The Cypriot economy entered 2025 with strong momentum, having recorded solid real growth of 3.4 percent in 2024.
However, from the outset of the year, Cyprus’ small and open economy found itself facing persistent external pressures and a globally uncertain economic environment. These were fuelled by the tariff “war” declared by US President Donald Trump, which reignited fears of rising inflation and a global slowdown. At the same time, geopolitical risks, including the ongoing war in Ukraine, instability in the Middle East, and the accelerating challenge of climate change, further deepened uncertainty.
On the domestic front, 2025 also brought politically sensitive challenges, notably the government’s decision to proceed with tax reform through a package of six bills, as well as the conclusion of long-running negotiations between social partners over the Cost-of-Living Allowance (COLA).
Despite these headwinds, the Cypriot economy maintained its strong growth trajectory. GDP expanded by 3 percent in the first quarter, with momentum sustained throughout the year. The Ministry of Finance forecasts overall growth of 3.1 percent for 2025, while inflation is projected at 0.9 percent and unemployment at 4.6 percent, effectively reflecting conditions of full employment.
According to the June edition of the Strategic Fiscal Policy Framework 2026-2028, growth is expected to range between 2.9 and 3.1 percent over the next four years, while public debt is forecast to fall to 43.3 percent of GDP by 2028.
Energy, rates and early confidence signals
A key development in the first four months of the year was the signing of an agreement and Memorandum of Understanding in Cairo for the exploitation of hydrocarbon resources in Cyprus’ Exclusive Economic Zone (EEZ), strengthening cooperation between Cyprus and Egypt.
The Republic of Cyprus, Egypt, and the operating companies Chevron, NewMed Energy, and Shell signed an MoU for the development of the Aphrodite gas field, setting the framework for the commercialisation of natural gas.
This was followed by the signing of a Host Government Agreement with the ENI–TOTAL consortium for the development of hydrocarbons in Block 6, which includes the Cronos, Zeus and Calypso fields.
Monetary conditions also eased during 2025, as the European Central Bank implemented three interest rate cuts of 0.25 percentage points each in January, March and June.
Second quarter
As Cyprus exited the EU’s macroeconomic imbalance framework, positive signals emerged from Brussels and international rating agencies. Developments in energy, banking, tax reform and labour relations dominated the second four months of the year, contributing to a renewed sense of confidence despite ongoing global risks.
Under the European Semester Spring Package 2025, Cyprus was no longer classified as a country with macroeconomic imbalances, as vulnerabilities related to external and private debt were deemed to be receding, supported by strong growth.
The European Commission nevertheless issued targeted policy recommendations, identifying persistent challenges in innovation, the green transition, education and long-term care.
International rating agencies upgraded Cyprus’ credit profile during the year. On 24 May, Fitch Ratings affirmed Cyprus’ long-term foreign currency rating at A- with a stable outlook, citing strong fiscal performance, declining public debt and resilient growth, while flagging external and geopolitical risks.
In energy developments, President Nikos Christodoulides was briefed on the discovery of a 350-metre column of clean natural gas following the Pegasus-1 drilling in Block 10 of Cyprus’ EEZ, during a teleconference with ExxonMobil vice president John Ardill.
Preparatory work on tax reform intensified, with draft legislation released for public consultation in July.
The banking sector also saw major changes. The merger of Hellenic Bank with Eurobank was completed, with all assets and liabilities transferred as of 1 September. Separately, Alpha Bank Cyprus signed an agreement to acquire essentially all assets and liabilities of AstroBank, including staff, with completion expected in the fourth quarter of 2025.
Other notable developments included the launch of the e-kalathi price comparison application, major infrastructure announcements for Limassol, and the visit of Indian Prime Minister Narendra Modi, which highlighted growing investment ties between Cyprus and India.
The summer, however, was marked by devastating wildfires in mountainous Limassol, prompting government support measures for affected residents and workers.
Third quarter
The final four months of 2025 were defined by decisive economic and political developments. Chief among them was the adoption of tax reform by Parliament shortly before year’s end.
Equally pivotal was the agreement on the Cost-of-Living Allowance, resolving a dispute that had remained unresolved for around 15 years. After a period of deadlock and a general strike in September, intensive negotiations led to an agreement signed by social partners and the Ministers of Labour and Finance. President Christodoulides described it as a permanent solution, noting that linking COLA to the minimum wage extends coverage to approximately 55,000 low-paid workers.
The tax reform package was approved on 22 December and enters into force on 1 January. Measures include raising the tax-free threshold to €22,000, revising tax brackets and increasing corporate tax to 15 percent.
Public debate also intensified around the Cyprus–Greece electricity interconnection project, the Great Sea Interconnector. Greek Prime Minister Kyriakos Mitsotakis underscored its strategic importance for energy-isolated Cyprus, while the Cypriot government reaffirmed its commitment, allocating €25 million in the 2026 budget.
Energy infrastructure challenges persisted, particularly regarding the LNG terminal at Vasiliko, following delays, the withdrawal of €67 million in EU funding and an investigation by the European Public Prosecutor’s Office. Energy Minister George Papanastasiou maintained that the project remains viable.
Internationally, Cyprus signed a landmark EEZ delimitation agreement with Lebanon and advanced regional energy cooperation initiatives. Credit ratings continued to improve, with upgrades by DBRS Morningstar and positive outlooks from S&P Global Ratings and Fitch.
The year concluded with a partial cabinet reshuffle affecting key economic ministries.
Source: CNA