Cyprus has built a reputation for resilience. Even amid external shocks, the economy continues to post solid growth, maintain low unemployment and preserve a healthy fiscal position. But beneath those headline figures, the Fiscal Council says there are vulnerabilities that could become costly if left unaddressed.

Growth And Fiscal Performance Remain Solid

Presenting the council’s 2026 interim report, chairman Andreas Charalambous said gross domestic product expanded by 3.8% in 2025, with growth projected at 3% this year. In the council’s assessment, that is “very satisfactory under the circumstances.”

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The public finances also remain on a constructive path. Cyprus recorded a budget surplus of 3.4% in 2025, while public debt fell to 55% of GDP, comfortably below the 60% benchmark.

Labour market conditions have likewise remained favourable. Unemployment stood at 4.4% last year and eased further to 3.6% in the first half of this year, reinforcing the picture of a broadly stable economy.

Migration And Foreign Investment Have Supported Expansion

The Fiscal Council said Cyprus has benefited from migration inflows in recent years, as well as from foreign companies establishing operations on the island. That combination has supported job creation, lifted household incomes and consumption, and strengthened the services export sector.

Foreign corporations have played an important role in deepening the economy’s activity base. They bring employment, business spending and a wider flow of services exports, all of which help sustain growth in a small, open economy such as Cyprus.

But the council also warned that this support has limits. Migrants now account for more than 20% of the population, and possibly as much as 30%, while demographic ageing has reduced the share of people of working age.

That means future growth cannot rely simply on more workers or higher employment participation. According to the council, the real constraint is productivity — and Cyprus does not perform well on that front.

Inflation And Energy Dependence Expose New Pressures

On the negative side, inflation rose sharply in 2026, putting the greatest strain on low-income households. Although much of the inflation is imported and tied to geopolitical developments, Charalambous said Cyprus also bears responsibility because of its slow transition to green energy.

“Reliance on conventional forms of energy keeps energy costs high, rendering the economy more susceptible to international crises,” he said.

The country’s dependence on imported fuel is also weighing on the external balance. Despite solid performance in services and tourism, Cyprus remains in current account deficit, with higher oil prices amplifying the pressure.

Public Investment And Project Execution Remain Weak Points

The Fiscal Council also pointed to long-standing weaknesses in public finances that are not always visible in headline economic data but become clearer over time.

One of the most persistent problems is low public investment. Although annual state budgets set ambitious targets, execution remains weak. In the first half of 2026, implementation of government-backed development projects reached only 25%.

That, the council said, reflects limited administrative capacity and ongoing difficulties in designing and delivering large-scale projects. A separate assessment by the University of Cyprus also found that absorption of funds from the Recovery and Resilience Facility remains low.

Social Spending And Major Projects Need Closer Scrutiny

Charalambous also argued that social spending is not sufficiently targeted. “Essentially, Guaranteed Minimum Income is the only social expenditure granted according to strict means-testing,” he said.

The council urged caution on major planned projects, including the electrical interconnection with Greece and Israel and the long-delayed LNG terminal at Vasiliko. Both could require significant public spending, raising the stakes for the state budget.

There are also medium-term risks in the pension system. Charalambous noted that roughly four workers currently support one pensioner, but that ratio could fall to 2:1 in the future, creating a potential sustainability problem for the social insurance fund.

The Central Message: Strength Today, Risk Tomorrow

The report’s central message is straightforward: Cyprus is in a relatively strong position today, with the fiscal and economic room to absorb future shocks. But that cushion will hold only if the country confronts its structural weaknesses in time.

If it does not, the council warned, those weaknesses could gradually turn into fiscal costs and erode the economy’s current positive trajectory.