Fiscal council warns of risks to Cyprus economy in 2026

In its 2026 interim report, the Cyprus Fiscal Council has issued warnings regarding several fiscal risks threatening the nation's economic stability. While the economy is projected to grow by approximately 3% in 2026 following a 3.8% growth in 2025, officials emphasize that current resilience does not justify complacency due to structural and geopolitical pressures.

A major point of concern is the explosive growth of the public sector payroll, which rose from €3.17 billion in 2022 to €4.16 billion in 2025, a cumulative increase of 38%. The Council specifically highlighted the Automatic Cost-of-Living Allowance (COLA) as a source of rigidity, noting that its cost surged from €42 million to €199 million over the same period. To maintain stability, the Council recommends restricting horizontal wage increases and reforming the COLA mechanism.

Furthermore, the report identifies significant fiscal uncertainty stemming from major energy projects, specifically the Vassiliko LNG terminal and the Great Sea Interconnector. The Council cautioned that any additional state funding for these projects must be backed by updated technical and economic studies to ensure viability and avoid excessive public exposure. Chronic weaknesses such as limited public investment and demographic shifts remain critical long-term challenges.