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Cyprus may be riding high on economic growth, but the message from international watchdogs this week is blunt: slow down the spending, especially on public salaries, or risk unraveling the progress.
In back-to-back reports, the International Monetary Fund (IMF) and the European Commission warned that Cyprus is veering off course by pumping too much money into public sector wages and benefits. And while both bodies praised the island’s strong recovery, they didn’t mince words: unchecked pay raises for government workers could backfire hard.
The IMF was particularly stark. It cautioned that wage pressures, especially in the bloated public sector, could stoke inflation and undermine financial stability. In plain English, if the government keeps handing out raises like party favors, the hangover could hit soon — and hit everyone.
Two years, one big spending spree
According to the EU Commission’s Spring Package, Cyprus is projected to blow past agreed spending limits in both 2024 and 2025. Net expenditure is expected to jump 7.3% next year, a leap driven largely by public sector pay, increased consumption by government departments, and expanded social benefits.
Add that to the 2.9% rise in 2024, and Cyprus is on track for a double-digit spending surge. EU officials are sounding the alarm: the country risks undoing hard-won fiscal gains and straining its economy if it doesn’t rein in the spending spree.
Private sector resentment simmers
This doesn’t sit well with many in the private sector, especially those who’ve faced wage stagnation, rising costs, and far fewer perks than their public counterparts. For years, Cyprus has carried a reputation for being top-heavy with state employees. These new warnings are rekindling old frustrations about an unequal playing field where government jobs come with better pay, more job security, and often, little accountability.
The IMF took aim at policies like automatic cost-of-living adjustments (the infamous “ATA” mechanism) and called for a freeze on new wage hikes. It also urged Cyprus to stay focused on reducing its debt rather than opening the taps on public spending.
Finance Minister: We’ve got this
Finance Minister Makis Keravnos responded quickly, saying the government remains “committed to fiscal discipline” and will “intensify efforts to rationalize public spending.” That’s political speak for: we hear the warnings, and we’ll try to cool it.
But whether the government can stand up to pressure from powerful public sector unions, especially in a pre-election climate, remains to be seen.
Growth, but with growing pains
Cyprus did record one of the eurozone’s strongest growth rates in 2024 (3.4%), thanks to booming tourism and resilient consumer spending. And while the IMF and EU see continued growth into 2025, both are lowering their expectations slightly.
The IMF is predicting 2.5% growth next year, citing rising wages, trade restrictions, and a ballooning current account deficit as warning signs. Meanwhile, the EU wants to see more investment in things that will actually grow the economy, like education, green energy, and innovation, rather than just more public paychecks.
