The troika concluded its first post-memorandum evaluation of the Cypriot economy, public finances, and the banking sector for 2025 last Thursday. It is the first time in recent years that the technocrats of the international creditors left without preparing a preliminary on-site report in the Republic of Cyprus.

Their final report, containing all findings and recommendations across the three areas of evaluation, will be published in May.

However, they are said to have expressed serious concerns regarding the risks to public finances—at a time when the Cypriot economy is being upgraded, systemic banks are regaining investment-grade ratings, and various economic indicators are showing positive trends.

According to information obtained by Brief, the main concerns of the international creditors over public finances stem from government policies on energy and their potential impact on the state budget and, by extension, on taxpayers.

The troika’s technocrats requested detailed updates and data on the ongoing efforts regarding the Cyprus-Greece electricity interconnection project. They also sought clarity on the status of negotiations concerning the GSI project and asked for the Cypriot authorities’ final decision on whether the country intends to participate in the project—and under what conditions.

They warned that if Cyprus proceeds with the project and complications arise, particularly related to geopolitical developments and associated risks, there is a significant possibility that public finances could suffer adverse consequences. The interconnection cable project is estimated to cost around €2 billion by 2030.

The Vasilikos Energy Center also came under scrutiny. The primary reason for the creditors’ interest is that the project has been financed by the European Investment Bank and the European Bank for Reconstruction and Development. Total funding for the project amounts to approximately €135 million, with the EU providing around €73 million of that sum.

However, the project remains stalled, generating no revenue. Due to contractual obligations, the Republic of Cyprus is now required to begin repaying the loans. Energy Minister George Papanastasiou had stated a few months ago that all infrastructure at the Vasilikos Energy Center, including the floating LNG unit “ETYFA Prometheus,” would be completed by the end of 2025.

On March 19, 2024, Mr. Papanastasiou expressed optimism about the project’s progress, saying that the terminal at Vasilikos and its link to the floating unit "could be completed by the end of 2024."

The troika also raised concerns over the continuing increase in the public payroll, which they identified as a major issue requiring immediate containment measures.

Special mention was made regarding the government’s intention to further increase the Cost of Living Allowance (COLA) as part of upcoming social dialogue negotiations. According to Brief, the troika's technocrats view COLA and annual across-the-board pay increases as the number one threat to the state budget.

They also reviewed the government’s decision to proceed with compensation payments amounting to millions of euros for depositors affected by the 2013 bail-in at Bank of Cyprus and the former Laiki Bank, as well as to holders of haircut bonds. They cautioned that replenishing these funds, combined with the state’s non-discretionary spending, could negatively impact public finances.

While acknowledging that the haircut of deposits, bonds, and even shares was and remains a major injustice, one technocrat noted:
"I understand the injustice done, but past mistakes and the pursuit of quick profits should not be paid for by future generations."

The troika called for faster completion of state development projects and quicker implementation of requirements stemming from the Recovery and Resilience Plan (RRP). The RRP has a total budget of €1.2 billion and includes the execution of 133 investments and reforms, with a deadline set for 2026.

The technocrats inquired why the judicial reform process continues to be delayed.

They also warned the government and those managing the country’s economic portfolio to take into account the upcoming cycle of continuous elections (2026 and 2028), expressing concern that fiscal policy might loosen under party pressure and pre-election promises.

Regarding demographic challenges, Brief reported last Thursday that the issue is considered a “critical concern” by international creditors, requiring effective long-term measures.

They alerted the Cypriot authorities to the risks posed to both public finances and the labor market due to declining fertility rates and rising underpopulation.