Cyprus enters the economic turbulence caused by the Middle East conflict from a strong position but faces higher inflation and short-term uncertainty, according to the European Commission’s Spring 2026 forecasts.
Inflation is projected to rise to 3.6% in 2026 before falling to 2.2%, reflecting a sharp initial increase in international energy prices followed by gradual normalisation, the Commission said.
Household consumption growth is expected to slow as inflation erodes real disposable incomes, though the automatic cost-of-living adjustment mechanism is likely to provide some support to wages.
Tourism will be negatively affected by the conflict, the Commission said, though services exports are expected to remain resilient. It added that weaker tourism prospects could moderate services sector inflation, as companies may offer more competitive prices to attract inbound visitors.
Cyprus’s fiscal position remains strong. Budget surpluses are expected to continue and the debt-to-GDP ratio fell below 60% by the end of 2025, continuing a sharp downward trend.
The budget surplus is forecast to narrow to 2.1% of GDP in 2026 and 2.5% in 2027, reflecting a 0.7% of GDP fiscal cost from a broad tax reform that came into force in early 2026. The reform reduces certain special tax payments for companies and lowers personal income tax through adjustments to brackets and allowances. Partially offsetting this, the corporate tax rate rose from 12.5% to 15%.
The sharp rise in oil prices has pushed up energy costs, though reductions in VAT and excise duties on energy may help limit further price increases, the Commission noted. Government measures to address rising energy prices, including targeted subsidies and VAT and excise duty reductions, are also weighing on the budget.
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