The Ministry of Finance anticipates a period of consistent, albeit slightly decelerating, economic expansion for Cyprus over the next four years, alongside a notable reduction in public debt. According to the June 2024 edition of their “Strategic Framework for Fiscal Policy 2026–2028,” the Ministry projects a GDP growth rate fluctuating between 2.9% and 3.1%. Furthermore, a significant decrease in public debt is foreseen, reaching 43.3% by 2028.
Economic Projections (2025-2028)
The Ministry’s forecasts indicate a 3.1% growth rate for both 2025 and 2026. This is expected to moderate slightly to 3% in 2027 and further to 2.9% in 2028.
Regarding inflation, a rate of 1.9% is estimated for 2025, followed by a steady 2.1% annually through 2028. Unemployment is also predicted to decline, reaching 4.7% in 2025 and 2026, then further easing to 4.5% in 2027 and 2028.
Public Finance Trajectory
A key highlight of the Ministry’s outlook is the projected substantial reduction in public debt. It is expected to fall below 60% by the close of 2025, settling at 54.7%. The downward trend is then set to continue, reaching 52.6% in 2026, 48.4% in 2027, and ultimately achieving the 43.3% target in 2028.
The Ministry also foresees sustained fiscal and primary surpluses in the coming years. A fiscal surplus of 3.5% is anticipated for 2025, rising slightly to 3.7% for the subsequent years up to 2028. Similarly, a primary surplus of 4.8% is expected in 2025, increasing to 5% for the following years.
In monetary terms, a fiscal surplus of €1,247 million (3.5% of GDP) is projected for 2025, a decrease from the €1,437 million (4.3% of GDP) recorded in 2024. The primary surplus for 2025 is estimated at €1,701 million (4.8% of GDP), compared to €1,856 million (5.6% of GDP) in 2024.
Based on anticipated central government revenues (€10.23 billion in 2026, €10.76 billion in 2027, and €10.98 billion in 2028) and fiscal objectives, the Ministry of Finance has established expenditure ceilings for the central government. These are set at €10.54 billion for 2026, €10.73 billion for 2027, and €11.2 billion for 2028.
Assessment of Potential Risks
The Ministry’s “Medium-Term Fiscal Framework 2026–2028” incorporates a thorough risk analysis. Significant external risks include ongoing geopolitical tensions stemming from the conflict in Ukraine and the situation in the Middle East. The potential for a global trade war is also identified as a concern, primarily due to its indirect impact on Cyprus’s economic growth.
Domestic risks include the continued effect of US and UK sanctions on Cypriot legal and natural persons, which impact the country’s services sector. Challenges related to the termination of operations at the natural gas terminal in Vasilikos and an ongoing international arbitration in the UK also pose threats. These include the possibility of guarantees not being liquidated, demands for repayment of government-guaranteed loans, and potential requirements to return subsidy amounts to the European Commission.
The Republic’s involvement in the Crete–Cyprus electricity interconnection project (Great Sea Interconnector) also presents potential risks.
Non-Performing Loans (NPLs) remain a persistent risk factor. While substantial progress has been made in reducing NPL levels and the banking system is characterized by strong capital and excess liquidity, the Ministry acknowledges that a resurgence in NPLs cannot be entirely ruled out.
Finally, the General Healthcare System poses a potential strain on public finances, mainly due to deficits within the State Health Services Organization, which may require state coverage during its initial six years of operation.
Government Strategic Priorities
The government’s overarching strategic objectives, as outlined by the Ministry, revolve around fostering a robust, adaptable, and competitive economy. This economic strength is intended to underpin key areas such as Health, Education, the Welfare State, and Culture. Furthermore, the government aims to bolster security through addressing climate change and ensuring energy independence, while also establishing a lawful, modern, and digital state characterized by transparency and accountability.
A paramount government priority is the sustained implementation of reforms supported by the Recovery and Resilience Plan and the “THALIA” Cohesion Policy Programme. The government is also committed to advancing the green transition and accelerating digital transformation.
The Ministry emphasizes the crucial role of strengthening sectors such as information and communication technologies, tourism, higher education, agri-tech, renewable energy sources, light industry, and professional services. These sectors are deemed vital for securing a strong and stable growth trajectory for Cyprus.
Consideration is also being given to priorities that will be defined within the framework of Cyprus’s upcoming EU Presidency.
Public Sector Modernization
The Ministry also outlined ongoing efforts for public service reform. This includes a study focused on containing payroll costs, the preparation of legislation to facilitate more flexible work arrangements, initiatives to enhance staff mobility, and a strong emphasis on training and education.
Source: Stockwatch.com.cy