Fresh discussions on the Cost of Living Allowance (CoLA) will get underway after the Easter holiday, media reported on Monday, on the back of the release of an International Monetary Fund report recommending sweeping changes to rein in the public payroll.

The Cyprus News Agency said the minister of labour has convened a meeting of stakeholders – trade unions and employers’ organisations – for April 25 to discuss the future of CoLA.

All people employed in the broader public sector are entitled to CoLA. In the private sector, the allowance is given only to those who work in professions governed by collective agreements.

The news agency said the government has set a timeline for an outcome – by June this year.

Trade unions want to fully reinstate CoLA to 100 per cent (from 66.7 per cent now) whereas employers seek a new method of calculating the allowance.

Currently CoLA is calculated at two-thirds of the change in the consumer price index.

In late 2012, as part of a preliminary deal between Cyprus and international lenders, parliament passed a series of laws slashing salaries and benefits for people employed in the broader public sector.

The salary reductions began being rolled back in July 2018, and were implemented in stages every January 1 of each year. The final stage in phasing out the cuts came into force on January 1 of 2023 – at which date civil servants recovered all the salary reductions imposed since 2012.

The rollback has led to a significant rise in the public sector wage bill.

In a report published over the weekend, the International Monetary Fund (IMF) recommends suspending CoLA for government employees or reducing the indexation coefficient to less than two-thirds of inflation.

The IMF’s Technical Assistance Report had been requested by Cyprus’ finance ministry in July 2024 during an IMF mission visit to the island.

“To generate fiscal space, the priority is to contain growth in government compensation levels as opposed to employment levels. Although the size of the workforce is comparatively moderate, the authorities could gradually reduce it slightly to create modest fiscal space for other expenditure,” the IMF writes.

“This is best accomplished by identifying non-critical positions and abolishing them once they become vacant. Slowing the growth of pay, however, offers greater potential.”

Significantly, the financial institution suggests scrapping the 13th salary in the public sector.

“To create fiscal space sooner, the authorities could consider, as a last resort, reducing overtime or eliminating the 13th-month payment…”

Recognising that such a step would be “highly contentious”, the report adds that “applying certain measures only to new hires is a possibility, but the savings would take far longer to materialise, especially given low turnover in the government.”

In 2023, Cyprus spent 12 per cent of GDP on the compensation of employees in the general government.

The IMF notes a considerable discrepancy between wages in the public and private sectors – 27 per cent on average.

“Public-sector compensation in Cyprus is 27 per cent higher than that in the private sector, other things being equal, a gap larger than in many other advanced economies.”

The analysis is based on data for the year 2021.

“Given that government employees generally benefit from greater job and income security, more predictable working hours, and other non-monetary benefits than in the private sector, it is usually advised that the pay premium should be somewhat negative, for similar jobs.”

The UN agency goes on to say that the 27 per cent gap is “large in comparison with other countries Only Luxembourg and Spain exhibit wage premium above 20 per cent. The average among European countries is at 3.7, with a minimum at 17 per cent in Norway.”

The premium is broadly similar for men and women.

Elsewhere, the IMF recommends slowing down the disbursement of automatic statutory pay increments to civil servants, from every one year currently to every two years.

“Step increases are granted every year, which is more frequent than in many countries, and are comparatively very large. In addition, compensation is automatically linked to inflation, which is rarely done elsewhere. A general lack of recruitment and retention challenges is further evidence that compensation levels are higher than needed for government employment to be competitive.”

In addition, the IMF recommends reducing overtime to 75 per cent of the 2023 level.

“There is scope to improve the effectiveness of public service delivery,” the report concludes.

“Generous pay for government employees has enabled the recruitment and retention of highly qualified personnel. However, measures of government effectiveness in Cyprus still lag other advanced economies. Moreover, relatively high pay might lead job applicants to apply for positions for which they are overqualified, resulting in a loss of human capital for the broader economy and disruptive internal turnover at the clerical level.”