The Cypriot economy is poised for a significant growth spurt between 2027 and 2028, fueled by a surge in major private infrastructure projects and robust exports in the technology and financial sectors. In the newly released 2025 Annual Report from the Central Bank of Cyprus (CBC), Governor Christodoulos Patsalides outlined a trajectory of recovery and expansion, even as the island navigates the immediate ripple effects of regional conflict.
While 2026 is expected to act as a transitional year with moderated growth, the medium-term outlook remains strong, supported by full employment conditions and a resilient banking sector.
GDP Projections: From 2026 Slowdown to 2028 Acceleration
Economic momentum is forecast to dip slightly in the short term before hitting a higher gear. The CBC’s March 2026 projections highlight a shift in pace:
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2025: 3.8% (Actual growth)
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2026: 2.7% (Projected slowdown due to Middle East war and foot-and-mouth disease impacts)
- 2027: 2.9% (Projected recovery)
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2028: 3.1% (Projected acceleration)
The Governor noted that while tourism may face a difficult 2026, the sector is expected to rebound fully by 2027. Domestic demand will remain a secondary engine of growth, bolstered by rising real disposable incomes and a stable unemployment rate projected to hover around 4.5%.
The Inflation Outlook and “ETS2” Impact
Inflation management remains a priority for the CBC. After a period of relative calm in 2025, prices are expected to fluctuate based on energy costs and new environmental regulations.
- 2026 Spike: Inflation is forecast to rise to 2.7%, driven by supply chain disruptions and a spike in global fertilizer and food prices linked to regional tensions.
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2027 Easing: Rates are expected to cool to the 2.0% target as energy markets stabilize.
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2028 Adjustment: A minor uptick to 2.2% is anticipated, specifically due to the rollout of the ETS2 (Emissions Trading System), which will introduce new costs for fuel and heating.
Banking Stability: NPLs Hit Historic Lows
A standout highlight of the report was the continued health of the Cypriot banking system. By the end of December 2025, the Non-Performing Loans (NPL) ratio had plummeted to 1.6%.
“The banking sector maintained high resilience throughout 2025. Our NPL ratio is now officially lower than the European Union average of 1.8%,” Governor Patsalides stated, signaling a definitive turn from the island’s past financial challenges.
Strategic Modernization
Beyond the numbers, Patsalides confirmed he has submitted a formal proposal to the President and the Minister of Finance to modernize the Central Bank’s governance model. This move aims to enhance the institution’s agility in maintaining financial stability within an increasingly volatile global environment.
With public debt now comfortably below the 60% GDP threshold and credit ratings on the rise, the Central Bank maintains that Cyprus is well-positioned to transform current “geopolitical uncertainty” into long-term “sustainable and balanced growth.”
Source: Stockwatch.com.cy