Cyprus economy’s ‘foreign engine’ raises fears of investment flight

The Cyprus Fiscal Council has announced that national public debt remains on a downward trajectory and is expected to fall below the threshold of 60 per cent of gross domestic product (GDP) once official figures for 2025 are finalised.

“The downward trend of the debt will continue in 2026 and probably in 2027,” estimated the chairman of the Cyprus Fiscal Council Michalis Persianis.

“There is no concern regarding the possible adoption of measures, as the debt trajectory remains downward and the debt will be at levels lower than 60 per cent of GDP,” Persianis stated, despite anticipated overruns regarding the trajectory of net primary national expenditure.

“The liquid assets of the Republic remain close to 10 per cent of GDP, driven primarily by revenues from Kedipes, and provide additional options for the state,” Persianis said during recent a roundtable discussion on the Cypriot economy.

Inflation is recording trends near zero in 2025, specifically around 0.2 per cent, and is expected to move slightly higher than 2 per cent in 2026, he mentioned.

“Despite high growth rates, this is driven by a small number of industries, which are based on high-mobility foreign-controlled enterprises, creating increased vulnerability for the economy and public finances,” Persianis said.

“The requirements for additional spending of a social nature should be expected to increase in the coming years,” the Fiscal Council Chairman highlighted.

“There are great needs for funds concerning projects, actions, and needs which are expected to mature in the coming years,” he reported.

These requirements include infrastructure such as water, energy, transport, protection from natural disasters, and defence spending, Persianis explained.

“It is likely that several of these needs will mature to a degree that will not allow further delay in their servicing in the coming years, creating a significant risk for public finances,” he added.

The allocation of funds with high inelastic expenditures traps each government into pro-cyclical policies, depriving the state of fiscal space and policy options during periods of increased pressure, Persianis pointed out.

“Spending prioritisation does not favour long-term solutions to worsening problems,” according to the Council Chairman.

“Spending continues for the expansion of the road network without substantial infrastructure spending or medium-term planning for the enhancement of public transport,” Persianis said as an example regarding traffic issues.

A similar picture exists for energy, climate risks, water resources, and housing policy, he noted.

“The increases in average real wages are driven by large increases in a small number of sectors of the economy and official data overestimate the actual income of households,” Persianis said regarding salary trends.

“The requirements for additional spending of a social nature must be expected to increase in the coming years,” he underlined.

The difference between Gross National Income and Gross Domestic Product approaches 12 per cent of GDP and maintains an increasing trend, with primary incomes flowing out of Cyprus, he underlined.

“Thus, while GDP per capita has increased in recent years, the increase in the disposable income of households was marginal,” Persianis concluded.

“The Cypriot economy presents significant growth and resilience despite the uncertainty of the external environment,” said Marios Polemidiotis, the head of the Economic Analysis and Monetary Policy Department at the Central Bank of Cyprus (CBC).

The Cypriot economy is expected to continue showing strong growth in the medium term, while unemployment will remain at low levels and inflation will stay near 2 per cent, according to Polemidiotis.

Private debt has been on a downward trajectory since its peak in 2015, with banking reforms, recapitalisation, and stricter credit standards limiting net credit growth to manageable levels, he noted.

The labour market remains tight but presents flexibility with the support of both Cypriot and foreign workers, while wage growth has moderated and productivity growth continues, Polemidiotis said.

“Cyprus maintains a cost advantage in comparison with the Eurozone,” he stated.

“Headline inflation returned closer to the target in January 2026 after a six-month period of fluctuating around zero,” Polemidiotis added.

The current account deficit remains consistently high due to the positive contribution from the services balance surplus, which prevails over the deterioration of the trade balance in goods and the primary income balance, he reported.

The public and banking sectors now constitute “fortresses” of liquidity and low debt, while the private sector is recovering despite being burdened by the weight of old issues, said Ioannis Tirkides, an economist and President of the Cyprus Society of Economic Studies.

“The external sector remains the main vulnerability as foreign ownership of domestic assets increases, although the growing surplus in the balance of goods and services is a positive development,” Tirkides concluded.