Cyprus’ near-term sovereign risk is low: the general government surplus reached 4.3% of GDP in 2024, 3.5% in 2025 and is to stay around this level in 2026, while public debt continue to fall. Iin Q2 2025, it was already 6.5pps below a year earlier at 62.2% of GDP, supported by high primary surpluses, robust growth and large cash buffers. To maintain a tight fiscal stance to avoid overheating and to bring debt comfortably below 60% of GDP, the expenditure composition should be more tilted to investment rather than rigid current spending (including COLA indexation). Over time, age-related outlays (pensions, healthcare, long-term care) and green and digital transition needs will absorb fiscal space beyond the RRP horizon, limiting scope for discretionary easing.  

The tax mix remains highly concentrated on corporate income taxation (>6% of GDP, among the highest in the EU), while recurrent property and environmental taxes are minimal. This structure makes fiscal revenues sensitive to corporate profit cycles, profit-shifting practices and global tax reforms. Diversifying the tax base toward more stable and environmentally friendly sources—such as a carbon levy or landfill charge—and enhancing compliance. At the same time, Cyprus benefits from a solid banking sector, which underpins financial stability. Banks are well-capitalized, highly liquid and profitable, supported by wide interest margins. The non-performing loan ratio has fallen to around 6.2%, among the lowest levels since the financial crisis, thanks to active resolution and foreclosure frameworks. Macroprudential measures, including a planned increase in the countercyclical capital buffer to 1.5% by 2026, aim to lock in resilience. These strengths reduce short-term systemic risk, although legacy exposures outside the banking perimeter and strong real estate linkages still warrant close monitoring. 

The current account deficit remains high (around 7% of GDP) and the NIIP is deeply negative (near −80% of GDP), highlighting the need for continued reliance on foreign capital. Historically, Cyprus' services ecosystem was closely intertwined with Russian capital flows. Since 2022, EU sanctions have led to a significant reduction in these activities, resulting in increased compliance costs and reputational risk. In the meantime, Cyprus repositioned itself towards ICT, fintech and energy, with foreign corporations expanding their operations in Cyprus, attracted by EU market access and favorable regulation. This has reinforced the country's dependence on foreign inflows and anti-money laundering scrutiny. Concurrently, strategic energy projects such as the Great Sea Interconnector and a proposed Israel-Cyprus gas pipeline have the potential to attract capital and expertise, but they may also introduce execution, regulatory and geopolitical risks if schedules are delayed or regional tensions escalate. 

Cyprus is facing heightened political uncertainty ahead of the May 2026 parliamentary elections. The fragmented nature of the party landscape could result in a parliament without a clear majority, which would complicate the president's ability to pass legislation and underscore domestic policy uncertainty. On the geopolitical front, renewed diplomatic efforts are underway to revive UN-led negotiations on the “Cyprus issue”, bolstered by the election of moderate Turkish Cypriot leadership and plans for trilateral meetings. However, the longstanding east-west divide, which is managed by Turkey, continues to pose risks, including the possibility of stalled progress and renewed tensions.  

Financial compliance is also a growing source of political risk. Cyprus has been criticized for its lack of enforcement action in implementing EU sanctions against Russia, specifically the failure to meet the 2025 deadline for the establishment of a central sanctions unit. This has been attributed to resistance from the legal community. Although a National Sanctions Implementation Unit (NSIU) and new criminal offences for sanctions evasion were finally instituted in mid-2025, the delay exposed reputational and regulatory vulnerabilities.