Remaining resilient but challenges persist

Economic activity in Cyprus remained robust in 2024, despite some volatility, and well above the Eurozone average. Looking ahead, growth is forecast to moderate – staying around +1.8% in 2025, still supported by strong domestic demand – and to gradually soften to +1.6% in 2026 as external conditions become less supportive and domestic demand normalizes.

Service exports, particularly in ICT sector and tourism, continued to show robust performance despite heightened geopolitical tensions both in the immediate region and more broadly. The strategic relocation of firms to Cyprus has contributed notably to recent growth, driven by businesses seeking a more stable operating environment amidst global uncertainties. This influx has helped diversify the island’s economic base, reducing reliance on any single market or source country.

The summer of 2024 saw international arrivals to Cyprus remaining 2% below pre-pandemic levels. Nonetheless, the tourism sector has adapted well to the loss of Russian and Ukrainian visitors –which accounted for around 20% of arrivals in 2019 – by successfully attracting more visitors from Western Europe. The UK led this shift, representing 34% of total arrivals in the first half of 2024. Israel emerged as the second-largest tourist market at 10% of arrivals during the same period. While the ongoing Middle East conflict poses potential risks, its impact on Cyprus’s tourism industry has so far been modest.

Looking at prices, the gradual normalization of energy prices has helped inflation to decline markedly during 2023. The disinflationary trend continued in 2024, reaching 1.4% in the third quarter – the lowest level after the post pandemic spike (at 9.5% y/y in Q3 2022). Overall, we expect inflation to slowly increase towards the 2% target in 2025 and 2026.

Cyprus has committed to fiscal discipline. The government’s fiscal position is expected to remain solid over the next years. After posting a surplus of around 2.0% of GDP in 2023, the government balance improved further in 2024, driven by robust revenue growth outpacing rising expenditures. Government revenues will continue to benefit from improved labor market conditions, resulting in stronger social security contributions following the higher employer and employee contribution rates introduced in January 2024. At the same time, corporate and personal income taxes and VAT collections are expected to rise. On the expenditure side, public wage bills are projected to increase, reflecting inflation indexation and higher social contributions for civil servants. Meanwhile, public investment will benefit from the Recovery and Resilience Plan (RRP) related projects, and the deployment of other EU funds from the 2021–2027 budget. Looking ahead, we expect the fiscal surplus to remain positive, but to slightly decrease from the current level while risks around the fiscal outlook have not disappeared, including additional fiscal cost or implementation delays in large-scale infrastructure projects, such as the liquified natural gas terminal.

The labor market continued to strengthen in 2024, boosted by increased hiring in the tourism industry and the public sector. As a result, the unemployment rate fell by 1pp to 4.5% by the end of Q3 2024 – its lowest level in 15 years. Skills mismatches and overall labor market slack remain limited, supported in part by the government’s initiative to attract multinational businesses, which has helped bring in foreign workers with the needed skill sets.

Cyprus is ranked 54 out of 190 economies in the 2020 World Bank's doing business ranking. The country achieves its highest rankings in the categories of protecting minority investors, paying taxes and resolving insolvencies.

The revised Recovery and Resilience Plan is worth EUR1.22bn, including EUR0.2bn in loans and EUR1.02bn in grants, equivalent to 5.2 % of the country's 2019 GDP. In detail, Cyprus’s RRF devotes 45% to the green transition and 25% to the digital transition. In 2024, the country received the second payment of EUR115mn in grants after successfully meeting 37 milestones and targets.