**Title: Cyprus Economy Faces Hidden Risks, Fiscal Watchdog Warns**
The Fiscal Council of Cyprus has issued a cautionary report highlighting potential vulnerabilities within the country's economy, despite its recent resilience to external shocks. In its 2026 interim report presented on Thursday, Council Chairman Andreas Charalambous noted that while the economy has shown positive growth and low unemployment rates, underlying issues could pose significant risks in the future.
According to the report, Cyprus's Gross Domestic Product (GDP) grew by 3.8 percent in 2025, with a forecast of 3 percent growth for the current year. Charalambous described these figures as "very satisfactory under the circumstances," reflecting the economy's ability to withstand various external pressures.
The fiscal landscape also appears promising, with a reported budget surplus of 3.4 percent for 2025 and a reduction in public debt to 55 percent of GDP, well below the 60 percent threshold set by the European Union. Additionally, the unemployment rate has improved, dropping from 4.4 percent last year to 3.6 percent in the first half of 2026.
The Fiscal Council attributed this economic resilience to increased migration inflows and the establishment of foreign corporations in Cyprus. These entities contribute to job creation, income generation, and heightened consumption, which in turn stimulate economic activity and enhance service exports.
However, Charalambous warned that the growing migrant population, which now constitutes over 20 percent—potentially up to 30 percent—of the total population, could lead to challenges in the labor market. Coupled with an aging population, the number of individuals of working age is contracting, suggesting that future economic growth may need to rely more on productivity improvements rather than simply increasing employment.
Inflation has emerged as a significant concern, with rates rising sharply in 2026, disproportionately affecting low-income households. While much of the inflation is attributed to imported goods and geopolitical factors, Charalambous pointed to Cyprus's struggle to transition to green energy as a contributing factor. The country's reliance on conventional energy sources keeps energy costs high and makes the economy vulnerable to international crises.
Despite positive indicators in the services and tourism sectors, Cyprus's current account remains in deficit, primarily due to its dependence on imported fuel, particularly amid rising oil prices. The Fiscal Council highlighted chronic weaknesses in public finances that may not be immediately evident but become apparent through long-term trends.
One of the critical issues identified is the low level of public investment. Although the government sets ambitious goals in its annual budget, actual implementation remains low. For instance, only 25 percent of government-backed development projects were executed in the first half of 2026. This underperformance reflects limited administrative capabilities and challenges in managing large-scale projects.
Additionally, the absorption of funds from the Recovery and Resilience Facility has been low, according to a recent assessment by the University of Cyprus. The report also criticized the targeting of social spending, noting that most expenditures lack sufficient means-testing, with the Guaranteed Minimum Income being the only social support granted based on strict criteria.
The Fiscal Council urged caution regarding planned projects, such as the electrical interconnection with Greece and Israel and the stalled liquefied natural gas (LNG) terminal at Vasiliko. These projects may require substantial government investments, which could strain public finances.
On the topic of pension reform, Charalambous highlighted a concerning demographic trend: currently, four working individuals support one pensioner, but this ratio could decline to 2:1 in the future. Such a shift could jeopardize the sustainability of the social insurance fund.
In summarizing the report's key message, Charalambous emphasized that while Cyprus currently enjoys a favorable fiscal and economic environment, addressing chronic weaknesses is essential for navigating future challenges. If these issues are not resolved promptly, they could lead to increased fiscal costs and undermine the positive trajectory of the economy.
As Cyprus continues to navigate its economic landscape, the insights from the Fiscal Council serve as a reminder of the importance of vigilance and proactive measures in ensuring sustainable growth and stability.