The International Monetary Fund (IMF) has acknowledged Cyprus’s strong fiscal and economic performance in 2024, highlighting a 4.3% budget surplus and a significant drop in public debt to 65% of GDP. However, in its latest Article IV consultation report, the IMF cautions against policies that could reignite inflation or constrain future spending capacity.

Approved by the Executive Board and released Monday evening, the report notes that Cyprus recorded one of the highest growth rates in the euro area last year—3.4%—driven by robust tourism, expansion in the ICT sector, and resilient private consumption. However, signs of economic overheating are beginning to surface.

The IMF projects GDP growth to moderate to 2.5% in 2025, stabilizing at 3% over the medium term as the economy transitions from consumption-driven to investment-led growth. Inflation, which fell to 2.1% in March, is expected to settle at 2% by year-end, aided by easing oil prices and slower economic activity.

Still, the Fund warns that any loosening of fiscal policy or upward pressure on wages—particularly in the public sector—could reignite inflation risks. Short-term risks remain tilted downward due to global trade tensions and geopolitical instability, though medium-term prospects look more balanced if reforms continue.

The IMF praises the economy’s resilience, citing strong service exports, domestic demand, and a tight labor market with low unemployment. Yet, it flags overheating pressures stemming from rising wages and trade imbalances. It also notes that Cyprus’s external position remains weaker than its fundamentals would justify.

Cyprus posted a 4.3% fiscal surplus in 2024, with the primary surplus reaching 5.6%. Public debt fell to 65% of GDP, boosting the country's ability to withstand future shocks and improving investor confidence.

Nonetheless, the IMF urges authorities to prioritize debt reduction and avoid fiscal loosening measures, such as increases in public sector wages or social transfers. In particular, it warns against expanding the Cost-of-Living Allowance (ATA) and introducing new ad hoc wage hikes.

The report welcomes the government’s commitment to maintaining fiscal surpluses until 2028 under the EU’s revised fiscal governance framework. However, it stresses that long-term spending needs—linked to climate transition, digitalization, and demographic shifts—limit the scope for policy relaxation.

The IMF considers Cyprus’s banking sector stable, with strong capital, liquidity, and record-high profitability. Despite high interest rates, asset quality continues to improve thanks to the broader economic upturn.

Still, the Fund calls for continued vigilance, especially in the real estate sector. It welcomes the increase in the counter-cyclical capital buffer (CCyB) as a preemptive measure that strengthens banking resilience without constraining credit or growth.

Non-performing loans (NPLs) have declined sharply but remain high in absolute terms. Full implementation of foreclosure legislation and rollout of the "rent-for-installment" scheme are seen as vital for resolving legacy NPLs and freeing up domestic capital.

The IMF emphasizes that structural reforms are essential as Cyprus shifts toward an investment-led growth model. With employment already high, future gains must come from boosting productivity and improving the investment environment.

Authorities are urged to expedite justice reforms, enhance creditor rights and insolvency procedures, and shorten court delays. Measures to address skills mismatches and improve youth and long-term unemployment are also recommended.

In energy, the IMF stresses the importance of completing the LNG terminal and electricity interconnection projects to cut costs, strengthen energy security, and meet EU climate targets. It also supports the introduction of green taxation and increasing competition in the electricity market.

Finally, the IMF underscores the importance of maintaining a robust anti-money laundering (AML) framework to safeguard the financial system’s reputation and security. It welcomes Cyprus’s efforts to expand AML supervision and the planned creation of a National Sanctions Implementation Unit within the Ministry of Finance.