The Cypriot economy continues to demonstrate resilience despite risks stemming from the conflict in the Middle East, according to the European Commission’s assessment conducted under post-programme surveillance as part of the Spring European Semester.
The evaluation was carried out between March and April 2026 by Commission officials in cooperation with representatives of the European Central Bank, the European Stability Mechanism, and the International Monetary Fund.
According to the assessment, Cyprus’s real GDP growth reached 3.8% in 2025 and is expected to moderate to 2.3% in 2026 before rising to 2.7% in 2027, with private consumption remaining the main driver of economic activity. However, imported inflation is expected to erode real incomes, with inflation projected to reach 3.6% in 2026 due to higher energy prices before easing to 2.2% in 2027. Unemployment is forecast to stabilise at 4.2% in both 2026 and 2027, marking its lowest level in a decade.
Banking sector
Regarding public finances, the fiscal balance remained in surplus at 3.4% of GDP in 2025. Surpluses of 2.1% and 2.5% of GDP are projected for 2026 and 2027, respectively. Public debt fell below the 60% of GDP threshold at the end of 2025 and is expected to continue declining, reaching 50.4% in 2026 and 45.5% in 2027.
The banking sector remains strong, with capital buffers continuing to improve. The CET1 ratio - the key measure of banks’ capital adequacy - reached 25.8% in December 2025, which the Commission’s report notes is the highest level in the European Union. Return on equity stood at 14.2%, compared with an EU average of 9.6%. The non-performing loan (NPL) ratio fell below the EU average for the first time, reaching 1.6%.
However, the report expresses concerns about recent legislative initiatives by the House of Representatives of Cyprus regarding the foreclosure framework. According to the Commission, these measures “could significantly weaken the effectiveness of the existing framework” and may negatively affect the completion of state-aid obligations, including the repayment of €1.8 billion in state support through KEDIPES.
Credit rating
The report also notes that Cyprus maintains a strong cash reserve of €1.7 billion and a healthy debt maturity profile. It highlights the successful issuance of a €1 billion 10-year government bond, which was oversubscribed 16 times—a record level of demand.
Cyprus’s credit rating remains in the “A” category with all major rating agencies. As of November 2025, the country was rated: A by DBRS Morningstar (stable outlook), A− by S&P Global Ratings (positive outlook), A− by Fitch Ratings (positive outlook), A− by Scope Ratings (positive outlook), A3 by Moody's Ratings (stable outlook).
The report notes that its macroeconomic projections are based on the European Commission’s Spring 2026 Economic Forecast, published two weeks earlier, and incorporate macroeconomic data available up to 4 May 2026.
Source: CNA
