Imported energy costs drive Cyprus inflation surge, economist warns of spreading economic pressure
"Economist Tassos Yiasemides warned that Cyprus’s recent inflation spike to 3.5 percent in August is driven almost entirely by a 20.3 percent year-on-year surge in imported energy costs stemming from Middle East geopolitical instability, exposing the island's chronic vulnerability as a purely import-dependent economy lacking a competitive electricity market, adequate storage, and swift renewable energy integration."
EU Directive 2019/790 Article 15 Attribution • Verified Energy Document
Cyprus's latest inflation increase is primarily due to rising imported energy costs, rather than excessive domestic demand or loose fiscal policies, according to economist Tassos Yiasemides. He cautioned that this inflationary pressure is progressively extending throughout the wider economy.
Following the consumer price index reaching 3.5 percent in August, Yiasemides, speaking to the Cyprus News Agency (CNA), highlighted that the surge was almost entirely concentrated in the energy sector, with petroleum product prices jumping by 20.3 percent year-on-year. He noted that industrial product prices remained largely stable, confirming that "petroleum products and electricity alone are driving the index higher."
This indicates that the inflation is not a symptom of an overheating economy but rather an external cost increase, now starting to impact other areas. Yiasemides attributed persistently high international energy prices to geopolitical instability and uncertainties in the Middle East, with trade tensions among major global economies adding further risk.
For an island nation heavily reliant on fossil fuels, any such global disturbance immediately affects petrol station prices, and subsequently, electricity bills, transport costs, insurance premiums, and freight rates before eventually influencing retail prices. However, Yiasemides stressed that the fundamental issue is not the international disruption itself, but Cyprus's vulnerability to it.
While global prices are beyond Cyprus's control, the extent of their impact on the country can be addressed domestically. Yiasemides characterized Cyprus as a "purely import-dependent economic system, with a widening trade deficit, no substantial connection to other energy networks, an electricity market that has yet to operate competitively, and a primary sector that has been allowed to wither." Consequently, Cyprus continues to import goods that could potentially be produced locally, thereby importing the higher production costs of other countries.
The economist also criticized the slow pace of progress in renewable energy and storage, noting that discussions have spanned over a decade with insufficient implementation. Regarding government support, he argued that temporary VAT reductions on energy offer only short-term relief and do not tackle the root cause of the problem. Furthermore, if extended indefinitely, these measures become a permanent fiscal commitment responding to a supposedly temporary issue.
Yiasemides suggested that assistance should be targeted at vulnerable households and energy-intensive small and medium-sized businesses, with measures being time-limited and accompanied by clear exit mechanisms. While blanket support might be politically appealing when public finances are in surplus, it also stimulates demand when the economic problem lies on the supply side.
He advocated for more systematic oversight of the fuel market to ensure that falling international prices are passed on to consumers as swiftly as price increases. The more impactful response, he emphasized, must be a medium-term strategy. This includes accelerating the development of renewable energy sources, with a strong focus on storage and enhancements to the electricity grid, as well as finalizing the competitive electricity market and advancing efforts to bring natural gas to Cyprus.
The country should also assess which goods could realistically be produced domestically, giving particular attention to the primary sector, while acknowledging that Cyprus is not an industrial economy. Improving the energy efficiency of buildings and transport would offer another relatively inexpensive way to reduce consumption and exposure to external price shocks.
However, Yiasemides cautioned that complete energy independence is an unrealistic goal for an island. Instead, Cyprus should pursue "a gradual and measurable strategy for reducing its dependence," warning that without such a plan, "during the next crisis, we will be making exactly the same observations." He also noted that renewed inflationary pressure could lead central banks to reconsider monetary policy, potentially resulting in higher interest rates. This would add pressure on borrowers at a time of increasing mortgage lending, potentially burdening households "twice."
Finally, Yiasemides pointed out that the automatic cost-of-living allowance (CoLA) would transfer part of the energy shock to the state wage bill, reigniting past budget debates.