The Cypriot economy maintained a robust trajectory through December 29, 2025, as the government successfully navigated a complex landscape of global trade tensions and regional instability to implement landmark domestic reforms.
Globally, uncertainty sharpened early in the year as renewed trade tensions emerged following tariff measures announced by US President Donald Trump, reviving fears of higher inflation and a possible slowdown in global growth.
These pressures coincided with persistent geopolitical instability, from the ongoing war in Ukraine to heightened tensions in the Middle East, while climate-related risks increasingly shaped economic planning across Europe.
Against this backdrop, Cyprus also faced a demanding domestic agenda.
The government moved forward with a comprehensive tax reform, submitting a package of 6 bills aimed at reshaping income and corporate taxation, while long-standing negotiations between social partners over the Automatic Cost of Living Allowance (CoLA) entered a decisive phase after years of stalemate.
Despite these challenges, economic performance remained resilient.
Growth in the first quarter stood close to 3 per cent, reflecting strong domestic demand, solid labour market conditions and continued strength in services exports.
For the full year, the Ministry of Finance forecast growth of 3.1 per cent, while inflation was expected to remain subdued at 0.9 per cent.
Unemployment, projected at 4.6 per cent, remained consistent with full employment conditions.
Looking beyond the short term, the strategic fiscal policy framework for 2026-2028, published on June 15, 2025, projected growth of between 2.9 and 3.1 per cent over the medium term.
Public debt, which has fallen sharply since the pandemic, is forecast to decline further to 43.3 per cent of GDP by 2028, reinforcing the improving fiscal profile of Cyprus.
Energy policy emerged as a central pillar of economic strategy in the early months of the year.
Cyprus and Egypt signed agreements in Cairo to advance the exploitation of natural gas deposits in the Cypriot exclusive economic zone.
A memorandum of understanding with Chevron, NewMed and Shell established the framework for the commercialisation of gas from the Aphrodite field, marking a significant step towards monetising offshore resources.
This was followed by the signing of a host country agreement with ENI and Total for the development of hydrocarbons in Block 6 of the EEZ, which includes the Kronos, Zeus and Calypso fields, further strengthening the position of Cyprus in the Eastern Mediterranean energy map.
Monetary conditions also provided support.
The European Central Bank cut interest rates 3 times during the year, in January, March and June, each by 25 basis points, easing financing conditions for households and businesses and supporting investment activity.
By the second quarter, confidence in the economy had strengthened, supported by positive assessments from European institutions, international rating agencies and developments in key sectors including energy, banking and labour.
In its Spring Package under the European Semester, the European Commission concluded that Cyprus was no longer experiencing macroeconomic imbalances, citing reduced vulnerabilities related to external and private debt and sustained economic growth.
At the same time, the Commission pointed to structural challenges that continue to weigh on long-term competitiveness, notably in innovation, the green transition, education and long-term care.
The spring forecasts of the Commission projected continued growth in 2025 and 2026, driven primarily by domestic demand and resilient exports of services, while cautioning that indirect effects from global developments could still weigh on the outlook.
International rating agencies echoed the broadly positive tone.
In May, Fitch affirmed the long-term foreign-currency rating of Cyprus at ‘A-’ with a stable outlook, pointing to strong fiscal performance, declining public debt and economic resilience, while emphasising ongoing exposure to external shocks and geopolitical risks.
Energy developments gathered pace in early July, when President Nikos Christodoulides was briefed on the discovery of a 350-metre column of clean natural gas following the Pegasus-1 drilling in Block 10 of the EEZ, during a teleconference with ExxonMobil executives.
The finding added momentum to the offshore exploration programme of Cyprus.
At the same time, preparatory work on tax reform intensified, with the government submitting the relevant bills for public consultation in July.
The banking sector continued to consolidate.
The merger of Hellenic Bank with Eurobank was completed, with all assets and liabilities transferred as of September 1, 2025, following supervisory approvals.
Separately, an agreement was signed in June for Alpha Bank Cyprus to acquire nearly all of AstroBank’s banking operations, including its personnel, with completion expected in the fourth quarter of the year.
Government policy initiatives also remained in focus.
Projects worth €660 million were announced for Limassol, while consumer transparency was boosted with the launch of the e-kalathi application, allowing consumers to compare supermarket prices.
June also brought a diplomatic and economic milestone with the visit of Indian Prime Minister Narendra Modi.
Cyprus and India highlighted expanding investment opportunities, established the India-Cyprus-Greece Business and Investment Council and referred to the participation of Cyprus in the IMEC corridor, underlining its growing role as a regional gateway.
The summer months, however, were overshadowed by devastating wildfires in mountainous areas of Limassol.
The government introduced emergency financial support measures for affected households and businesses, including wage coverage for fire-affected workers.
In August, long-delayed replacement payments under the National Solidarity Fund also began, addressing claims that had been pending for years.
The third quarter of 2025 was dominated by decisive developments on labour relations and tax reform, culminating in the passage of the tax overhaul by Parliament shortly before the end of the year.
A central issue was the agreement on CoLA, which marked a breakthrough after approximately 15 years of inconclusive negotiations.
Talks stalled in September, prompting strike action by trade unions, before intensive consultations led to an agreement between social partners and the Ministries of Labour and Finance.
The arrangement links CoLA to the minimum wage, extending its coverage to around 55,000 low-paid workers.
On the fiscal front, the tax reform bill was submitted to Parliament in November and debated in the Finance Committee before being approved by the Plenary on December 22, 2025.
The reform raises the tax-free threshold to €22,000, revises income tax brackets and increases the corporate tax rate to 15 per cent, aligning Cyprus with international minimum tax standards.
Energy policy remained a focal point, particularly amid public debate over delays to the Great Sea Interconnector linking Cyprus and Greece.
While Athens reaffirmed the strategic importance of the project for energy-isolated Cyprus, Nicosia committed €25 million in the 2026 budget, even as concerns were raised over costs and feasibility.
In November, Cyprus, Greece and the European Commission agreed to update the technical and economic studies of the project to reassess its viability.
Attention also turned to the liquefied natural gas terminal at Vasilikos, following delays, the withdrawal of €67 million in EU funding and an investigation by the European Public Prosecutor’s Office.
The government maintained that the project remains feasible and will be completed.
Foreign economic policy advanced on several fronts.
Cyprus and Lebanon signed an agreement on the delimitation of their exclusive economic zones, while also agreeing to explore electricity interconnection through technical teams and feasibility studies.
At the same time, Cyprus intensified investment promotion efforts during presidential visits to Canada and the US.
At the macroeconomic level, interest rates remained unchanged in the second half of the year.
The competitive electricity market entered commercial operation on October 1, 2025, marking the transition to a fully liberalised electricity market.
International institutions continued to revise their assessments upwards.
DBRS Morningstar upgraded the credit rating of Cyprus to ‘A’, S&P Global Ratings revised its outlook to positive, while Fitch upgraded its outlook.
The IMF raised its growth forecast for 2025 to 2.9 per cent, while the autumn forecasts of the European Commission were more optimistic, projecting growth of 3.4 per cent.
The period was not without disruption.
Strike action at the port of Limassol affected operations at the main export hub of the country, while Parliament adopted new legislative frameworks on foreign direct investment screening and teleworking in the public sector amid political debate.
The full rollout of SEPA instant payments also began, enabling faster interbank transactions.
On the fiscal side, the 2026 state budget was approved in December, projecting revenues of €12.68 billion and expenditures of €10.78 billion, with the government describing it as people-centred and responsive to emerging challenges.
The year closed with further international initiatives, including trade agreements linked to the Kronos gas field, closer economic ties with the United Arab Emirates and France, and a partial cabinet reshuffle affecting key economic portfolios.
