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Cyprus’ economy is continuing to grow strongly, with falling debt and a stabilizing financial system, but new risks linked to regional instability and long-term structural challenges are still hanging over the country, according to a new European report.
In its 2025 annual assessment, the European Stability Mechanism (ESM) says Cyprus is on a clear path of fiscal consolidation, in simple terms, the government is bringing its finances under control while the economy keeps expanding.
For everyday Cypriots, that picture shows up in a few key numbers.
The economy grew by 3.8% in 2025, driven mainly by strong local demand and a booming tourism and services sector. Inflation also eased sharply to 0.9%, meaning price increases slowed compared with previous years, good news for households still dealing with the cost-of-living squeeze.
At the same time, Cyprus has made significant progress in reducing its debt. Public debt fell to 55% of GDP, down from 63% the previous year and a dramatic drop from around 114% in 2020, when the pandemic pushed borrowing to record levels.
The report also notes that Cyprus continues to enjoy relatively strong investor confidence, with government borrowing costs steady at around 3% and the gap compared with German bonds narrowing, a sign markets see Cyprus as more stable.
On the banking side, the picture is also improving. Cypriot banks remain profitable, well-capitalized, and liquid, meaning they are considered financially stable. Nonperforming loans, the legacy of older bad debts that once weighed heavily on the system, have fallen to 3.2%, the lowest level in more than a decade.
However, the report warns that challenges remain, especially in smaller banks and credit companies still managing older problematic loans.
The ESM also says Cyprus has the capacity to meet its financial obligations in the coming years and considers the long-term risk to debt sustainability to be low.
But the tone is not entirely positive.
The report flags geopolitical instability in the wider region, particularly the war in the Middle East, as a major risk that could affect Cyprus through higher energy prices, weaker tourism, and renewed inflation pressures. For an island economy heavily dependent on tourism and imported fuel, that exposure is significant.
Another concern is the pace of reforms and investment under Cyprus’ Recovery and Resilience Plan. The ESM says implementation needs to speed up, especially in areas linked to green energy, digital transformation, and modernizing the economy.
Looking further ahead, the report highlights longer-term pressures that Cyprus cannot avoid: an aging population, climate change, water shortages, and the need for greater energy diversification.
In short, the message is mixed. Cyprus is currently on stable economic ground, growing, reducing debt, and strengthening its banks, but the next phase will depend on how well it handles risks from outside the island and structural challenges at home.
