Although Cyprus’ economy is experiencing strong growth, the Troika of international lenders have identified key concerns during their 18th post-memorandum audit.
The Troika’s primary focus is on government spending, energy costs, judicial reform, and unfinished public works. While the economy and banking sector appear stable, these challenges pose risks to long-term financial sustainability.
Rising government spending
A major issue flagged by the Troika is the escalating state payroll. Wage increases and enhanced public sector benefits, including the Automatic Cost of Living Adjustment (COLA), have significantly raised personnel expenses.
The Fiscal Council warns that inelastic spending, which makes up 60% of the budget, could rise to 70% by 2027. By then, public sector wages alone are projected to account for 31.7% of total government expenditures, reducing flexibility in government spending.
While Cyprus’ public debt remains manageable, unchecked payroll costs could strain the country’s financial health.
Energy sector concerns
The Troika has also scrutinised the Cyprus Electricity Authority (EAC) and the overall energy sector. Electricity costs remain high, raising concerns about Cyprus’ transition to a more sustainable energy system.
EAC has previously been criticised for inefficiencies, and its role in Cyprus’ green energy plans is under examination.
Projects such as the Vasilikos power station remain incomplete, further delaying progress in energy sector reform.
Judicial reform delays
Another persistent issue is the slow pace of judicial reform. The Troika has long urged Cyprus to overhaul its courts, but significant progress has yet to be seen.
Reforming the judiciary is a prerequisite for accessing EU Recovery and Resilience Fund (RRF) support, making it a key priority.
The inability to modernise the legal system affects efficiency and economic confidence.
Unfinished public projects
The Troika has raised alarms over stalled public works, particularly in the energy sector. Delayed projects are seen as bottlenecks to economic growth.
The incomplete Vasilikos power station, among others, is a particular concern, as infrastructure delays hinder overall development.
Banking and healthcare stability
On a positive note, Cyprus’ banking sector is stable, with no major concerns raised in the audit.
The General Health System (GHS) has also been removed from the Troika’s list of concerns, as costs remain under control.
The road ahead
The Troika’s audit will continue until Cyprus repays 75% of its European Investment Bank loan. Addressing government spending, energy, judicial, and infrastructure issues is crucial for ensuring long-term economic stability.
(Further details of the Troika’s Bailout Programme for Cyprus may be found at Economic Adjustment Programme for Cyprus.)
