Cyprus

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.

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 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 co­operative banking sector. In cases where prices are regulated, a more market­based 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.

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 co­ordination 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 co­ordination 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 co­operative 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 off­shore 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.

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 off­shore 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.

On 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 pre­accession 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 co­ordination 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 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 anti­trust and state aid, the infrastructure, staff, and the rather weak enforcement record of the anti­trust 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 medium­term Accession Partnership priorities, and has partially fulfilled a number of them, such as justice and home affairs, regional policy and co­ordination of structural instruments and issues relating to the internal market.

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