Last month the Northern Cyprus administration imposed 40 percent salary cuts on its bloated civil service, and announced plans to sell off its telecoms and electricity providers and privatise a university.

Turkey contributes around $500 million a year to Northern Cyprus.

Turkey is the only country to recognize Northern Cyprus as a separate state, and maintains a military presence on the island, though Ankara has backed UN-led diplomatic efforts to reunite Cyprus, which was split in 1974 after a Greek-inspired coup in Nicosia prompted Turkey to invade.

Disputes with Cyprus, which gained membership of the European Union in 2004, represent a major stumbling block in Turkey’s own efforts to join the EU.

Cicek said the Northern Cyprus government was expected to show a deficit of 550-600 million lira ($314-376 million) and could run out of resources by the autumn. It needed to spend more wisely or it could follow its airline into bankruptcy.

“Northern Cyprus Turkish Airlines, which posted 40 million lira loss annually, has gone bankrupt,” Cicek told Hurriyet.

“Northern Cyprus state could face the same risk if they do not abide by the protocols. Eighty-four percent of all resources are spent on public sector salaries, with not much left for other expenditures,” he said.

Some 12,000 people work in Northern Cyprus’s civil service but it is estimated that double that number are on the public payroll.

Northern Cyprus has a population of 264,000 people, but its demographic make-up is a highly sensitive issue as many residents are from Turkey. A wave of Turks migrated to the enclave after the 1974 invasion, while many Turkish Cypriots left for Britain or Turkey.

Northern Cyprus’s economy is worth some 3.5 billion euros a year, compared with 17 billion in the more populous south. A collapse in its construction sector led to a fall of almost 10 percent in economic output in 2008 and 2009, but the economy is expected to have grown by one percent in 2010.