Nicosia: The International Monetary Fund (IMF) has lauded Cyprus’ robust fiscal and economic performance in 2024, highlighting a 4.3% budget surplus and a reduction in public debt to 65% of GDP. However, in its latest Article IV Consultation report for 2025, which was published on Monday evening, the IMF also warned over emerging signs of economic overheating and urged authorities to maintain prudent fiscal discipline.
According to Cyprus News Agency, Cyprus recorded one of the euro area’s highest growth rates last year at 3.4%, driven by strong tourism activity, rapid expansion in Information and Communication Technology (ICT), and resilient consumer demand. Yet the Fund warned that the momentum, while positive, also carries inflationary risks.
Growth is expected to decelerate to 2.5% in 2025, before stabilizing around 3% over the medium term. Inflation, which had moderated to 2.1% by March, is projected to align with the European Central Bank’s 2% target later in the year. However, the Fund cautioned that factors such as public sector wage hikes and relaxed fiscal policy could rekindle price pressures.
Strong Fiscal Metrics, But Caution Urged
The IMF pointed out Cyprus’ fiscal achievements, noting that the primary surplus reached 5.6% of GDP in 2024-an outcome supported by buoyant revenues that offset higher government spending on wages and social transfers. These surpluses have reinforced the country’s fiscal buffer, enhancing its resilience against external shocks and improving market confidence.
However, the IMF advised caution in light of rising expenditure needs linked to climate action, digitalization, and an aging population. It stressed that fiscal space must be preserved by keeping debt on a downward path and avoiding policy shifts that would loosen spending discipline.
Specifically, the report urged authorities to focus public expenditure on investment priorities, particularly those that support long-term productivity gains and the green transition. In contrast, it warned against expanding current spending through untargeted social measures, wage increases, or changes to the cost-of-living allowance (COLA), which could exacerbate public-private wage imbalances and heighten wage-driven inflation.
Slower Growth But Long Term Potential
While Cyprus continues to demonstrate strong economic fundamentals, short-term risks remain to the downside. The IMF referred to global trade tensions, regional instability, and potential energy price shocks as key threats that could affect foreign investment, tourism, and inflation dynamics.
Despite these vulnerabilities, longer-term prospects are more balanced. The IMF described Cyprus as economically resilient, underpinned by dynamic service exports and a labor market characterized by low unemployment and high job vacancy rates. However, signs of strain-such as rising wages and lingering trade frictions-have prompted concerns over potential overheating.
The country’s external position also remains a challenge. Although the current account deficit narrowed in 2024, it remains weaker than what fundamentals would suggest, underscoring the need for structural adjustments to improve competitiveness.
Banking System Stable, But Real Estate Risks Linger
Cyprus’ banking sector continues to show strength, with capitalization among the highest in Europe, ample liquidity, and solid profitability for a second straight year. Despite elevated interest rates, asset quality is improving, aided by the broader economic recovery.
However, the IMF emphasized the importance of monitoring risks in the real estate market. It welcomed the recent macroprudential tightening-including the increase in the countercyclical capital buffer-as a timely step to safeguard financial stability without hampering credit or growth.
Non-performing loans (NPLs), although significantly reduced and largely removed from bank balance sheets, remain high in absolute terms. The Fund expects further progress in resolving these legacy loans, driven by the full implementation of the foreclosure framework and growing participation in the mortgage-to-rent scheme.
Reforms Essential for Sustained Growth
With employment near full capacity, the IMF stressed that future growth must be driven by productivity enhancements and capital deepening. This, it said, requires a supportive and efficient business environment.
Judicial reform remains a key priority. The Fund called for further efforts to strengthen insolvency and creditor rights and improve court efficiency, steps it views as critical to boosting investor confidence and accelerating project execution.
Labor policies should focus on reducing skills mismatches and addressing persistent youth and long-term unemployment. On the energy front, completing the LNG terminal and enhancing regional electricity links are seen as important to lowering costs, improving security, and meeting climate goals.
The IMF also highlighted progress in anti-money laundering efforts, commending Cyprus for broadening AML supervision and backing the planned National Sanctions Implementation Unit as a step toward greater regulatory clarity.