Cyprus Urged to Maintain Fiscal Discipline Amid Rising Global Risks, Economic Council Warns

The Cyprus Economy and Competitiveness Council has issued a strong warning against the expansion of inflexible public spending, highlighting the need for strict fiscal discipline and strategic, forward-looking investment as the country navigates a volatile global economic landscape.

In a statement released on Wednesday, the council pointed to rising trade tariffs and geopolitical uncertainty as significant threats that, while not yet producing immediate economic consequences, could ultimately undermine Cyprus’ long-term economic stability.

Citing recent warnings by the International Monetary Fund (IMF), the council stressed that “rising trade tensions and policy uncertainty could limit economic growth both in the short and long term.” Similarly, the Economic Research Centre of the University of Cyprus (CypERC) has identified growing risks to both fiscal sustainability and economic growth, adding to the concerns.

“Given these challenges, Cyprus must be especially cautious in expanding inflexible public expenditures, as this would constrain the fiscal flexibility needed to address immediate challenges such as the water supply and demographic issues, as well as critical transitions in energy and technology,” the council said.

The council also referenced recent IMF assessments, which caution that protectionist measures are dragging down global growth prospects. The IMF has revised its outlook for Cyprus accordingly, projecting GDP growth to slow to 2.5 per cent in 2025, down from its previous estimate of 3.1 per cent. Growth in 2026 is expected to reach 2.7 per cent.

Parallel projections by the CypERC mirror this caution. Their latest report forecasts a moderation in Cyprus’ economic expansion—from 3.4 per cent in 2024 to 2.8 per cent in 2025—before seeing a slight rebound to 3.2 per cent in 2026. The report also underscores the need to closely track indicators like the Cyprus Composite Leading Economic Index, which links economic uncertainty with declining investment levels and weakening consumer confidence—factors that can amplify fiscal strain.

Although Cyprus has made commendable progress in reducing public debt relative to GDP and continues to record fiscal surpluses, the council emphasised that current global conditions require especially prudent management of public finances.

“The increase in inflexible expenses, such as permanent wage commitments or large-scale projects, and additional general, non-targeted tax cuts could restrict the state’s ability to respond to economic uncertainties,” the council warned. “On the contrary, fiscal policy must remain flexible, ensuring resources are available to address unforeseen challenges amid the broader climate of instability, and to support strategic investments in energy and technology.”

The council reiterated the necessity of fiscal caution, warning that rising fixed costs or any reduction in state revenues could diminish the government’s ability to respond effectively to future shocks. It argued that lowering public debt and maintaining fiscal space is essential if Cyprus is to preserve its capacity for economic intervention during crises.

Building greater economic resilience must be a priority, the council said, calling for policy measures that broaden the country’s productive base and reduce reliance on a narrow set of international partners and imported goods.

In terms of investment, the council advised that public spending be directed toward strategic sectors—particularly energy and technology—aimed at boosting competitiveness and long-term sustainability. It also underlined the value of active engagement in international collaborations and global initiatives that foster predictability and stability in international trade.

Cyprus, the council noted, is now at a “pivotal point” where responsible fiscal governance is key to navigating the global economic headwinds. “With the adoption of prudent fiscal practices and a focus on strategic investments, our country can ensure its long-term stability and growth,” it said.

The council concluded by reflecting on the lessons of recent crises, stating that Cyprus’ ability to respond effectively to the COVID-19 pandemic in 2020 was in large part due to the ample fiscal space it had at the time—an advantage not available during the 2011 financial crisis.

By fLEXI tEAM