CYPRUS

Cyprus[1] is a unitary country with a single-tier subnational government system, made up of municipalities and communities. Local governments are recognised by the 1960 Constitution, but indirectly. The principle of local self-government and the subdivision of the territory are not explicitly mentioned. Part 12 of the Constitution relating to “Miscellaneous provisions” refers to local governments from article 173 to Article 178. Article 173 stipulates the creation of separate municipalities in the five largest cities of the island, namely Nicosia, Limassol, Famagusta, Larnaca and Paphos and that their councils are elected by the population. The other articles are dedicated to local taxes and fees and responsibilities for issuing licences or permits relating to premises, places or building operations, or establishing town planning. They focus on providing communities with an institutional balance, through separate tax schemes and representation systems.

Cyprus belongs to the group of EU members that have a centralised governance. The main laws framing local government are the Municipalities Law of 1985 (Law N 111) and The Communities Law of 1999 (Law N 86). The Municipalities Law, which regulates the legal and administrative status of municipalities, has been amended more than 50 times since 1985. The Communities Law regulates the legal status, organisational matters and the major tasks and functions of the communities and has also been amended several times.

A major reform of local government was approved by the government in 2020 and approved by the Parliament in March 2022. The reform comprises three laws: (i) the Municipalities Law of 2020, (ii) the Communities Law of 2020 and (iii) the District Organisation Law of 2019. The first law aims to provide municipalities with more financial autonomy and responsibilities in specific domains, and to enhance control mechanisms on transparency and accountability. The second law aims to create 32 local clusters to cover the 350 existing communities to provide aggregated services through inter-municipal cooperation (e.g. waste collection and management, secretariat, accounting and technical services). The third law will merge the existing sewage, water supply, solid waste management and urban planning councils at the district level by establishing five district councils, as deconcentrated entities of the central government, to carry out these responsibilities.

The municipal law is the most significant amendment to the Municipalities Law as it implies the creation of 20 new municipalities (initially 17), resulting from the merger of the current 30 municipalities and the dissolution of 48 communities. Mergers can be initiated by local governments themselves (then the approval of the Minister of Interior is necessary), or it can be a top-down process, if the Ministry considers that a merger would be “desirable”. A local plebiscite may also take place in order to approve the merger.

TERRITORIAL ORGANISATION
MUNICIPAL LEVEL	INTERMEDIATE LEVEL	REGIONAL LEVEL	TOTAL NUMBER OF SNGs (2021)
30 municipalities (demos) 350 communities (koinnotites)
Average municipal size: 3 178 inhabitants
380			380

OVERALL DESCRIPTION: Cyprus has a single-tier local government system, comprising two categories: urban municipalities and rural communities.

MUNICIPAL LEVEL: Cyprus comprises 30 municipalities and 350 communities. The above-mentioned reform of local government will reduce the number of municipalities and communities to create 20 new municipalities.

Municipalities are urban and tourist centres with over 5 000 inhabitants, while communities constitute local entities in rural areas with very few inhabitants (sometimes less than 100 inhabitants). They have different legal and administrative status and different range of powers and responsibilities. Municipal and Community councils are each composed of local councillors, whose number varies from eight to 26 for municipal councils, and four to eight for community councils. They are elected through a proportional voting system for five-year terms. Residents of municipalities also elect a mayor by direct universal suffrage for a five-year term. Local councillors then elect a deputy mayor through secret ballot.

Communities can become a municipality by local referendum and approval of the Council of Ministers if they reach the threshold of 5 000 inhabitants, or if they have sufficient economic resources to carry out municipal functions. Similarly, a municipality may be abolished if it has less than 4 000 inhabitants for three years consecutively.

Nicosia is the most important political, economic and cultural centre but it does not have a special administrative status. It has, like the three other regional centres (Limassol, Larnaca and Paphos), some additional functions delegated by the central government. The four cities are planning authorities.

HORIZONTAL COOPERATION: The Municipalities Law authorises inter-municipal co-operation in the form of a contract for the joint performance of certain public services, like public utilities. Municipalities may also establish associations through formal agreement (e.g. consortia) for waste collection and disposal, the construction and maintenance of streets, water supply, the issue of planning and building permits and other services. They can also cooperate on general interest urban projects and social inclusion. Similarly, the Communities Law entitles communities of the power to contract together for the joint execution of public utility programmes and to create “complexes” of communities, after a referendum triggered by the Minister of Interior.

STATE TERRITORIAL ADMINISTRATION: Cyprus is also divided into six districts (eparchies) for administrative purposes. They act as a deconcentrated level of the central government. They are headed by district officers (senior civil servants) that are appointed by the government and are responsible for the co-ordination and monitoring of the activities between local and central ministries in their area of jurisdiction, under the direct control of the Ministry of the Interior. Since 2016, the members of each district councils are elected directly from the district’s constituency.

The 1960 Constitution does not provide indications regarding local competences. However, the Municipalities Law and the Communities Law define administrative responsibilities. Municipalities and communities have few powers and responsibilities. There is strong government supervision over the exercise of the regulatory powers of local authorities, over their human, administrative and budgetary resources, and in particular over small communities.

Municipalities have a general clause of competence, meaning that they may administer all local affairs and may exert all powers vested in them by law. Despite this clause, the law enumerates a list of compulsory tasks and functions of municipalities, stating that tasks and powers which are not enumerated are carried out by administrative agencies of the central government. Communities have relatively similar powers to those of the municipalities but they are more limited.

Planning responsibilities are shared between municipalities and the Department of Town Planning and Housing. While municipalities are responsible for waste disposal, water supply and public health, municipalities are also responsible for social services and building permits. Larger municipalities (namely Nicosia, Limassol, Paphos and Lamaca) are also responsible for the provision of planning permits. In major urban areas, water supply, sewerage and drainage are built and managed through specialised bodies (Water and Sewerage Boards) – established by separate laws – which are administered by a Council/Board comprised of elected officials (mayors and councillors) representing all participating municipalities. The reform on local governments will transfer more competencies to municipalities, notably in the fields of social welfare, building permits, infrastructure maintenance, environmental protection and education.

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	Municipal level
1. General public services (administration)	Internal administration; Permits issuance for the construction and renovation of buildings
2. Public order and safety
3. Economic affairs / transports	Road and bridges maintenance and construction; Regulation of local markets
4. Environment protection	Waste disposal; Sewerage management and treatment
5. Housing and community amenities	Street lighting; Water supply; Local planning; Land development and Land use planning; Public areas, including parks and cemeteries
6. Health	Control responsibilities over public health
7. Culture & Recreation	Theatre regulation and control; Art; Sport
8. Education
9. Social Welfare	Basic humanitarian aid; Integration of immigrants and asylum seekers

Scope of fiscal data: municipalities and village authorities.

SNA 2008

Availability of fiscal data: High

Quality/reliability of fiscal data: High

GENERAL INTRODUCTION: The Constitution and the Municipalities and Communities Laws contain provisions relevant to local finance. In accordance with the law, each local authority must keep proper books of accounts and prepare financial statements by the end of the fiscal year. Local councils may have their own local budgets. Municipalities have to prepare two budgets each year, which are subject to central government approval before they can be implemented. For communities, budgets have to be approved by the district officer and by the Minister of Finance. The reform on local government aims to improve SNG financial reporting, through a harmonised accounting and reporting framework.

Subnational government expenditure by economic classification
	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure	478	1.6%	3.6%	100.0%
Inc. current expenditure	342	1.2%	2.8%	71.7%
Compensation of employees	179	0.6%	4.5%	37.5%
Intermediate consumption	151	0.5%	12.2%	31.7%
Social expenditure	0	0.0%	0.0%	0.0%
Subsidies and current transfers	6	0.0%	0.4%	1.2%
Financial charges	6	0.0%	1.0%	1.3%
Others	0	0.0%	0.0%	0.0%
Incl. capital expenditure	135	0.5%	13.2%	28.4%
Capital transfers	7	0.0%	4.5%	1.5%
Direct investment (or GFCF)	129	0.4%	14.8%	26.9%

EXPENDITURE: Cypriot local governments have very few spending responsibilities, although the reform will transfer more competences to the local level. The weight of SNG expenditure in GDP and public expenditure is well below the EU27 average (1.6% of GDP and 3.6% of public expenditure in 2020 vs. 18.3% and 34.3% respectively at the EU level). The share of staff expenditure in SNG expenditure is high, representing around 40% of SNG expenditure in 2020 (against 32.1% on the EU27 average). However, their staff spending accounts for a small share of total public staff spending (4.5%), well below the EU27 average (53.6%). Staff is a rigid expenditure for local governments since they need prior approval of the Minister of Interior, the Council of Ministers and the Parliamentary Committee on finance and budget for any decisions on human resources. By promoting mergers between municipalities, the local reform will decrease staff costs and increase economies of scale.

DIRECT INVESTMENT: One of the main functions of SNGs is investment. Investment accounts for a relatively large share of SNG spending (28.4% in 2020 vs. 13.1% at the EU27 average). However, it remains very limited as a percentage of GDP and public investment (below the EU27 average of 1.8% and 54.4% respectively in 2020). The share of capital expenditure has decreased in recent years, from one-third of public investment in 2013 to 13.2% in 2020. In 2019, 40.1% of investment went to general public services, 27.9% to housing and community amenities, 17.0% to culture, recreation and religion and 15.1% to environmental protection, which have been stable shares for several years.

Subnational government expenditure by functional classification
	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure by economic function	478	1.5%	-	100.0%
1. General public services	197	0.6%	8.6%	41.3%
2. Defence	0	0.0%	0.0%	0.0%
3. Security and public order	0	0.0%	0.0%	0.0%
4. Economic affairs/transports	0	0.0%	0.0%	0.0%
5. Environmental protection	69	0.2%	81.6%	14.5%
6. Housing and community amenities	134	0.4%	20.3%	28.0%
7. Health	0	0.0%	0.0%	0.0%
8. Recreation, culture and religion	78	0.3%	27.3%	16.3%
9. Education	0	0.0%	0.0%	0.0%
10. Social protection	0	0.0%	0.0%	0.0%

In line with the limited scope of responsibilities of municipalities and communities, SNG spending is split between only four categories. General public services was by far the biggest category of SNG expenditure in 2019, representing 41.3% against 17.8% at the EU27 average. The second most important item is housing and community amenities (mainly urban lighting, water supply) (28.0%), recreation, culture and religion (16.3%) and environmental protection (14.5%).

At the national level, SNGs play a particularly crucial role in the area of environmental protection (accounting for 81.6% of total public expenditure in this area in 2019), especially since they are responsible for waste disposal and sewerage management and treatment. Responsibility for water can fall to water boards and sewerage boards, especially in large cities. SNGs do not have responsibilities related to education, health, social protection or economic affairs/transport.

Subnational government revenue by category
	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total revenue	472	1.6%	4.1%	100.0%
Tax revenue	104	0.4%	1.5%	22.1%
Grants and subsidies	199	0.7%	-	42.1%
Tariffs and fees	168	0.6%	-	35.7%
Income from assets	0	0.0%	-	0.1%
Other revenues	0	0.0%	-	0.0%

OVERALL DESCRIPTION: Grants and subsidies represent the largest share of SNG revenue (close to the EU27 average of 46.6% in 2020), while tax revenue accounts for only 22.1% of SNG revenue (well below the average of EU countries at 40.1%). Nevertheless, own-source revenue, including tariffs, fees and local taxes, account for more than half of SNG revenue, which reflects high fiscal autonomy Cyprus local governments benefit from to finance local public services they are responsible for.

TAX REVENUE: All tax revenue is generated by own-source taxes, which include two main taxes since the abolition of the immovable property tax in 2017: (i) the professional tax and (ii) the hotel accommodation and entertainment tax.

The professional tax, introduced in 1985, applies to legal persons operating any business, industry, artisanship, work, trade or profession within the municipal boundaries. It is levied based on revenue generated, share capital and number of employees. The maximum tax rate is set by the central government.

The government announced a tax reform for 2022 in order to decrease tax inequality, strengthen transparency and simplify the tax system. It will, however, mostly apply to national taxes, such as the increase of the corporate tax rate from 12.5% to 15% on large multinational companies and the introduction of a carbon tax with a progressive increase on fossil fuels.

GRANTS AND SUBSIDIES: The share of grants and subsidies is high for Cyprus local authorities. Rules for calculating or allocating grants are not set out by law and there is no financial equalisation mechanism in place. Local councils receive an annual government subsidy, the amount of which is set by the Council of Ministers (through the Government Budget and by an agreement with the Unions of Municipalities and Communities) and approved by the House of Representatives. One-third of the overall grant is divided equally among the 30 municipalities and the remaining two-thirds are distributed according to the number of voters in each jurisdiction. Municipalities also receive a grant from the state to compensate for the abolition of the professional tax to individuals since 2003. Community councils receive an additional subsidy for street lighting.

In addition, local councils may receive specific earmarked grants for local development projects, approved on a project-by-project basis. These grants play a major role in the financing of local development projects, as they usually cover from 70% to 100% of the total project cost. The total amount of transfers to SNGs has significantly decreased over the last decade following the economic crisis that hit Cyprus. Overall, currents grants accounted for 81% of total local grants in 2020 and capital grants 19%.

OTHER REVENUE: User charges and fees account for a significant share of SNG revenue in 2020 (35.7% against 10.3% at the EU27 level). They include communal service fees for refuse collection, street lighting, fees for water supply services, charges for the provision of various municipal services, rents, etc. Additionally, according to the Municipalities Law and the Communities Law, municipal councils can impose “fees” on tourists for hotel nights, as well as impose duties on horse-racing games. Municipalities also receive extrajudicial fines and several other licenses.

Property income accounts for 0.1% of total local government revenue in 2020, which a low level compared to the EU27 average (1.0%). Municipalities are entitled to sell or exchange properties in their possession, if the council of Ministers approves the transaction. Municipality-owned properties must remain registered by the state-controlled district land offices.

Subnational government fiscal rules and debt
	Dollars PPP / inh.	% GDP	% general government debt	% SNG debt	% SNG financial debt
Total outstanding debt	319	1.1%	0.8%	100.0%	-
Financial debt	197	0.7%	0.5%	61.7%	100.0%
Currency and deposits	0	-	-	0.0%	0.0%
Bonds / debt securities	0	-	-	0.0%	0.0%
Loans	197	-	-	61.7%	100.0%
Insurance pensions	0	-	-	0.0%	-
Other accounts payable	122	-	-	38.3%	-

FISCAL RULES: Although there are no legal limitations on local spending, local authorities must - according to government circulars - have a balanced budget for their current expenditure and reimburse their loans. An umbrella law, known as the Fiscal Responsibility and Budget System Law (FRBSL) and the Public Financial Management system, enacted in February 2014, requires local governments to send financial data to the central government on a monthly basis. The Auditor General is an independent officer appointed by the President and is responsible for auditing various entities, including the central government, public organisations, local authorities and other public bodies and funds.

DEBT: According to the Municipal Law, municipalities can borrow to fund capital expenditure (golden rule) including carrying out work of public utility and purchasing mechanical equipment and vehicles. They are also permitted to refinance debt. However, there are several additional borrowing constraints: municipal loans have to be approved by the Council of Ministers and community loans must be approved by the district officer. Municipalities can borrow amounts that do not exceed 20% of their total revenues. Moreover, the total amount of loans of each municipality should not exceed 250% of their total revenues including government grants.

Also, as part of a five-year strategy to strengthen public debt management, Cyprus is using the Commonwealth Secretariat’s Debt Recording and Management System (CS-DRMS) that aims to improve public debt accounting and management. The main creditors in the domestic market are the Central Bank of Cyprus and the Cyprus Cooperative Bank (in order to finance school committees) and private domestic banks.

In 2020, the local debt was very low, at 1.1% of GDP and 0.8% of public debt, which is well below the EU27 average (13.9% of GDP and 15.4% of public debt in 2019). SNG debt is composed entirely of loans.

TERRITORIAL MANAGEMENT OF THE CRISIS: Cyprus is one of the most centralised EU countries, with few competences devolved at the local level. The participation of local authorities in the management of the crisis was therefore limited, as they have no competence over health, education and social protection, which are state responsibilities. This level of dependency to the central government is especially true for rural communities, which are isolated.

According to national associations, local authorities were not able to decide on restrictive measures implemented in their territory during the pandemic as this was done centrally. Most were however responsible for the disinfection of public facilities. Local authorities also reported that dialogue with the central government was reduced during the pandemic.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: Local governments received little support from the central government to cope with the economic consequences of the pandemic. They however received EU transfers from the state at an earlier stage in the year and in a larger scale to mitigate their liquidity problems. The payment of subnational financial debts to the central government was also suspended for six months and extended in 2021.

Following the pandemic, local authorities had to submit a budget with reduced expenses for the approval of the ministries and, when revenue declined sharply, a reduction of development projects costs proportional to the revenue fall. They also had to submit their bank balances so that the government provides additional grants to municipalities with serious liquidity problems to cover their operational expenses. The government provided grants to only three municipalities for a total of EUR6 million in 2020.

Some municipalities provided essential goods to vulnerable households. They also implemented tax reductions for local companies that were constrained to suspend their activities during the containment measures.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: The crisis led to a significant drop in local revenue (by 4.8% between 2019 and 2020), mainly due to the sharp decline in tax revenue (-14.9%), not compensated by the small increase in grants and subsidies. Lockdowns and international travel restrictions largely reduced tourism-related incomes (taxes, fees), which is a key economic activity for local governments.

By contrast, as local governments have limited competences, the impact of the pandemic on expenditure was limited (+1.5% in 2020 compared to 2019). They however registered some expenditure increase linked to the disinfection of public facilities and the support of unemployed persons, to a small extent, through basic humanitarian aid. According to the Union of Municipalities, municipalities had to postpone development projects and were not able to pay suppliers or fixed costs as they received little support from the state.

Local debt increased by 2.6% in 2020, of which +7% for the financial debt, while other accounts payable decreased (-9.5%). Financial debt was entirely financed by an increase in municipal borrowing as Cypriot municipalities do not issue bonds.

ECONOMIC AND SOCIAL STIMULUS PLANS: The government implemented a EUR4.4 billion economic stimulus plan over 2021-2026, the ‘Cyprus - Tomorrow” project, which is the largest plan put in place in the country since its independence. The plan will be funded by EUR 1.2 billion from the EU Recovery and Resilience Plan, EUR 1.8 billion from the EU Cohesion Funds and EUR 1.4 billion from private investment or public-private partnerships. The plan focuses on five domains, including public health, environment, competitiveness, digitalisation and human capital. In order to make public and local governments more effective and modern, the plan includes a series of institutional and administrative reforms, in addition to targeted investments to upgrade public services provision (e.g. the “Regeneration and Revitalisation of Nicosia Inner City” investment to attract young residents and companies in the area). The modernisation of local authorities is estimated at EUR96 million within the plan.

Local governments are key in the Cyprus’ Integrated National Energy and Climate Plan’ for the period 2021-2030, specifically in terms of environmental protection.