**Cyprus Economy Faces Challenges Amid Rising Energy Prices and Tourism Decline**
The International Monetary Fund (IMF) has issued a cautionary assessment regarding the state of Cyprus' economy, predicting a slowdown in growth due to escalating energy prices and a decline in tourism arrivals. This evaluation was part of the IMF's Article IV Consultation, which provides an in-depth annual review of a country's economic and financial policies.
According to the IMF, while Cyprus has shown resilience against geopolitical challenges, the current economic landscape is expected to moderate growth. The organization forecasts the country’s Gross Domestic Product (GDP) growth to decrease to approximately 2.6% this year, a notable drop from 3.8% in 2025. In a more pessimistic scenario, particularly if the ongoing crisis in the Gulf region persists, growth could be limited to just 1.7%.
The IMF highlighted that inflation, which had previously decreased due to favorable energy and goods price developments, is now on the rise. This uptick is attributed to higher energy costs stemming from the conflict in the Middle East. The harmonized rate of inflation, which fell to 0.8% in 2025, is projected to increase to 3.5% this year before stabilizing at around 1.5% in 2027.
The organization noted that tourism, a critical sector for the Cypriot economy, is also experiencing signs of softening. This decline in tourism is expected to impact overall economic confidence and real incomes. Despite these challenges, the IMF reported that the fiscal performance of Cyprus remains strong, with continued budget surpluses and public debt decreasing to below 60% of GDP. The financial sector is described as sound, characterized by robust capital and liquidity buffers alongside improving asset quality.
The IMF commended the Cypriot authorities for their strong fiscal management, which has effectively rebuilt economic buffers and placed public debt on a stable downward trajectory. It acknowledged that Cyprus has made significant strides since the banking crisis of 2013, with per capita GDP now returning to pre-crisis levels in relation to the EU average.
However, the IMF's report also underscored the necessity for Cyprus to enhance the efficiency of government spending and taxation. It emphasized the importance of prioritizing high-quality public investments and maintaining discipline in public wage growth. The organization advised that any measures aimed at supporting households should be temporary and well-targeted to avoid long-term fiscal imbalances.
In addition, the IMF welcomed the recent comprehensive tax reform and the proposal to build financial assets within the social security fund, indicating a positive step toward strengthening the country’s economic framework.
Overall, while the outlook for Cyprus' economy is tempered by external pressures, the IMF's assessment reflects a balanced view, recognizing both the challenges ahead and the underlying strengths that could support recovery and growth in the medium term.