Fiscal council warns of risks to Cyprus economy despite growth

The Fiscal Council of Cyprus, led by Andreas Charalambous, presented its 2026 interim report in Nicosia, highlighting that despite a resilient economy, significant long-term fiscal risks persist. While GDP grew by 3.8% in 2025 and is projected to rise by 3% in 2026, with a 3.4% budget surplus and public debt at 55% of GDP, officials warned against complacency. Key concerns include geopolitical instability in the Middle East, rising energy prices, and structural weaknesses such as low productivity and demographic shifts.

A major point of contention is the public sector wage bill, which surged 38% between 2022 and 2025, reaching €4.16 billion. The council specifically criticized the current Automatic Cost of Living Allowance (COLA) system, noting that costs rose from €42 million to €199 million in that period, causing rigidity in public spending. Additionally, the report highlighted concerns over major infrastructure projects, including the Great Sea Interconnector and the LNG terminal at Vasiliko, citing uncertainty over final costs and timelines.

Finally, Charalambous noted that recent tax reforms have inadvertently worsened social inequalities by favoring high-income earners. The council cautioned that the upcoming pre-election period poses a high risk of fiscal overruns, necessitating strict budgetary discipline and evidence-based planning for any future state-funded projects.