The International Monetary Fund has issued four key policy recommendations to Cyprus following the conclusion of its latest mission to the country, stressing the need for fiscal discipline, structural reforms and caution over changes to the foreclosure framework.
In a statement released after meetings with Cypriot authorities between 22 April and 4 May 2026, the IMF said Cyprus has shown strong economic resilience in recent years, but warned that sustaining growth will require continued reform efforts.
Alex Pienkowski, head of the IMF mission to Cyprus, noted that growth remains among the highest in the European Union and public finances have improved significantly, with public debt falling below 60 percent of GDP.
“The fiscal performance has been exceptional,” he said, adding that despite recent shocks, the outlook remains favourable. However, he stressed that medium-term growth will depend on reforms in human capital, innovation and the judicial system.
Four key policy priorities
The IMF outlined four main policy recommendations for Cyprus.
First, it called for high-quality fiscal policies focused on growth-enhancing investment, alongside more efficient spending and taxation.
Second, it warned against distortionary tax cuts introduced to address short-term inflation pressures, arguing that such measures are costly, poorly targeted and weaken price signals.
Third, the fund advised against any relaxation of the foreclosure framework and urged authorities to intensify efforts to reduce non-performing loans outside the banking sector.
Finally, it called for accelerated investment and reforms in the energy sector to reduce costs and strengthen energy security.
Strong growth, but inflation pressures persist
According to the IMF, economic growth remained strong in 2025, supported by robust private consumption and continued expansion in export-oriented services, particularly in information technology and tourism.
Growth is expected to remain solid in 2026, with IMF staff projecting an expansion of 2.5 percent.
However, higher oil prices are expected to push average inflation to around 3.5 percent this year, weighing on real incomes and consumption.
Tourism, which has been affected in recent months, is expected to partially recover during the peak season.
Fiscal performance and debt reduction
Despite some loosening, fiscal performance remained strong. While revenue growth was robust, the fiscal surplus narrowed in 2025 due to increased spending on public investment, wages and social transfers.
Nevertheless, strong economic growth, continued fiscal surpluses and the use of cash reserves helped reduce public debt to 55 percent of GDP, further strengthening economic resilience.
Progress in implementing the Recovery and Resilience Plan has accelerated, although meeting all remaining milestones before the August 2026 deadline remains a key challenge.
Risks remain balanced
The IMF said short-term risks are tilted to the downside, while medium- to long-term risks are broadly balanced.
An escalation of the war in the Middle East could push inflation higher and weaken growth, particularly through its impact on tourism.
Over the medium term, geopolitical fragmentation and infrastructure bottlenecks could weigh on activity. However, ongoing structural reforms and further expansion in the digital economy present significant upside potential.