With its inefficient allocation and wasting of resources, Cyprus is amplifying inequalities and damaging significantly the physical environment

Cyprus’ GDP is growing rapidly and banks are making big profits, but is the welfare of most people benefiting from such developments? The answer is a definite no as the corrupt and inefficient allocation of real and financial resources in generating economic growth and bank profits is just benefitting the few comprising mainly the political and business elite and their relations.

Both the government and financial institutions are failing to use sizable amounts of their ample financial resources productively and are hoarding and depositing great mounts of cash at the Central Bank of Cyprus and commercial banks.

Furthermore, Cyprus with its inefficient allocation and wasting of resources is amplifying inequalities and damaging significantly the physical environment in the process.

Government

Why should the Cyprus government continue to produce relatively large surpluses and take money out of the economy when many households are struggling with cost-of-living pressures including being unable to afford decent housing accommodation? Finance Minister Makis Keravnos argues that the government needs to be prudent with its finances. Yet the time for fiscal austerity has well passed with the government debt to GDP ratio now very close to the EU target of 60 per cent, while Cyprus had the lowest annual rate of consumer price inflation in the EU of minus 0.1 per cent in August.

Moreover, with its continuous surpluses the government is piling up reserves, which surely are well in excess of its contingency needs. In fact, at end-August 2025 the government held deposits at the Central Bank and commercial banks totaling €5.96 billion or around 17 per cent of GDP. Strikingly, in July alone such deposits increased by €350 million.

Apart from generously expanding the payroll for government employees, advisors and consultants as well as awarding lucrative contracts, often corruptly, to certain companies, the government is being particularly stingy in allocating funds to meet development and social needs. In truth, most of the surpluses of the general government stem from the large surpluses of the Social Security Fund and it would seem only fair that the latter surpluses be used to be spent on social needs such as building affordable housing for lower-income households rather than being channeled into boosting government deposits at banks.

Furthermore, with its endless surpluses and the European Commission and the IMF making little criticism of the government’s glaring shortfalls in spending on effectively implementing essential infrastructure projects and in meeting social needs as well as credit rating agencies  lavishly praising its fiscal policies, the Cyprus authorities became complacent and even quite irresponsible in managing and acquiring the resources to serve public needs including for the protection of residents against natural and man-made disasters. Indeed, the lack of preparations and adequate equipment for dealing with the outbreak of fires and the poor initial response to the disastrous fires in the Limassol district has exemplified the human-life and financial costs of failing to manage and allocate responsibly government resources.

Financial Institutions

Since the financial crisis of 2012/13 and its immediate aftermath Cyprus banks have played a much less dominant role in financing real economic activity. Cyprus banks have massively reduced the size of their balance sheets by selling and transferring NPLs to mainly “credit acquiring companies” such as Gordian and Altamira and cutting-back on new credits to finance NFCs and households.

In contrast, the magnitude of bank deposits has risen substantially following the deposit haircut of March 2013. As a result, the ratio of deposits to loans had ballooned to 211.6 per cent by December 2024 compared with 74.3 per cent at end-December 2013. In consequence, the excess reserves of banks soared. However, Cyprus banks rather than using their abundant liquidity to contribute toward productively financing the economy and society, unlike most banks in the euro area, have placed the greater part of their excess reserves in interest-bearing deposits at the European Central Bank (ECB).

In fact, this practice contributed to Cyprus banks recording losses when interest rates at the ECB were negative. However, when ECB interest rates were increased to positive levels, from 3 to 4 per cent for overnight deposits between March 2023 and February 2025, these banks registered very large profits.

While there has been considerable criticism of the abnormally high bank profits made in 2023 and 2024, it is most concerning that a large part of these profits has stemmed from activities that have not benefitted the economy and society.

And In view of the marked decline in the role of banks in financing real economic activity over recent years there is the question of how and what institutions are supporting the real growth of the Cyprus economy with finance. According to the latest IMF Consultation Report on Cyprus “Non-bank financial institutions (NBFIs) have over €17 billion in assets under management (around 50 per cent of GDP)”. This compares with the total assets of Cyprus banks of over €65.6 billion at end-2024. And on the allocation of assets by NBFIs the IMF report states that “most are funds that use foreign or domestic high-wealth capital to invest abroad, indicating that direct links to the banking sector and the real economy are limited”.

However, the further question arises as to how the bulk of operations and investments in the key trading, tourist and construction/real estate sectors of Cyprus are financed. It appears that the former two sectors rely on income from current operations and supplier credits to support ongoing production and mainly on equity financing for investments.

In contrast, construction/real estate activities and investments are being financed mainly by advance payments by domestic customers with bank loans and from cash purchases of both existing and planned properties primarily by foreign entities.

Implications

The failure of the government and financial institutions to responsibly use the abundant financial resources at their disposal to benefit the economy and society is having profound implications for the development and stability of the economy, let alone producing adverse effects on income and wealth inequalities and the physical environment.

Apart from financing road construction and property development, the Cyprus government is doing little in using its finances, including available funding from the EU, to effectively meet the economy’s development needs meaning among other things that infrastructure to provide reliable and affordable supplies of electricity and water to businesses and households is most likely to be inadequate. And with the population ageing, both parents of young children working, and mental health problems rising, investments in the care economy are falling far short in providing support and facilities for the elderly, children and the unhealthy.  

Unless, the government uses its resources more efficiently including significantly cutting back on its excessive expenditures on personnel and broadening its tax base, the government is likely to face financial stability problems. Satisfying demands on its financial resources for addressing the aforementioned hard and soft infrastructure needs, as well as fulfilling challenges such as substantially boosting outlays on defence and cybersecurity, and undertaking meaningful action to combat climate change and effect the promised digital transformation would greatly raise government spending and place serious strains on the public finances. Accordingly, the forthcoming tax reform should aim at substantially increasing government revenue by broadening the tax base through the much greater taxation of immovable property and the serious tackling of tax evasion and avoidance.

On the issue of how Cyprus financial institutions are using financial resources there should be concern that they are falling considerably short in contributing to development, while at the same time posing some risks in ensuring financial stability.

Given the ongoing propensity of Cyprus banks in continuing to place a large part of their assets in deposits at the ECB rather than in extending interest-bearing loans to productively finance real development, there should be concern that with ECB deposit rates on the decline below 3 per cent, that these banks could experience marked falls in their profits, and perhaps jeopardise financial stability in the process. In fact, the Central Bank of Cyprus in its latest Financial Stability Report states that “the normalisation of ECB monetary policy could affect bank profitability”.

Also, the considerable exposure of banks and largely unregulated NBFIs, especially credit acquiring companies, to the real estate sector poses risks to financial stability.

Accordingly, Cyprus bankers will need to display more competence and willingness to evaluate and extend affordable interest-bearing loans so as to bring about adequate profitability and stability. And as recommended by the IMF, NBFIs and the growing FinTech sector that complement traditional banks need to be subject to a robust supervisory framework with the capital and liquidity positions and investments of these institutions as well as their links to banks regularly monitored.

Finally, from a macroeconomic perspective it should be stressed that with Cyprus incurring current account deficits averaging a whopping 8.9 per cent of GDP over the years 2022 to 2024 a considerable amount of real economic activity must have been externally financed. Thus, it is very important for the Cyprus authorities to not only strongly promote exports, but also to combat irregular practices such as money laundering and tax evasion, which tarnish the reputation of Cyprus as a sound destination for foreign investments.