The European Commission delivered a broadly positive verdict on the Cyprus economy, publishing its post-programme surveillance assessment alongside its opinion on the country’s 2026 draft budget. The combined findings depict a country with strong growth, rapidly declining public debt and a resilient banking sector — yet facing a measurable risk of exceeding recommended spending levels next year.

Solid Growth and Strong Labour Market

According to the Commission’s post-programme surveillance report, Cyprus maintains a “positive macroeconomic environment.” Real GDP expanded by 3.6% in the first half of 2025, powered by robust though moderating consumption (+3.4%) and a striking 10.4% jump in investment.

Exports of services remain a key engine of growth, particularly in ICT, while the tourism sector achieved record arrivals. Employment rose by 1.7%, pushing unemployment to a historic low of 4.6%. Inflation has eased, though core inflation remains elevated due to service-sector demand.

Fiscal Surpluses Drive Rapid Debt Reduction

Cyprus’ public finances continue to outperform European averages. The general government surplus reached 4.1% of GDP in 2024, more than double the previous year, and is expected to remain high through 2027 (3.3% in 2025, 3.0% in 2026, 3.2% in 2027).

This strong performance is helping shrink public debt faster than initially planned. Brussels expects the debt-to-GDP ratio to fall below 60% by end-2025 and down to 51% by end-2026, marking one of the EU’s steepest debt reductions.

Banking Sector Remains Resilient

The report highlights an “exceptionally robust” financial sector. Cypriot banks show high profitability, ample liquidity and the highest CET1 ratio in the EU (26.3%). Non-performing loans continue to decline, though vulnerabilities persist in smaller institutions.

Cash reserves of €3.9 billion — equal to 11% of GDP — provide a safety buffer and cover 1.3 times the country’s gross financing needs for 2026.

Debt Sustainability: Stable and Long-Term

Cyprus maintains a strong capacity to service its debt, the Commission concludes. Long maturities (average 6.4 years), exclusively euro-denominated obligations and favourable financing conditions support long-term sustainability.

The first repayment to the ESM — €350 million — is scheduled for December 2025, followed by annual repayments of roughly €1 billion through 2031.

International agencies including DBRS, Fitch, Moody’s and S&P highlight the country’s “resilience” and “stable ability to repay debt,” while the Debt Sustainability Monitor 2024 judges medium-term risks as moderate and short- and long-term risks as low.

Cyprus is among 12 eurozone countries whose 2026 draft budget is deemed compliant with EU fiscal rules. However, the Commission issued one notable warning: net expenditure is projected to rise 6.5%, above the recommended maximum of 5.0%.

This deviation — equal to 0.5% of GDP — may put pressure on future budget discipline, although Brussels confirms that overall fiscal obligations under the Stability and Growth Pact are met.

Despite this, the bloc expects Cyprus to maintain a solid 3.0% surplus in 2026, even amid slower economic growth.

Speaking from Strasbourg, Commissioner Valdis Dombrovskis reaffirmed that Cyprus should “continue to implement the planned fiscal policy” while keeping a close eye on spending dynamics.