Cyprus: dealing with the affordability crisis

There needs to be a fundamental shift towards energy and water infrastructure, higher-productivity industries, fairer taxation and better incomes This opinion piece focuses on the challenges for the government in dealing with the affordability crisis in Cyprus. The crisis stems from an ongoing mismatch between soaring prices – particularly for energy, food, and housing – and the relatively low incomes of households. To date the government has attempted to deal with the affordability crisis by implementing a series of short-term measures, including tax reductions on refined fossil fuels, price caps on basic goods and subsidies. But as argued by the IMF and the European Commission these measures or short-term fixes can be counter-productive over the longer-term in creating fiscal pressures and harming environmental sustainability and, moreover, in failing to address the root causes. On the supply side the affordability crisis in Cyprus results from the inability of producers and importers to provide consumers with supplies of fuel, electricity and products with high energy inputs, such as air travel, at prices that are affordable to many households and businesses. Heavy reliance on fossil fuels In truth, Cyprus is now paying the price of its heavy reliance on imports of high-priced fossil fuels and its appalling lack of promised investments in alternative energy sources and supporting infrastructure including the upgrading and expansion the electricity grid. On the demand side the incomes of many private sector employees and pensioners are relatively low, which makes them unable to afford the purchase of goods and services subject to rapidly rising prices. In digging deeper on the root causes of the affordability crisis, it is contended that the government are failing in using their ample resources in dealing with the important issues of inadequate energy and water infrastructure, the private sector’s low productivity and wages, and relatively low pensions, while simultaneously hoarding excessively surplus cash. Most notably, the government and the banks have overwhelmingly favoured the increased concentration of resources in the low productivity construction/property development, tourism/hospitality, and retail and wholesale trade sectors of the economy. And employers in these low productivity sectors have been able to extract easy profits by paying low wages, particularly in the compensation and exploitation of their large number of foreign workers, as well as frequently engaging in irregular practices. In fact, in 2025 the average gross monthly wage of non-Cypriot employees in the aforementioned low productivity sectors was estimated by Cystat to be €1,622 and was 16.8 per cent below that of €1,949 paid to Cypriot workers. In addition, to supporting the large flow of real and financial resources to low productivity sectors the Cyprus government has grossly under-invested its abundant financial resources in essential energy and water infrastructure and spent little on Research and Development (R&D) to foster high value added activities. Instead, the latest figures show that the government has used mainly its large fiscal surpluses to accumulate €6.3 billion in bank deposits or reserves by end-August 2026. Making the economy more productive Against this background of the questionable allocation and excessive hoarding of resources by the government, what can be done to make the economy more productive and efficient, while sharing the benefits of growth more equitably for deserving employees and pensioners? The main instrument for formulating and implementing economic policies is the government budget, whereby funds can be allocated in accord with official priorities. Unfortunately, with the government budgets proposed for 2027 to 2029, it appears that it is business as usual. In fact, a large fiscal surplus of 3.9 per cent of GDP or over €1.2 billion for 2027 is being targeted, while the funds allocated for energy projects is appallingly low, and spending for social services is contained to a modest rise of 3.9 per cent, despite promises of large increases in payments to pensioners under the proposed social security reform. The only exception to the usual mechanical updating of government budgets is the huge increase of 42.5 per cent to €895 million in funds earmarked for the defence ministry. More funds for energy and water supply There needs to be a fundamental shift in budget priorities by allocating more funds for the implementation of projects in the energy and water supply sectors, including the expansion of essential infrastructure, such as installing renewable energy-powered water desalination plants, and greater spending in providing adequate income support for deserving social beneficiaries. Importantly, the budgeting of more funds for investment projects and deserving individuals must be supported by substantial improvements in the government’s institutional capacity, otherwise, there is no guarantee that even high-priority projects and programmes will be effectively implemented. Indeed, government ministries and agencies, including the Tenders Review Authority, need to have the competence and integrity to select, prepare, and manage key projects so that such public investments can be efficiently executed without the taint of corruption. Furthermore, despite the government’s current ample fiscal space, there are longer-term fiscal challenges including the need to spend much more on health benefits and pensions for an ageing population, on defence and security, and on combatting climate change, that along with very large outlays on energy infrastructure will require action to sustainably raise government revenue. Realignment of tax incentives And the tax system needs to be changed by increasing rates on the lightly taxed property sector so as to shift investments away from the construction of and foreign demand for “up-market” housing and toward the building of affordable social housing. In addition, there should be a realignment of tax incentives to make more attractive investment in economic activities with the potential for high productivity growth based on the utilisation of modern technologies. And the government must fight against irregularities and corruption, particularly by property “developers”, that give unproductive enterprises competitive advantages over more law-abiding and efficient firms as well as cheating the government out of revenue, and damaging the natural environment. In sum, given the likelihood of a continuation of elevated energy and related prices over at least over the medium-term, the biggest challenge for Cyprus policymakers to sustainably overcome the affordability crisis would be to bring about a profound reallocation of resources that not only produces affordable energy and water supply, but generates productivity gains in the private sector that lead to higher incomes for employees enabling them to afford purchases and enjoy a decent standard of living. But, such a reallocation of resources, particularly in inducing a move in finance away from investments in the property sector, will be difficult to accomplish as a “once-in-twenty years” reform of tax rates and incentives just took place in 2025 and because Cyprus banks also tie a large proportion of their lending to the security of immovable property rather than appraising the repayment capabilities of investors and entrepreneurs in applying for loans. Furthermore, while there may be considerable scope for employers to raise the productivity levels of their firms through the automation and digitisation of the work processes, it is far from certain that productivity gains will lead to increased wages for many employees. Indeed, studies for the United States have shown that automation and digital technology reduce the demand for labour and that highly skilled workers are the main beneficiaries of elevated incomes. Hence, if the Cyprus government were to drive technological productivity growth as a key part of the challenge in dealing with the affordability crisis it could produce tensions with efforts to narrow income inequalities and create a critical policy dilemma.