A questionable positive spin on Cyprus’ economic success and resilience

President Nikos Christodoulides and Finance Minister Makis Keravnos brag frequently about the successful performance and good management of the economy by citing the relatively rapid growth of GDP and the upgraded credit ratings of the government and banks.

However, the impressive increase in real GDP per head by 44.1 per cent over the ten years to 2025 has in no way been matched by a similar rise in the average real disposable incomes of households, which is estimated to have increased by a much lower 21.8 per cent. And the credit upgrades have not resulted in any significant improvement in the performance of the government and banks in investing their ample financial resources in essential infrastructure and worthwhile projects to support sustained economic development.

Thus, it seems a delusion or a myth that the government and banks are contributing profoundly in generating durable and equitable economic growth that is enabling the present and future advancement in public welfare.

Government leaders should know or be informed that GDP per se does not provide data on how the gains from its growth are distributed to households and, accordingly, whether the well-being of ordinary people is being improved. And there is no direct link between changes in the credit ratings of the government and banks and developments in the standard of living of households. Hence, to maintain credibility with the public, these politicians should before providing news on evaluating an economy’s performance and the success of their policies review, firstly, data on the level and distribution of the real incomes of households and, secondly, whether the resources of the government and banks are being used efficiently to serve the public and support the sustained development of the economy.

Policy success?

More specifically, the taxation and expenditure policies of the government have resulted in GDP gains being distributed disproportionately to the few, resulting in a widening of income and wealth inequalities. Low taxation of real estate benefits immensely wealthy property owners, while the prolific award of public contracts to very few selected developers greatly augments their income and political influence. And lower-income households are adversely affected by an increasingly regressive tax system and inadequate social income support. Indeed, Eurostat estimates that over 18 per cent of the Cyprus population runs the risk of experiencing poverty.

Meanwhile, Cyprus banks after building up their liquidity and capital to adequate levels by 2015 have concentrated their activities in dealing with their large amount of impaired loans, that has involved the rescheduling of loans and the transferring of a vast amount of non-performing debt and related property collateral to mainly ‘credit acquiring companies’, like Gordian. And these debt management activities of banks have resulted largely in the transfer of wealth rather than in the creation of real value added or wealth. Furthermore, in compensation for their debt management activities – including property foreclosures – bank executives and employees have been remunerated handsomely.

In addition, banks have not shown much willingness and competence to evaluate and finance economically viable projects, that are necessary for generating and sustaining economic development. Instead, Cyprus banks in recent years have deposited their abundant excess reserves at the European Central Bank (ECB) to earn income from interest rates considerably in excess of what they offer on customer deposits. In fact, cash and cash balances of Cyprus banks amounted to €20.1 billion or 28.7 per cent of their total assets at end-2025, with most of this cash deposited at the ECB earning an interest rate of 2.0 per cent. In contrast, the average interest rate paid by Cyprus banks to its customers is currently around 1.0 per cent, being among the lowest in the euro area, while the interest rates charged on bank loans mostly exceed the euro area average.

Accordingly, Cyprus banks are making a large part of their relatively high profits from unproductive activities and their high loan rates and pitifully low deposit rates. And in addition, with the majority of these profits going to the foreign shareholders it can be concluded that it is a delusion that Cyprus banks are contributing substantially in supporting the Cyprus economy and society.

Resilience?

The current war with Iran and its consequences have raised questions about the vulnerability of the Cyprus economy. Have government policies made the economy and society more resilient to external shocks such as from the war with Iran or is it a delusion?

Keravnos, while claiming that prudent fiscal policies have enabled Cyprus to be resilient in facing the adverse effects of the war with Iran, called for ‘fiscal discipline’ and a ‘continuation of responsible and strict economic policy’. Thus, although the government held cash deposits at banks of €6.1bn at end-February 2026 it announced supportive measures costing just €100 million to help alleviate the plight of households and hoteliers and farmers hit hard by the war in the Middle East. 

However, as many lower-income households are on the edge or are in poverty, these supportive measures would appear to be inadequate in making a significant portion of the Cyprus population largely resilient to the adverse effects, such as much higher energy prices, arising from the Middle East conflict. Notably, despite the reduced excise duties on car fuels, petroleum prices on April 16 were around 15 per cent above their pre-war level.

In truth, especially given its ample financial reserves, the government seems to be complacent or even uncaring at present about the situation of those persons and firms being hardest hit by the damaging effects of the war with Iran.

And Cyprus banks as well with their plentiful reserves and adequate capital appear to have done very little with their interest rate and credit policies to ease the burden of debt on customers suffering from the war. In fact, in a recent article the governor of the Central Bank, Christos Patsalides, stressed that the banks in response to the ‘war in the Middle East’ should ‘further strengthen financial stability’ through maintaining high liquidity reserves and high capital buffers. And he advanced nothing on how banks could support their customers affected adversely by the war!

While the government appears to be risking and even deluded about the shorter-term resilience of the economy by not using to an adequate extent its financial reserves to counter the damaging consequences of the war and possibly hoping that energy prices and supplies will return soon to their pre-war levels, it is the questionable resilience of the Cyprus economy over the longer-term that should be of vital concern. 

In this respect, the government has not planned and invested in implementing effectively the essential infrastructure projects required to ensure the affordable, reliable and adequate supplies of electricity and water over the medium to longer-term for all households and businesses. Moreover, with the current corruption, institutional incompetence, and uncaring attitude of government leadership in relation to implementing what should be priority infrastructure projects, such as in expanding electricity grid connectivity, there is hardly any guarantee of energy and water security or resilience for Cyprus over the coming years.