Cyprus has repaired its finances – now it must invest in its future

The IMF said the island should prioritise high-quality investment in energy, climate adaptation and infrastructureEconomic success creates a new question for Cyprus. Having repaired the state’s balance sheet, is the island using its financial strength sufficiently to repair structural weaknesses in its economy? Cyprus’ upgrade into the A credit-rating category is an important achievement reflecting strong economic growth, sustained fiscal surpluses and rapid reduction of public debt, also reflected in a fiscal surplus seen in 2025 and one predicted for 2027. Nowhere is the question of investing in the future more relevant than energy and water. Traditionally treated separately, they are becoming increasingly interdependent. Cyprus faces an electricity system requiring substantial modernisation just as drought and rising temperatures are making water supply increasingly dependent on energy-intensive desalination. Energy security, water security and climate adaptation should therefore become parts of the same long-term national strategy. Fiscal policy has reached a turning point While not abandoning fiscal discipline, maximising fiscal surpluses and reducing debt as rapidly as possible should not become objectives in themselves. Both the IMF and, now, Cyprus’ Fiscal Council point towards a different approach. The IMF’s says Cyprus’ falling debt creates scope for “gradual and growth-friendly fiscal easing”, prioritising high-quality investment in energy, climate adaptation and infrastructure. It also calls for accelerated energy investment and reform to reduce costs and strengthen energy security. The Fiscal Council approaches the issue from another direction. Its 2026 Interim Report warns that Cyprus’ structural dependence on expensive imported energy creates pressure for government intervention whenever international energy prices rise. Energy-subsidy measures could rise to 0.3 per cent of GDP in 2026. Repeated temporary measures, it warns, risk becoming permanent expenditure. It has also identified a wider “triple deficit”: insufficient ambition, inadequate infrastructure planning and weak implementation. This goes to the heart of the issue. Cyprus should not repeatedly use its strong fiscal position to subsidise the consequences of structural energy weaknesses. It should increasingly invest in removing them. Modernise the electricity system Cyprus remains about 88 per cent dependent on imported petroleum products. Electricity prices remain among Europe’s highest. For years the debate has concentrated on natural gas, new conventional generation, renewables and the Great Sea Interconnector. All remain important. But much greater attention must now be paid to the electricity system itself. Cyprus already has more than 1,055MW of photovoltaic capacity. Yet renewable electricity is being curtailed on an extraordinary scale. Adding renewable capacity without developing the infrastructure needed to integrate it produces diminishing returns. Climate adaptation cannot simply mean building more desalination plants Cyprus needs a sustained programme to reinforce and digitalise transmission and distribution networks, with modern substations, automation, smart meters, forecasting and management capable of accommodating distributed solar, storage and flexible demand. Storage must be developed as an integral part of this system. The objective is to use substantially more of the renewable electricity Cyprus already produces, reduce curtailment, improve reliability and reduce dependence on expensive oil-fired generation. Unlike temporary electricity subsidies, these investments can produce benefits for decades. Water is becoming an energy issue The IMF identifies rising temperatures and extreme climate events as risks to infrastructure, food security and economic growth. For Cyprus, one of the clearest manifestations is water scarcity. Desalination is inevitably playing a growing role. But it cannot be planned independently of electricity. It is energy-intensive, so increasing desalination raises electricity demand and makes the cost and security of water increasingly dependent on the electricity system. Yet Cyprus is also losing large quantities of water through ageing networks. Audited figures put unaccounted-for water at about 29 per cent. Producing expensive desalinated water only to lose a substantial proportion through deteriorating networks makes little economic sense. Every cubic metre lost also represents electricity wasted producing and pumping it. Modernise and integrate the water system Climate adaptation cannot simply mean building more desalination plants. The hierarchy should be clear: reduce losses, maximise wastewater reuse, improve storage and management, and desalinate the remaining requirement. That requires sustained network rehabilitation: replacing ageing pipelines, district metering, pressure management, smart meters, sensors, leakage detection and digital control. Reducing leakage can postpone additional desalination capacity, cut electricity consumption and lower operating costs. It is simultaneously investment in water security, energy efficiency and climate adaptation. There is then an opportunity to integrate the two systems. Cyprus produces large quantities of solar electricity around midday, some of which cannot currently be absorbed. Desalination plants are large electricity consumers. New desalination capacity should be designed from the outset to maximise the use of renewable electricity, producing more water when renewable electricity is abundant and reducing production when electricity is scarce or expensive. Water has an important advantage: it can be stored. Instead of always storing surplus solar electricity in batteries, Cyprus could use it to produce water and store the product rather than the electricity. This would not replace batteries, but be complementary to them. Water security also requires reliable desalination regardless of weather conditions. New plants should increasingly combine renewable electricity, flexible operation, storage and reliable grid supply. Climate adaptation is productive investment The IMF’s emphasis on climate adaptation is particularly relevant. Adaptation is often regarded simply as another cost imposed by climate change. Properly designed, it is investment that reduces future economic and fiscal costs. Replacing a deteriorated water main costs money today but reduces losses for decades. Modernising the electricity grid costs money today but enables more solar generation to be used, reduces curtailment and supports an increasingly electricity-dependent water system. Prevention and adaptation can be cheaper than repeatedly responding to crises. A national plan to 2040 Cyprus therefore needs more than individual projects. It needs an integrated Energy-Water-Climate-resilience plan to 2040. It should assess electricity and water requirements under economic and climate scenarios; grid reinforcement and storage; future desalination capacity; water-network rehabilitation; wastewater reuse; renewable integration and digitalisation. Crucially, it should establish priorities, costs, timetables and responsibility for delivery. Government need not finance everything. EAC and network operators, water authorities, EU funds, EIB and private investment all have roles. Public resources should be used where they can accelerate, leverage or de-risk investments with strong economic returns. The issue is not spending more for its own sake. It is spending better. Cyprus needed the decade following the financial crisis to repair its public finances. That strategy succeeded. The next phase should use the financial strength created to make the economy more productive, competitive and resilient. The A credit rating should not simply demonstrate Cyprus’ ability to save. It should strengthen its ability to invest intelligently. Few investments will be more important than ensuring secure and affordable electricity and water in a hotter and drier climate.