A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Nicosia, Cyprus: An International Monetary Fund (IMF) mission met with the Cypriot authorities during April 22–May 4, 2026, to discuss recent economic developments, the outlook and risks, and policy priorities. At the conclusion of the visit, Mr. Alex Pienkowski, IMF mission chief for Cyprus, made the following statement:
Over recent years, Cyprus has demonstrated impressive resilience, with growth among the highest in the EU. Fiscal performance has been exceptional, with public debt falling below 60 percent of GDP. Despite recent shocks, the outlook remains favorable. But sustaining medium-term growth will require advancing structural reforms in human capital, innovation, and the judiciary. Key policy priorities include:
Robust Growth and Strong Fiscal Performance
Growth was strong in 2025, again among the highest in the EU. This impressive performance was supported by strong private consumption, and continued expansion of export-oriented services, particularly ICT and tourism. The labor market remains tight, with unemployment at the lowest rate since 2008 and still elevated vacancies.
Despite disruption from the war in the Middle East, growth is expected to remain robust in 2026. IMF staff expect growth this year to be around 2½ percent. Higher oil prices will push up inflation to around 3½ percent on average for the year, which will weaken real incomes and consumption, but underlying growth will remain robust. And while tourism has been affected in recent months it is expected to partially recover during the peak season.
Despite some easing, fiscal performance has remained strong. While revenue growth was robust, the fiscal surplus narrowed in 2025 due to higher spending on public investment, wages, and social transfers. However, strong economic growth, a continued fiscal surplus, and the use of cash buffers reduced public debt to an impressive 55 percent of GDP, further strengthening economic resilience. Progress in implementing the Recovery and Resilience Plan accelerated, although meeting all remaining milestones and targets before the final implementation deadline in August 2026 to receive full disbursements by end-2026 remains a key challenge.
Near-term risks are tilted to the downside, while medium- to long-term risks are broadly balanced. A further escalation of the war in the Middle East could further raise inflation and weaken growth, especially from tourism. Over the medium term, geopolitical fragmentation and infrastructure bottlenecks could weigh on activity, although continued structural reforms and further expansion in digital economy sectors offer significant upside potential.
A High-Quality Fiscal Loosening
Gradual fiscal loosening can support growth and accommodate rising long-term spending needs. Strong fiscal performance has placed public debt on a firmly declining path, creating scope for a lower budget surplus. Over the medium term, the primary balance should be anchored at or above the level consistent with debt stabilization, estimated at about -0.5 percent of GDP. Any fiscal easing should proceed gradually to avoid economic overheating while also supporting long-term growth and addressing rising spending pressures from population ageing, defense, and climate change.
New spending or lower taxes should focus on supporting long-term growth. Priority should be given to high-quality public investment in energy, climate adaptation, digital infrastructure, and sustainable transport, all supported by strong public investment management. At the same time, zero and reduced VAT rates, excise duty cuts, and other price-based measures to mitigate energy-related inflation are costly, poorly targeted, and distortionary, and should be rolled back. Instead, targeted and temporary transfers coupled with measures to improve energy efficiency and infrastructure are the most effective ways to protect vulnerable households.
Public wage increases should not exceed the current COLA index. Wage setting should remain prudent, and further revisions to COLA or broad-based pay increases should be avoided to prevent further widening the public-private wage gap. In addition, the financing strategy of the National Solidarity Fund should be clarified and its fiscal costs carefully assessed.
Rising long-term spending pressures need to be anticipated and addressed. Public spending is projected to increase significantly over the coming decades, driven mainly by higher pension and healthcare costs, but also by defense, climate, and infrastructure needs. The proposal to begin building financial assets in the social security fund is welcome.
The recent comprehensive tax reform is welcome and provides a solid basis for further improvements in the fiscal framework. Continued efforts should focus on broadening tax bases, reducing fragmentation in the taxation of capital income, implementing the postponed environmental tax reform, and strengthening recurrent property taxation, while ensuring that fiscal policy remains consistent with medium term debt stabilization.
Maintaining Financial Sector Resilience
The banking sector remains resilient, supported by strong capital and liquidity buffers, and improving asset quality. Bank solvency and liquidity ratios are amongst the highest in the EU, supported by strong profitability. Asset quality has improved through a steady reduction in NPLs. While property markets do not appear overvalued, real estate remains systemically important in the banking sector and should be carefully monitored.
The recent tightening of the macroprudential stance will further strengthen resilience. The decision to increase the counter-cyclical capital buffer to 1.5 percent in 2025, effective January 2026, remains appropriate, helping to secure already high capital buffers with limited impact on credit provision. Going forward, macroprudential policy should remain carefully calibrated to preserve financial stability while supporting the continued recovery in credit growth.
Despite the recent recovery of credit, the banking sector shows limited dynamism. The sector’s loan-to-deposit ratio is only 50 percent, compared to over 100 percent in the EU on average. Remaining frictions in resolving NPLs outside the banking sector, structural constraints related to market size and concentration, scarring from the 2014 crisis, and frictions within the EU banking union all contribute to this lack of dynamism. Further reforms to improve judicial efficiency, reduce barriers to cross-border banking, and efforts to resolve legacy debt would help promote competition and deepen credit intermediation.
Changes to the foreclosure framework that slow the resolution process should be resisted. After years of compromise, the existing framework broadly strikes the right balance between debtors and creditors to support debt resolution. In contrast, some recently proposed legislative changes would significantly slow resolution and increase administrative costs. This could undermine borrower incentives, increase credit risk, and reduce access to finance. Future borrowing—for example, for first-time homebuyers or small-businesses—would become harder.
Unlocking Long-Term Growth Potential
Cyprus has stepped up its leadership role in Europe. A successful EU Presidency has pushed Cyprus into a leading role in European policymaking. The authorities should capitalize on this by pushing further reforms to deepen integration, including on banking and capital markets, energy interconnectedness, and non-tariff trade barriers.
Cyprus can further promote growth through reforms in skills, innovation, and the judiciary. With employment already high, growth will depend more on productivity and investment than on adding more workers. Priorities should include emphasis on digital skills in learning, coupled with upskilling and reskilling of the existing workforce to help manage the impact of AI on employment. Promoting AI adoption, especially among SMEs, while supporting workers through a potentially difficult transition should also be a priority. Improving judicial efficiency through faster case resolution, greater specialization, adequate staffing, and stronger digitalization is also essential to support investment, lending, and debt resolution.
Advancing energy sector reform is critical to reducing costs, strengthening energy security, and supporting the green transition. Electricity generation remains heavily oil-based, and the system is not interconnected, contributing to high prices and emissions. Progress on electricity interconnection, LNG infrastructure, and the competitive electricity market framework would help lower costs, diversify supply, and facilitate renewable energy integration.
The IMF mission team would like to thank the Cypriot authorities and other counterparts for their frank and open discussions and hospitality.
