The Cypriot economy is performing well, but sustaining the positive momentum and giving fresh impetus to growth will require a series of 'difficult' policy choices at fiscal, financial, energy and institutional level. Containing the public‑sector wage bill, abolishing all untargeted tax reductions, targeting fiscal relaxation, resolving the energy problem and maintaining the framework for the management of non‑performing loans are among the measures requested by the IMF mission to Cyprus, which held a series of engagements from 22 April to 4 May 2026.
The head of the IMF mission for Cyprus, Alex Pienkowski, in his statement summarising the mission’s findings, acknowledges that the Cypriot economy remains among the fastest‑growing in the EU, but warns that this alone is not enough.
“Sustaining medium‑term growth will require advancing structural reforms in human capital, innovation and the judicial system,” Mr Pienkowski says.
In a statement, the Ministry of Finance says it agrees with the Fund’s recommendations, with particular reference to expenditure targeting and foreclosures.
The recommendations
“P” has codified the Fund’s recommendations in the form of a ten‑point plan.
1. 'High‑quality' fiscal relaxation, not untargeted hand‑outs
The IMF accepts that Cyprus has room for gradual fiscal relaxation, as debt is on a declining path and surpluses are strong. However, it calls for this relaxation to be “high quality”, with a gradual reduction of the primary surplus only up to the point that stabilises debt – placing the medium‑term target at around ‑0.5% of GDP – and warns that every move should avoid overheating the economy.
2. Investment and GDP
A central recommendation is the channelling of additional resources into public investments that boost productivity, such as energy, climate‑change adaptation, digital infrastructure and sustainable transport. The Fund links 'high‑quality' relaxation to the state’s ability to design and implement such projects, underlining the need for strong public‑investment management to prevent resources being lost to fragmented spending.
3. End to horizontal tax cuts
The IMF calls for the abolition of untargeted measures to address high prices, such as VAT rate reductions and across‑the‑board cuts in excise duties. It describes these measures as “costly, poorly targeted and distortionary” and urges their withdrawal, to be replaced by temporary and strictly targeted benefits for vulnerable households, combined with measures to improve energy efficiency and infrastructure.
4. Containing the public‑sector wage bill
On wages, the IMF stresses that increases in the public sector should remain within the framework set by the Cost‑of‑Living Allowance (COLA) and that new across‑the‑board revisions or additional increases should be avoided. It warns that a more generous wage policy would further widen the pay‑cost gap between the public and private sectors, risking competitiveness and putting pressure on spending at the expense of other priorities.
5. Planning for ageing, health, defence and climate
The Fund warns that long‑term spending pressures, mainly from pensions and healthcare, but also from defence, the climate transition and infrastructure, will increase significantly in coming decades. It welcomes the proposal for gradual accumulation of financial reserves in the Social Insurance Fund but calls for comprehensive planning on how to address ageing‑related costs without derailing public debt.
6. Deepening tax reform
The recent broad tax reform is described as a step in the right direction, but not a completed project. The IMF recommends continuing changes aimed at broadening the tax base, reducing fragmentation in capital‑income taxation, implementing the postponed environmental tax reform and strengthening recurrent property taxation, so the system becomes more efficient and growth‑friendly.
7. Supporting credit expansion
The IMF describes the banking sector’s momentum as limited despite the recent recovery in lending activity. Difficulties in resolving non‑performing loans outside the banking sector, structural constraints linked to market size and concentration, lingering scars from the 2014 crisis and frictions within the EU banking union all contribute to this lack of dynamism. The Fund proposes improving judicial efficiency, reducing barriers to cross‑border banking and efforts to resolve legacy debts.
8. Resisting changes to foreclosures
On banking, the IMF acknowledges strong capital‑adequacy and liquidity ratios and a steady reduction in non‑performing loans. At the same time, it welcomes the gradual tightening of macroprudential policy – such as raising the countercyclical capital buffer to 1.5% from 2026 – and warns that pressure to ease the foreclosure framework should be rejected, as it would slow the resolution of problem loans, increase credit risk and undermine access to finance, particularly for new borrowers and SMEs.
Regarding NPLs, the IMF notes that despite progress, non‑performing loans transferred outside the banking system are not being resolved at the same pace. It advocates accelerating judicial reforms – faster adjudication, specialisation, adequate staffing and digitalisation – to improve the overall debt‑resolution process and strengthen competition.
9. Shift towards skills, innovation and AI
With employment already high and unemployment at its lowest level since 2008, the Fund stresses that future growth will depend more on productivity and investment than on adding new workers. It calls for strengthening digital skills within the education system, upskilling and reskilling programmes for the existing workforce and promoting the adoption of artificial intelligence – particularly by SMEs – alongside measures to support workers during the transition.
10. Energy transition with interconnection and competition
Finally, the IMF places particular emphasis on energy policy, highlighting that the current, heavily oil‑based and non‑interconnected electricity system drives up costs and emissions. It proposes accelerating investments in electricity interconnection, LNG infrastructure and completing the competitive electricity‑market framework.
