Panayiotis Rougalas
The Cypriot economy is showing strong signs of growth, with GDP expected to rise by over 3% and unemployment dropping below 5% in 2024. Private consumption continues to play a key role in driving this growth. However, as international lenders (the "Troika") began their 18th post-memorandum audit of Cyprus on Monday, it became clear that several issues are raising red flags.
The Troika’s attention is focused on four main areas of concern: government spending, particularly the rising state payroll; the cost of electricity, with a spotlight on the Cyprus Electricity Authority (AHK); the long-awaited reform of the country's courts and judiciary; and the unfinished public works and procurement projects that continue to pile up.
While the economy's overall health, including the banking sector, seems stable, these underlying concerns reveal that not everything is as rosy as it seems.
Rising Government Spending
One of the biggest issues on the Troika’s radar is the steadily increasing government spending, particularly related to the state payroll. Over the past few years, agreements with unions have led to higher wages and increased public sector benefits, including the ATA (Automatic Cost of Living Adjustment). The Troika has raised alarms about the impact of these rising costs on Cyprus' long-term financial health.
In fact, the Fiscal Council’s latest report warns that inelastic spending – spending that cannot be easily adjusted – continues to make up about 60% of the government’s budget, a figure expected to rise to 70% by 2027. Personnel expenses are the largest chunk of this spending, and by 2027, they are projected to account for 31.7% of total government expenditures. This leaves less room for the government to make discretionary spending decisions in the future, which could limit its ability to respond to unexpected challenges.
Despite concerns about government spending, the Troika has noted that Cyprus' public debt is manageable for now and that there are no immediate concerns regarding the country’s ability to service its debt.
Energy Sector and AHK
The energy sector is another major point of focus for the Troika, particularly the semi-public utilities like the Cyprus Electricity Authority (AHK). This is not the first time that AHK has come under scrutiny – previous audits have highlighted the role the utility plays in Cyprus' energy transition and its impact on the country’s green goals. As Cyprus works towards a more sustainable energy future, the Troika is keeping a close eye on AHK’s operations and the overall cost of electricity, which remains a significant concern.
Judicial Reform
Cyprus’ courts and judicial system continue to be a major concern for the Troika. The issue dates back to the early days of the country's post-memorandum audits and remains a key point of contention. Despite some efforts at reform, the Troika has yet to see significant progress in overhauling the courts. Judicial reform is also a pre-condition for Cyprus to access funding from the European Union’s Recovery and Resilience Fund (RRF), making it a priority for the international lenders.
Unfinished Public Projects
Another new concern for the Troika is the ongoing issue of unfinished public works and delayed projects. Specifically, the Troika is concerned about energy-related projects like the Vasilikos power station, which remain incomplete and are seen as holding back Cyprus' development. The Troika has expressed alarm over the growing number of stalled or delayed projects, warning that they are hindering the country’s progress and development.
Health System and Banks
On a more positive note, the Troika has removed Cyprus' General Health System (GHS) from its list of concerns. While health costs in Cyprus remain high, they are considered manageable and within the expected range, with the GHS even experiencing lower inflation than other sectors.
The banking sector is also in a good place, with no major issues raised during the Troika’s meetings with Cyprus' financial institutions. The Troika’s questions were quickly answered, indicating that the sector is currently stable and not in need of immediate attention.
The Road Ahead
The Troika’s 18th surveillance programme is set to continue until Cyprus repays 75% of the loan it took from the European Investment Bank. The focus of this latest audit reflects ongoing concerns about government spending, energy, the judiciary, and public works – all of which could shape the country’s financial future. As the Troika completes its review, Cyprus will need to address these issues to ensure continued economic stability and progress.
*This article was translated from its Greek original
