The Cypriot economy`s cost competitiveness has deteriorated significantly over the past decade, according to a European Commission overview of competitiveness in the 27 EU member states.
The Commission notes that labour productivity growth has been offset by the growth of prices and wages.
The challenge, it says, is to maintain and increase exports so as to keep the current account balance from posing serious long-term problems.
It adds that the system of wage indexation and high electricity prices limit the competitiveness of Cypriot industry.
According to the Commission, the Cypriot government is trying to modernise the indexation system to better reflect productivity gains, while in the long term the discovery of natural gas can create opportunities to build a more diversified energy system.
The move towards knowledge-intensive and high-growth economy would benefit from improved research and innovation policies.
Get all the latest news and videos in your inbox. Register FREE