European Semester: Cyprus not in list of countries with macroeconomic imbalances

Cyprus is no longer considered a country with macroeconomic imbalances, according to the Spring Package of the European Semester 2025, as vulnerabilities related to external and private debt are limited, also thanks to strong growth.

The European Commission also makes specific policy recommendations for continued reforms and investment, as significant challenges are still identified in areas such as innovation, the green transition, education and long-term care.

According to a briefing by an EU official, the European Commission, in the context of the Spring Package of the European Semester 2025, identifies five positive aspects in the Cypriot economy. It notes that economic growth in Cyprus remains strong, despite the fragile international environment. Public finances are recording high surpluses, while public debt is decreasing at a rapid pace.

Moreover, the weaknesses related to external and private debt are steadily being reduced, something which led to the Commission's decision to remove Cyprus from the list of countries with macroeconomic imbalances.

In addition, the effort to diversify the sectors of the economy is bearing fruit, while Cyprus is recording an improvement in most of the UN sustainable development indicators.

Ten key challenges

Despite the positive image of the Cypriot economy, the European Commission also lists ten key challenges that the country is called upon to face. It warns of the risk of increasing public spending, calling on Cyprus to adhere to the agreed annual fiscal path for 2025, since at this stage a slight deviation is observed.

A significant weakness is also identified in the research and innovation sector, as investments remain among the lowest in the EU (0.29% of GDP compared to 0.72% on average).

Also, it says that the national innovation system is characterized by weak links between universities, the financial sector, businesses and the state. It stresses the need to strengthen the research and innovation strategy with clear objectives, indicators and monitoring mechanisms as well as to improve the legislative framework governing the commercial exploitation of research.

In relation to energy, it says that the energy transition faces significant obstacles, as coal products continue to dominate energy consumption. This, combined with the high dependence on energy imports, makes the country vulnerable and energy isolated. It adds that Cyprus records some of the highest electricity prices for households in the EU, with particularly high cooling costs. In the environmental sector, the insufficient use of water resources, especially treated water, is highlighted, as well as the lack of investment in this sector.

The Commission also identifies challenges in the labour market and skills development, highlighting labour shortages in specific sectors and the existence of underutilised human resources. Young people's basic skills have shown the biggest decline in the EU since 2018, while Cyprus has the lowest participation rate in science, technology and engineering (STEM) studies.

Five recommendations to Cyprus

The Commission makes five recommendations to Cyprus for the period 2025-2026. It recommends that Cyprus strengthens its defence spending, while complying with the budgetary rules and the expenditure ceiling applicable under the revised EU economic governance.

It proposes to accelerate the implementation of the Recovery and Resilience Plan and the Cohesion Funds, with the aim of absorbing the available European resources and supporting the competitiveness of the Cypriot economy, by the end of 2026.

Particular emphasis is placed on strengthening the structural environment for productive investment and innovation. Cyprus is called upon to increase public and private investment in research and development, promote the commercialization of results and strengthen cooperation between academic institutions and businesses.

Furthermore, the Commission recommends to strengthen access to alternative financial instruments, promote financial education, facilitate participation in capital markets and develop non-bank sources of financing for businesses. It also calls for the simplification of regulations and the reduction of administrative burdens, especially with regard to the investment licensing process and the establishment of new businesses.

The report proposes to improve the governance of state-owned enterprises, by adopting best practices in boardrooms, ownership and efficiency. Priorities also include reducing dependence on fossil fuels, through the development of interconnections with neighboring countries, increasing financing for energy efficiency and promoting sustainable transport.

Moreover, the Commission stresses the need to upgrade the electricity grid and energy storage infrastructure  in order to strengthen the penetration of renewable energy sources, as well as address energy poverty.

Cyprus is also called upon to strengthen investments in water supply, sanitation and waste management infrastructure, to promote sustainable water use practices and to strengthen waste prevention and source separation policies. The Commission calls for improving the implementation of climate change adaptation policies, through the upgrading of the institutional framework.

The fourth and fifth recommendations focus on structural challenges in the labour market and skills development. The Commission calls on Cyprus to address labour shortages and skills with an emphasis on enhancing the participation of young people in the labour market and in vocational training.

It underlines the need to promote lifelong learning, enhance green and digital skills, increase participation in early childhood education and care, and increase participation in STEM (Science, Technology, Engineering and Mathematics) programmes.

In relation to accessibility to long-term care services, Cyprus is called upon to establish a comprehensive and adequately funded model. It is also noted that Cyprus can benefit significantly in the above areas from projects financed by the Recovery and Resilience Fund, however, it will need to increase speed in order to utilize the resources by the end of 2026.

(Source: CNA)