By Carlo Capuano and Alessandra Poli, Sovereign & Public Sector

We expect Cyprus’s (A-/Stable) robust economic growth to average around 3% a year over 2025-30 (despite higher US tariffs) which, together with a solid budgetary performance, should ensure debt-to GDP declines to below 50% in the coming years from 65% in 2024.

Multiple shocks, including Covid, Russia’s invasion of Ukraine and higher inflation, have tested Cyprus’s resilience in recent years but the country’s public finances have held up well. The government has recorded rising budget balance surpluses and overseen a reduction in financial imbalances, leaving debt-to-GDP at 65% in 2024, almost 49 percentage points below its peak at 113.6% in 2020.

The trend looks set to continue as highlighted by the most recent economic and public-finance numbers.

GDP growth remains the second strongest in the euro area, after Ireland, with latest data showing output expanding by 3.3% year-on-year in Q2 2025. This favourable domestic economic backdrop is feeding through to the country’s public accounts.

After a record-high budget surplus of 4.3% of GDP in 2024, recent data on cash balances points to a favourable performance in 2025 too. Although we expect a lower budget surplus of 3.5% of GDP in 2025, buoyant fiscal revenues, supported by social contributions and taxes, continue to bolster Cyprus’ public accounts.

Moreover, the government also has the possibility to drawdown its sizeable amount of cash reserves, estimated at around 11% of GDP at end of 2024, which further bolsters the country’s public finances.
 

Fiscal revenues strong, but the risk of more rigid spending is rising

Latest preliminary cash balance data points to a surplus of EUR 840.6m (2.4% of GDP) in the first seven months of 2025. Although this is EUR 71m below the surplus recorded in the same period last year, it highlights strong growth in social security contributions (+9.2%) and income and wealth taxes (+8.8%), due to buoyant labour market and robust growth. We expect total employment to remain resilient despite slower economic growth, given the less favourable external environment in the coming quarters.

However, the recent growth in public expenditures, including in public wages (+6.9%) and social transfers (6.7%), could continue and put upward pressure on public accounts. At the same time, the upcoming tax reform might not be tax neutral. The government plans to ease the tax burden on middle-income earners, fight tax evasion and make the system more transparent but additional details will emerge after the end of public consultation, due to end 10 September.

Overall, we expect a decline in the headline balance to slightly below 1.0% by 2030, which, however, would remain among the most favourable fiscal balances in the euro area.

Cyprus’s banking sector loan-loss absorption capacity improves

Cyprus’s financial stability is also improving, supporting the country’s resilience amid the less favourable external environment of higher US tariffs and moderate growth in the euro area.

In the banking system, the non-performing loan (NPL) ratio continues to decline, while banks have improved their loan-loss absorption capacity, thanks to a rising NPL coverage ratio and the upcoming introduction of a countercyclical capital buffer (CCyB), effective from January 2026.

Despite elevated interest rates, asset quality continues to improve, while the upcoming tightening in the CCyB will bolster resilience by securing already high capital buffers. NPLs are now mainly a legacy problem, with significant volumes outside the banking system, though they remain particularly elevated at smaller banks.

The NPL ratio has fallen by around 1.5 percentage points to 5.9% in May this year over the past 12 months. Moreover, the increase in the NPL coverage ratio to 61% in May 2025 from 54% a year ago strengthens banks’ loan-loss absorption capacity. For households, the NPL ratio remains higher at 7.6% in May, pointing to potential risks in the context of high household debt.

Nevertheless, moderate household borrowing and a sound labour market are important mitigants. The buoyant economy should lead to a further gradual improvement in the NPL ratio towards the EU average of around 2% in coming years.

Scope’s next calendar review date for Cyprus is on 10 October 2025