They do not reflect reality of income inequality and worker exploitation in Cyprus

During the administrations of the governments of Nicos Anastasiades and Nikos Christodoulides praise has been heaped on the economic performance of Cyprus by referring to statistics on its relatively rapid GDP growth and on the pronounced decline in the government debt to GDP ratio since 2015.

Furthermore, the performance of Cyprus banks is seen as showing a marked improvement owing to the very large shifting of non-performing loans (NPLs) off bank balance sheets.

As it should be the prime and ultimate objective of economic policy to sustainably improve the welfare and living conditions of a country’s citizens, a key question is whether the much-publicised developments in GDP, government debt and bank NPLs in Cyprus are contributing significantly to achieving this objective.

GDP

Are Cyprus households benefiting from the relatively rapid growth shown by official GDP statistics? Does GDP growth correlate well with measures that affect the welfare of households, such as employment, employee incomes, and net wealth?

Economic activity began recovering in 2015 and by 2024 real GDP had increased by 59.4 per cent since then. However, this large rise in real GDP coincided with a smaller increase in employment of 40 per cent from 2015 to 2024.

One factor that could account for this divergence between GDP and employment growth from 2015 onward would be gains in productivity, a sizable part of which could be attributed to labour.

And if there was considerable labour productivity growth, employees should have received increases in their real earnings somewhat in line with the rise in real GDP per employee of 17.2 per cent in the years from 2015 to 2024.

However, over this period real mean gross earnings of employees increased by a lower 8.5 per cent, while real median income was up by a mere 2.6 per cent.

These statistics reveal that the earnings of employees, that are the main source of household incomes in Cyprus, have hardly benefited from the rapid growth of GDP since recovery began during 2015.

Undeniably, it is the owners of capital that have disproportionately gained from GDP growth.

In fact, national accounts data show that the compensation of employees fell from 45.2 per cent of GDP in 2014 to 44.1 per cent in 2024, while in stark contrast “net operating surplus” (essentially company profits) as a share of GDP rose spectacularly from 18.5 per cent in 2014 to 26.1 per cent in 2024.

There is a need to dig deeper in explaining developments in inequalities in income and wealth distributions in Cyprus, that are affecting lower income households more adversely and threatening to hollow out the middle class.

Indeed, what is most concerning from the point of view of mitigating income inequalities is that the average money compensation of employees in the lowly-paid private sectors, such as retail trade, accommodation and food services and construction, which account for around two-thirds of total employees, rose by 34.4 per cent over the period from 2015 to 2024 to just €22,200 annually.

In marked contrast, employees in the more highly-paid government and private sectors recorded higher rates of increase in their average compensation, with that of government employees rising by 42.6 per cent to reach €51,460 annually, while mean annual earnings of finance and insurance sector employees increased by 54.7 per cent to an estimated €58,875 in 2024.

Thus, GDP growth statistics in Cyprus, mask profoundly what is happening in developments in income inequalities between the low and high-paying job sectors and, accordingly, cannot be relied upon for assessing advances or lack thereof in the welfare of households.

Government debt

President Nikos Christodoulides and Minister of Finance Makis Keravnos advertise frequently following credit upgrades, that the generation of budget surpluses and the reductions in the government debt to GDP ratio affirm the government’s exercise of responsible policies.

But, are the citizens of Cyprus benefiting from such fiscally austere policies, which this author regards as unnecessary and irresponsible?

While the Cyprus authorities needed to restore stability in the government finances after the financial crisis of 2013, they have gone overboard in recent years in producing budget surpluses.

Surely, once stability in the government finances had been achieved, through balancing the budget and having a government debt to GDP ratio approach 60 per cent in line with the Maastricht criteria, as happened by 2023, focus should have been directed at improving the quality of the government finances.

But instead, the government continued to produce surpluses and just pile-up billions of euro in deposits at banks, with its cash balances at the Central Bank at end-January 2026 amounting to over €4.7 BILLION.

Moreover, these government surpluses, which result from effectively taking money out of the economy and curbing the purchasing power of households, could be better used in efficiently investing in productive projects, such as in infrastructure to ensure the reliable and affordable supply of electricity and water, as well as in providing adequate social support for vulnerable persons, rather than spending excessively on employing many incapable, but politically loyal personnel.

In addition, the sizable surpluses of the Social Security Fund should be used for social purposes, such as in the construction of affordable housing, rather than being lent to the central government to finance certain current expenditures like payments of the National Health Services.

Furthermore the “reformed”, but poor quality, regressive tax system of Cyprus needs fundamental changes.

Most importantly, income, wealth and intergenerational inequalities should be narrowed by instituting greater progressivity into the tax system by, among other things, lowering indirect taxes on energy consumption and levying much higher taxes on the purchases and ownership of wealth.

And the tax base requires broadening, by not only significantly taxing wealth, but by taking serious and effective action to combat prolific tax evasion and questionable tax avoidance, so as to deal with medium and longer-term fiscal challenges.

That is, much government revenue will be required to finance considerably higher spending on defence and on action combatting climate change and corruption as well as to provide greater care for the aging population – all challenges that need to be met to sustainably improve the living conditions of households.   

Private debt

The financial health of businesses and households and their ability to undertake productive investments is affected not only by their current incomes, but by their net wealth positions.

In this connection, the performance of Cyprus banks since the financial crisis has been praised mainly owing to the massive shifting of the NPLs of businesses and households off their balance sheets.

But, this transfer of impaired loans and often the selling of related property collateral primarily to agencies, such as Gordian and Altamira, has not relieved many borrowers of their heavy debt burdens.

In fact, the debt of non-financial companies and households amounted to 119.8 per cent and 57.5 per cent of GDP, respectively, at end-2024.

Importantly, this large overhang of outstanding loans of the private sector, a considerable proportion of which is non-performing, continues to pose problems for the economy.

Indebtedness is reducing the purchasing power of firms and households, while banks are reluctant to lend to what they perceive to be uncreditworthy customers and those without property collateral.

Notably, banks despite their abundant excess reserves have been unwilling and even lacking in competence in financing economically viable investments needed for generating economic development.

In sum, Cyprus banks in recent years have been far from sufficiently industrious and socially-oriented in seeking worthwhile projects to finance and in rescheduling debt at affordable interest rates and charges.

Rather banks have chosen to use their plentiful financial resources and make large risk-free profits by depositing huge amounts of cash at the ECB and receive interest at rates well above the rates they pay on customer deposits.

Indeed, this latter unproductive activity of banks has not benefited the economy and society of Cyprus.

With a sizable part of bank profits going to foreign shareholders, certain political parties have proposed an extraordinary tax on bank profits, with the proceeds of the tax to be used for social purposes.

The prime indicators used by the Cyprus authorities, specifically GDP growth, the government debt to GDP ratio, and the NPLs of banks, in assessing the performance of the economy and the appropriateness of government and bank policies, are deficient and misleading in determining whether the main objective of economic policy, namely to sustainably improve the well-being and living conditions of the country’s people is being achieved.

GDP growth statistics, provide little information on developments in the distribution of income and wealth between the various income groups, including the owners of capital, and on the extent to which lower income workers are being exploited.

Notably, in Cyprus over the period from 2015 to 2024 real GDP per employee rose by 38.5 per cent, yet estimated real median income and average compensation of lower paid private sector employees rose by just 2.6 and 10.6 per cent, respectively.

And the continued generation of sizable budget surpluses aimed at reducing the government debt to GDP ratio by regressive taxation and in not spending on implementing vital infrastructure projects and combatting corruption and climate change as well as in not providing enough adequate social protection to the vulnerable, is curtailing significantly the purchasing power and harming the living conditions of households.

Finally, Cyprus banks with their deficient lending policies and questionable debt management, highlighted by a massive shifting of NPLs off their balance sheets, are hardly contributing to economic development with their very limited financing of economically viable investments, while at the same time directly and indirectly keeping many businesses and households heavily indebted.

Les Manison is a former senior economist at the International Monetary Fund, an ex-advisor in the Cyprus finance ministry and a former senior advisor at the Central Bank of Cyprus