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The name Ayia Napa is derived from a Venetian -era monastery of the same name, located in the centre of the town, next to the square that today is the clubbing centre. The word Ayia means "holy" in Greek. Napa is archaic and means "wooded valley" or " dell ". In ancient times [ when? ] the area surrounding the town was covered with thick forest.

Ayia Napa lies near Cape Greco at the eastern part of Cyprus, south of Famagusta, and forms part of a larger area known as Kokkinochoria ("Red Villages", a name derived from the vivid red colour of the soil). It is a town of the Famagusta District, in the remaining Republic of Cyprus-controlled southern part of the district, Ayia Napa is about 12 kilometres (7.5 miles) from Protaras, which has also been developed as a tourist destination.

According to a local legend, a hunter in pursuit of his prey discovered an icon of the Virgin Mary in a cave, after which a monastery dedicated to her was built around the cave; the name Virgin Mary of Napa was eventually shortened to Ayia Napa. Another legend has it that a Venetian noblewoman fled from her parents, who forbade her from marrying a commoner, to live there as a nun. The Venetians built a church in c. 1500. According to local tradition, the area (except for the monastery) was uninhabited until about 1790, when Nikolaos Kemitzis of Thessaloniki arrived from Greece and settled in the village of Panayia, located in the northeastern part of Ayia Napa. Kemitzis had come into conflict with the Ottoman authorities who then ruled Cyprus, and decided to move near the monastery of Ayia Napa.

Between 1999 and 2003, Ayia Napa was the UK garage music summer holiday destination, attracting DJ Spoony, MC Creed, MC DT, Norris "Da Boss" Windross, Kele Le Roc, MC CKP, Little Charlie, and So Solid Crew.

In 2014, Ayia Napa was given the status of a main city-urban centre by the Government of Cyprus, in recognition of its importance to the economy. This was credited to the efforts of Mayor Yiannis Karousos, elected in March 2013. The city of Ayia Napa has the seventh largest budget of the 30 active municipalities of Cyprus, and employs 280 people. [ when? ]

The City of Ayia Napa is governed by a mayor, an alderman, and a six-member city council; Christos Zannettou was elected mayor in January 2020. It is well known for its municipal management, which has influenced that of other local authorities in Cyprus.

Until the end of 2014, beaches in Cyprus were under the management of private individuals and companies which were given licences to manage the beaches directly and without public tenders. Mayor Yiannis Karousos led an initiative to place all the city's beaches under direct city management. Ηe and the councillors who voted for the proposal faced threats and legal actions, but as of 2018 [update] the city received over 3.5 million euros in annual revenue from beaches, and all beaches in Cyprus are now managed by the local authorities.

In October 2017, the city decided that €240,000 of its development budget will be allocated to projects proposed and chosen by citizens and organisations of Ayia Napa, becoming the first city in Cyprus to implement a participatory budget.

In January 2017, Ayia Napa become the first city council in Cyprus to transmit a live webcast of its council meetings.

Starting in 2017, the city instituted an annual survey of citizens, businesses, and visitors evaluating the city and giving feedback.

Through an online app, citizens and visitors can report issues and make complaints and track how long it takes the city to fix the problem.

On 2 May 2018, the city signed an agreement with the University of Nicosia under which the university will act as consultant to the city in implementing blockchain technology, artificial intelligence, and smart city utilities; it is the first city in Cyprus to implement blockchain technology.

Until the end of 2014, beaches in Cyprus were under the management of private individuals and companies which were given licences to manage the beaches directly and without public tenders. Mayor Yiannis Karousos led an initiative to place all the city's beaches under direct city management. Ηe and the councillors who voted for the proposal faced threats and legal actions, but as of 2018 [update] the city received over 3.5 million euros in annual revenue from beaches, and all beaches in Cyprus are now managed by the local authorities.

In October 2017, the city decided that €240,000 of its development budget will be allocated to projects proposed and chosen by citizens and organisations of Ayia Napa, becoming the first city in Cyprus to implement a participatory budget.

In January 2017, Ayia Napa become the first city council in Cyprus to transmit a live webcast of its council meetings.

Starting in 2017, the city instituted an annual survey of citizens, businesses, and visitors evaluating the city and giving feedback.

Through an online app, citizens and visitors can report issues and make complaints and track how long it takes the city to fix the problem.

On 2 May 2018, the city signed an agreement with the University of Nicosia under which the university will act as consultant to the city in implementing blockchain technology, artificial intelligence, and smart city utilities; it is the first city in Cyprus to implement blockchain technology.

Ayia Napa is the largest tourist resort in Cyprus, with a 27,000-person-bed capacity and more than 175 hotels and apartments of all sizes. In 2017, the resort received over 700,000 tourists and accommodated 5 million overnight stays, representing approximately 30% of all Cyprus overnight stays.

Beginning in the 2010s, under Mayor Yiannis Karousos, the city has sought to expand tourist offerings and declared an aim of discouraging rowdy groups of young tourists and becoming "the best and most cosmopolitan tourist resort of the Mediterranean" by 2030. Since 2013, it has shut down problematic establishments, upgraded infrastructure, hotels, and restaurants, and added facilities such as a new marina and the underwater museum. The vision set by the city is supported by the Cyprus Tourism Strategy, which was completed in March 2017 and aims for Ayia Napa to be "regarded as one of Europe's top three beach and nightclubbing holiday destinations [...] offering the best beach and marine experience in Cyprus for young adults, complemented by international standard beach clubs and nightlife". The strategy evaluated the then quality of Ayia Napa as 3.4/5 and proposed that it should plan to increase its quality to 4.4/5.