Cyprus goes into the autumn growing faster than almost any other EU economy, but with the same imported problem as everyone else: the war in the Middle East has pushed up the price of oil, and with it the price of everything that moves by road or ship. With the ECB raising rates again, the next few months will show how much of the growth reaches household budgets.
The starting point is strong. Real GDP grew by 3.8% in 2025, against 1.5% in the EU, and the Commission’s May forecasts still see Cyprus ahead in 2026, at 2.3% versus 1.1%. The gap is narrowing, though. The slowdown is not bypassing us.
Energy, again
The economy’s oldest structural weakness is back at the center. In 2024, net imports covered 87.7% of the island’s energy needs, down from around 92% in 2022 but far above the EU average of 57.2%. When oil goes up abroad, it shows up quickly at the pump, in production costs and on the supermarket shelf.
Harmonized inflation was 1.5% in March. By July it had climbed to 4.4%, against 3.0% in the EU, and the August flash estimate reached 5.2%, compared with 3.3% in the euro area, the fourth consecutive monthly rise. The Central Bank points to more expensive oil, tied to the conflict and to restrictions in the Strait of Hormuz: petroleum products in the national CPI were 20.3% higher in August than a year earlier. From there the pressure spreads: more expensive transport and fertilizer push up food prices, while restaurants and accommodation were already 12% higher in July on the harmonized index.
Interest rates on the way up
Inflation of this kind does not stay a Cypriot problem for long. On 10 September the ECB raised its deposit rate by another quarter point to 2.50%, its second increase since June, and markets expect a third by December. Most loans in Cyprus are priced off Euribor, so borrowers will feel it within months. The cost-of-living allowance (CoLA) will then pass part of this year’s inflation into wages in January: a relief for employees, a cost for employers, and a risk of a second round of price increases if energy stays expensive.
Tourism: recovered, but leaning on one market
Tourism had a bad spring and a decent summer. Arrivals in the first seven months were down 8% at 2.24 million, after growth from 4.04 million in 2024 to 4.53 million in 2025. Most of the damage was done in March and April, when arrivals fell by around 30% as the conflict escalated. By July the monthly decline had narrowed to 1.1%. Overnight stays still fell 7.7% in the first half, the steepest drop in the EU, while Malta gained 9.9% and the EU 1.7%. Tourism revenue fell 11.4% in the first half, or about €157 million.
The caveat is in the composition. July held up because arrivals from Israel jumped by more than half, to a fifth of the total, while the UK and most European markets slipped. The Deputy Ministry now expects the year to close around 5% below 2025, which makes new markets and a longer season more urgent.
Trade: the risk comes through Europe, not the US
US tariffs, capped at 15% for most European goods, add cost for the Cypriot products they cover, and US imports from Cyprus fell 13% to $43 million in the first seven months. The bigger risk, however, is weaker European demand. The Commission expects EU exports to grow by just 0.9% in 2026, with net trade subtracting 0.4 percentage points from growth. That means fewer orders for Cypriot goods and services, and fewer Europeans booking a holiday.
Where the opportunities are
The most direct route to relief is the electricity bill. Seven storage projects have funding agreements under THALIA. Once operating, they will allow midday solar power to be used in the evening, when the island currently burns expensive fuel, lowering generation costs and, in time, bills. The Great Sea Interconnector is also moving again: Meridiam took a controlling stake in August, seabed surveys are about to start, and the government must decide on state participation, with the cable alone estimated at over €1.9 billion. Further out, the Kronos gas field targets production in 2028, but it is planned for export through Egypt and would lower bills here only with separate domestic supply agreements and infrastructure.
The second opportunity is already visible in the pay data. Technology contributed €5.9 billion directly in 2025, or 16.2% of GDP, up from 15.5% in 2024, according to KPMG. Employment in the broader sector has reached 48,200, growing 9.7% a year on average over 2016–2025, with Cypriots a significant share of the workforce. The pay gap is striking: the 2022 official survey put median hourly earnings in Information and Communication at €15.98, against €8.98 across the economy. Cloud Office’s expansion is the latest example of corporate presence, and the diplomatic openings towards India and Kazakhstan work in the same direction, with contacts possible this year and the payoff mostly medium-term.
The third is EU funds through various major European funding schemes. 2026 is the final year of the Recovery and Resilience Facility and, on the July assessment, around €337 million remains after the sixth instalment, subject to milestones. The projects are concrete and, among others, include Phase B3 of the Nicosia ring road, €37 million and due in 2028, and €20 million energy upgrades in schools running to 2027. Construction supports jobs now, and the savings in transport and energy costs arrive as each project is completed.
Cyprus has something most of its EU partners lack: room to act. Public debt fell to 54.6% of GDP at the end of March 2026, against 82.9% in the EU, and the budget ran a surplus of 2% of GDP in the first seven months. That allows targeted, temporary support for those hit hardest by fuel and electricity prices without damaging the public finances. The test of the coming months is whether growth is turned into lower bills, productive investment and better-paid jobs, or whether it gets absorbed by imported inflation.
*By Kyriacos Inios, Board Member, CFA Society Cyprus
