Nicosia:Cyprus' economy is currently experiencing positive growth, with a projected increase of 3.8% in 2025 and an anticipated 3% growth rate in 2026. This optimistic outlook is complemented by a surplus in public finances and a reduction in public debt to 55% of GDP.
According to Cyprus News Agency, the Fiscal Council has identified several significant risks that could affect the economy in the medium to long term. Geopolitical developments, energy dependence, low productivity, demographic changes, and persistent weaknesses in public investment are highlighted as potential challenges.
Andreas Charalambous, President of the Fiscal Council, presented the 2026 Interim Report in Nicosia, emphasizing the country's strong fiscal position. The general government recorded a surplus of approximately 3.4% of GDP in 2025, supported by fiscal surpluses, economic growth, and favorable borrowing conditions.
Economic growth has been driven by increased migration, foreign company presence, rising employment, domestic consumption, and service exports. Despite geopolitical tensions, tourism remains resilient, contributing to the positive economic climate.
Employment grew by 3.5% in 2025, with unemployment decreasing to 4.4% and further to 3.6% in the first half of 2026. However, structural challenges such as an aging population and demographic trends indicate that migration and employment might not sustain growth indefinitely, with migrants already making up more than 20% of the population.
The Fiscal Council also pointed out Cyprus' current-account deficit, partially due to its reliance on imported energy and higher oil prices. Foreign companies' presence affects the primary income balance, adding to the economic complexity.
Charalambous warned that escalating geopolitical tensions could increase energy prices, weaken growth, and raise government borrowing costs, necessitating the maintenance of sound public finances.
Public investment is another area of concern, with a development budget execution rate of only 25% in the first half of 2026, hindered by administrative capacity constraints and project preparation delays. Limited absorption of funds from the Recovery and Resilience Facility is also an issue.
Despite high revenues supporting Cyprus' fiscal performance, expenditure remains high, surpassing European-agreed limits. The Council expressed concerns about public spending levels and quality, particularly the low investment and insufficiently targeted social expenditure.
Short- and medium-term fiscal risks include potential spending pressures during the upcoming election period and prolonged Middle East conflict impacts, particularly energy-price pressures. The Council emphasized the need for credible assessments of major infrastructure projects like the Cyprus-Greece-Israel electricity interconnection and the Vasilikos power station.
In the long term, climate change and population aging pose significant challenges, with a potential fall in the worker-to-pensioner ratio necessitating pension reform.
The Fiscal Council urged continued prudent fiscal policies, improved public investment assessments, better social spending targeting, a binding three-year fiscal framework, faster productivity-enhancing reforms, and stronger fiscal governance. It also called for closer monitoring of large state-owned and semi-government organizations to prevent structural weaknesses from undermining Cyprus' positive economic outlook.