Cyprus’s economy remains resilient despite risks from the wars in the Middle East, but recent changes linked to the foreclosure framework could weaken an important part of the financial system, according to the European Commission.
The assessment was carried out between March and April 2026 as part of post-programme surveillance and the Spring European Semester, in cooperation with the European Central Bank, the European Stability Mechanism and the International Monetary Fund.
The Commission said Cyprus’s real GDP grew by 3.8% in 2025 and is expected to grow by 2.3% in 2026 and 2.7% in 2027, with private consumption remaining the main driver of economic activity.
Inflation is expected to rise to 3.6% in 2026, mainly because of higher energy prices, before falling to 2.2% in 2027. The report said imported inflation is expected to put pressure on real incomes.
The labour market is expected to remain strong, with unemployment forecast to stabilise at 4.2% in both 2026 and 2027, its lowest level in the past decade.
Public finances also remain in surplus. The fiscal balance stood at 3.4% of GDP in 2025 and is forecast at 2.1% in 2026 and 2.5% in 2027.
Public debt fell below 60% of GDP at the end of 2025 and is expected to continue declining, reaching 50.4% of GDP in 2026 and 45.5% in 2027.
The banking sector remains strong, with capital buffers strengthening further. The CET1 ratio, a key measure of bank capital adequacy, stood at 25.8% in December 2025, the highest in the European Union, according to the Commission.
Return on equity reached 14.2%, compared with an EU average of 9.6%, while the non-performing loans ratio fell below the EU average for the first time, to 1.6%.
Despite the positive assessment, the Commission raised concerns over recent legislative initiatives by the House of Representatives concerning the foreclosure framework.
The report said the changes “could significantly weaken the effectiveness of the existing framework”.
It also said the developments could negatively affect the recovery of state aid linked to the repayment of €1.8 billion by KEDIPES.
Cyprus maintains a strong cash buffer of €1.7 billion and a healthy debt maturity profile, according to the report. It also referred to the issue of a €1 billion 10-year bond, which was oversubscribed by a record 16 times.
The country’s credit rating remains at “A” level from all major rating agencies. In November 2025, Cyprus held an A rating from DBRS Morningstar with a stable outlook, A- from Standard & Poor’s with a positive outlook, A- from Fitch with a positive outlook, A- from Scope Ratings with a positive outlook and A3 from Moody’s with a stable outlook.
The macroeconomic forecasts are based on the Spring 2026 Economic Forecast, presented two weeks ago, which took into account macroeconomic data up to May 4, 2026.
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