Cyprus must avoid fiscal loosening and focus on structural reforms to sustain growth and reduce public debt, according to the latest assessment by the International Monetary Fund (IMF). Following a mission to the island from March 17 to 28, 2025, the IMF praised Cyprus's resilience in the face of multiple external shocks but warned of emerging risks tied to inflation, public spending, and economic overheating.

The IMF mission, led by Alex Pienkowski, found that Cyprus's economy continues to grow robustly, with 2024 GDP growth reaching 3.4%—among the highest in the eurozone. This performance was largely driven by strong exports in services, private consumption, foreign investment, a booming tourism sector, and a thriving information and communication technology (ICT) industry.

However, the Fund noted “moderate signs of overheating,” pointing to a tight labour market, falling unemployment, persistently high job vacancy rates, and rising wages. Inflation is easing but remains above 2%, partly due to lingering effects from the 2022 energy crisis and sustained price increases in services. The IMF expects inflation to stabilize at 2% by the end of 2025.

Cyprus’s public finances remain strong. The country posted a primary fiscal surplus of 5.8% in 2024, with rising revenues outpacing increased public sector wages and social transfers. As a result, public debt fell from 74% of GDP in 2023 to 65% by the end of 2024. Authorities aim to reduce this further below 60% of GDP, aligning with the goals of the EU’s new economic governance framework.

Yet, the IMF warned against complacency, stressing that unbudgeted pay raises in the public sector or untargeted social spending could undermine fiscal space and stoke inflation. It urged the Cypriot government to prioritize capital investments and climate transition-related expenditures, rather than expanding rigid current expenditures like payroll or subsidies.

To sustain long-term, investment-driven growth, the IMF called for accelerating structural reforms. These include improving the efficiency of the judicial system, especially in handling insolvency and creditor rights, and addressing skill mismatches in the labour market. It also encouraged efforts to activate underutilized labour segments, particularly women, youth, and the long-term unemployed.

With employment already at high levels, boosting productivity and capital investment is seen as crucial for future growth. A predictable and streamlined business environment is also deemed vital to attract and retain investors.

Cyprus’s banking sector is well-capitalized and liquid, with profitability indicators at record highs for a second consecutive year. Non-performing loans (NPLs) continue to decline and are no longer seen as a systemic threat, thanks in part to strong economic conditions and effective policy tools like the mortgage-to-rent scheme and new foreclosure mechanisms.

Still, the IMF emphasized the importance of continued vigilance, especially in real estate markets. The recent decision to increase the countercyclical capital buffer is expected to bolster resilience with minimal impact on credit flows.

On the energy front, the IMF urged Cyprus to fast-track key infrastructure projects such as the Vasilikos LNG terminal and the Great Sea Interconnector. These initiatives are deemed crucial to lowering energy prices, enhancing energy security, and meeting climate targets. Opening up the electricity market to more competition and implementing green taxation are also seen as steps in the right direction.

Short-term risks are tilted downward, including potential regional tensions, energy price shocks, or trade conflicts affecting Cyprus’s main partners. Domestically, overheating could intensify if fiscal policy becomes overly expansionary. In the longer term, the IMF stressed that Cyprus’s growth trajectory will depend heavily on the successful implementation of reforms outlined in the national Recovery and Resilience Plan.

Finally, the Fund welcomed ongoing efforts to strengthen Cyprus’s anti-money laundering (AML) framework, including proposals to establish a National Sanctions Implementation Unit under the Finance Ministry.