Cyprus Economy Shows Resilience Amid Global Turbulence and Sweeping Reforms

The Cypriot economy sustained a strong and steady course through December 29, 2025, with the government managing to steer through a challenging international environment while advancing far-reaching domestic reforms.

Globally, uncertainty intensified early in the year as renewed trade frictions surfaced following tariff announcements by US President Donald Trump, reigniting concerns over rising inflation and a potential deceleration in global economic growth. These developments unfolded alongside persistent geopolitical instability, including the ongoing war in Ukraine and escalating tensions in the Middle East, while climate-related risks increasingly influenced economic policymaking across Europe.

Within this demanding international setting, Cyprus also faced an ambitious internal agenda. The government pushed ahead with an extensive tax reform, submitting a package of six bills designed to overhaul income and corporate taxation. At the same time, long-running negotiations between social partners on the Automatic Cost of Living Allowance (CoLA) reached a critical stage after years of deadlock.

Despite these pressures, economic indicators remained robust. Growth in the first quarter approached 3 per cent, underpinned by strong domestic demand, favourable labour market conditions and continued momentum in services exports. For the full year, the Ministry of Finance projected growth of 3.1 per cent, while inflation was expected to stay low at 0.9 per cent. Unemployment, forecast at 4.6 per cent, remained consistent with conditions of full employment.

Looking further ahead, the strategic fiscal policy framework for 2026–2028, published on June 15, 2025, anticipated growth ranging between 2.9 and 3.1 per cent over the medium term. Public debt, which has declined sharply since the pandemic, is expected to fall further to 43.3 per cent of GDP by 2028, reinforcing Cyprus’s improving fiscal standing.

Energy policy emerged as a cornerstone of economic strategy during the early part of the year. Cyprus and Egypt signed agreements in Cairo aimed at advancing the exploitation of natural gas reserves within Cyprus’s exclusive economic zone. A memorandum of understanding with Chevron, NewMed and Shell laid the groundwork for the commercialisation of gas from the Aphrodite field, marking a major step towards monetising offshore resources. This was followed by a host country agreement with ENI and Total for the development of hydrocarbons in Block 6 of the EEZ, which includes the Kronos, Zeus and Calypso fields, further strengthening Cyprus’s role in the Eastern Mediterranean energy landscape.

Monetary conditions also provided a supportive backdrop. The European Central Bank reduced interest rates three times during the year—in January, March and June—each by 25 basis points, easing borrowing costs for households and businesses and bolstering investment activity.

By the second quarter, confidence in the economy had improved, buoyed by positive evaluations from European institutions, international credit rating agencies and developments in key sectors such as energy, banking and labour. In its Spring Package under the European Semester, the European Commission concluded that Cyprus was no longer facing macroeconomic imbalances, pointing to reduced vulnerabilities related to external and private debt and sustained economic growth. However, it also highlighted structural weaknesses that continue to affect long-term competitiveness, particularly in innovation, the green transition, education and long-term care. The Commission’s spring forecasts projected ongoing growth in 2025 and 2026, driven mainly by domestic demand and resilient services exports, while cautioning that indirect effects from global developments could still pose risks.

International rating agencies echoed this broadly positive assessment. In May, Fitch affirmed Cyprus’s long-term foreign-currency rating at ‘A-’ with a stable outlook, citing strong fiscal performance, declining public debt and economic resilience, while underscoring continued exposure to external shocks and geopolitical risks.

Energy developments gained further momentum in early July when 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 the EEZ, during a teleconference with ExxonMobil executives. The find added impetus to Cyprus’s offshore exploration programme.

At the same time, preparations for tax reform intensified, with the government releasing the relevant bills for public consultation in July. The banking sector also continued to consolidate. The merger between Hellenic Bank and Eurobank was completed, with all assets and liabilities transferred as of September 1, 2025, following regulatory approvals. Separately, an agreement was signed in June for Alpha Bank Cyprus to acquire nearly all of AstroBank’s banking operations, including its staff, with completion expected in the fourth quarter of the year.

Government initiatives remained prominent. Projects totalling €660 million were announced for Limassol, while consumer transparency was enhanced through the launch of the e-kalathi application, which enables shoppers to compare supermarket prices. June also marked a diplomatic and economic milestone with the visit of Indian Prime Minister Narendra Modi. Cyprus and India highlighted expanding investment opportunities, established the India-Cyprus-Greece Business and Investment Council and referenced Cyprus’s participation in the IMEC corridor, underscoring its growing role as a regional gateway.

The summer period, however, was marred by devastating wildfires in mountainous areas of Limassol. In response, the government introduced emergency financial support for affected households and businesses, including wage coverage for workers impacted by the fires. In August, long-delayed replacement payments under the National Solidarity Fund also began, addressing claims that had remained unresolved for years.

The third quarter of 2025 was shaped by decisive developments in labour relations and tax reform, culminating in the approval of the tax overhaul by Parliament shortly before year-end. A pivotal issue was the agreement on CoLA, which represented a breakthrough after roughly 15 years of inconclusive talks. Negotiations stalled in September, leading to strike action by trade unions, before intensive consultations resulted in an agreement involving social partners and the Ministries of Labour and Finance. The arrangement links CoLA to the minimum wage, extending coverage to approximately 55,000 low-paid workers.

On the fiscal front, the tax reform bill was submitted to Parliament in November, examined by the Finance Committee and approved by the Plenary on December 22, 2025. The reform increases the tax-free income threshold to €22,000, revises income tax brackets and raises the corporate tax rate to 15 per cent, bringing Cyprus into line with international minimum tax standards.

Energy policy remained firmly in the spotlight, particularly amid public debate over delays to the Great Sea Interconnector linking Cyprus and Greece. While Athens reaffirmed the project’s strategic importance for energy-isolated Cyprus, Nicosia committed €25 million in the 2026 budget, even as concerns persisted over costs and feasibility. In November, Cyprus, Greece and the European Commission agreed to update the technical and economic studies of the project to reassess its viability. Attention also focused on the liquefied natural gas terminal at Vasilikos, following delays, the withdrawal of €67 million in EU funding and an investigation by the European Public Prosecutor’s Office. The government maintained that the project remains viable and will be completed.

Foreign economic policy advanced on multiple fronts. Cyprus and Lebanon signed an agreement delimiting their exclusive economic zones and agreed to explore electricity interconnection through technical teams and feasibility studies. Investment promotion efforts were also intensified during presidential visits to Canada and the United States.

At the macroeconomic level, interest rates remained unchanged during the second half of the year. The competitive electricity market entered commercial operation on October 1, 2025, marking the transition to a fully liberalised electricity sector.

International institutions continued to revise their assessments upwards. DBRS Morningstar upgraded Cyprus’s credit rating to ‘A’, S&P Global Ratings revised its outlook to positive and Fitch upgraded its outlook. The International Monetary Fund raised its growth forecast for 2025 to 2.9 per cent, while the European Commission’s autumn forecasts were more optimistic, projecting growth of 3.4 per cent.

The year was not without disruptions. Strike action at the port of Limassol disrupted operations at the country’s main export hub, while Parliament adopted new legislative frameworks on foreign direct investment screening and teleworking in the public sector amid political debate. The full rollout of SEPA instant payments also commenced, enabling faster interbank transactions.

On the fiscal side, the 2026 state budget was approved in December, forecasting revenues of €12.68 billion and expenditures of €10.78 billion, with the government describing it as people-centred and responsive to emerging challenges.

The year concluded with further international initiatives, including trade agreements linked to the Kronos gas field, strengthened economic ties with the United Arab Emirates and France, and a partial cabinet reshuffle affecting key economic portfolios.

By fLEXI tEAM