Despite Cyprus’s robust economic growth, the Troika (a group comprising the European Commission, the European Central Bank and the International Monetary Fund) highlighted several key issues in its 18th post-memorandum review. The focus was on public spending, the energy sector, judicial reform and unfinished infrastructure projects. While the banking sector remains stable, these challenges pose risks to the country’s long-term financial stability.
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Increase in government spending
One of the main problems is the growing government wage bill. Increased wages and improved benefits for public sector workers, including the automatic cost-of-living adjustment (COLA), have significantly increased personnel costs.
The Fiscal Council warns that rigid expenditure, which currently accounts for 60% of the budget, could rise to 70% by 2027. Public sector wages alone are expected to account for 31.7% of total government expenditure by that time, significantly limiting the scope for flexible budget allocation. While Cyprus’s public debt level remains manageable, uncontrolled increases in personnel costs could threaten the country’s fiscal stability.
Problems in the energy sector
The energy sector is also under close scrutiny by the Troika of international lenders, with high electricity costs raising concerns about Cyprus’s transition to a greener energy system.
The Cyprus Electricity Company (EAC) has been criticised for its poor performance and its role in implementing green energy policies remains in question. Delays in projects such as the Vasilikos power plant are complicating energy sector reforms and delaying the implementation of green solutions.
Delays in judicial reform
Another long-standing problem is the slow progress in reforming the judicial system. The Troika of international creditors has repeatedly stressed the need to modernize the courts, but significant changes have yet to occur.
Judicial reform is a prerequisite for receiving support from the EU Recovery and Resilience Facility (RRF), making it an important priority. Failure to modernise reduces the efficiency of the system and undermines economic confidence.
Unfinished public projects
Troika experts also express concern about stalled infrastructure projects, especially in the energy sector. Delays in the implementation of projects such as the Vasilikos power plant pose obstacles to economic growth and development.
Stability of the banking system and healthcare
On the positive side, Cyprus’s banking sector remains stable and no major issues were identified during the audit. Also excluded from the Troika’s list of problems is the health care system (GHS), as its costs are under control.
The audit by the Troika of international creditors will continue until Cyprus repays 75% of its European Investment Bank loan. Addressing public spending, energy sector reform, the judiciary and infrastructure are key to ensuring the country’s long-term economic stability.
