Cyprus faces a range of domestic and external risks that could affect its public finances and the trajectory of the economy, according to the Ministry of Finance’s Fiscal Risks report accompanying the state budget for 2027.
Among the domestic risks identified by the ministry are the implications of the deadlock surrounding the natural gas terminal project at Vasilikos, higher state operating costs arising from volatility in energy prices, and loans granted in previous years through various public and financial institutions that have subsequently become non-performing.
The report also highlights the potential fiscal cost of failing to meet national climate targets.
Vasilikos project remains a source of uncertainty
In relation to the Vasilikos natural gas terminal, the risks stem from state guaranteesprovided for loans, the failure to liquidate guarantees by the consortium that had undertaken the project, and the outcome of international arbitration proceedings taking place in England.
The project has therefore been identified as a potential source of pressure on publicfinances, depending on the outcome of the ongoing proceedings and the state’spotential obligations under the guarantees.
Climate targets could carry financial costs
The Ministry of Finance also warns that failing to meet Cyprus’s obligations under EU rules on greenhouse gas emissions could result in additional fiscal costs.
A deviation from the targets set under the regulation on binding annual reductions in greenhouse gas emissions by member states between 2021 and 2030, as well as the amended Regulation (EU) 2023/857, could require Cyprus to purchase emissionallowances from other EU member states.
The resulting cost would depend on the extent to which the Republic falls short of its targets.
Other risks arising from the domestic environment include the possible activation of state guarantees and the impact of higher interest rates on consumption, investmentand public debt servicing.
The report also points to outstanding court cases, pension fund deficits, and the negative financial performance of state organisations, state-owned enterprises and local authorities.
Potential risks associated with public-private partnership agreements are also identified, alongside the financing needs of the Health Insurance Organisation (OKYPY).
The government could additionally face fines for partial or full non-compliance with the EU acquis, while the report identifies both direct and indirect economic effects from the outbreak of foot-and-mouth disease as another potential risk.
External risks include geopolitics and US tariffs
Turning to external risks, the report says geopolitical developments in the wider region remain a significant source of uncertainty.
Such developments could affect fuel and energy prices, tourism, trade and industry, while also increasing the flow of migrants and creating potential knock-on effects for public finances.
The report also highlights inflationary pressures linked to the war in Ukraine and tensions in the Middle East, as well as the impact of the new US tariff policy.
Another potential source of pressure is a possible increase in Cyprus’s contribution to the EU budget.
Climate change adds to fiscal pressures
Climate change is also identified as an external fiscal risk, particularly through thepotential impact of natural disasters, compensation requirements in the primary sector and the need for investment in infrastructure and prevention and preparedness projects.
The report further warns that negative economic developments in other countries could affect key productive sectors of the Cypriot economy.
Such developments could result in economic growth falling below forecasts and lead to a deterioration in key fiscal and economic indicators, including the fiscal balance, publicdebt and current account balance.
They could also contribute to a rise in unemployment, adding another potential sourceof pressure to Cyprus’s public finances.
