demand, the Central Bank has maintained a rather tight monetary stance.

However, during the first half of 2001, a sizeable interest rate differential has developed

between euro-denominated loans and domestic loans, and inevitably foreign currency

borrowing has risen. This has exposed clients and therefore banks to increased exchange rate

risks, although the Central Bank has repeatedly warned about this.

In an effort to confront the challenges posed by greater capital mobility, the central bank

has announced that the exchange rate regime will be more flexible.

The central bank at

first was committed to keeping the exchange rate within the +/-2.25% bands in normal times,

with fluctuations of +/-15% permitted in the event of unusual pressures in the exchange rate

market. Yet, during the first half of 2001, there were few convincing signs that the central bank

was prepared to be more flexible. Despite strong inflows, the exchange rate remained close to

its pre-announced central parity. The central bank’s resolve to defend the parity was tested in

June, when capital inflows were particularly strong, and it was forced to neutralise the impact of

these flows. Subsequently, the central bank abolished the narrower margins in August,

concurrent with a decision to lower interest rates to counter the anticipated negative impact of a

global economic slowdown on the Cyprus economy. This also reduced the interest differential

between euro denominated and domestic loans, diminishing pressure to borrow abroad.

If the authorities continue to maintain a relatively fixed exchange rate regime, fiscal

policy will have to become more flexible.

More specifically, the fiscal deficit will have to be

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reduced further, in order to curtail domestic demand and reduce the current account deficit to

more sustainable levels.

With the exception of petrol prices, the vast majority of prices are freely determined.

2000, the Cypriot authorities partially liberalised petrol prices. Previously, the authorities

operated a price stabilisation scheme which capped the price of petrol when world oil prices

increased. This scheme proved to be very costly in 2000 when world oil prices rose sharply.

While the new system links the domestic price more closely to world prices, there remains a

strong element of subsidisation. There are also residual price controls on milk, common bread,

and cement.

In 1999, the private sector produced around 80% of GDP.

During the last 12 months, the

authorities did not privatise any public enterprises. However, in the Pre-accession Economic

Programme, the authorities made a commitment to divesting their remaining equity holdings by

2003 in a number of important enterprises, including Cyprus Airways, Cyprus Forest Industries

Limited, and the Cyprus Oil refinery.

Market entry is relatively straightforward in most sectors and bankruptcy procedures

operate efficiently.

However, there are significant barriers to entry in certain key sectors.

Several semi-government organisations including telecommunications and electricity enjoy

extensive legal monopolies. The authorities are now committed to liberalising these sectors by

2003.

Cyprus has a highly effective legal system, with a well-established body of commercial

law.

Indeed, the relative strength of its legal system is a major contributory factor to the growth

of the offshore sector. Property rights are well established in the southern part of the island,

notwithstanding certain complex political issues arising from the conflict in 1974, and the

subsequent de facto division of the island.

The financial system is highly developed, and it provides an effective intermediation

between savers and investors.

The commercial bank part of the sector is well regulated by the

central bank. In 2000, domestic banks were adequately capitalised. As of the end of 2000, the

average risk adjusted asset ratio of domestic banks was 13.5% (as against 11.7% in 1999).

With the exception of the Cyprus Development Bank, the financial sector is in private

ownership.

The co-operative banking sector plays a very important role in providing financial

services, in particular, to the household sector.

There are about 360 co-operative credit and

savings societies (CCSS), and the sector accounts for around 30% of bank deposits. At

present, the co-operatives enjoy a number of legal advantages – most notably exemptions from

both stamp duties and required reserve ratios – which places them at a competitive advantage

relative to the commercial banks. The Department of Co-operative Development supervises the

co-operative banking sector, while the Co-operative Central Bank, an institution independent of

the Central Bank of Cyprus, manages the overall liquidity operations for the sector.

The banking sector needs be supervised in a consistent manner.

The Department of Co-

operative Development will continue to be the supervisory agency for the co-operative sector.

In an effort to improve its administrative capacity, the department will receive additional

resources, including more staff and training facilities. The largest co-operative banks will be

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given the opportunity to become full credit institutions with an EU "passport". Meanwhile the

central bank will continue to supervise the commercial banking sector. It will be necessary to

ensure that the supervision by different agencies of similar financial institutions, i.e. commercial

banks and the newly transformed co-operative banks, is sufficiently co-ordinated and carried

out in a uniform way.

The domestic securities and equities markets have developed rapidly in recent years.

However, confidence in the domestic equities market was shaken after the 1999 speculative

bubble in domestic share prices and the inevitable painful correction. This experience provided

an important lesson on the importance of capital market regulation. Parliament has recently

passed legislation strengthening the Securities and Exchange Commission (SEC), and increasing

the penalties for companies who do not comply with stock market regulations.

Cyprus has an extensive offshore sector covering a wide range of activities, including re-

exports and financial services.

The strong legal structure, tax incentives, and infrastructure

have contributed to making Cyprus an important regional business centre. Notwithstanding this

achievement, preferential tax arrangements enjoyed by the offshore sector have introduced

distortions in the allocation of resources in the economy. The authorities have announced their

intention to introduce a major tax reform which would eliminate the preferential treatment.

The offshore financial system is the subject of close international scrutiny as a potential

location for money-laundering activities.

In recent years, the authorities have made strenuous

efforts to counter this reputation. In 1996, a comprehensive anti-money laundering law was put

in place. In 1999, the law was further amended to improve customer identification procedures.

The authorities have also developed an information reporting system, which has improved the

detection of suspicious transactions. A recent (July 2001) IMF assessment of the supervision of

the offshore financial sector in Cyprus indicated that supervision was generally effective and

thorough.

The capacity to cope with competitive pressures and market forces within the

union

The ability to fulfil this criterion depends on the existence of market economy and a stable

macroeconomic framework, allowing economic agents to make decisions in a climate of

predictability. It also requires a sufficient amount of human and physical capital, including

infrastructure. State enterprises need to be restructured and all enterprises need to invest to

improve their efficiency. Furthermore, the more access enterprises have to outside finance and

the more successful they are at restructuring and innovating, the greater will be their capacity to

adapt. Overall, an economy will be better able to take on the obligations of membership the

higher the degree of economic integration it achieves with the Union before accession. Both the

volume and the range of products traded with EU Member States provide evidence of this.

Cyprus is a functioning market economy with a sufficient degree of macroeconomic

stability for economic agents to make decisions in a climate of predictability.

These are

essential requirements for confronting the competitive pressures and market forces within the

European Union.

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Cyprus has a strong human capital endowment.

Over the last 12 years, the tertiary

education sector has been strengthened. In 1990, the University of Cyprus was established, and

in subsequent years, its activities and facilities have been expanded. The authorities intend to

establish a second university in the southern part of the island. Several private sector tertiary

institutions have also recently been established. Since the establishment of the university, the

proportion of employed persons who have received tertiary education rose from just under

20% to over 28%.

Throughout the 1990s, employment increased by around 1.5% a year.

However, domestic

labour supply has grown more slowly, and the economy has become increasingly dependent

upon temporary foreign labour. In particular, labour force participation among women is low

compared to the European Union. Labour productivity increased rapidly. Between 1990 and

1999, GDP per employed person grew by over 20%. Most wages are influenced by the annual

cost-of-living adjustment mechanism, which limits the extent to which wage differentials can

adjust in response to market incentives.

A continuation of rapid economic growth would require that Cyprus maintain its recent

impressive rate of employment growth.

In the short term, this can only be achieved by either

increasing labour force participation, particularly amongst women, or becoming increasingly

dependent upon temporary foreign labour. In the summer of 2001, the Cypriot authorities and

the Commission services agreed a Joint Assessment of Employment Priorities. The Assessment

identifies measures that will mobilise additional domestic labour supply and raise skill levels in

the labour force. These measures include a more active role for the public employment service,

completion of reforms in education and training, and measures to improve women's access to

the labour market.

Physical capital, including infrastructure, is well developed.

A comprehensive system of

motorways links all the major cities. The telecommunications system is technologically

advanced, while internet services have grown rapidly in the last five years. The authorities have

launched major projects to upgrade the two international airports at Paphos and Larnaca

through a public-private partnership. Gross fixed capital formation accounts for a moderate

18% of GDP. In the past, capital account restrictions have limited foreign investment flows.

Cyprus has started to provide vital infrastructure investments to expand water supply.

Cyprus is suffering from a long-term decline in rainfall levels. Furthermore, the quantity of water

stored in dams and reservoirs has diminished by around 35%. At the same time, the demand for

water has increased. Until this year, the Cypriot water supply system has been unable to satisfy

household demand, and the authorities have been forced to ration supplies. To tackle the

structural water shortage, two desalination plants have been constructed and a third plant is

planned. At present, the two plants with a potential annual production capacity of 92,000 m³

can produce around 70% of domestic household water demand. When the third plant becomes

fully operational, desalination capacity will be sufficient to meet all domestic household demand.

Rationing to the household sector has now stopped, but the supplies available to the agricultural

sector continue to be subject to rationing. Water-pricing policy needs to be adjusted to more

accurately reflect production costs.

The agricultural sector needs to be restructured extensively.

Although agriculture still makes

a significant contribution to economic activity, its importance has declined both in terms of GDP

and employment. The prospects for future growth are poor. The sector is heavily concentrated

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in irrigation-dependent products, such as citrus fruits and vegetables. Agricultural production

consumes around three-quarters of the water available in the southern part of the island.

Moreover, the sector enjoys high levels of tariff protection and significant water-related

subsidies. Although the sector suffers from periodic rationing of water supply, the prices paid by

the agricultural sector are extremely low. At present, farmers pay between CYP0.08-0.10 per

cubic metre, while domestic residents pay around CYP 0.33. Production costs for desalinated

water are CYP0.50 and CYP 0.18 for “run-off” water.

In the past, Government policy and legislation provided a sheltered environment for the

growth and development of the private sector.

The Cypriot authorities adopted a

protectionist and interventionist approach to industrial policy, which has favoured domestic

producers at the expense of foreign competitors. The government is now committed to the

liberalisation of key sectors of the economy, including the air transport sector, the electricity

sector, telecommunications and postal services.

Cyprus has a strong entrepreneurial culture, demonstrated by the large number of small

and medium sized enterprises.

They are mostly found within the services sector, particularly

within the tourism industry.

Cyprus is a highly open economy.

Trade openness (total exports plus imports as a percentage

of GDP) stood at 97% of GDP in 2000. Moreover, international trade is highly integrated with

the European Union. At present, the EU accounts for 48% of Cypriot exports and 56% of

imports. However, these trade data understate the extent of integration between Cyprus and the

EU. The majority of tourist arrivals come from the EU with around half coming from the United

Kingdom alone. Reflecting its regional location, Cyprus also has intense trade relations with the

countries of Central and Eastern Europe and the Middle East.

Export receipts are heavily concentrated in a small number of sectors.

The economy has

become increasingly dependent upon tourist revenues and financial services, while many

traditional sources of export earnings, particularly within the manufacturing sector, have suffered

from long term decline. The authorities are keenly aware of the problem, and have tried hard to

encourage alternative sources of export earnings. Most recently, the authorities have introduced

an initiative called the New Industrial Policy, which aims to reverse the declining contribution of

the agricultural and manufacturing sectors. This new instrument also provides support for

manufacturing restructuring, increasing FDI in the high-tech sector and improving industrial

research and innovation. However, Cyprus has a powerful comparative or competitive

advantage in the tourism sector and financial services which has tended to overwhelm all

government initiatives designed to diversify the economy.

3.4.

General evaluation

Cyprus is a functioning market economy. It should be able to cope with competitive pressure

and market forces within the Union.

The macroeconomic situation has continued to be robust with high GDP growth, low inflation

and unemployment. The fiscal consolidation plan introduced in 1999 is successfully addressing

See "Making a success of enlargement: Strategy Paper and Report of the European Commission on the progress towards

accession by each of the candidate countries", COM (2001) 700.

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some important structural deficiencies in public finances. Progress has been made in structural

reforms, notably within the financial sector, the environment, and healthcare. Both the financial

sector and the capital account took major steps towards greater liberalisation.

However, the current account deficit increased significantly. The welcome liberalisation of the

financial sector and the capital account pose new challenges to the economy. Cypriot authorities

should ensure a proper and uniform supervision of the financial sector, including the co-

operative banking sector. In cases where prices are regulated, a more market-based approach

should be adopted. Cyprus must continue to prepare its private sector to operate in the single

market environment that integration in the EU implies, by opening key sectors to foreign

competition.

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4. Ability to assume the obligations of membership

Introduction

This section aims to update the Commission’s 2000 Regular Report on Cyprus' ability to

assume the obligations of membership - that is, the legal and institutional framework, known as

the

acquis,

by means of which the Union implements its objectives. Alongside an evaluation of

relevant developments since the 2000 Regular Report, this section seeks to provide an overall

assessment of Cyprus' ability to assume the obligations of membership, and of what remains to

be done. This section is structured to follow the list of twenty-nine negotiating chapters, and

incorporates an assessment of Cyprus' administrative capacity to implement the

acquis

in its

various aspects.

The European Council in Madrid in December 1995 referred to the need to create the

conditions for the gradual, harmonious integration of the candidates, particularly through the

adjustment of their administrative structures. Taking up this theme, in Agenda 2000 the

Commission underlined the importance of effectively incorporating Community legislation into

national legislation, and the even greater importance of implementing it properly in the field, via

the appropriate administrative and judicial structures. This is an essential pre-condition for

creating the mutual trust indispensable for future membership.

The European Council in Santa Maria da Feira and in Gothenburg in June 2000 and June 2001

respectively recalled the vital importance of the applicant countries’ capacity to implement and

enforce the

acquis,

and added that this required important efforts by the applicants in

strengthening and reforming their administrative and judicial structures.

Building on the

assessment of Cyprus' administrative capacity provided in the 2000 Regular Report, the present

Report seeks to add further depth and detail, focusing on the main administrative structures

which are required for implementing the

acquis

in its various aspects.

In the 2000 Regular Report, the Commission concluded that:

“Since the last Regular Report, Cyprus has achieved substantive progress in various areas of the

acquis

and continued with further harmonisation measures. As regards administrative capacity,

it continued with the upgrading of the existing infrastructure, including staff recruitment.

Over the last year, there has been progress in adopting legislation in key areas of the internal

market. Although new legislation has been adopted in some areas of free movement of goods,

further efforts are still needed in respect of standardisation and certification as well as of the

framework for the New Approach Directives. In financial services further progress has been

achieved in the adoption of appropriate national legislation and enhancing administrative

capacity. The steps taken towards liberalisation of capital movements are positive; however,

further efforts are still needed for a timely and orderly removal of remaining restrictions on

capital movements before accession. Moreover, the already quite high degree of alignment on

anti-trust has been further improved by amending legislation on public undertakings and

undertakings with special and exclusive rights in respect of the rules of competition. However,

as regards State aid, the situation remains unsatisfactory, as there still exists no proper State aid

control and no legal basis for it. Cyprus has achieved progress in the field of indirect taxation, as

the standard rate of Value Added Tax (VAT) has been increased from 8% to 10% and

legislation for further alignment with the VAT

acquis

has been adopted.

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During the last year Cyprus has enacted some harmonisation legislation in the field of agriculture,

however, what has been done is mainly preparatory work, therefore harmonisation with the

acquis

in the veterinary and phytosanitary fields continues to be partial. Further efforts are still

needed regarding veterinary controls at border posts.

In the fields of transport and fisheries, Cyprus has undertaken serious efforts to achieve further

alignment with the

acquis

by adopting legislation as well as strengthening its administrative

capacity.

As regards alignment with the environment

acquis,

several laws and orders have been adopted,

but the emphasis lay on preparatory work. Although more attention has been paid to the

allocation of sufficient budgetary and administrative resources to the environmental sector to

ensure the implementation of the

acquis,

given the size of the alignment task in this area, this

sector still remains a high priority.

In the area of justice and home affairs, Cyprus has made progress with the adoption of

legislation on asylum and also with a view to judicial co-operation in criminal and civil matters.

However, attention should be paid to the enforcement of border control, with special regard to

the fact that Cyprus will be an external border of the EU, as well as to efficient implementation

of the existing legislation on money laundering, although in this area considerable efforts have

already been undertaken.

Cyprus has further strengthened its

administrative capacity.

Several institutions have already

gained experience in several areas of the

acquis,

such as for instance the Department of Social

Insurance in the case of the co-ordination of social security. In the fields of regional policy and

financial control the required structures are already to a large extent in place. Various measures

are being taken to further strengthen the capacity to implement the

acquis

and to upgrade the

existing equipment; this applies for example to the area of free movement of goods, company

law, fisheries and justice and home affairs. In some of these sectors, and as regards employment

and social policy, this also involves administrative restructuring and reorganisation. A concrete

example is the efforts undertaken for maritime transport, where in order to improve the safety

record of the Cyprus fleet, the last year has seen the number of ships inspected more than

double and an increase in the world-wide network of inspectors of Cyprus’ ships. Furthermore,

additional staff have been recruited/trained, or this is foreseen in the budget, for areas such as

taxation and combating money laundering.

However, despite the strong basis of its administrative capacity, the country still has to set up

regulatory authorities, and build institutions in the field of free movement of goods, agriculture,

energy, telecommunication and justice and home affairs. Further recruitment of staff in several

areas such as company law, transport, taxation, environment and justice and home affairs is

needed.

During the last year Cyprus has met the short-term priorities of its Accession Partnership with

regard to fisheries and transport. In most other areas the priorities were partially fulfilled.

However, in some areas of the

acquis

such as the State aid sector in the field of competition

and the transposition and enforcement of the environmental

acquis

further harmonisation

measures are needed.

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Cyprus has made progress in addressing the medium-term Accession Partnership priorities, and

has partially fulfilled a number of them, including in such areas as the internal market, energy,

and justice and home affairs.”

4.1.

The chapters of the

acquis

As indicated, the review of Cyprus' ability to assume the obligations of membership that is

below has been structured in accordance with the list of twenty-nine negotiating chapters.

Accordingly, this section opens with an assessment of progress related to the so-called “four

freedoms”, the cornerstones of the internal market, and continues with a systematic review of

progress on each of the chapters, to cover the

acquis

in all its various aspects, including

sectoral policies, economic and fiscal affairs, regional policy, environment, justice and home

affairs, external policies, and financial questions.

Chapter 1: Free movement of goods

During the period covered by this report, Cyprus has made some further progress in the field of

free movement of goods, mainly in the area of sector specific legislation.

In the area of

horizontal and procedural measures,

on the basis of an agreement with the

British Standard Institute of February 2001 over 80 % of all European standards (almost 8,000

EN standards, of which 5, 600 CEN standards and 2, 350 CENELEC standards) have been

adopted as Cypriot standards. However, the Framework Law on the New and Global

Approach principles has not yet been adopted. Nor can any significant progress be reported on

the transposition of the

acquis

relating to the notification procedure, market surveillance and

safety checks at external borders.

As regards

sector specific legislation,

no progress can be reported in areas covered by

New

Approach Directives

because of the lack of framework legislation.

Concerning sectors covered by

Old Approach Directives,

new legislation on foodstuffs was

passed in 2001, including regulations on colouring matters in foodstuffs, sweeteners in

foodstuffs, food hygiene and the official control of foodstuffs (see also chapter 7 –

Agriculture).

On chemicals, legislation aligning with the

acquis

on drug precursors was

adopted in March 2001. Since the last Regular Report progress was made in the

implementation of the acquis on pharmaceuticals, cosmetics, textiles, legal metrology and pre-

packaging. The Law on Medicinal Products for Human Use (Quality, Supply and Pricing

Control) was approved in April 2001, accompanied by five regulations on good manufacturing

practices, on colouring matters, on procedure and content of examinations for wholesalers

licenses and on fees. Similarly, four regulations complement the Law on Veterinary Medicinal

Products (Control of quality, Registration, Supply, Administration and Use) of July 2001. The

Cosmetics Law, adopted at the same date, is accompanied by regulations dealing with methods

of analysis and sampling. In the textile sector, the Trade Description Law and the Textile

Products Regulations were enacted in July 2001. In the area of metrology, further progress has

been made with the alignment with the

acquis

through the adoption of a set of regulations. They

refer to weight and measures, packaged commodities, alcohol-meters and alcohol,

alcoholmetric tables on weights, tyre pressure gauges for motor vehicles, measuring of standard

hectolitre, calibration of tanks of vessels and to gas volume meters.

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There have been no developments regarding the transposition of the

acquis

on firearms and

cultural goods.

As regards the development of Cyprus’ administrative capacity for the implementation of

horizontal and procedural measures and sector specific legislation, improvement can be

recorded. In view of its future responsibility in market surveillance (covered by the New

Approach), the Department of Labour Inspection was further enhanced with the appointment of

a Director and three Senior Labour Inspectors. In the field of foodstuffs, training programmes

for Health Inspectors have been implemented, six additional Health Inspectors have been

approved and several activities have taken place to ensure effective implementation of EC

legislation. The Type Approval Authority for Motor Vehicles is in the process of being

established. Cyprus’ Organisation for Standardisation and Accreditation (CYS) continued to

function well and is an affiliated member of CEN/CENELEC and a full member of ETSI.

On the basis of a ministerial decision of August 2000, a private organisation that will be

responsible for all certification activities is being established. The existing Drugs Council is now

assisted by an Advisory Drugs Price Committee, and a Cosmetics Council is in the process of

being set up. As regards products for veterinary use the competent authorities for

implementation are the Ministry of Agriculture, Natural Resources and Environment and the

State General Laboratory. On information exchange, the Ministry of Commerce, Industry and

Tourism has been designated as the authority responsible, and the Ministry of Interior as well as

the Department of Antiquities are assigned for the implementation of the relevant

acquis

in the

field of firearms and the return of unlawfully removed cultural goods.

Concerning the

non-harmonised sector,

screening of the existing legislation is currently taking

place in order to identify the statutes to be amended through the introduction of mutual

recognition clauses by the end of 2001.

As regards

public procurement,

no legislative or administrative progress can be reported.

Overall assessment

On the whole, the establishment of the general framework for the Old Approach is at an

advanced stage, whereas transposition of the New Approach and alignment in the public

procurement sector are still outstanding.

The Cypriot authorities continue the transposition of directives on industrial products.However,

further serious efforts will be needed to transpose and implement the

acquis

as far as possible

prior to accession.

Concerning horizontal and procedural measures, the government has adopted all currently

existing EN standards. Regarding restructuring in the areas of standardisation, accreditation,

notification procedure and certification, CYS is still in charge of the former three, but the private

organisation for certification activity should be established and become operational soon.

Cyprus is encouraged to finalise the adoption of the framework law on the principles of the

New and Global Approach Directives so that regulations providing for the transposition of the

New Approach Directives for product groups can be issued as well.

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As regards sector specific legislation, the foodstuffs

acquis

has been partially transposed, whilst

in particular the

acquis

concerning labelling and food for particular nutritional uses needs to be

enacted. Administrative capacity has been strengthened, but the efforts would need to be

intensified. In the chemical sector the legal framework on fertilisers and drug precursors is now

largely in line with the

acquis

and the administrative capacity in place, but the legislation on

dangerous substances and detergents remains to be adopted. With regards to the

pharmaceutical sector, new harmonised legislation concerning products for human and

veterinary use has been adopted. For the cosmetics, textiles and legal metrology sectors

transposition of the

acquis

has been completed.

Regarding pre-packaging, the work on alignment with the

acquis

should continue.

With respect to the free movement of goods within the Community, the legislation providing for

a general import licensing system and a compulsory origin marking of imported products is

contrary to Art. 28 EC. Therefore, this legislation should be repealed, as far as Community

products are concerned, before accession. The Ministry of Commerce, Industry and Tourism

will be the administrative entity responsible for the follow-up of the application of Articles 28-30

EC on non-harmonised areas and the implementation of the principle of mutual recognition

whose practical implications must be urgently addressed.

As regards safety checks on products at external borders, Cyprus still needs to establish

appropriate customs and market surveillance infrastructure as well as effective administrative

co-operation between competent authorities.

In the field of public procurement, the Cypriot legislation maintains at present a national

preference clause by imposing a 20% charge over the duty free value of the respective imported

goods and up to 5% on the tender amount of services and works of foreign bidders (under

certain conditions). However, in accordance with a provision already incorporated in the

existing Public Procurement Law, this type of protection will be automatically eliminated upon

accession. In addition, laws extending coverage to local authorities, bodies governed by public

law, utilities sector and concessions, as well as achieving compliance with EC review

procedures, still need to be enacted.

In order to develop administrative capacity, the personnel of the competent Treasury

Department of the Ministry of Finance should be increased.

Chapter 2: Free movement of persons

Since the last Regular Report, progress in this area has been limited.

In the area of

mutual recognition of professional qualifications, citizens' rights,

and

free

movement of workers

, no legislative developments can be reported, although preparatory

work with regard to legal approximation has been undertaken.

Concerning co-ordination of social security systems, in April 2001 the House of

Representatives approved a new law, which provides for the introduction of a new national

health insurance scheme. The Scheme provides for universal coverage and its financing will be

based on contributions from the social partners. It is proposed that the government contribution

shall cover approximately 50 % of the scheme's total budget, and the remaining 50% be shared

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equally between employers and employees. The implementation of the General Health

Insurance Scheme will take place after the approval by the House of Representatives of the

implementing regulations to be issued under the new Law.

Overall assessment

Cyprus has already undertaken a number of measures to abolish existing discrepancies between

its legislation and the

acquis

in this area. Important legislative work, including the adoption of

framework legislation, still remains to be done for the

acquis

to be implemented by the time of

accession.

Concerning the mutual recognition of professional qualifications, a number of professions are

already regulated in Cyprus, but not all. For example, those not requiring a university degree are

not regulated yet. The preparation of the transposition of the General System Directives should

be accelerated. The legislation needs to ensure the distinction between academic and

professional recognition and include simpler procedures for the provision of services. No

provisions contrary to Community law, especially as regards nationality, residence or language

requirements may subsist by accession.

With respect to professional qualifications obtained before harmonisation, Cyprus will need to

introduce measures to ensure that all its professionals can, as from accession, meet the

requirements laid down by the

acquis.

The various professional councils are the competent authorities in their specific spheres of

responsibility. A unit dealing with the recognition of professional qualifications still needs to be

created in the Ministry of Labour.

As regards citizens’ rights, amendments to the existing legislation relating to voting rights will be

required to comply with the

acquis

on municipal elections and elections to the European

Parliament. As existing legislation on student rights is not in line with the principle of equal

treatment, further efforts for alignment will be needed.

With respect to the free movement of workers, preparatory work has taken place, but further

efforts will be required in order to ensure complete alignment by accession.

In the area of co-ordination of social security systems, Cyprus applies bilateral social security

agreements which normally rely on the same principles as the Community rules in this field.

The Department of Social Insurance, which it is intended should be the competent body for

implementation of the EC regulations, has gained experience in co-ordinating social security

schemes through the implementation of bilateral agreements and started to train its staff on EC-

specific issues.

A detailed human resources needs analysis has been carried out by the Ministry of Labour and

Social Insurance regarding the implementation of the

acquis

in the areas of mutual recognition of

professional qualifications, free movement of workers (EURES) and co-ordination of social

security schemes. The conclusions of the analysis should be taken into account when deciding

how to strengthen the public administration in these areas.

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Chapter 3: Freedom to provide services

Since last year’s Regular Report, Cyprus has made good progress regarding financial services

and enhancing administrative capacity.

In the field of

the right of establishment and the freedom to provide services

(other than

financial services) no significant legislative and administrative development took place.

Alignment with the

acquis

in the area of

self-employed commercial agents

was achieved

through the entry into force of the Commercial Agents Law along with the related regulation, in

November 2000.

In the field of

financial services,

with regard to the

banking sector,

a Deposit Guarantee

Scheme for commercial banks became operational in September 2000. Membership of the

scheme is compulsory for all banks. They are required to make contributions in proportion to

their deposit base. Foreign banks, which are members of an equivalent scheme, may be

exempted.

A similar Deposit Guarantee Scheme applies to deposits in Cypriot pounds held by Co-

operative Credit and Savings Societies.

As regards this particular sector, a high-level working group was set up in June 2001 in order to

prepare the measures required to align this sector with the

acquis.

It is worth noting that 6 new

officers were recruited on a temporary basis as from April 2001, to help with the alignment

process as well as with the actual exercise of the functions of the Department in charge of these

institutions. The number of inspections (both onsite and offsite) increased significantly during

2000.

In the

insurance sector

no particular legislative developments have taken place during the

period under review.

The computerisation of the Insurance Companies Control Service (ICCS) of the Ministry of

Finance and an appropriate training of members of staff in using the developed system facilities

has been started in late 2000. New posts have been awarded to the ICCS in June 2001 so that

the additional recruitment of 11 staff members is expected for 2002.

With regard to

investment services and securities markets

a law approved by the House of

Representatives in April 2001 extended the supervisory powers and independence of the

Securities and Stock Exchange Commission so as to ensure greater effectiveness. In parallel,

the Parliament enacted the Undertakings for Collective Investment in Transferable Securities

and other Related Matters Act, with the aiming of transposing the UCITS-Directive into

Cypriot law.

The Securities and Exchange Commission has recruited additional staff to ensure compliance

with the requirements of the securities and stock exchange laws.

Concerning the

protection of personal data and the free movement of such data

as well

as concerning the

Information Society regulations,

no legislative development can be

reported.

Overall assessment

Cyprus’ alignment process is overall satisfactory, although further legislative alignment is still

needed.

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In the field of the right of establishment and freedom to provide services, as from January 2000,

natural or legal persons from EU member states may freely set up companies in Cyprus or

acquire up to 100 % of existing companies. However, the administrative approach to EU

investors seems to be less open minded. There remain a few sectors (tertiary education, public

utilities, radio and television stations, publication of newspapers and magazines) which are

governed by specific restrictive legislation, such as the requirement of Cyprus nationality or

permanent residence.

Concerning

self-employed commercial agents,

as a result of the legislation adopted in 2000,

Cyprus has aligned with the

acquis.

The Central Bank as the regulator of the banking industry has issued rules and is implementing

policies and practices which are similar to the Recommendations of the Basle Committee of

Banking supervision and broadly in line with EC directives. The Banking Law empowers the

Central Bank to exchange information with foreign as well as with national supervisory

authorities. The Law contains extensive enforcement powers and penalties, which include the

power to revoke a licence. The supervisory process includes both on-site examination and off-

site monitoring. Upon accession the authorisation requirement with respect to the “economic

need criterion” which the Central Bank may presently apply should be waived and the exchange

of information with non-banking supervisory authorities and the notion of large exposure should

be streamlined. Due care should also be given to the timely implementation of the agreed

profound restructuring of the Co-operative Credit and Saving Societies sector. Furthermore, it

will be important to make sure that branches of Cypriot banks which may set up in other EU

countries are providing their customers with the same level of deposit guarantee as offered in

Cyprus.

As regards the

insurance sector,

some basic features of the EC supervisory system are

covered by the current legislation. Cyprus should finalise the transposition of the Non-Life and

Life Insurances Directives and complete its reform of the legal bases for insurance supervision; it

should provide adequate staffing for its supervisory bodies. In addition, further alignment is

needed as regards accounting rules.

In the field of

investment services and securities markets,

in order to align Cypriot law with

the

acquis,

there is still a need for certain amendments to the Securities and Stock Exchange

Laws, e.g., to ensure that the Securities and Exchange Commission is able to exchange

information and co-operate with other competent authorities. In particular, Cypriot authorities

are encouraged to immediately transpose the two key Directives in this area: the investment

services and the capital adequacy Directive, both of which are due to be transposed in autumn

2001. Furthermore, harmonisation is needed with regard to investor compensation and

prospectuses.

The Council of the Stock Exchange and the Securities and Exchange Commission (SEC) are

the relevant competent authorities for the implementation and supervision of the Stock Exchange

Laws and Regulations. Given that their powers and human resources have been extended it is

likely that the implementation record will make progress.

The overall standard of supervision in the

financial service sector

in Cyprus appears to be

satisfactory. Cyprus is encouraged to continue the effective implementation of the

acquis

particular as regards the establishment of the necessary administrative and regulatory

infrastructure to ensure an efficient and well-supervised financial sector.

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In the field of the protection of personal data and the free movement of such data, Cyprus

should introduce legislation to be fully in line with the

acquis

and, on the basis of a bill yet to be

adopted in Parliament, establish a fully independent national supervisory authority for data

protection.

In the field of Information Society Services, regulations still need to be introduced on the

provision of information, in the field of technical standards and regulations, on the legal

protection of services, and on conditional access to information society services respectively.

Furthermore, the e-commerce Directive needs to be transposed. The Cyprus Organisation for

Standards and Control of Quality is the competent authority for provision of information on

technical standards.

Chapter 4: Free movement of capital

Since the last Regular Report, Cyprus has continued to make progress through liberalisation

measures in the area of capital movements, and significant measures to combat money

laundering have been taken both on the legislative and administrative level.

In the area of

capital movement,

steady progress was made in liberalisation. Medium and

long-term borrowing in foreign currencies by residents from banks in Cyprus or abroad was

liberalised as from the beginning of 2001, simultaneously with the abolition of blocked accounts.

In December 2000 the Central Bank of Cyprus authorized domestic banks to grant loans and

credits of any size in Cypriot pounds to non-residents to finance their activities in Cyprus.

Previously, loans and credits over 2000 Cypriot pounds (CY£) - approx. €3,500 - per person

were referred to the Central Bank of Cyprus for authorization.

In the second half of 2000 the Central Bank abolished the requirement for prior approval of the

Central Bank for the acquisition of over 5 % of the share capital of Cypriot companies, other

than banks, listed on the Stock Exchange by a natural or legal person from a third country.

However, the Central Bank maintained the ceiling of 49 % on the participation of person from

third countries in the share capital of such companies.

Following a legislative amendment of May 2001, a natural or legal person from an EU member

state can buy shares in a radio or television station up to 25 % (5 % for a person from a third

country, subject to approval by the Council of Ministers). A limit of 49 % was set on the

aggregate participation of persons from EU member states in the share capital of each such

company. Furthermore, the law provides for the complete abolition of restrictions on natural or

legal persons from EU member states regarding radio and television stations with effect from the

date of accession.

In May 2001 the Central Bank of Cyprus issued an order under the Exchange Control Law, by

which restrictions on the export of certificates of title to any securities were lifted. By the same

order, the amount of Cypriot banknotes that may be exported by resident travelers was

increased from € 175 to € 1,750 (CY£ 100 to 1000).

In July 2001, the ceiling on investments abroad by investment companies listed on the Cyprus

stock exchange was raised to € 35 million (CY£ 20m). At the same time the percentage limit on

investments abroad increased from 25% of each company’s investment portfolio to 50% of its

capital and reserves (net worth). Thus public investment companies may invest up to 50% of

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their capital and reserves (net worth) or € 35 million (CY£ 20m) in foreign stock exchanges

depending on which amount is smaller.

Due to a liberalization measure adopted by the Central Bank of Cyprus in July 2001, every

resident family is allowed to freely transfer up to € 175,000 (CY£ 100,000) abroad in order to

acquire a secondary residence outside Cyprus. Previously, investments in real estate abroad

were subject to prior approval of the Central Bank.

Concerning

cross border credit transfers

, on the basis of the amendment to the Banking Law

adopted in June 2000, in November 2000 the Central Bank issued instructions according to

which it can take mandatory instructions including matters covered by the cross-border credit

transfers directive. These instructions took effect in April 2001. A committee has been

established under the auspices of the Central Bank to investigate complaints and take

appropriate action for the settlement of disputes.

As regards

prevention of the use of the financial system for the purpose of money

laundering,

an amendment of November 2000 implements the EU Joint Action of 3 December

1998 on money laundering, the identification, tracing, freezing, seizing and confiscation of

instrumentalities and the proceeds from crime.

In November, 2000 the Central Bank of Cyprus issued a Guidance Note under the Prevention

and Suppression of Money Laundering Activities Law of 1996 by virtue of which banks are

prohibited from accepting cash deposits in foreign currency notes in excess of US$100.000 or

other foreign currency equivalent from any person or group of connected persons without the

prior written approval of the CBC. By virtue of second Guidance Note issued in July 2001

banks must not accept cash deposits in foreign currency notes without the CBC’s prior

approval even for amounts below the threshold limit of US$100.000 if the aggregate amount of

cash deposits effected by the same customer or group of connected customers will exceed

US$100.000 in a calendar year. According to a third Guidance Note of 17 September 2001,

banks have to apply a stricter identification procedure for corporate customers, trusts and

nominees of third parties. Hence, banks are no longer allowed to open accounts without directly

establishing the identity of the beneficial owners of the company, or the private parties involved,

namely the trustee(s), settlor(s) and beneficiaries.

A decision of the Council of Ministers of March 2001 designates the supervisory authorities for

lawyers and accountants. There is now a realisation that MOKAS, the unit in charge of

combating money laundering, needs to work with these professionals to ensure that action is

taken preventively against money laundering. Also last year, MOKAS members participated in

numerous seminars organized by Interpol and the Egmont Group (International Group of

Financial Intelligence).

Overall assessment

Cyprus is steadily liberalising the movement of capital. It has already implemented a number of

liberalisation measures,

inter alia,

in the fields of direct investment, personal capital movements

and portfolio transactions.

However, the efforts in aligning with the

acquis

in the field of capital movements must continue

to ensure a proper functioning of the markets from the date of accession. A timely and orderly

removal of remaining restrictions for capital movements is essential to avoid the risk of sudden

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disruptions in the financial markets upon accession. This point refers to, portfolio transactions,

financial credits and the opening of deposits abroad. The abolition of the statutory limit in

interest rates and their determination as of January 2001 by the Central Bank should facilitate

the process of liberalisation.

Concerning cross border credit transfer Cypriot legislation has been aligned with the relevant

Directive through the amendments to the banking law of June 2000 and the instructions of the

Central Bank of November 2000 thereunder. The mechanism to settle disputes foreseen in Art.

10 of the Directive has also been established.

The legislation to prevent the use of the financial system for the purpose of money laundering

appears to be in line with the

acquis.

With the amendment of November 2000, Cyprus

abandoned the “list approach”. Assets can now be searched for, seized and confiscated if they

are proceedings from a crime which carries potential sentence of a year or more. This widens

the scope of application of the law by accepting a larger definition of the predicate offences.

Cyprus has further tightened its implementing measures relating to the identification of account

holders and reporting of transactions in accordance with the recommendations of various

international fora. In general, it should continue to follow the broad range of the

recommendations of the Financial Action Task Force.

The number of measures taken by MOKAS has increased steadily since it started to operate in

January 1997. 462 cases have been reported to MOKAS up to April 2001, both from

domestic and foreign sources. It has obtained 43 freezing orders and 273 court disclosure

orders. There were five convictions between July 1998 and January 2001 while four cases are

pending before the courts. MOKAS supports international co-operation in this area of

combating criminal activities. To this end, it gives priority to requests for legal assistance

submitted by foreign authorities. Out of the above 462 cases dealt with by the unit, 95 cases

represent requests for legal assistance by foreign authorities through formal rogatory letters, 128

cases represent requests for information by foreign Financial Intelligence Units and 10 cases

represent requests for information by drug liaison officers posted in Cyprus.

Chapter 5: Company law

Since last year’s regular report, Cyprus has made further progress in the areas of company law

and the protection of intellectual and industrial property rights.

Regarding

company law

as such, the First Company Law Directive on registration of

companies was aligned through an amendment to the Cyprus Companies Law that entered into

force in November 2000. Another amendment, that came into force in October 2001,

incorporates provisions of the Second Council Directive on the restriction of the acquisition of

own shares by a public limited company.

As regards the Eighth Company Law Directive on the approval of persons responsible for

carrying out the statutory audits of

accounting

documents, the Cyprus Companies (Amending)

Law of 2001 came into force as from May 2001.

The Company Law Regulations were amended by Parliament in December 2000 to enable the

introduction of new legal forms.

Concerning

administrative capacity,

the Department of the Registrar of Companies and

Official Receiver started to transfer company data from the files to a newly established

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computerised system. The Company Section of the Department has been strengthened with 10

temporary clerical staff as from August 2000. In addition, four persons have been added to the

permanent technical staff, as examiners on companies.

In the field of

industrial and intellectual property rights

an amendment to the Trademarks

Law, aiming to comply with the First Council Directive on trademarks, entered into force in

December 2000. The definitions of a trademark and the exclusive rights of the proprietor of the

trademark have been brought into line with the

acquis.

An amendment to the Patent Law and implementing regulations entered into force in November

2000, concerning the creation of a supplementary protection certificate for plant products

similar to the one provided for in the relevant Council Regulation.

To enhance

administrative capacity,

in September 2000 the Department of the Registrar of

Companies and Official Receiver launched a two-year co-operation programme for the

computerisation of the Patent Registry with the assistance of the European Patent Office.

Adequate funding has been included in the 2001 Budget and eight permanent specialised

officers had been added to the staff by March 2001.

As regards the

Regulation replacing the Brussels convention

on jurisdiction and

enforcement of judgements in civil and commercial matters and the

Rome convention

on the

law applicable to contractual obligations, preparatory work for swift implementation has started.

Overall assessment

Cyprus has already to a large extent achieved alignment with the

acquis

in the area of company

law, and transposition in the field of industrial and intellectual property rights is continuing at a

steady pace.

As regards Cypriot company law, even though many of the EC directives in this field are

already incorporated in the national law of Cyprus, some divergences still remain. Although

some preparatory work has started, the Second Directive on co-ordinating safeguards, the

Third Directive on mergers, the Sixth Directive concerning the division of public limited liability

companies, as well as the Eleventh Directive concerning disclosure requirements still need to be

fully aligned.

Cypriot legislation is already to a large extent in line with the

acquis

on accounting law.

Concerning administrative capacity, the computerisation of the Office needs to be finalised, and

training as well as further additional staffing need proper attention.

In the field of industrial and intellectual property rights (IPR), Cyprus’ trademark and patent law

is now far advanced. Only the implementation of the Directive on legal protection of

biotechnological inventions and the Designs Directive is outstanding. Some additional

adjustments of trade mark legislation will be necessary upon accession. It is imperative not to

postpone the implementation of the copyright

acquis

any longer. Substantial legislative changes

are necessary to align it with the Directives on legal protection of design and databases as well

as on certain aspects of Copyright and Neighbouring Rights in the Information Society and the

Resale Directive.

Further efforts are required to strengthen law enforcement capacity especially as regards border

controls and combating piracy and counterfeiting. Particular attention should be given to the

effectiveness of the administrative and judicial bodies involved in enforcement, such as the

customs services, the police and the judiciary, in particular by improving co-ordination among

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them. Targeted training necessary both for copyright officials and for enforcement officials,

including judges and prosecutors, should continue. Concerning the Regulation replacing the

Brussels convention on jurisdiction and enforcement of judgements in civil and commercial

matters and the Rome convention on the law applicable to contractual obligations, the

government is in close contact with the judiciary for the designation of the relevant courts which

will have to deal with applications and appeals. Cyprus seems to be in the position to apply this

part of the

acquis

effectively upon accession (see also

Chapter 24 - Co-operation in the

fields of justice and home affairs).

Chapter 6: Competition policy

During the period covered by this regular report, Cyprus has made some progress both in the

field of anti-trust and in the state aid sector.

In the field of

anti-trust

policy the Council of Ministers adopted block exemptions on vertical

agreements and concerted practices in December 2000.

In November 2000, an amendment to the Protection of Competition Law entered into force. It

strengthened the investigative and sanction powers of the Commission for the Protection of

Competition (CPC). According to the new law, the President will be a full-time post, whereas

the five CPC-members (appointed at the end of 2000) will have full-time occupations outside

their position with the Commission. The CPC’s enforcement record for 2000 consists of 19

decisions (2 on horizontal agreements, 7 on abuse cases and 10 on mergers). In March 2001,

Parliament approved new staff for the CPC.

state aid,

the new Public Aid Control law entered into force in April 2001 and was slightly

amended in July 2001. It incorporates into Cypriot law rules equivalent to those of Article 87

EC. Authorities that grant public aid must notify the Commissioner of all existing public aid

schemes and ad hoc measures, within six months. However, the law currently excludes control

over the most important State aid scheme in Cyprus, i.e. fiscal aid to international business

enterprises. In April 2001, Parliament adopted three important regulations covering public aid

to small and medium-sized enterprises, research and development, and professional training.

Further regulations and orders of July 2001 concern procedural issues as well as substantial

rules on aid for rescuing and restructuring firms in difficulty, aid for environmental protection

purposes, and aid in the form of guarantees.

A Commissioner for Public Aid was appointed in May 2001. Three qualified officials and two

support staff are attached to his office. A temporary Working Group for State aid headed by

the Commissioner has been set up in the Ministry of Finance. It prepared an initial list of existing

aid measures. Up to the end of September 2001, the Commissionar issued eleven decisions,

five of which were already published in the official Gazette. Training for Cypriot officials in the

various aspects of the

acquis

concerning state aid is ongoing since April 2001.

Overall assessment

Overall, Cyprus has seriously started to align with the

acquis

on competition policy, but further

legislative and administrative efforts are still needed.

Although Cyprus has already achieved good alignment with the EC’s anti-trust legislation

through its Protection of Competition Law of 1989 as amended, further alignment is still

necessary. In particular, the Community’s new policy on horizontal co-operation agreements

(block exemption regulations of November 2000 on specialisation agreements and research

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and development agreements) needs to be taken into account. The infrastructure, staff, and

especially the weak enforcement record of the CPC need to be improved considerably.

Presently, the CPC relies on 4 investigators and 3 support staff. The objective is to reach 20

employees in a year’s time. Due to current lack of qualified staff, the CPC is not yet in a

position to conduct investigations on its own initiative. The CPC should become more pro-

active and adopt a more deterrent sanctioning policy.

Cyprus has moved forward in state aid, but several thorny issues remain. This includes the

necessity to align the existing aid schemes and legislation under which authorities at various

levels grant aid well before accession with the

acquis.

The specific tax privileges for the

offshore sector should be addressed as a matter of priority in the coming tax package reform

that must pave the way for the enforcement of state aid rules.

The powers of the newly appointed Commissioner for Public Aid appear to be weak. In the

case of illegal aid and of irregularities in the implementation of aid authorised by the

Commissioner, the powers of the Commissioner are limited to submitting a report to the

President of the Republic and publishing a summary of that report. The Commissioner does not

have the power to order the recovery of aid. Staff reinforcement is necessary.

Cyprus is encouraged to accelerate its efforts with a view to drawing up a regional aid map that

would fix the maximum aid intensities in the areas eligible to receive regional aid.

Chapter 7: Agriculture

In 2000, the contribution of agriculture was 3.8% of gross value added and 9.2% of

employment, compared with 4.2% and 9.5% respectively the previous year. The output of the

agricultural sector declined by 4.9% in real terms in 2000 following an increase of 7.5% in

1999.

The 2001 State agricultural budget was € 119.875 million (68.5 million Cyprus pounds)

compared with € 80.5 million (46 million Cyprus Pounds) the year before and included various

types of direct and indirect subsidies for farmers.

EC imports of agricultural products from Cyprus (raw plus industrial products of agricultural

origin) exhibited a marginal decline in 2000 and amounted to €96.6 million compared to €108.5

million in 1999, whereas EC exports to Cyprus showed a substantial increase, from €260.8

million in 1999 to €330.5 million in 2000

. The resulting trade surplus for the Community

increased from €152.3 million in 1999 to €233.9 million in 2000. Over the past three years, the

most important product groups in terms of EC imports from Cyprus have been new potatoes

(37%) and fruit and nuts (33%). EC exports to Cyprus are spread over a wider range of

products, the most important of which are barley (8%) and sugar (7%).

Horizontal issues

No progress can be reported as regards the implementation of measures related to the

European Agricultural Guidance and Guarantee Fund (EAGGF)

and as concerns

quality

policy.

Uruguay Round definition of agricultural products, figures taken from EUROSTAT COMEXT (see U.E. 12/15:

Commerce des Produits Agricoles 1988-2000, 1 Partie D.G. AGRI/A.2 Analyses quantitatives, prévisions, statistiques,

études, 2001, p. 10-57 et 86-89).

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Concerning an

integrated administration and control system

(IACS), the Department of

Agriculture has undertaken preparatory work aimed at identifying the user requirements and

technical specifications for a state-of-the-art IACS software.

Common market organisations

Progress has been achieved in the sector of fruit and vegetables and in the sector of poultry and

eggs.

New harmonised legislation on the quality and marketing standards for 33

fresh fruit and

vegetables

for exports was enacted by House of Representatives in November 2000. New

legislation on the “Production, Grading, Labelling and Marketing Standards” of eggs entered

into force in August 2001.

The Department of Agriculture developed a software programme to project chick adequacy

over the following five-month period. Since January 2001, monthly data on chick production

has been forwarded to EUROSTAT. An interim in-house computer application has been

developed to set up registers of eligible farmers and training of staff has been carried out.

In August 2001, the Department of Agriculture started the recruitment of 21 additional

permanent officers.

Rural development and forestry

The Department of Agriculture is continuing to align its procedures for authorisation, internal

audit and execution of payments with those of the

acquis.

The project for the support of young

farmers has been harmonised further and reinforced.

Veterinary and phytosanitary issues, including food safety

The veterinary medicinal products Law (control of quality, registration, supply, administration

and use), accompanied by four Regulations, was enacted in July 2001. In the field of animal

nutrition, in March 2001 the House of Representatives approved an amendment to the basic

Feeding-stuffs Law of 1993 and the necessary implementing regulations concerning the

registration and approval of establishments and intermediaries.

The animal identification and registration system has been set up and bovine animals already

identified and registered in the data bank. Five new veterinarians have been recruited and nine

additional posts have been approved. Temporary technical staff has also been employed for the

application of animal identification and registration as well as for disease campaigns, lab tests

and BSE surveillance. As regards establishments, Cyprus continued to give financial incentives

to upgrade to EC standards. The number of slaughterhouses has already been reduced from 69

to 50.

In the context of the Geographical BSE Risk Assessment, Cyprus has been classified in group

III.

The Pesticides Authorisation Board decided that only those active substances that are already

authorised in at least one Member State will be authorised in Cyprus from now on, and that

those substances that are withdrawn in the EU as a result of the Community review will also be

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prohibited in Cyprus. The construction of a border inspection post at Larnaca airport has

started and progress has been made on the development of the border inspection post at

Limassol port. A decision to merge the different departments involved in phytosanitary

inspections has been taken.

In April 2001 Cyprus produced a Food Safety Strategy, which outlines the systems for co-

ordination between the various official bodies involved, their competencies, organisation and

staffing (see

also Chapter 1 – free movement of goods).

Overall assessment

Although Cyprus’ ongoing preparations for the Common Agricultural Policy are satisfactory,

substantial elements and mechanisms of the agricultural

acquis

remain to be applied, in

particular those related to the Common Market Organisations.

Concerning

horizontal issues,

with regard to the

European Agricultural Guidance and

Guarantee Fund

(EAGGF), Cyprus has substantial experience in support, restructuring and

development measures, but the competencies are spread between the ministry of agriculture and

various other bodies.

Concerning budgetary and financial aspects, agricultural policy is conceived and implemented

within the framework of multi-annual Strategic Development Plans. Some administrative and

financial adjustments are required for full harmonisation with the procedures prescribed by the

acquis.

The procedure for the establishment of the IACS has been accelerated but some important

steps have still to be taken with a view to implementation. The introduction of a direct payment

system for cereals that was due in 2001 has been delayed. The application is envisaged to be

based on the cadaster with the government controlling 100% of the plots declared by farmers.

The implementation of this system would create an opportunity to identify the eligible land on the

one hand (in view of creating the land parcel identification system) and on the other hand to

allow farmers and the administration to gain experience with a direct payment scheme. Cyprus

is encouraged to make progress in this regard.

Legislation in the field of

quality policy

relating to designations still needs to be adopted.

Harmonising legislation on the certification of geographical indications, of designations of origin

and of other specific character is still under legal vetting. The competent authority for

geographical indications, designations of origin and certificates of specific character as a special

unit within the Office of the Official Receiver and Registrar of Companies needs to be

appointed; the core already exists. A body of inspectors needs to be established too.

Though a register of all organic farmers has already been completed, Cyprus is encouraged to

finish harmonising legislation on organic farming.

As regards

Common market organisations,

several areas in the field of arable crops need to

be brought into line with the

acquis.

The envisaged system of direct hectare payments for

cereals

still requires adoption by the Council of Ministers. Though preparatory works have

started, the procedure for the abolition of the monopoly of the Cyprus Grain Commission needs

to be accelerated. Moreover, the reorganisation of the existing administrative infrastructure, in

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order to create an intervention agency and intervention centres as well as management of export

and import licenses and tenders for cereal export, has not taken place yet.

With regards to

fresh fruit and vegetables,

the enactment of the new legislation on the quality

and marketing standards for 33 products intended for export is noted with satisfaction. As

agricultural holdings are, in general, small and divided into many parcels and as Cyprus has no

tradition as regards producers’ organisations in this sector, it is invited to adopt new legislation

for the setting up, recognition and operation of producer organisations without delay.

With regard to

bovine and pig meat

new legislation introducing a system of compulsory

carcass classification and regulating certain aspects of price collection and reporting was

completed early in 2001, and legal vetting is underway. In the

sheep and goat sector

most of

the elements of the

acquis

are already applied. With regard to

eggs and poultry,

new

legislation on production, grading, labelling and marketing standards has entered into force for

edible eggs and it is expected to enter into force in October 2001 for poultry meat.

Concerning the

wine

industry, legislation is already partially harmonised and many implementing

regulations are before the House of Representatives or under legal vetting. However further

alignment with the

acquis

is needed, mainly as regards the rules of wine growing potential,

market rules for wine and the protection of wine designations. In addition, the monopoly status

of the Cyprus Vine Products Commission needs to be reformed. In connection with the

abolition of the Cyprus

Olive Products

Marketing Board, the preparation of the olive oil

registry is almost completed and verification as well as application of GIS for olive trees will

follow. No progress was recorded in the direction of the abolition of the monopoly status of the

Cyprus

Milk Industry

Organisation (CMIO), although the option of maintaining the CMIO as a

semi-independent organisation with certain functions delegated to it by the Paying Agency will

be examined.

In terms of administrative capacity to implement the

acquis,

Cyprus has a good basis but the

state monopolies managing the various markets hamper the necessary restructuring of the

existing infrastructure. The process of abolishing these monopolies should therefore be

accelerated.

As regards

Rural development and forestry,

Cyprus already has some experience in these

areas, including agri-environmental measures. However, the control bodies necessary for the

environmental scheme will have to be put in place. Furthermore, a code of good agricultural

practice needs to be established.

As regards rural development, the Department of Agriculture is gradually aligning its procedure

for authorisation, internal audit and execution of payments with thatof the

acquis.

The

administrative capacity for the implementation of the rural development

acquis

needs to be

further enhanced.

Concerning

veterinary and phytosanitary legislation including food safety,

with regard to

veterinary

issues, transposition of the

acquis

is partial, given that six framework bills aimed at

covering all Community Veterinary Legislation (namely in the areas of importation and trade,

animal health, hygiene of foods of animal origin, animal welfare, veterinary pharmaceutical

products and animal genetic material) need still to be enacted. Cyprus will have to take the

necessary measures to ensure that the procedure does not create a bottleneck for the

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transposition process. Furthermore, the directive on fees for veterinary inspections has not been

transposed yet.

The setting-up of an animal identification and registration system should be completed. In the

field of animal disease control measures, Cyprus laboratories are capable of carrying out

diagnosis for many notifiable diseases. Contingency plans, such as for foot and mouth disease

and classical swine fever are considered to be satisfactory. On animal nutrition, the legislative

package of March 2001 is harmonised to the

acquis

as it stood by the end of 2000 for

enforcement in October 2001. There remains a need of upgrading food processing

establishments.

As for

phytosanitary issues,

the border inspection posts will,

inter alia,

have to be equipped

with laboratory facilities for initial on-the-spot examination of imported produce. The relevant

surveillance of domestic production and the control of imports of

food

(both of plant and animal

origin) are carried out mostly by the Veterinary Service and the Ministry of Health, although the

State General Laboratory is also involved in carrying out laboratory examinations on food.

Strengthening of personnel numbers and the diagnostic capability of the Laboratories of the

Veterinary Services will be required. A computerised system will also be needed for recording

movement of animals and products in the internal market. Inspection and Certification of organic

produce is currently undertaken by inspection bodies, approved for this purpose in Member

States of the EU, since there is no relevant legislation yet in Cyprus.

As regards administrative capacity, Cyprus has a good basis but the process of abolishing the

state monopolies in this area must be accelerated in order to clear the way for the restructuring

of the existing infrastructure. Cyprus should also take the necessary measures to implement

IACS. Moreover, Cyprus still needs to make significant efforts to prepare for the

implementation of the CAP mechanisms. While for eggs and poultry there is new legislation

since August 2001, together with marketing standards for fruit and vegetables, for a number of

sectors, the drafting of new legislation seems to be slow.

Chapter 8: Fisheries

Since the last Regular Report, Cyprus has made further progress, notably in the field of

resource management, inspection and control, as well as that of State aid to the fisheries sector,

while the administrative capacity has been strengthened.

Concerning

resource management, inspection and control,

Cyprus decided to implement its

own satellite monitoring system to control vessels longer than 24 meters fishing in the high seas.

For this purpose, an amount of approx. €190 000 (120 000 Cypriot pounds) has been

earmarked in this year’s budget. The recruitment of one officer and two technicians was

approved, and the tendering process was initiated.

The Inspectorate Service of the Department of Fisheries and Marine Research has been

strengthened since the last report, with the appointment of three new inspectors, increasing the

manpower of this service from 11 to 14. The service has also scheduled a multi-purpose patrol

vessel for acquisition.

As far as

structural actions

are concerned, Cyprus continued to pursue its policy for the

reduction of the number of fishing vessels under its flag that operate in the high seas and to set

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up a Fishing Vessels Register. The relevant software and hardware were acquired and installed

early this year. A first data transmission test was sent to the Commission services in August

2001.

In the field of

market policy,

no concrete legislative developments can be reported.

Regarding

state aid,

the subsidy scheme for Cypriot trawlers fishing in international waters was

abolished in January 2001.

Cyprus did not conclude any

international fisheries agreements

during the period covered

by this report.

Overall assessment

Cyprus' alignment with the

acquis

in this area is quite advanced. However, progress is still

needed with market policy, as well as with regard to the current and planned structure of the

fishing fleet under the Cypriot flag.

Concerning market policy, the Common Market Organisation for fisheries is of limited

importance for Cyprus, since it does not engage in fishing or importing of the main species

covered by CMO. As there is no wholesale market and representative wholesale price,

Cyprus will have to submit an equivalent representative wholesale price for imports of fish and

fish products. However, a relevant system for recording landing prices of imported products

already exists.

The four inspectors from the four District Offices, under the supervision of the central

administration in charge of the market, ensure

inter alia

the checking of landings and the

collection of prices. They carry out one to two control visits per week at each site.

Cyprus will have to enforce the common market standards and implement the recognition

conditions for producer organisations. Cyprus is encouraged to finalise the adoption of a new

Law on the responsible authority for the recognition of these organisations.

Concerning resources, management, inspection and control, with the operation of the fishing

licence system, Cyprus will be in a better position to assess the situation and review its policy on

this matter. Administrative capacity in this field is in place in the Department of Fisheries and

Marine Research, but equipment still needs to be improved.

As regards international fisheries agreements, Cyprus has initiated the procedure for ratifying

specific UN and FAO agreements. Cyprus co-operates with the relevant International and

Regional Fisheries Organisations for the sustainable exploitation of fishing resources. It is a

signatory to the General Fisheries Commission for the Mediterranean Agreement.

Concerning structural measures, Cyprus’ policy of reducing the number of fishing vessels under

its flag that operate in distant waters should continue at a steady pace. The effectiveness of the

means introduced so far, including penalties for infringement, will have to be reviewed after a

year. The establishment of a Fishing Vessel Register in line with the requirements of the

acquis

is being pursued. The legal framework was adopted in June 2000 and implementing regulations

are under preparation.

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Information and guarantees on measures envisaged to implement structural policy and to

manage structural funds is lacking.

Concerning state aid, Cyprus has now aligned with the

acquis

by giving up the subsidy scheme

for trawling in international waters.

The measures taken to prepare a national action plan for the development of aquaculture are

positive steps.

Chapter 9: Transport policy

Since the last Regular Report Cyprus has made significant progress in nearly all sectors of

transport policy.

As regards

Trans-European Transport Networks,

no legislative development can be

reported.

As regards

land transport,

the House of Representatives adopted an amendment to the road

law in July 2001 in order to achieve compliance with the

acquis

on market access and on

combined transport. The amendments also foresee alignment for admission to the profession of

road haulage operator and road passenger transport operator as from 2003.

The law to achieve gradual compliance on road user charges for heavy goods vehicles was

enacted in March 2001. It will enter into force in 2003.

Concerning safety issues, a regulation concerning speed limitation devices took effect for all

newly registered vehicles as from January 2001 and will enter into force in January 2002 for

existing vehicles. A second regulation on maximum dimensions and weights and a third

regulation on roadworthiness tests for motor vehicles and trailers came into force in March

2001. The House of Representatives adopted in June 2001 a new Law on driving licenses that

will enter into force by 2003. Another amendment to the road law of July 2001 is aimed at

aligning with the

acquis

on the use of safety belts.

The Department of Road Transport in the Ministry of Communications and Works has created

a new unit with a number of new posts to deal with market access and other issues of the

acquis.

Roadworthiness tests on public vehicles are carried out by the Department itself

whereas private vehicles will be checked by the private sector under the direct supervision of

the Department.

In the field of

air transport

Cyprus has shown a clear willingness to accelerate harmonisation

with the

acquis,

notably through its efforts to participate in the ongoing negotiations of the

European Common Aviation Area agreement. Some regulations adopting the Eurocontrol

standards for air traffic management equipment and systems entered into force in February

2001. In May 2001, the action plan on ‘Development of Safety Oversight Capabilities’ was

launched. It covers the provision of consultancy services and technical assistance for the

introduction of regulations, procedures and manuals, as well as on-the-job training of personnel,

with a view to achieving alignment for aircraft maintenance standards and flight operations

inspections.

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To harmonise access to the groundhandling market, the accounts for the ground handling

sections have been separated from those for other activities of the Department of Civil Aviation

at Community airports since May 2001.

Concerning administrative capacity, the recruitment of five new professional staff for the

Department of Civil Aviation and of one accountant was approved in the Supplementary

Budget Law of March 2001.

In the field of

maritime transport,

two Ratification Laws were enacted in April 2001. They

incorporate amendments to the SOLAS and MARPOL conventions respectively, so as to align

with the relevant

acquis.

Furthermore, two Merchant Shipping Laws were adopted on that

date, aimed at aligning with the

acquis

on port State control and on common rules and

standards for ship inspection and survey organisations respectively.

To align practice as regards the transfer of ships from one register to another within the

Community, the Council of Ministers adopted, in October 2000, the IMO Bulk Chemical Code

and the IMO Bulk Gas Carrier Code.

Over the last year, Cyprus carried out over 40 inspections on over-age bulk carriers and

deleted 18 of them from the Cyprus Register of Ships, as the owners were not willing to submit

their ships to close scrutiny. A programme to study the “long distance strength” of 40 over-age

bulk carriers was initiated at the beginning of the year; 10 individual studies are being prepared

at the moment. In January and May 2001, two ships were deleted from the Cyprus Register of

Ships on account of repeated detentions by foreign port State control authorities for serious

deficiencies relating to the safety of the ship. Lastly, since the beginning of 2001, a classification

society is no longer allowed to issue a passenger ship safety certificate unless an inspection of

the ship is conducted by surveyors and any deficiencies and non-conformities found are

satisfactorily dealt with.

With regard to the effective implementation of the International Safety Management (ISM)

Code, Cyprus has recently punished shipping companies that fail to pay their crews, by

withdrawing their safety management documents. Between July 2000 and May 2001, Cypriot

authorities revoked the Documents of Compliance required by the ISM Code of 6 companies,

managing 15 Cyprus flag vessels in total. The certification of 11 of these vessels has been

restored after thorough joint verification of their Safety Management System by official

surveyors and the respective classification societies involved and rectification of the non-

conformities found.

According to year 2000 statistics under the Paris Memorandum of Understanding, the

percentage of Cyprus flag vessels detained following port State control was 9.71 %, a decrease

compared to 9.97% in 1999. This compares to an average for EU-flagged vessels of 3.9% in

2000.

The process of full computerisation of the Department of Maritime Safety (DMS) has started.

Training on the

acquis

on maritime safety took place in September 2000. The Parliament

approved the recruitment of 25 more staff for DMS in March 2001. From July 2000 until May

2001, 14 additional ship inspectors working in several ports world-wide have been appointed

to monitor and to verify that the applicable safety standards are indeed implemented on Cyprus

ships.

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Overall assessment

Cyprus is well advanced in its harmonisation of the basic legislative and administrative

framework with the

acquis,

but further efforts are still to be made.

Regarding horizontal issues, the overall responsibility for administering the Community guidelines

in the field of Trans-European Transport Networks lies with the Ministry of Communications

and Works; the Planning Bureau will be responsible for the financial aspects.

Regarding land transport, alignment has been achieved in the harmonisation of road-transport-

related fiscal measures, admission to occupation, technical requirement for vehicles, collection

of road transport statistics, co-operation between authorities and the road transport industry,

maximum dimensions and weights, and speed limitation devices. Legislation still to be passed

concerns recording equipment (tachographs), safety belts and minimum levels of driver training.

Cyprus should also continue its efforts to transpose the

acquis

on transport of dangerous

goods, and reinforce the relevant administrative capacity. The main responsibility for

administering and enforcing the land transport

acquis

lies with the Ministry of Communications

and Works.

The preparatory work to adopt a new law on air transport should continue to align the

outstanding discrepancies with the

acquis

in this sector. Cyprus has made a clear move towards

accelerating harmonisation, as shown by its willingness to join the European Common Aviation

area project. Measures should be taken to ensure that licensing and safety oversight capacities

are improved over the next months. The Department of Civil Aviation of the Ministry of

Communication and Works is the competent authority. Its staff has been considerably

strengthened recently. However, Cyprus is encouraged to set up an independent investigatory

body for accidents and incidents as well.

Concerning maritime transport, Cyprus has aligned its legislation to a considerable extent.

However, further transposition is needed with regard to the

acquis

on safety regimes for fishing

vessels of at least 24 metres in length and for passenger ships. Furthermore, despite

administrative practice to that effect, the

acquis

on mandatory surveys for the safe operation of

regular ro-ro ferry and high-speed passenger craft services and on the registration of persons

sailing on board of passenger ships operating to or from Community ports has still to be

transposed.

Cyprus has improved its performance on safety controls. In line with the new law, Cyprus

should monitor the performance of the classification societies acting on behalf of the Cyprus

government. In this regard it is a promising sign that no transfer to other classification societies

has been allowed since June 2000. There have been steady decreases in detention rates and in

marine accidents (from 128 in 1997 to 72 in 2000). Stricter standards are being imposed on the

registration of over-aged ships and a more severe policy is being applied to sub-standard ships.

However, Cyprus’ detention rates as result of state Port controls remain considerably above the

average for EU-flagged vessels. The improvement of the safety record of the Cypriot fleet

should continue through,

inter alia,

the appointment of additional inspectors working in ports

abroad.

The improvement of the administrative capacity of the Department of Merchant Shipping is a

step in the right direction and should be continued. The Ministry of Communications and

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Works, the Department of Merchant Shipping, and, as regards the operation of ports, the

Cyprus Ports Authority are the competent authorities in this area.

Chapter 10: Taxation

Since the last regular report, Cyprus has achieved limited progress in the area of taxation.

Concerning

indirect taxation,

in April 2001 Cyprus adopted an amendment to the Customs

and Excise Duties Law according to which imports of small consignments of goods of a non-

commercial character from third countries are exempted from taxes. By the same amendment,

portable containers of fuel were exempted from the turnover tax and the excise duty on imports

in international travel. Furthermore, the definition of tobacco products was aligned with the

acquis

by a Law adopted in May 2001.

No legislative progress can be reported in the field of

direct taxation

and

administrative co-

operation and mutual assistance.

As regards

administrative capacity,

the computerisation of the relevant services of the

Ministry of Finance continued. The Value Added Tax (VAT) service has elaborated a detailed

“business strategy” defining its priority activities over the next 3 years. In March 2001, the

Parliament approved the recruitment of 48 new VAT officers, mainly in the field of VAT

control.

Overall assessment

Overall, Cyprus has started to align its taxation legislation with the

acquis,

but substantial further

efforts will be required.

While recognising the efforts that have been made in the past and the initiatives taken to further

align the tax legislation of Cyprus, by way of the scheduled Tax Reform in particular, concern

remains as to Cyprus’ ability to fully address the outstanding issues.

The main challenges in the field of indirect taxation relate to the level of taxation. Concerning

VAT, the current standard rate of 10% will have to be increased to a minimum of 15 % upon

accession. Part of such an increase in the rate level (3 %) is planned to enter into force by the

end of 2001, whereas the remaining 2 % will be effected six months prior to accession. In order

to compensate for the increase in the VAT rate by 3 %, Cyprus intends at the same time to

abolish its current defense levy. The introduction of a special VAT scheme for farmers, who in

principle are not subject to VAT at present, is scheduled to be initiated by mid-2002 and fully

implemented upon accession. The VAT Act, which was adopted by the House of

Representatives in June 2000 and will enter into force by the end of 2001, will align the VAT

legislation further with the

acquis.

Concerning excise duties, further increases in the duty rates

are required for most product categories. Furthermore, for imported products, a full

replacement of the current import duties will have to be carried out. Moreover, the current

protection of domestically produced goods will have to be eliminated, so as to ensure that

excisable products are taxed equally, irrespective of origin. These issues, together with a

broadening of the taxable scope, in particular as regards mineral oils and alcoholic beverages,

are scheduled to be carried out in a three-step exercise during 2002. Further efforts are also

required with regard to the introduction of a tax warehouse system.

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In the field of direct taxation, the special regime for offshore companies in Cyprus needs to be

addressed urgently so as to fully comply with the Code of Conduct for Business Taxation to the

same extent as current Member States. 47 465 permits have been issued since 1976 in this

field, and it is estimated that roughly half of the beneficiaries are still operating. There were

1 080 entities maintaining a physical presence in 2000, and the number of their employees

amounted to 5 864. The economic branches most closely involved are trade, marketing,

distribution, ship management and maritime operations. The volume of activity of the offshore

companies, however, remains low. Although Cyprus stated that this problem would be tackled

within the framework of the Tax Reform, currently under preparation, this will now not take

place until the end of 2001, leaving little time for legislative adaptation and implementation of the

required adjustments.

The Department of Inland Revenue is the competent authority for the administration of direct

taxation. Currently, the Department employs around 600 employees. Its systems are

computerised for the issuing of income tax returns, raising of assessments and collection of

taxes.

In the area of

administrative co-operation and mutual assistance,

Cyprus will have to

introduce harmonised legislation including the VAT Information Exchange System (VIES) and

develop the existing infrastructure to apply this system. Cyprus already has a computerised

system for the collection and processing of VAT returns. In order to be able to meet the new

demands concerning administrative co-operation and mutual assistance, Cyprus will have to

further reinforce its tax administration structures and control procedures.

As concerns administrative capacity, the VAT Service administers VAT, operating as a

separate structure within the Department of Customs and Excise. Although the Cyprus tax

administration is a modern institution, further efforts are needed to ensure it has enough

capacity, including computerization, to implement, control and enforce the

acquis.

The increase

in VAT staff is satisfactory.

Overall, although there are some plans to address the outstanding issues, the scope of the

required changes means that Cyprus faces a considerable challenge with a short timetable.

Chapter 11: Economic and monetary union

A detailed assessment of Cyprus’s economic policy in its various aspects has been given above,

in the Chapter discussing the economic criteria (B-2). Therefore, the present section is limited to

a discussion of those aspects of the Economic and Monetary Union

acquis--as

defined by title

VII of the EC treaty and the other relevant texts--which candidate countries should implement

before accession, i.e. the prohibition of direct public sector financing by the central bank, the

prohibition of privileged access of the public sector to financial institutions, and independence of

the national central bank. As to the process of liberalisation of capital movements, upon the

completion of which compliance with the EMU

acquis

is conditional, this aspect has been

covered above, in the section on

Chapter 4 – Free movement of capital.

Since the last Regular Report, Cyprus has made some progress in the adoption of the EMU

acquis.

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As regards the

direct public sector financing by the Central bank and the independence

of the Central Bank,

no legislative developments have been recorded in the reporting period.

Where the

prohibition of privileged access of the public authorities to financial

institutions

is concerned, a law abolishing the interest rate ceiling came into force on 1 January

2001.

Overall assessment

Cyprus will participate in EMU upon accession with the status of a country with a derogation

under article 122 EC. It will need to implement the necessary changes to its institutional and

legal framework by the date of accession.

Overall, Cyprus still has to implement substantial portions of the

acquis,

relating notably to the

direct financing of the public sector and to the independence of the Central Bank.

According to present legislation, the Central Bank of Cyprus may still provide the government

with funds through direct advances and purchases of government paper. The Central Bank is

also permitted by law to purchase securities issued by public corporations. Cyprus is

encouraged to finalise its preparations for the change of its legislation and its Constitution in

order to provide for the statutory independence of the Central Bank and compatibility in all

material respects with the EMU

acquis.

The liberalisation of interest rates constitutes progress in the field of privileged access of the

public sector to financial institutions, since the structure of interest rates is now differentiated

according to risk, including higher rates for unsecured loans.

Concerning

administrative capacity

in the field of EMU, the departments responsible are the

Ministry of Finance, the Central Bank of Cyprus and the Planning Bureau. The Central Bank of

Cyprus has the overall responsibility for defining and conducting monetary policy.

Chapter 12: Statistics

Cyprus has made considerable progress over the past year due in particular to the

implementation of the Law on Statistics of January 2000.

In the field of

statistical infrastructure

a Statistical Council has been set up, representing the

government as well as bodies outside the government sector including the Trade Unions and

academia. It is chaired by the Director-General of the Ministry of Finance. As regards

administrative capacity, the Cypriot Statistical Office (CYSTAT) has strengthened its

information technologies infrastructure through the acquisition of advanced equipment and

software. It has introduced optical data entry and processing methods, starting from the 2001

population census. The ongoing computerisation of the Treasury Department and the

Department of Customs and Excise will enhance the statistical production process in the areas

of public deficit and debt as well as for external trade. The Budget of 2001 has been increased

to € 6.6 million, as compared to € 4.3 million in 2000 and € 3.6 million in 1999 and provides

for 12 more posts for statistics officers, three of which were already filled in May 2001.

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A fully harmonised business register of local units is being set up following the completion of a

census of enterprises in the first half of 2001.

As regards

classifications,

the compilation of a fully harmonised monthly volume index of

industrial production at the appropriate level of the NACE classification took place. Output

prices (for manufacturing) both for the domestic and the non-domestic market have also been

made available on a monthly basis.

As regards

demographic and social statistics,

a population census is carried out since

October 2001 in line with EU standards and recommendations. In the field of

sectoral

statistics

numerous harmonisation efforts were made. A labour cost survey is being carried out

since last year according to EC legislation.

There are no statistics available at

regional level.

In the area of

macro-economic statistics,

procedures for the compilation of public deficit and

debt data were initiated. From the 3 quarter of 2001 on, quarterly national accounts are

available. Moreover, the Central Bank of Cyprus has completed the first stage of a reporting

system for Foreign Direct Investment (FDI) statistics.

Harmonised consumer price indices are produced and reported monthly. In the area of

business statistics,

business surveys have been extended to cover more variables; additional

short-term indicators such as volume index of industrial production have also been compiled.

Transport statistics

exist in the field of maritime transport and the motor vehicle register is in

the process of being set up (see

Chapter 9-Transport policy).

The

external trade

statistics

have been revised in January 2001 to include a special trade system for exports. In

agricultural statistics

livestock surveys have been harmonised whilst various crop registers

are being set up.

Overall assessment

Overall, Cyprus is quite well advanced in the field of statistics, although some further efforts are

needed to fully align practices with the

acquis.

As regards statistical infrastructure, the new Statistics Law of 2000 provides an appropriate

legal framework for the work of CYSTAT on official statistics within the context of the EU.

Both the role and functions of CYSTAT have been redefined. There is strengthening of co-

operation and co-ordination with other data producers, such as the Central Bank of Cyprus, the

Ministry of Agriculture, Natural Resources and Environment and other organisations such as the

Cyprus Tourism Organisation. They now use common classifications and methods and they

adhere more strictly to the timetables for the transmission of data subject to confidentiality to

EUROSTAT. Furthermore, it is to be welcomed that the Statistics Law provides for the

immediate transposition of EC requirements in this area to the statistical system of Cyprus

without further legal measures. The fundamental principles of impartiality and reliability of data

as well as the transparency of statistics and confidentiality of personal data are safeguarded.

CYSTAT is highly computerised in terms of terminals, personal computers, connection to the

LAN and access to Internet.

As regards classifications, continuing efforts to use the NACE classifications are needed.

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In the area of sectoral statistics, Cyprus has progressed. A good level of alignment exists in

agricultural statistics. As regards demographic, social and regional statistics, several important

new data collection systems are being developed. The methods in macro-economic statistics

are improving. Business statistics, transport statistics, and external trade statistics seem to have

improved also.

Chapter 13: Social policy and employment

Since the last Regular Report Cyprus has achieved considerable progress in the field of social

policy and employment.

As regards

labour law,

legislation adopted by Parliament in March 2001 aims at transposing

the Directives on the protection of employees in the event of the insolvency of their employer

and the Directives on collective redundancies. A law of April 2001 sought alignment of Cypriot

law with the Directive on the protection of young people at work.

Concerning

equal treatment of women and men,

regulations defining the powers of the

inspectors were issued in November 2000 under the equal pay legislation. Furthermore, an

amendment to the Social Insurance Legislation of April 2001 aims to bring Cypriot legislation in

line with aspects of the

acquis

on equal treatment for men and women in matters of social

security.

A special group of officials was set up (including representatives of the Ministry of Labour and

Social Insurance, the Planning Bureau and the Law Office) to examine in detail the new

structures of the Government with regard to equal treatment of men and women.

In the field of

health and safety,

to bring legislation on the protection of chemical agents at

work in line with the

acquis,

a regulation was issued in June 2001. Two other regulations of

April 2001 transposed the

acquis

on biological and carcinogenic agents. Finally, the health

standards for workers who manually handle loads would seem to have been incorporated by a

regulation of June 2001.

The administrative capacity of the recently established Department of Labour Inspection was

further enhanced by the appointment of a Director and three Senior Labour Inspectors, one in

charge of each of the three sections of the Department, namely the Section on Conditions at

Work, the Section on Industrial Pollution Control and the Section on Field Operations.

In the field of

public health,

Cyprus has further brought its legislation in line with the

acquis

labelling of tobacco products and on maximum tar yields, as of January 2001. A new laboratory

for measuring the tar yield of cigarettes was created at the General State Laboratory of the

Ministry of Health. A number of health prevention programmes have been developed and

implemented such as school education, anti-smoking campaigns, screening for cancer

prevention, promotion of health nutrition and combating drugs and cardiovascular diseases.

Whereas in the field of

social dialogue

no developments can be reported, the process of

employment

policy review in Cyprus has been launched and a joint assessment paper on

employment policy has been agreed between the Commission and Cyprus. This will form the

basis for joint employment monitoring in the pre-accession period. Overall labour market

performance in Cyprus remains strong, with both the employment and unemployment rates

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comparing favourably with the EU average. The overall unemployment rate was still declining

and reached 5% in 2000.

As regards

social protection,

new legislation for a National Health Insurance Scheme (NHIS)

was adopted by Parliament in April 2001. It provides for universal coverage and its financing

will be based on contributions by the social partners. It also aims to introduce checks and

balances that will lead to cost containment and improve the quality of services provided.

No further legislative progress can be reported in the field of

anti-discrimination.

However, in

July 2001 the Council of Ministers appointed an interministerial committee, with a mandate to

study the Second Report on Cyprus (2000) of the European Commission against Racism and

Intolerance and to submit to the Council suggestions towards concrete measures and further

action to be taken on combating racism, xenophobia, discrimination and intolerance in specific

areas of concern.

Overall assessment

Although Cyprus is advanced in this area, some parts of the

acquis

have not yet been fully

transposed.

In the area of labour law, the Directives on working time, part time work, fixed-term work,

posting of workers, and European Works Councils still need to be transposed. Cyprus is

encouraged to set up the independent guarantee institution foreseen in the

acquis

on protection

of workers in case of insolvency of the employer.

Concerning equal treatment for women and men, parts of the

acquis

remain to be transposed.

Legislation has been under preparation and/or consideration for a considerable period of time.

Gender mainstreaming was incorporated for the first time in the 1999-2003 National

Development Plan. The National Machinery for Women Rights advises the Council of Ministers

on policies, promotes women’s rights and subsidises women’s organisations. A large number of

NGOs are represented. In addition, each ministry has an official responsible for the promotion

of women’s rights, but there are no regional or local bodies dealing with the promotion of

equality of women. Cyprus also recognises that the implementation and enforcement machinery

needs to be strengthened.

In the field of health and safety at work, several regulations covering all fields of the

acquis

are

outstanding. The labour inspectorate team is small but consists of qualified professionals. The

high number of court cases (51 for 1998) indicates good enforcement of the present legislation.

In general, training and staff recruitment should continue.

As regards public health, minor changes in the definition of tobacco products and the

establishment of a public health laboratory are necessary. When harmonising tobacco

legislation, Cyprus should take into account the latest

acquis

in this field.

Regarding epidemiological surveillance and the control of communicable diseases, a notification

system for communicable disease exists under the Quarantine Law of 1935 and its

amendments. As this law is considered inadequate Cyprus is encouraged to introduce new

legislation, aligned with the principles of the Community network for epidemiological

surveillance and the control of communicable diseases by 2003. In this respect, a national

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structure for surveillance and control of communicable diseases should be developed which

would allow Cyprus to participate in the relevant Community network.

There are some deficiencies regarding health status monitoring. The computerisation of the

public health services is underway, while the actual establishment of a Health Information system

should begin by the end of June 2002. In this respect, Cyprus should continue its efforts to

develop a health monitoring and information system in order to obtain health data and indicators

comparable to the EC system.

Concerning social dialogue, Cyprus has a long-standing tradition in this area. Workers’ and

employers’ organisations are strong and play an active role in particular in various existing

tripartite bodies. Nevertheless, the effectiveness of the tripartite process could be further

improved, especially considering the very small number of agreements reached in recent years.

Autonomous social dialogue, sectoral social dialogue and collective agreements could be

reinforced in order to prepare the social partners in Cyprus for the role they will be called upon

to play in the sectoral social dialogue at EU level. At company level, forms of workers’

consultation and information should be promoted along the lines of the Community

acquis

and

practice.

The Ministry of Labour is the national authority dealing with employment services. Cyprus is

computerising the existing system in order to be able to participate fully in the network.

However, the employment policy delivery systems, and specifically the Public Employment

Services will need to be strengthened.

In the field of social security the newly adopted National Health Insurance Scheme (NHIS)

opens the way for major health reforms in Cyprus. Among others, the health monitoring system

has to be put in place, and surveillance for communicable diseases needs to be upgraded.

The combat against exclusion, as laid down in article 136 of the Treaty establishing the

European Community, is part of the objectives of EU social policy. As decided at the Lisbon

and Nice European Councils, policies to combat social exclusion combine commonly agreed

objectives at the EU level, and national action plans. The Gothenburg European Council in June

2001 invited candidate countries to translate the Union's objectives of promoting social inclusion

into their national policies.

In relation to the European Social Funds (ESF), the Planning Bureau will be the single Managing

Authority for the Community Support Framework or the Single Programming Document,

according to the Structural Funds Regulations. The Ministry of Labour and Insurance will be the

authority responsible for the ESF and, for the time being, staff have been trained in this field. A

Special Preparatory Programme (SPP) project for Structural Funds is under preparation, which

aims to review the envisaged Structural Funds implementation system. Following the

implementation of the SPP the necessary structures will have to be set up Cyprus is encouraged

to recruit additional staff in the Ministry of Labour and Social Insurance in 2002 for the creation

of a specific ESF section.

In its analytical approach to policy development, the Ministry of Labour has already adopted

the four-pillar structure of the European Employment Guidelines, and work has commenced on

the preparation of a National Employment Action Plan in line with the annual procedures in the

Member States.

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Efforts are needed to ensure alignment with the

acquis

on anti-discrimination based on Art. 13

EC.

Chapter 14: Energy

Cyprus has made some progress in the energy sector although a number of measures still need

to be adopted.

In the fields of

security of supply, competitiveness and the internal energy market,

legislative development can be reported.

As regards

energy efficiency,

in June 2001 the House of Representatives enacted legislation

for the labelling of household appliances.

In May 2001 an Institute of Energy was established. It supports the promotion of measures for

the rational use of energy, renewable energy sources and fossil fuels. The Government has

introduced a grant scheme for investments in energy conservation and for the substitution of

electrical energy or conventional fuels with renewable energy sources to run until 1 January

2003. The Ministry of Commerce, Industry and Tourism has been designated as the

enforcement agency concerning the labelling of household appliances. The human resources of

the Energy Section of the Ministry of Commerce, Industry and Tourism have been increased.

Overall assessment

Overall, the adoption of the

acquis

until now is satisfactory but further sustained efforts are

required

With regard to the security of supply, due to the heavy dependency of Cyprus on imported oil,

the issue of building up the required 90 days of oil stocks in accordance with the

acquis

is of

particular significance. Currently, stocks are held by the petroleum refinery, the Electricity

Authority and oil companies for their own requirements, but additional storage capacity needs

to be developed. Cyprus has taken some initial steps towards the progressive building up of its

oil stocks and storage capacity.

In the field of competitiveness and the internal energy market, concerning

electricity,

the

Electricity Authority currently remains the sole producer and distributor of electricity in Cyprus.

It has the status of a semi-governmental organisation with a legal monopoly. Under the present

rules only when the Electricity Authority lacks capacity can permission to generate electricity be

granted to others. This monopoly position will need to be altered in order to comply with the

acquis.

Cyprus should strengthen its efforts to comply with the

acquis

in the electricity sector. It

should also consider how to eliminate remaining price distortions.

Although possibilities for the future development of a

gas

sector continue to be studied, the

current situation whereby there is no consumption of natural gas, no gas network and no

interconnections remains unchanged. Similarly, as Cyprus does not have any coal mines the

sector of

solid fuels

is of no significance, although a new oil-fired power plant is under

construction, which can also be converted for coal. Cyprus continues to have no plans for on-

shore/off-shore oil exploration.

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Concerning the oil-related

acquis,

further adjustments are necessary for alignment.

Although Cyprus has already taken some steps with regard to energy efficiency, further efforts

are needed to improve efficiency, to achieve alignment with the

acquis

in this field and to

strengthen the relevant institutions.

As regards administrative capacity, the Energy Section of the Ministry of Commerce, Industry

and Tourism is the competent department for all energy matters and has overall responsibility

for implementing the

acquis.

The Energy Section incorporates an Inquiry Point to which any

request for information about laws, regulations, and administrative rulings may be addressed.

No Regulatory mechanism as required by the internal energy market

acquis

has as yet been

established in Cyprus.

Whereas Cyprus does not generate electricity from nuclear power sources, the Council Report

on Nuclear Safety in the Context of Enlargement (June 2001) contains recommendations with

regard to other nuclear activities of relevance to Cyprus (that is the management and disposal of

institutional radioactive waste, i.e. mainly sealed sources from industrial and medical

applications).

The Report emphasises that its general observations and recommendations are relevant, in

particular with regard to the need for Cyprus to ensure that the appropriate regulatory oversight

is established according to good practices within the EU.

Cyprus will need to ensure compliance with Euratom requirements and procedures. In this

respect, continued attention should be given to preparing the implementation of Euratom

Safeguards, in particular regarding the reporting of nuclear material flows and inventories

directly by the persons or structures operating nuclear installations or storing nuclear material. It

should be noted that Cyprus has concluded a Full Scope Safeguards Agreement with the

IAEA. An additional Protocol to this Agreement has been signed in July 1999.

Chapter 15: Industrial policy

Since the last regular report, Cyprus has made some further progress in implementation, and as

during the previous year, mainly concentrated its efforts on investment promotion.

In the implementation of

industrial strategy,

Cyprus last year started to implement 12 support

schemes included in the “New Industrial Policy” adopted in 1999 to improve the

competitiveness of Cypriot industry. Ten of these schemes concern traditional industries, the

remaining two the diffusion of information technologies.

In the field of

privatisation and restructuring,

no further legislative development can be

reported. The government has decided to enhance the

administrative capacity

of the Ministry

of Commerce, Industry and Tourism for the effective implementation of the

acquis.

Developments concering Industrial policy should be seen in relation to the overall enterprise policy, including the SME

policy (see

chapter 16 - Small and medium-sized enterprises).

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Overall assessment

The industrial policy of Cyprus is substantially in line with the concepts and principles of EC

industrial policy. It has always been based on the premise that productive and commercial

activity is the responsibility of the private sector, whereas the role of the state is to foster an

environment conducive to private initiative and to create the necessary infrastructure. The

degree of state intervention in the production process in the manufacturing sector in Cyprus is

limited, although the government holds equity in some companies. However, special efforts

have to be made to fight structural problems such as high production costs or low productivity.

Cyprus’ industrial policy is laid down in the 1999-2003 Strategic Development Plan. In this

framework, the New Industrial Policy contains incentives and schemes in twelve areas. These

areas are: high technology (business incubators and R&D); one-stop shop for foreign investors;

mergers, acquisitions and subcontracting; laboratories for quality improvement; access to

finance (guarantees for loans to SMEs); development of specialized software; energy

conservation; tax incentives; incentives to internationalisation; development of the Larnaca Free

Zone and grants for manufacturing industries. Measures have been introduced to support co-

operation between companies such as mergers, joint ventures or subcontracting, the

technological upgrading of industrial units and the quality improvement of manufactured

products. It should be noted that an important element of any industrial policy is the control of

state aid and the compatibility of support schemes with EC rules, including the current rules of

state aid of the ECSC Treaty, which will have to be examined (see

chapter 6 – Competition

policy).

The execution and monitoring of the implementation of industrial policy is the responsibility of

the Ministry of Commerce, Industry and Tourism, which introduces the appropriate policy and

administrative measures and formulates policy or sets objectives according to emerging needs.

Co-operation

with other Ministries and the Planning Bureau is well established. Private sector

institutions such as chambers, business associations etc. participate, through the Advisory

Committee on Commerce and Industry, in both the formulation and the monitoring of

implementation of industrial policy. At local level, apart from the Cyprus Chamber of

Commerce, there are regional Chambers of Commerce in the five major cities.

Industrial policy is developed in an integrated manner among the different Ministries and private

sector institutions. There is no need to establish new institutions or administrative bodies for the

implementation and the enforcement of the

acquis.

Chapter 16: Small and medium-sized enterprises

As regards

SME policy

and

business environment

Cyprus continued to make progress with

implementation during last year.

The Government has signed contracts with the private sector for the creation of two business

incubators. A new scheme has been put into effect by the Central Bank of Cyprus for financing

SMEs at favourable interest rates.

Developments concerning SME policy should be seen in relation to the overall enterprise policy, including Industrial

policy (see

chapter 15 - Industrial policy).

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A decision by the Council of Ministers of 16 June 2001 brought the

SME definition

in line

with the

acquis.

In August 2001, the government drew up a catalogue of contact points in the

Ministries for information on Internal Market issues.

Overall assessment

As regards SME policy Cyprus is broadly in line with the principles and objectives of EU

enterprise policy. In the Strategic Development Plan for Cyprus (1999-2003) there is a specific

chapter on SMEs, which adopts the guidelines set out by the EU in the Third multi-annual

programme for SMEs. Its objective is the creation of a simplified legal and institutional

framework for SMEs, the improvement of the financial environment and the enhancement of

the competitiveness of SMEs through their internationalisation and their access to the

information society. A special scheme for start-up loans was introduced, but no agreement with

the banks was reached for a government guarantee scheme for loans and interest rate subsidies.

A new scheme was put into effect by Central Bank of Cyprus for financing SMEs at favourable

interest rates.

Policy to favour entrepreneurship is based on the co-ordination between the objectives of

educational, economic and employment policies, as well as on close co-operation with all the

actors concerned, especially the business community. Further improvements in the

administrative simplification for enterprises are still needed.

As regards the implementation of SME policy in Cyprus, sufficient infrastructure already exists.

The Ministry of Commerce, Industry and Tourism is responsible for SME policy. Its action is

supported by other ministries and private bodies such as Employers and Trade Associations or

Chambers of Commerce. Private sector institutions participate in both the formulation and the

monitoring of the implementation of the policy. An Institute of Technology exists as well as a

Centre for SMEs, which was set up within the Cyprus Development Bank.

Chapter 17: Science and research

Cyprus has undertaken further measures to strengthen its capacity to implement the

acquis

the field of Science and Research since the previous report.

The association with the Fifth Framework Programme continues to function well. Within the

framework of the Industrial Policy for the development of high technology industry in Cyprus,

the government has signed contracts with the private sector for the creation of two business

incubators.

The budget for national research programmes increased from €437 500 (CY £ 250 000) in

1998 to €1,75 million (CY £ 1 million) in 2001. The Research Promotion Foundation is actively

involved in the co-ordination and encouragement of the participation of Cyprus’ institutions in

the 5th Framework Programme. Since January 2001 it has had an appointed liaison officer in

Brussels in order to be kept informed of all new developments and to foster co-operation with

the Commission and other liaison officers of Member States. One of the priorities of the

Foundation is the improvement of links between academia and research institutions with the

industry and SMEs.

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The Planning Bureau continues to play a pivotal role in the promotion of scientific and

technological co-operation with foreign research institutes.

Since May 2001 Cyprus has participated as an observer in the CREST Committee (Comité

pour la Recherche Scientifique et Technique).

Overall assessment

In Cyprus, co-operation in the field of science and technology is well established and

participation in the Fifth Framework Programme should enable Cyprus’ authorities to become

more familiar with Community rules and proceedings. Further reinforcement of research-related

administrative capacity and infrastructure is necessary to enhance successful association. For a

further development of the sector and for an effective integration of Cyprus into the European

Research Area, it is important to significantly increase the gross domestic expenditure on

research and technological development. Within the framework of the New Industrial Policy for

the Development of High Technology Industry in Cyprus, the concept of incubators for high

technology companies and centres for applied research and development should be promoted.

With the increase of the human resources available to the Research Promotion Foundation, this

body now seems to be adequately staffed. Apart from launching national research programmes

the Foundation is actively involved in the co-ordination and encouragement of the participation

of Cypriot institutions in the Fifth Framework Programme for Science and Research.

Chapter 18: Education and training

Cyprus made significant progress in the last year in the field of education and training.

It has started to participate in the second phase of the

Community programmes

Socrates,

Leonardo da Vinci and Youth (see

section A.b - Relations between the European Union

and Cyprus).

In November 2000, the Parliament adopted the Education Degree, General Minimum

Education and Curriculum Act. It addresses – together with the National Education Act - the

requirements of the

Directive concerning education of children of migrant workers,

regulating the conditions for learning the mother tongue as well as the acquaintance with the

culture of origin of children of migrant workers. In this context funds were provided through the

2000 Budget enabling the training of trainers, the training of teachers and the provision of

technical assistance.

Cyprus has made progress in

reforming its education and training system.

The

amendments of November 2000 to the Vocational Education and Training Act introduce a legal

framework for licensing vocational training institutions as well as for the de-centralisation of

administration to regional, municipal and school level. The National Agency for Vocational

Education and Training is responsible for the monitoring of standards in these areas. However,

there are financial and human resource capacity constraints, which impede the implementation of

this Act and the adequate functioning of the Agency.

The Council of Ministers decided to establish the University of Applied Sciences and Arts (7

February 2001) and the Cyprus Open University (30 June 2001).

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Overall assessment

Participation in the relevant Community programmes is satisfactory and the established national

agencies are functioning. The Directive concerning the education of children of migrant workers

now seems to be fully transposed. Its implementation has to be ensured.

Reforms of the education and training system have made a big step forward with the

establishment of two universities. The Open University will develop e-learning on an initial level.

As far as continuing vocational training is concerned the training infrastructure is relatively good,

but the necessary legal basis, which provides incentives for employers to ensure continued

training for employees, needs to be further strengthened. In response to the Commission’s

memorandum on lifelong learning, Cyprus’ government has approved a reform proposal for

secondary vocational education and training. It has set up a consultation process but an overall

coherent continuing training policy is still missing. It will be important that the key players at

national level are brought together to ensure an increased effort towards the development of a

comprehensive approach to lifelong learning, incorporating initial education, continuing and

labour market training.

The Ministry of Labour and Social Insurance has commissioned a study to review the

apprenticeship scheme. A committee has started work to define the framework for the creation

of a Technical University. Despite recent progress, there is a need to further strengthen the

administrative capacity of the Ministry of Education and Science, to further decentralise the

educational system to the regions and municipalities, as well as to develop a framework for

dialogue with social partners. The co-operation between the Ministry of Labour and Social

Insurance and the Ministry for Education and Science still needs to be improved.

Chapter 19: Telecommunications and information technologies

Since the last regular report good progress has been made concerning the improvement of the

telecommunications infrastructure, the quality of services and the introduction of tariffs reforms.

Little progress has however been made regarding liberalisation.

As regards the

liberalisation of the telecommunications market,

there have been no further

developments. However, in order to prepare for future competition, a new numbering plan has

been elaborated by the network operator CYTA with effect from November 2001.

As for the

regulatory framework,

in April 2001 the Parliament adopted the Law on the

creation of the office of the Commissioner for Telecommunications and Postal Regulation. The

Commissioner has not yet been appointed, but the budget for his office is under preparation.

The functions related to radio-communications will continue to be exercised by the Directorate

of Telecommunications of the Ministry of Communications and Works.

A study on the elaboration of a new numbering plan has been submitted to the Ministry of

Communications and Works by CYTA. Another study is currently prepared for this

Directorate, which covers issues of pricing for the frequency spectrum as well as criteria and

procedures for licensing of an additional GSM operator and the Third Generation Mobile

Telephony operators.

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The House of Representatives approved the new tariff-rebalancing package in November

2000. The scheme will be carried out in three steps up to December 2001, gradually reducing

tariffs on international and long-distance calls over the fixed network, mobile telephony and

ISDN, while prices for local calls will increase.

Although preparations have advanced, no legislative development has been recorded in the

postal services

since the last regular report. However, the domestic mail system was assessed

commencing November 2000 by external monitors, with the aim of improving its quality. Upon

a recommendation by a German expert, Cyprus Post has re-organised the sorting centre as

from April 2001. The universal service has been expanded to cover house-to-house delivery to

15 more communities, extending the service to 148 in total. In January 2001, the Government

decided to change the legal status of the Postal Services according to a model applied in EU

Member States.

The

administrative capacity

of the Directorate of Telecommunications is being enhanced with

two additional posts. The staff of the Directorate attended several workshops on

telecommunications regulation and spectrum management, and new frequency monitoring

equipment was acquired in November 2000.

On the initiative of the Government, all schools have been connected to the Internet since last

year.

Overall assessment

Whereas infrastructure and services are well advanced in Cyprus, efforts to gradually open the

telecommunications and postal markets need to be maintained. In particular, Cyprus should

liberalise the mobile telephony market.

In the field of telecommunications, although the current moves towards cost-orientation of tariffs

are encouraging, the preparation and the adoption of legislation and secondary regulatory

instruments to transpose essential parts of the

acquis

is not progressing according to the plan.

The administrative procedures, and the requirement that even very detailed regulations have to

be passed through Parliament, make it difficult to adapt the legal framework to the rapidly

changing telecommunications technologies and markets and to promote the development of the

Information Society in Cyprus.

The public network operator (CYTA) is to be transformed into a joint stock company at the

end of 2001. Compared to the telecommunications sector, Internet use has developed only

slowly, with a current penetration rate of about 15 %, far below the EU average (about 36 %),

and a market still dominated by CYTANET.

As for the postal market, there is neither a licensing regime nor a legal provision for a Universal

Service Provider. However, in practice, the Department of Postal Services offers universal

service to nearly the whole population. The remaining 48 communities with more than 200

inhabitants are to be included in the service soon. Cyprus Post, as a member of the European

association of public postal operators (USPs)-PostEurop, participates in regular cross-border

assessment of the postal service and has started to monitor its domestic mail system as well.

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As the appointment of the Commissioner for Telecommunications and Postal Regulations is

delayed since May 2001 the new Regulatory Authority is still not operational. It is essential to

ensure that the authority has sufficient staff to carry out the tasks of drafting regulations and

ensuring market surveillance.

Despite the recent reinforcement of administrative capacity it seems that the human resources in

the Directorate of Telecommunications still need to be increased in order to cope with the tasks

of the Directorate.

Chapter 20: Culture and audio-visual policy

There have been no significant legislative developments in this area since the last regular report.

Cyprus has continued to develop its administrative capacity to implement the Radio and

Television Stations Law.

Developments in the field of

audio-visual policy

have been entirely administrative. The Cyprus

Radio and Television Authority (CRTA), established in 1998, has significantly raised its profile

among the public and broadcasters during the period covered by this report. It began to

monitor and intervene on questions relating to human rights, the right to privacy, the protection

of minors and it promoted and called for a public response, which itself brought an increase in

complaints against television and radio broadcasters. In figures released in February 2001 the

CRTA announced that it had considered 212 possible violations over the last year. Of the 160

cases examined, 104 resulted in penalties ranging from € 350 (C£ 200) to € 7000 (C£ 4000).

A new Director of the CRTA was appointed on 1 July 2001.

In the field of

culture

no particular developments are to be reported.

Overall assessment

Overall, Cyprus’ legislation in this field is largely aligned with the

acquis.

As regards audio-visual policy the Cyprus Radio and Television Stations Law is already largely

in line with the

acquis.

The government has announced that the list identifying events of major

importance, to which viewing access should be ensured shall be approved soon. However,

further clarification is still needed as regards, in particular, certain definitions and the right to

reply. The CRTA seems to implement the law effectively.

Cyprus has ratified the Council of Europe Convention on Transfrontier Television and its

Protocol.

The Cultural Services of the Ministry of Education and Culture are responsible for formulating

and implementing the national cultural policy in the field of Letters and Arts. The Department of

Antiquities of the Ministry of Communications and Works is in charge of the discovery,

maintenance and protection of the cultural heritage of the Republic of Cyprus. The preservation

and rehabilitation of buildings of cultural importance is assigned to the Town and Country

Planning of the Ministry of Interior.

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Chapter 21: Regional policy and co-ordination of structural instruments

Over the reporting period Cyprus has made further progress in preparing for the implementation

of structural policies.

Regarding

territorial organisation,

the Council of Ministers took a decision in December

2000 establishing two programming regions. In August 2001, Cyprus has submitted to

EUROSTAT a proposal for provisional definition of regions corresponding to NUTS Levels 2,

3 and 4; this has not been agreed upon by the Commission.

While the

legislative framework

has not changed, the

institutional structures

have been

strengthened. In December 2000, the Council of Ministers decided to set up Regional Councils

in each programming region. They will have a substantial role in the formulation of regional

development strategy. Elected representatives of local authorities and elected representatives of

other organizations will participate in the Regional Councils.

In the field of

financial management and control,

the implementation of the new

computerised financial information and management accounting system (FIMAS) commenced in

September 2000 and is expected to be fully operational in 24 months. FIMAS will make

possible the continuous monitoring of progress of implementation of all programmes/projects

included in the budget. This analysis will enable constant follow-up of progress achieved and

will constitute the basis for any appropriate corrective action in case of material budget

variances. Furthermore, an Internal Audit Manual is being developed, to provide guidelines and

support for internal auditors in carrying out their work. It has also been decided to concentrate

the management of the pre-accession aid in the hands of the Accountant-General (as National

Authorizing Officer) and the Permanent Secretary of the Planning Bureau (as National Aid

Coordinator).

As regards

statistics,

no particular developments for the management of Structural Funds are

to be reported since the latest Regular Report. No regional statistics have been provided in

support of the proposed similar to NUTS classification.

Overall assessment

Cyprus can be considered well on the way to having the full capacity to implement structural

policies. However, efforts still need to be speeded up, in particular as regards the establishment

of a territorial organisation which allows for the effective implementation of Structural Funds and

the setting up of the required monitoring and evaluation system. Other actions that are required

include: the preparation of a coherent development plan aiming at producing a Single

programming Document as required by the Structural Funds regulation, the definition of the

implementation structures of the final plan, and the definition of the paying authorities.

Although less urgent, issues such as the strengthening of administrative capacity (especially in

terms of recruitment and training), the alignment with the specific financial management and

control procedures for future Structural Funds and Cohesion Funds, and the technical

preparation of projects eligible for Structural and Cohesion Funds assistance (project pipeline)

also need attention.

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As regards territorial organisation, Cyprus’ administration relies on the division of the island into

six districts and 33 self-governing municipalities, as well as 576 Community Councils.

Concerning the legislative framework, no further legislative initiatives appear necessary in order

to implement the EC structural policy

acquis.

The institutional structures are envisaged to be in place upon accession. The co-ordination of

government’s policies for regional development is performed by the Planning Bureau. Once an

agreement is reached on similar to NUTS classification the planned Regional Councils can help

in implementing a coherent regional policy, but the decision regarding their final composition

needs still to be taken.

On Structural Funds, the responsibilities have been shared out. The Planning Bureau will be the

single Managing Authority for the Community Support Framework or the Single Programming

Document and the lead authority for the European Regional Development Fund (ERDF) and

the Cohesion Fund. The Ministry of Agriculture, Natural Resources and Environment will be the

lead authority for the European Agricultural Guidance and Guarantee Fund (EAGGF)-Guidance

Section and the Financial Instrument for Fisheries Guidance (FIFG). Finally, the Ministry of

Labour and Social Insurance will be the lead authority for the European Social Fund (ESF).

Payment agencies are to be designated in 2002. As regards preparation of programming, the

partnership principle, monitoring and evaluation, no particular developments can be reported.

Cyprus has prepared a special Programme for the Preparation of EU Structural Policy (SPP),

which is about to be launched. Its main aim is the enhancement of the administrative capacity to

manage the Structural Funds and regional planning. The Planning Bureau (comprising a staff of

57) is the national planning and co-ordination authority, and is also responsible for medium and

long term macroeconomic planning. A unit has been set-up within the Planning Bureau, currently

consisting of three officers responsible for the co-ordination of all preparatory activities in

relation to Structural Funds. The administrative capacity seems to be sufficient, although further

efforts are needed in terms of recruitment and training.

In general, the necessary structures and operational arrangements to implement the ESF

effectively, are already in place. However, adjustments and further strengthening is necessary in

order to improve both administrative capacity and the mechanism for co-ordination of ESF

interventions in the context of the European Employment Strategy and the Inclusion Process.

Since 1960, the Government of Cyprus has drawn up five-year national Strategic Development

Plans (SDP). The current SDP covers the period 1999-2003. The SDP is implemented

annually through the budget category of development expenditure. Programming of expenditure

is established on an annual basis with a Memorandum, which accompanies the budget

document covering multi-annual issues. This procedure corresponds to a large extent to the

pluri-annual commitment requirement of the Structural Funds. However, a coherent

development plan as required by the Structural Funds regulation has to be prepared and the

implementation structures for the final plan have to be defined. Support provided within the

framework of SPP should help to improve further this situation. Further efforts are required at

the level of the technical preparation of projects eligible for Structural and Cohesion Funds

assistance (project pipeline).

Concerning monitoring and evaluation, although Cyprus has already been implementing an ex-

post assessment of the development projects, the system is not at the level required by the

Structural Funds regulations, in particular for ex-ante evaluation and for the collection and

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processing of the relevant statistical information and indicators, in particular at regional and local

levels.

In the field of financial management and control, the budgetary procedures required for the

implementation of the Structural Funds are generally in line with the provisions of the relevant

regulations. The Directorate for the Development Expenditure of the budget, within the Planning

Bureau, is responsible for the formulation and implementation of development expenditure. Final

ex ante

control of payment vouchers has been moved from the Internal Audit Directorate to the

Accounting and Financial Services Directorate.

Financial control is carried out by the independent Internal Audit Directorate of the Treasury,

external auditing is carried out by the Office of the Auditor-General. In an effort to strengthen

the functional independence of the Internal Audit Directorate the Government will set up an

Internal Audit Board. The institutional, legal and administrative framework for the financial

control of structural assistance is already to a large extent in place but further efforts are needed.

Cyprus will still have to make some efforts to meet the specific financial management and

control provisions of the Structural Funds regulations.

As to regional statistics, further efforts are necessary to bring them up to the level required for

regional policy planning and programming, in particular ex-ante evaluation. Cyprus still needs to

improve the system for the collection and processing of relevant statistical information for the

purposes of ex-ante evaluation.

Chapter 22: Environment

Since the last Regular Report, Cyprus has made good progress in aligning with the

acquis

mainly in the fields of horizontal legislation, water quality and ozone depleting substances.

Cyprus has begun to

integrate the environment into other policies.

In agriculture, measures

have concentrated on the appropriate use of fertilisers and pesticides, the assignment of a

feasibility study for the installation of an incinerator for animal carcasses, the relocation of animal

husbandry units and the setting up of the legal framework for the promotion of organic

cultivation. In energy, Cyprus encourages the development of renewable energy sources

(primarily solar and wind) and promotes energy efficiency measures in all sectors. The erection

of a wind turbine by the Electricity Authority of Cyprus demonstrates the practical outcome of

these measures. Furthermore, through a wide range of fiscal measures, industrial policy assists

the predominantly small polluting units in adopting more environmentally friendly approaches.

Finally, “sustainable development” approaches are being applied to the transport and tourism

sectors.

Regarding

horizontal legislation,

the Law on Environmental Impact Assessment (EIA)

entered into force in April 2001. It aligns Cypriot law with the EIA Directive. The new law goes

beyond the minimum requirements of the Directive regarding the exception of defence projects,

the thresholds and categories of Annex I projects, transparency (the Cyprus Federation of

Environmental Organisations is a member of the EIA assessment committee) and the role of the

environmental authority (Environment Service).

In the field of

air quality,

the operating conditions for volatile organic compound (VOC)

emissions from the storage of petrol were issued in March 2001 under the Air Pollution Control

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Law. They oblige terminals to install the necessary equipment by January 2003. Furthermore, a

new comprehensive report on air quality assessment in Nicosia was completed and

disseminated at the end of 2000.

In the field of

waste management,

no specific waste legislation was adopted in the period

covered by this report. The Law on Environmental Impact Assessment of April 2001

transposed the provisions of the Decisions on the list of waste and hazardous waste.

With respect to

water quality

the Parliament enacted the Quality of Water Intended for Human

Consumption Law in May 2001, transposing the requirements of the Drinking Water Directive.

A strict monitoring programme for water supply will ensure the proper implementation of the

act. Concerning the discharge of dangerous substances into the water (dealt with by the water

Directive of 1976 and its six "daughter" directives) an Order based on the Water Pollution

Control Law was issued in January 2001. It adopted the remaining ambient water quality values

and the measurement methods under the directives.

Construction works for the central sewage and waste treatment plants in Larnaca, Paphos, Ayia

Napa – Paralimni and a number of rural centres are under way. Work has also begun on the

design of the Greater Nicosia central sewage system.

In the field of

nature protection,

in March 2001 the House of Representatives adopted a law

for the ratification of the UN Convention on Wetlands of International Importance especially as

Waterfowl Habitats. A bill providing for the ratification of the Convention for the Protection of

Migratory Species of Wild Animals was approved in July 2001. As regards the trade in

endangered species, an amendment to the Animals (Scientific Experiments) Law was enacted in

July 2000, taking into account the stricter protection requirements for species covered by the

Convention on International Trade in Endangered Species.

As regards the EC Birds and Habitat directives, the technical data sheets on the habitats and

species for which adaptation of the technical annexes is proposed have been provided to the

Commission. The government has not yet made its final decision on the protection measures to

be taken to safeguard the Akamas Peninsula.

With regard to

industrial pollution control and risk management,

an environmental impact

study for the installation of Flue Gas Desulphurisation (FGD) at the Vasilikos power station was

completed in February 2001. It will be used by the Cypriot authorities to decide how to

complete the plant in compliance with the Large Combustion Plants (LCP) Directive.

In the field of

chemicals and genetically modified organisms,

the House of Representatives

passed a law in March 2001 providing for the ratification of the Copenhagen, Vienna and

Montreal II amendments to the Montreal Protocol. The law assigns the Minister of Agriculture,

Natural Resources and the Environment as the competent authority to issue regulations on

Ozone Depleting Substances permits and to issue licenses.

As regards

noise from vehicles and machinery,

no legislative development can be reported.

As regards

radiation protection,

a number of training activities were organised. Safety

equipment was upgraded; the preparation of an inventory of all radiation sources was initiated.

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Cyprus has also strengthened its

administrative capacity.

The Environment Service of the

Ministry of Agriculture, Natural Resources and Environment was allocated additional staff in

spring 2001. Furthermore, the public administration frequently takes advantage of the possibility

of purchasing private services. Thus eleven implementation programmes are already under way

(covering CO

strategy, ozone substances strategy, waste management strategy, environmental

information, IPPC and chemical substances, habitats, EMAS, PCBs, nitrate pollution, and

design of the Paphos landfill) and another five are about to commence (packaging, hazardous

waste, batteries, landfills assessment, and waste water systems design).

Overall assessment

Cyprus’ alignment with the

acquis

as well as strengthening administrative capacity are at an

advanced stage due to the national Programme for the Adoption of the Environmental Acquis.

With transposition now well underway, attention will need to be paid to implementation and

enforcement issues in the coming period.

Concerning horizontal legislation, efforts are still needed to achieve alignment with the

acquis

regards policies and measures intended to reduce greenhouse gas emissions and related

reporting requirements. In nature protection preparations to implement the birds and habitat

directives should continue although in relation to the latter, Cyprus is already party to the Bern

Convention on the protection of habitats. The government has not yet made its final decision

designating the sites to be covered by NATURA 2000. This issue will need to be further

monitored. Regarding water quality, Cyprus has made significant progress in transposition of the

acquis and has provided the Commission with detailed implementation programmes. The

necessary administrative and technical infrastructure is being developed. With regard to air

quality, transposition has continued in line with the commitments given by Cyprus. Concerning

VOC emissions from the storage of petrol the programme for the compliance of existing service

stations is on track.

Parts of the

acquis

in the field of industrial pollution control and risk management still need to be

transposed, The efforts to clarify the application of the

acquis

on large combustion plants in

Cyprus should continue following the receipt of the impact study on the Vasilikos plant in mid-

June 2001 and in the light of the forthcoming revision to the LCP Directive. The basic

institutional and administrative structures for effective control of industrial pollution and risk

management have been established. Within this context most of the industrial plants have been

licensed and are regularly inspected under the Atmospheric Pollution Control Law and the

Water Pollution Control Law.

As regards noise from vehicles and machinery Cyprus still needs to transpose the

acquis

household appliances as well as on equipment for use outdoors.

In the field of waste management, Cyprus rates of recycling are limited, partly because relevant

legislation has not been enacted. The recently launched Household Recycling Partnership

programme is a step into the right direction. Further alignment is needed regarding,

inter alia,

hazardous waste, supervision and control of shipment of such waste, packing and packaging

waste as well as batteries and accumulators containing dangerous substances. The pending

legislative bills covering these areas should be adopted soon.

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In the field of chemicals and genetically modified organisms, progress has been achieved to

reduce the emission of ozone depleting substances. A Law on the Control of GMO’s still has to

be adopted. Attention should be given to ensure the proper implementation of the said

legislation by the Veterinary Services of the Ministry of Agriculture, Natural Resources and

Environment.

Cyprus should continue to integrate environmental protection requirements into the definition

and implementation of all other sectoral policies with a view to promoting sustainable

development.

Considerable investments need to be secured, also in the medium-term, to ensure

implementation of the environmental

acquis.

As regards

administrative capacity,

at the national level, the small size of the country poses

particular problems in meeting the demands of the accession process. Competence for the main

requirements of the acquis has been clearly identified but the administrative system is fragmented

at national level where most regulatory activity occurs. These administrative structures inhibit

integration of permit, issuing and inspection functions. Either the restructuring of powers or the

adoption of an adequate formal integration mechanism should be considered as solutions.

Despite the recent strengthening staff resources remain weak, and this issue should be followed

closely.

Chapter 23: Consumers and health protection

Since the last regular report, Cyprus has made progress in consumer protection.

In the field of

safety related measures,

no legislative developments can be reported.

With regard to

non-safety related measures,

a law enacted in March 2001 aligned legislation

with the EC Directives on Consumer Credit. The Indication of the Prices of Products Offered

to Consumers Law came into force as from March 2001. A law aiming at transposing the

acquis

on timesharing and certain provisions of the Directive on injunctions entered into force in

July 2001. Concerning a

functioning market surveillance mechanism,

no further measures

have been adopted.

According to a decision of the Minister of Finance in June 2001, the Competition and

Consumer Protection Division of the Ministry of Commerce, Industry and Tourism will be re-

enforced with 10 additional officers, out of a total of 32 new officers to be distributed among

the various Divisions of the Ministry.

Eight additional posts were approved by the House of Representatives in March 2001 for the

Department of Veterinary Services of the Ministry of Agriculture, Natural Resources and

Environment.

Overall assessment

Overall, the situation is already satisfactory as legislative transposition is at an advanced stage

and administrative capacity has been strengthened considerably.

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Concerning injunctions, a framework legislation to transpose the relevant EC Directive has still

to be introduced, although certain provisions have already been included in amending or new

legislation.

As regards enforcement and market surveillance, the capacity of the Competition and

Consumer Protection Division in the Ministry of Commerce, Industry and Tourism should be

enhanced as planned by the Government. The existing and newly recruited staff will need to be

trained, in particular with respect to the implementation of the new areas of consumer

protection. An assessment of the future needs of the Division has led to identify some priority

fields for funding in 2001, such as advertising, package travel, general product safety, distance

selling, consumer credit, timesharing, and unfair contract terms.

Efficient activities are led by the Cyprus Consumers Association, which provides a complaint

and advice service and runs a number of educational activities for adults and children. The

association is also very active in promoting consumer interest in public life, taking active part in

the harmonisation process in Cyprus as regards consumer legislation and co-operating with

governmental services.

Chapter 24: Co-operation in the field of justice and home affairs

Since the last Regular Report, Cyprus has made progress especially in the fields of border

control migration and the fight against corruption and fraud.

In the field of

data protection,

although governmental preparations for a bill ratifying the

European Convention for the Protection of Individuals with regard to Automatic Processing of

Personal Data of 1981 have been finalised, no legislative developments can be reported.

As regards

visa policy

Cyprus has gradually abolished the practice of issuing visas at the

borders. In 2001, it has only been operating for nationals with whose countries Cyprus had has

bilateral agreements to this effect (i.e. Bulgaria, Lebanon, Syria and Israel) or in exceptional

cases for humanitarian reasons.

Concerning

border control,

Cyprus has continued its efforts to upgrade border control

equipment and to improve training of personnel to prevent illegal immigration. The construction

plans of Larnaca and Paphos airports, which will both serve as

Schengen

airports, have been

modified to include the separation of intra- and extra-Schengen passenger flows. Forgery

detection equipment was installed in summer 2001. The purchase of coastal radar, computer

equipment for the first phase of the National Schengen Information System (NSIS), two patrol

boats and three helicopters has been decided upon and is scheduled for 2001 and 2002.

Furthermore, in May 2001, Cyprus adopted a “Schengen Action Plan“.

Legislative harmonisation in the field of

migration

has intensified. An amendment to the „Aliens

and Immigration Law“ relating to marriages of convenience came into force in March 2001.

Furthermore, the Council of Ministers adopted a large number of decisions in view of EU

measures in the field. The decisions of December 2000 concerned unaccompanied minors from

third countries, the exchange of information in the area of asylum and immigration, joint

principles for the exchange of data in the Centre for Information, Discussion and Exchange on

the Crossing of Frontiers and Immigration (CIREFI), transit for the purpose of expulsion,

checks on and expulsion of third country nationals residing or working without authorisation,

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means of combating illegal immigration and illegal employment, and clauses to be inserted in

future agreements combining matters of EU and Member-State competence. In January and

February 2001, the Council of Ministers also took decisions as regards forgery detection

equipment at ports of entry, a specimen bilateral readmission agreement and the principles for

the drafting of protocols on the implementation or readmission agreements. In June 2001, it

issued a decision to align with the

acquis

as regards concerted action and co-operation in

carrying out expulsion measures. Furthermore, in July 2001 Parliament enacted a regulation on

the concept of family reunification.

As regards

asylum

no legislative progress can be reported. Neither the discussed amendment

to the law of asylum substituting the Ministry of Interior by a Law Officer as the appellate

authority nor the implementation regulations have been adopted so far. However, administrative

capacity has been strengthened; the Refugee Authority was set up in October 2000. The three

desk officers who are officials of the Ministries of Foreign Affairs, Interior and Justice and

Public Order were sent to the UNHCR for training.

Regarding

police co-operation and the fight against organised crime

, Cyprus was among

the signatories of the UN Convention against Transnational Organised Crime, adopted at the

UN Conference in Palermo in December 2000. It also signed the Convention’s two Protocols

covering combating the trafficking in women and children and the smuggling of immigrants.

In January 2001, Cyprus ratified the International Convention against Terrorist Bombings of

1997. The International Convention for the Suppression of the Financing of Terrorism was

signed by Cyprus in March 2001. National legislation for the protection of witnesses was

approved by the House of Representatives in June 2001. The law aligns with the

acquis

on the

protection of witnesses and of individuals who co-operate in the fight against international

organised crime.

In November 2000 the Council of Ministers designated the Focal Points and the relevant

Committees for combating organised crime for the implementation of the Pre-Accession Pact

on Organised Crime. It also decided, in March 2001, to second a police officer to the Embassy

of the Republic of Cyprus at The Hague, the Netherlands, to act as a liaison officer with

Europol.

With a view to the

fight against fraud and corruption,

Cyprus has continued its efforts

towards signature of the 1997 OECD Convention on Combating Bribery of Foreign Public

Officials in International Business Transaction. Due to factors external to Cyprus, these efforts

have so far been unsuccessful. Furthermore, any attempts towards the improper influencing of

authorities or persons with regard to any appointments, transfers, promotions or exercise of

disciplinary control in the broad public sector have now been criminalized by law.

Concerning

drugs,

the Drugs and Psychotropic Substances Law 29/1977 was amended in

March 2001 to meet EC requirements on the manufacture and placing on the market of certain

substances (precursors) used in the illicit manufacture of narcotic drugs and psychotropic

substances.

The Anti-Drug Council and Fund provided for in a law enacted in July 2000 is responsible for

the preparation and implementation of a National Drugs Strategy and for co-ordinating public

and private initiatives in the field of drug demand reduction and drug supply reduction. The

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fourteen members of the Anti-Drugs Council were appointed by the Council of Ministers in

February 2001 and the Council started having regular meetings. With a view to Cyprus‘

participation in Reitox (European information network on drugs and drug addiction),

preparations for the necessary legislative and administrative arrangements for the appointment of

a national focal point and representative for the European Monitoring Centre for Drug

Addiction are continuing. To enhance their co-operation in the fight against drugs the Cypriot

police and the Customs and Excise Department have signed a Memorandum of Understanding

in August 2001.

Regarding

money laundering,

Cyprus amended its existing law in November 2000, and has

enhanced its administrative capacity (for

more detail see Chapter 4 - Free movement of

capital).

In the field of

customs co-operation,

the EC and Cyprus have signed a Protocol on Mutual

Administrative Assistance in July 2001. Since September 2001 Cypriot police implements the

acquis

on the refining of targeting criteria, selection methods and collection of customs and

police information. In as far as the reinforcement of the operational capacity of the Customs

Department is concerned, reorganisation has taken place, while personnel training was

intensified since the second half of 2000. New equipment was also acquired and is in use since

the end of 2000. The computerisation of the Customs and Excise Department has been initiated

in 2001.

As regards

judicial co-operation in criminal and civil matters,

Cyprus adopted

implementing legislation for the Convention on Mutual Assistance in Criminal Matters on 22

February 2001. On 1 June 2001 Cyprus deposited the instrument of ratification of the

Additional Protocol to the Convention on the Transfer of Sentenced persons.

Overall assessment

Overall, Cyprus has already achieved a good record of alignment with the

acquis

However,

further efforts are needed to ensure full transposition of the

acquis

in the various fields of justice

and home affairs.

In the field of data protection, Cyprus still needs to establish a comprehensive framework for

the protection of individuals with regard to automatic processing of personal data. It is

encouraged to align its legislation soon.

As regards visa policy, Cyprus has over the years achieved substantial alignment with the EU

policy. However, eight countries on the EU list are still exempted from the visa requirement in

Cyprus. The practice of issuing visas at the border is gradually being abolished. With regard to

visas issued at the border for seamen in transit, the legal basis of this practice – the Merchant

Shipping Agreements with six third countries – need to be renegotiated soon. Cyprus is

continuing its efforts to prepare for the issuing of a uniform visa and its preparations to

participate in the Schengen Information System.

Concerning border control, Cyprus has improved the infrastructure and installed the necessary

equipment for the detection of forged documents. Meanwhile the architectural plans for the

future Schengen-airports have been changed as well. The establishment of the Schengen

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Information System should be further speeded up, and the technical capacities to control the

maritime border by radar systems need to be enhanced.

As far as migration is concerned, due to its geographical situation, Cyprus is a target country

and a potential transit area for illegal immigration. As the majority of illegal residents have

entered legally, e.g. as visitors or under non-renewable work permits, the implementation of the

legislation on combating illegal migration should be further continued. The decisions of the

Council of Ministers of December 2000 on checks on and expulsion of third country nationals

residing or working without authorisation as well as the new legislation on marriages of

convenience are steps in the right direction.

The recent readmission agreement with Lebanon (a similar one is pending with Syria) foresees

the repatriation of illegal immigrants to Lebanon if it is proven that their port of departure was in

Lebanon. The implementation of this agreement should be scrutinised closely to ensure that it

conforms to the principle of non-refoulement, bearing in mind that Lebanon (and Syria) has not

ratified the Geneva Convention.

In the field of asylum a fair, effective and efficient set of procedures is still not in place. Cyprus

urgently needs to build up capacities to deal with more than 400 applications in 2001 alone.

Cyprus must take the necessary steps to ensure, in line with the

acquis,

that at least an appeal

against the decisions of the Refugee Authority must be examined by an independent law officer.

Lastly, the scope of applications regarded as manifestly ill-founded seems to be rather broad.

To sum up, the alignment of the asylum law with European standards should be continued,

including the adoption of implementing regulations.

Regarding police co-operation and the fight against organised crime, Cyprus has already ratified

the major international conventions. The Cyprus police co-operates with the police authorities

of all Member States concerning exchange of information, for example in the fields of suspected

money-laundering cases, illegal trafficking in human beings or terrorist activities. Cypriot policy

forces have also established an information network with Interpol as regards the exchange of

information on suspected money laundering cases, unlawful drug trafficking, trafficking of

nuclear and radioactive substances, illegal immigration, motor vehicle crime and terrorist

activities.

A legislative framework is already in place with a view to fighting fraud and corruption (Criminal

Code, Prevention of Corruption Law, Customs and Excise Law). Cyprus needs to align these

provisions with the

acquis

on the protection of the financial interests of the EC, and in particular

with the relevant 1995 Convention and its Protocols.

Officers and members of the Cypriot police forces are regularly trained in the Cyprus Police

Academy and in the United Kingdom, the USA and Greece. The Police Academy courses are

constantly upgraded in co-operation with European Police Academies and Universities. They

include courses on combating organised crime, economic crime and computer crime.

As regards administrative infrastructure, public expenditure and control is within the sphere of

competence of the Auditor-General, who is an independent officer of the Republic.

Investigation of corruption cases is assigned to expert police officers who are members of a

special team at the Criminal Investigation Department (DCI) Headquarters. Enforcement and

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co-ordination of antifraud work is carried out,

inter alia,

by the Unit for Combating Money

Laundering at the Law Office of the Republic which has been recently strengthened.

Concerning drugs Cyprus adopted national legislation following its ratification of the UN Vienna

Convention on narcotic drugs and psychotrophic substances in 1990.

The Police and the Customs and Excise Department runs a special unit that co-operates with

various foreign institutions and government organisations through drug liaison officers. The

operation of the Anti-Drug Council and Fund will help to implement the National Drugs

Strategy. Cyprus preparations for participation in the European information network on drugs

and addiction (Reitox) of the European Monitoring Centre for Drugs and Drug Addiction

(EMCDDA) should continue.

Regarding money laundering, the “Unit for Combating Money Laundering” (MOKAS)

increasingly uses its investigative powers so that its the record in obtaining freezing orders and

disclosure court orders is improving (for

more detail see chapter 4,on free movement of

capital).

In the field of customs co-operation the Department of Customs and Excise works in close co-

operation with the Customs Administrations of other countries, including those of the EU

Member States. Cyprus should complete the signing of the Protocol between the EC and

Cyprus on Mutual Administrative Assistance and complete the computerisation of the Customs

Information System.

As regards judicial co-operation in criminal and civil matters, Cyprus is already party to the

most of the relevant conventions. It has ratified the European Convention on the transfer of

sentenced persons, and the Hague Conventions on Civil Procedure and on International Access

to Justice. Upon accession it will have to make sure that its reservation pursuant to Article 13 of

the European Convention of 1977 on the Suppression of Terrorism, according to which it

reserves the right to refuse extradition in respect of any terrorist offence which it considers to be

a political offence, does not apply to extradition between EU Member States.

The Ministry of Justice and Public Order is designated under all Conventions as the Central

Authority or the Transmitting/Receiving Agency and acts as the co-ordinator for the execution

of request. Other authorities involved in international judicial co-operation include the Judicial

Service and the police. A Unit for International Legal Co-operation is in charge of improving

and accelerating international co-operation.

Cyprus is a party to all human rights instruments under the Justice and Home Affairs

acquis,

with the exception of the European Convention for the Protection of Individuals with regard to

Automatic Processing of Personal Data of 1981, which remains to be ratified. These

instruments take precedence over national legislation (Art. 169 § 3 of the Constitution).

Chapter 25: Customs union

Cyprus achieved significant progress in the fields of customs value, temporary importation, duty

relief, the Common Customs Tariff, precursors and the computerisation of the customs

administration during the period covered by this report.

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With respect to the

EC Customs Code and its implementing provisions,

the Customs and

Excise (Amendment) Law of 2001 and the Customs and Excise (Rate of Exchange Conversion

of Foreign Currency) Regulations of 2001 entered into force in April 2001. They align the

exchange rate used for customs matters with the

acquis.

The law also contains provisions about

destruction and abandonment of goods. As regards customs procedures with economic impact,

a departmental circular covering operations permissible in customs warehouses in line with EC

requirements was sent to staff in May 2001. Furthermore, two regulations took effect in April

2001, one incorporating the provisions of the EC Customs Code for goods temporarily

imported for display or use for exhibitions, fairs, meetings or similar events, and the second

allowing temporary importation of professional equipment.

As regards the

customs

acquis,

the above mentioned amendment to the Customs Law of April

2001 also covers duty relief. The relevant implementation order (covering 11 out of 29 relief

cases) was adopted by the Council of Ministers on the same date. Another amendment to the

law and subsidiary legislation in March 2001 concerns the monitoring of precursor chemicals.

The Protocol on Mutual Administrative Assistance in Customs Matters (Mutual Assistance and

Co-operation) between the EU and Cyprus was approved by the Council of Ministers in

December 2000.

Concerning

administrative and operational capacity,

the Reform and Modernisation

Programme of the Department of Customs and Excise came into force in May 2001; it consists

of a business change management plan drawn up through the process of “gap-and-needs-

analysis” for the period 2000-2002. A national risk assessment document is in place in order to

assist in proper analysis of the risk involved in all areas where customs control is exercised.

Finally, Cyprus decided to adopt an updated version of the Danish Customs Administration's IT

system.

The Department of Customs and Excise also underwent a number of significant organisational

changes. The process of recruiting new staff to fill more than 80 departmental vacancies (almost

20% of total manpower) continued. 15 new customs officers started working in May 2001.

Overall assessment

Overall, Cyprus has already reached a considerable level in the transposition of customs union

acquis.

However, alignment with the EC customs code and its implementing provisions is still

needed with regard to some areas of temporary importation and customs procedures with

economic impact. Outside the Code, legislation is still needed as regards cultural goods, some

areas of duty relief and counterfeit and pirated goods, although legal vetting has been completed

with regard to the latter.

Cyprus also needs to speed up its preparations as regards administrative capacity in order to be

able to fully implement the

acquis

by the time of accession. A timely implementation of the

modernisation programme is necessary. In this respect, it must be emphasised that flawlessly

functioning EC-compatible IT systems should be put in place at least one year before accession

to the EU in order to guarantee interconnectivity with the EC customs computerised systems.

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Chapter 26: External relations

During the period covered by this report, Cyprus has continued harmonising with the

acquis

this chapter.

Upon accession, Cyprus will need to apply the Common External Tariff. In the framework of

the Customs Union Agreement with the EC, Cyprus has already adopted the Common

Customs Tariff for industrial products and for a number of agricultural products covered under

the Cyprus-EC Protocol. Cyprus‘ external trade regime is already substantially aligned with that

of the EC. In 2000, Cyprus‘ applied tariffs averaged 9.9 % (EC 6.3 %

) on all products, 4.1

% (EC 3.6 %) on industrial products, 133/4 % (EC 16.2 %) on agricultural products and 10.2

% (EC 12.4 %) on fishery products.

With regard to the

Common Commercial Policy,

Cyprus has continued to co-ordinate

positions and policies within the WTO with those of the EU, in particular with regards to the

preparation of the new round. Cyprus submitted in April 2001 a notification to the WTO

relating to the Agreement on Trade in Textiles and Clothing (ATC). Thereby it included those

products to the third stage of integration under the ATC which have been already integrated by

the EC.

bi-lateral agreements

on trade have been concluded with third countries.

In the

field of development policy and humanitarian aid

the co-operation with international

non-governmental organisations has been continued. In the last year Cyprus granted € 539,000

as bilateral aid mainly to the Russian Federation, several countries of Central and Eastern

Europe, South Africa and the Palestinian Autonomous Authority.

Overall assessment

Cyprus is advanced in aligning with the Common Commercial Policy

acquis,

yet further

progress needs to be achieved.

As member of the WTO Cyprus has been supportive of EU policies and positions within the

WTO framework. In view of the new round of negotiations, co-operation should continue and

be strengthened to ensure Cyprus’ support for shared EU objectives. Concerning textiles,

Cyprus has used the third stage of integration under the WTO Agreement on Trade in Textiles

and Clothing to align with the

acquis.

Further co-ordination is needed to ensure the alignment of

Cypus’ GATS commitments with the EC’s commitments and most-favoured nation exemptions.

By the time of accession Cyprus will need to have joined the WTO plurilateral agreements on

Civil Aircraft and Government Procurement.

As regards export credits, the Cypriot system has made progress in aligning to the OECD

Arrangement. In the area of medium and long term export credits, further efforts are necessary

to align with the

acquis.

WTO bound tariffs after full implementation of all concessions including – where possible – estimated ad valorem

equivalents of specific and compound tariffs.”

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Cyprus is in the process of preparing legislation for the control of export and transit of dual–use

goods in order to comply with the new EC Regulation in this area. It is a member of the Nuclear

Suppliers Group and of the Australian Group.

Cyprus has not concluded any preferential trade agreement with third countries that would have

to be re-negotiated or renounced prior to accession.

As regards

administrative capacity,

responsibility for commercial policy lies with the Ministry

of Commerce, Industry and Tourism, which co-operates closely with other Ministries especially

the Department of Customs and Excise. The administrative infrastructure which needs to be in

place as regards customs services is addressed under

chapter 25 – Customs union.

The

existing Unit dealing with import licensing should be strengthened and restructured, in order to

handle efficiently the expected volume of work. Training of personnel should be envisaged.

Concerning

development and humanitarian aid,

responsibility rests with the Ministry of

Foreign Affairs. The Planning Bureau is the competent authority for administering technical

assistance and development policy. Although no difficulties in the participation in the various

policy making and management bodies at different EU levels are expected, preparations should

be made to ensure that administrative infrastructure for development co-operation in the EU

framework is in place upon accession. For the purpose of the Cyprus’ future financial

contribution to the European Development Fund, the Cyprus’ management of its national

budget organisation and management of flow of funds to the EC budget is addressed under

Chapter 29 – Financial and budgetary provisions.

Chapter 27: Common foreign and security policy

Since the last Regular Report, Cyprus has continued to orient its foreign and security policy

towards that of the Union. It participated in the multilateral

political dialogue

within the

framework of the Common Foreign and Security Policy (CFSP) including regular meetings of

Political Directors, European Correspondents and at the Working Group level.

Cyprus continued to show its keen interest in the developments of the European Security and

Defence Policy (ESDP) as part of the CFSP and has actively participated in all the meetings in

EU + 15 format (ie non-European NATO members and candidates for EU accession), at both

ministerial and expert level. At the Capabilities Commitment Conference, held in Brussels in

November 2000, the Minister of Defence of the Republic of Cyprus announced Cyprus’s

contribution, which includes services, infrastructure and support means.

As regards

alignment with EU statements and declarations

, Cyprus has regularly aligned its

positions with those of the Union and when invited to do so has associated itself with the

Union’s joint actions and common positions. Since October 2000, it has associated itself with 8

EU common positions, including 3 on the Federal Republic of Yugoslavia. In addition, Cyprus

has continued its co-operation with the European Union in international fora such as the United

Nations and the OSCE.

Cyprus participated in the meeting of the EU and candidate countries on arms export policies

and control in Warsaw in January 2001 and hosted a follow-up meeting in Nicosia in June

2001.

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Cyprus has strengthened bilateral relations with a number of other candidate countries and with

Russia and China. It has maintained good and constructive relations with all neighbouring

countries in the Middle East. No significant changes in bilateral Cypriot-Turkish relations can be

reported.

Cyprus continues to comply with

mandatory sanctions

of the United Nations Security Council

and the autonomous measures of the European Union. Decisions of the Council of Ministers are

implemented by Decrees, Circulars and other administrative measures issued by the competent

Ministries and Departments. Such decisions, implementing EU Common Positions attach, as a

point of reference, the implementing regulations issued by the European Union.

Overall assessment

The policy pursued by Cyprus is generally in conformity with the CFSP.

Cyprus applies the mandatory sanctions of the United Nations Security Council and the

autonomous measures of the European Union. Cyprus maintains good and constructive relations

with all neighbouring countries in the Middle East. These relationships have allowed Cyprus to

contribute to the peace efforts in the area, by facilitating meetings in Cyprus between Israelis

and Palestinians and other parties and maintaining avenues of communication. Cyprus is an

active proponent of regional co-operation in the Eastern Mediterranean and strives to contribute

to regional stability in the framework of the Euro-Mediterranean partnership.

At the Ministry of Foreign Affairs (MFA) there are two divisions, the Multilateral Political

Affairs Division and the Bilateral Political Affairs Division. Overall responsibility in this area rests

with the Director of the Multilateral Political Affairs Division, who is also the Political Director.

The post of the European Correspondent is situated within this Division. The MFA is connected

to the Associated Correspondents' Network information system through which the EU

communicates within the Common Foreign and Security Policy with the associated partners.

Chapter 28: Financial control

Since the last Regular Report Cyprus has made further progress with the structural

modernization of its financial control system.

Cyprus has started reviewing its

Public Internal Financial Control

(PIFC) system. Following

discussions with the Commission, Cyprus has agreed to re-organise the Office of the

Accountant-General to ensure functional independence of the Internal Audit Directorate (IAD)

as central Audit Body on government level. The IAD will be placed directly under the authority

of a newly established Internal Audit Board chaired by the Minister of Finance. An Internal

Audit Manual, an Internal Audit Charter and a Strategic Audit Plan are currently being

developed.

The implementation of the new computerised financial information and management accounting

system commenced in September 2000. In March 2001, a team of fifteen government officials

headed by the Accountant General of the Republic was trained in Brussels.

In the field of

external audit,

no developments can be noted apart from a working visit by the

Cyprus Audit Office in April 2001 to the European Court of Auditors.

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As regards

control of structural action expenditure

, in August 2001 the Council of Ministers

decided that the Accountant General and the Permanent Secretary of the Planning Bureau will

be acting as National Authorising Officer (NAO) and National Aid Co-ordinator (NAC) for

receiving EC funds. Some progress has been made in developing an Operational Manual for the

National Fund as well as a preliminary audit- trail tool.

With regard to the

protection of EC financial interests,

no significant new developments can

be reported. However, OLAF has established regular contacts with the Law Office of the

Republic.

Overall assessment

Cyprus’ financial control system is already close to European standards. Efforts are still needed

in the areas of implementation of risk analysis methods, internal control of revenues and the

proper management of pre-accession funding and structural funds.

With regard to Public Internal Financial Control, Cyprus should continue its ongoing review

process. The revised PIFC system should be able to cope with the criteria and conditions for

the application of the Extended Decentralised Implementation System (EDIS), as laid down in

the pre-accession strategy.

The independent Audit Office, headed by the Auditor General, is responsible for the external

audit. It employs about 100 auditors and 10 administrative staff. Its audit work covers the usual

types of audits (financial, technical, performance) based on International Standards

(INTOSAI/EUROSAI).

In the field of structural action expenditure, Cyprus undertook the first steps towards the

establishment of the necessary structures with the designation of the National Authorising

Officer and the National Aid Co-ordinator and the development of an Operational Manual for

the National Fund.

Regarding the protection of EC financial interests, Cyprus has put in place legislation and the

necessary administrative structures. Cyprus should officially designate, in consultation with

OLAF, the institution that will co-ordinate investigations into cases of fraud and irregularities

affecting the Communities’ financial interests and act as a single contact point in relations with

OLAF.

Preparations for fully decentralised implementation of pre-accession aid and later the Structural

Funds have reached an advanced stage.

Chapter 29: Financial and budgetary provisions

During the period covered by this report, some progress was made in the area of financial and

budgetary provisions.

In the field of the

national budget and EC co-financed measures,

there are no particular

developments to point out in the period covered by this Regular Report.

Concerning the area of

own resources and administrative infrastructures,

and in particular

the estimate of the weighted average rate for the VAT resource (which is basically an estimate

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of the average rate applicable to the various categories of taxable goods), progress was made in

the adoption of the Classification of Individual Consumption by Purpose (COICOP). The

technical committee chaired by the Statistical Service and involving representatives from

relevant government departments (VAT Service, Planning Bureau, Ministry of Finance)

continued its study on the calculation of VAT own resources taking into consideration the new

developments in this area as well as improved data and assistance from EUROSTAT.

However, the provision of GNP data in accordance with EC methodology has not yet been

achieved in the last year. Regarding the other classifications used in the European System of

Accounts (ESA 95), significant work has been carried out, including breakdown by institutional

sector.

As regards control measures, the Department of Customs and Excise continued its participation

in the Customs 2000 EU Programme in the fields of the fight against fraud, customs debt and

the issue of a database system on tariffs. In addition, 15 customs officers were recruited, whilst

48 new VAT officers are to be recruited by the end of the year, mainly in the area of VAT

control.

Overall assessment

Cyprus’ financial and budgetary provisions are generally satisfactory. The implementation of

pre-accession aid should give a clearer picture of the management methods employed and

pinpoint any improvements that need to be made, and the extent to which Cypriot legislation,

structures and policies conform with the

acquis.

As regards the national budget and EC co-financed measures, as from the year 2000 the three

budgets of the central government have been merged into a single budget. The new

comprehensive budget is divided into three categories of expenditure, i.e. direct charges on the

Consolidated Fund (e.g. pensions and gratuities), ordinary (current) expenditure and

development expenditure. The latter category covers all capital expenditure which is of a non-

recurrent development nature and reflects the public investment programme for that year. It

appears that the current legislation should allow for the establishment of rules and procedures in

line with the standards usually practised in the EU. Every possible step must be taken to

guarantee the sound financial management of Community budget resources, and budgetary

principles and rules must be brought fully into line with the standards generally applicable in the

Community. Traditional own resources fall under the responsibility of the Customs and Excise

Department of the Ministry of Finance. The Treasury (through its Internal Audit Directorate) is

responsible for conducting all checks and enquiries concerning the establishment and the

provision of Traditional Own Resources.

The VAT Service (within the Department of Customs and Excise), a fairly well organised and

computerised structure, is responsible for the collection of VAT in Cyprus. The system for

administering VAT is based on a central administration with local control. As regards GNP,

Cyprus is continuing its work on the implementation of the European System of Accounts (ESA

95). No difficulties are foreseen in the development of a reliable, accurate and transparent GNP

and VAT calculation.

The Directorate of Budget and Fiscal Control of the Ministry of Finance will ensure the co-

ordination of the proper collection, monitoring and payment of funds to and from the EC

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budget. The Directorate is continuing its efforts to enhance its capacity through the continuous

training of its staff and the upgrading of its technological infrastructure (equipment and software).

With regard to the control of future EC Own Resources, Cyprus should continue its efforts to

set up effective instruments to combat VAT and customs duty fraud so that the protection of the

financial interests of the EC can be assured. In addition to the need for central co-ordination for

the proper collection, monitoring and payment and control of funds to and from the EC budget,

administrative capacity should be strengthened in the context of the relevant policy areas

described elsewhere in this Report, such as Financial Control, Customs, Taxation, Regional

policy and Agriculture.

4.2.

General evaluation

During the period covered by this Regular Report, Cyprus has achieved substantive progress in

different areas of the

acquis

and has continued at steady pace with further legislative alignment

as well as with the setting up and upgrading of the necessary administrative institutions. The

alignment process has gradually accelerated. However, there remain still a considerable number

of laws to be adopted.

Over the last year, there has been progress in important areas of the internal market.

Concerning

free movement of goods,

the adoption of EN standards has been accelerated and

new legislation was passed as regards sector specific legislation. However, continuing serious

efforts are required to transpose and implement the

acquis,

in particular as regards the

framework law on the new and global approach principles and subsequent regulations for the

transposition of the New Approach Directives. Furthermore, an overall strategy for better co-

ordination of the authorities responsible for market surveillance should be developed. Although

Cyprus has undertaken certain measures to abolish inconsistencies with the

acquis

in the area of

free movement of persons

in particular as regards the co-ordination of social security systems,

important legislative work remains to be done before accession. Concerning

financial services

good legislative progress can be reported, and the overall standard of supervision appears to be

satisfactory. Particular importance should be given to the restructuring of the co-operative and

saving societies sector. The liberalisation of

capital movements

has continued and should be

maintained to ensure a proper functioning of the markets upon accession. Significant measures

to combat money laundering have been undertaken e.g. with the inclusion of lawyers and

accountants within the scope of application of the relevant legislation. Cyprus has also tightened

its measures relating to the identification of account holders and reporting of transactions in

accordance with the recommendations of various international fora. The harmonisation process

should be accelerated with regard to

intellectual and industrial property rights.

The effective

application and enforcement of state aid rules, including the alignment of existing aid schemes as

regards in particular the tax regime for the off-shore sector, should be ensured.

Partial progress has been made in the field of

agriculture

but substantial elements and

mechanisms of the

acquis

remain to be applied as regards in particular the Common Market

Organisations and the veterinary and phytosanitary sectors.

See "Making a success of enlargement: Strategy Paper and Report of the European Commission on the progress towards

accession by each of the candidate countries", COM (2001) 700.

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In the field of

fisheries

the reinforcement of the administrative capacity has continued.

Additional progress is needed with regard to the current and planned structure of the fishing

fleet under Cypriot flag. Significant progress has been made in nearly all sectors of

transport

policy

particularly as regards maritime transport where safety controls have been improved.

The performance of the classification societies should be monitored.

While recognising the efforts made and the initiatives taken to further align the

tax legislation

with the

acquis

by way of e.g. the scheduled tax reform, concerns remain on the harmonisation

of the level of indirect taxation and the special regime of direct taxation for off-shore companies.

Concerning

telecommunications,

there is a considerable delay in the adoption of legislation

and the preparation of secondary regulatory instruments to transpose key parts of the

acquis.

environment,

good progress can be reported. Cyprus has continued with harmonisation

measures both as regards legislative alignment as well as strengthening administrative capacity.

Particular attention should now be paid to proper implementation and enforcement.

In the area of

justice and home affairs

progress has been made in particular in the fields of

border control, migration and in the fight against corruption and fraud. On asylum, although the

administrative capacity has been strengthened with the setting up of a refugee authority, no

legislative progress can be reported. In the light of increasing numbers of application alignment

should be accelerated as regards in particular the criteria for applications and the setting up of

an independent appeal authority.

Cyprus has achieved considerable progress in the field of

customs,

leaving only some areas

where further alignment is necessary, in particular as regards temporary importation, customs

procedures with an economic impact and cultural goods.

As regards

financial control,

Cyprus’ financial control system is sound and consistent with

European standards; efforts should be undertaken as to the internal control of revenues and the

proper management of pre-accession funding and structural funds.

Over the last year, Cyprus has continued sustained efforts to further strengthen its

administrative capacity.

Training programmes have been organised in different sectors, such

as co-ordination of social security systems, maritime safety, and justice and home affairs.

Furthermore, additional staff has been recruited in key areas such as financial services, company

law, veterinary and phytosanitary issues, fisheries, transport, taxation, social policy and

employment, telecommunications, environment and justice and home affairs. This allowed

Cyprus to reinforce market surveillance systems in the field of free movement of goods, to

improve the due supervision of financial services, to upgrade the inspection arrangements in the

veterinary and phytosanitary field and to strengthen its labour inspectorates.

New administrative structures have been set up in order to efficiently apply the

acquis.

Among

these are an authority to settle disputes as foreseen in the credit border transfer Directive, a

state aid monitoring authority, a new unit within the Department of Road Transport to deal with

market access, a Statistical Council, a special group of officials to examine in detail the new

structures of the government with regard to equal treatment of men and women, and finally a

refugees authority. In other cases, the powers of the existing enforcement bodies have been

increased, such as in the case of the Securities and Stock Exchange Commission, the Unit for

Combating Money Laundering (MOKAS) and the Commission for the Protection of

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Competition. Finally, there are plans to set up a new body on pharmaceuticals (Drugs Price

Control Committee). In the field of customs, Cyprus has recently started to introduce an

updated version of the IT system so as to allow for the exchange of computerised data with the

Community.

In future, it is advisable to reinforce the administrative infrastructure for standardisation and

certification to enhance the free movement of goods. Further efforts should also be made to

strengthen enforcement capacity in the field of intellectual property rights, especially as regards

border controls and fight against piracy and counterfeiting. Although progress has been made

both in the fields of anti-trust and state aid, the infrastructure, staff, and the rather weak

enforcement record of the anti-trust legislation should be improved. As regards taxation, Cyprus

should develop IT systems, so as to allow exchange of electronic data with the Community and

its Member States. Following the expected nomination of the Independent Regulator in the

telecommunications sector his newly established authority should start working soon. An

upgrading of the border management in the field of justice and home affairs is imperative.

Further efforts are also required in establishing the necessary administrative capacity to ensure

the sound, efficient and controllable management of EC funds.

Overall, the administrative capacity of Cyprus is already largely in place to implement the

different aspects of the

acquis.

Over the last year Cyprus has met the short–term priorities of its Accession Partnership with

regard to free movement of capital, environment and financial control. In most other areas the

priorities were partially fulfilled. Cyprus has continued to make progress in addressing the

medium-term Accession Partnership priorities, and has partially fulfilled a number of them, such

as justice and home affairs, regional policy and co-ordination of structural instruments and issues

relating to the internal market.

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C. Conclusion