Hanoi:The Cypriot economy is projected to experience growth of 3.1% in 2026, despite challenges posed by global conflicts such as the Russia-Ukraine war and unrest in the Middle East, announced Finance Minister Makis Keravnos during the presentation of the 2027 state budget to the House Finance Committee. The growth rate is expected to remain around 3% from 2027 to 2029.
According to Cyprus News Agency, inflation is forecasted to be 4% in 2026, then decrease to 2.5% in 2027, and further drop to 2% in 2028 and 2029. Unemployment is anticipated to be at 3.8%. The fiscal balance is predicted to stay in surplus, reaching 2.7% of GDP in 2026 and improving to 3.9% in 2027.
Public debt as a percentage of GDP is expected to decline significantly, falling by 6.1 percentage points in 2026, and further decreasing to 46.6% of GDP in 2027 from the current 48.9%. These projections indicate a steady downward trend in public debt over the medium term.
In the banking sector, deposits are on the rise, fueled by inflows from households and businesses. Domestic non-financial corporation deposits have shown a slight increase. Loans extended by Cypriot banks have been on the rise since 2023, along with an increase in new lending. The banking sector maintains a strong capital base and high liquidity levels, enhancing its resilience.
The 2027 state budget focuses on maintaining a fiscal surplus, reducing public debt, promoting the green transition, restraining public sector employment, and maintaining a robust financial system to mitigate potential risks to public finances. Keravnos described the budget as people-centered, with increased social policy spending to support households and businesses facing rising living costs due to the energy crisis exacerbated by international conflicts.
Cyprus has called for greater fiscal flexibility with the European Commission to allow additional spending to address the energy crisis's consequences. Discussions are underway regarding a further reduction in fuel taxation and potential corrections on VAT charges in electricity bills.
The draft 2027 budget estimates total expenditure at £14.406 billion, including loan repayments and interest. Public service posts will be reduced for the third consecutive year, with a net reduction of 51 posts. Cyprus has received £709 million from its £1 billion Recovery and Resilience Plan grant allocation, achieving most milestones. Infrastructure projects planned include new roads, museum development, and new government buildings. The budget allocates funds for defense equipment, local government, and the Solidarity Fund.
Keravnos identified fiscal risks such as the natural gas terminal at Vasiliko and the need to meet climate targets to avoid purchasing CO2 emission allowances. He also noted external risks from worsening geopolitical developments and climate change's impact on public finances.