Christodoulos Patsalides on why the Central Bank has revised the economy’s growth rate to 3.1%

The Cypriot economy continues to demonstrate significant resilience and adaptability, despite the period of uncertainty, says the Governor of the Central Bank of Cyprus, Christodoulos Patsalides.

He was commenting within the Central Bank’s Economic Bulletin for June, which was published on 21 July, and which revises the forecasts for the growth rate of the Cypriot economy for 2025 to 3.1%, compared to 3.2% in the March macroeconomic forecasts.

As Patsalides said, the resilience of the Cypriot economy is due,to a large extent, to the creation of strong reserves in recent years in critical areas such as public finances, the banking sector and the supervisory architecture.

At the same time, he adds that the enhanced diversification of the production base, the technological upgrading of critical sectors and the attraction of high-value-added foreign investments give the economy the required momentum to respond adequately to an ever-changing and geopolitically fragile international environment.

Growth at 3.4% in 2024, forecasts for 3.1% in 2025

In 2024, Gross Domestic Product (GDP) increased at a rate of 3.4%, due, among other things, to the increase in private consumption by 3.8%.

Investment (excluding ship registrations) increased by 1.4%. Net exports recorded a positive contribution, supported by the sectors of information technology services, intellectual property services, financial and professional services, and tourism.

In the first quarter of 2025, GDP recorded an annual increase of 3% compared to 3.7% in the corresponding quarter of 2024, coming from all sectors of the economy, especially trade, transport, hotels and restaurants, information and communication, financial and professional services, as well as construction.

According to the June 2025 forecasts of the Central Bank of Cyprus (CBC), the GDP growth rate for 2025 is expected to reach 3.1%, marginally lower than the March macroeconomic forecasts (3.2%), while for the period 2026-27, GDP growth is expected to be 3% per year, with private consumption remaining the main driver of growth, due to the increase in real disposable household income and the continued resilience of the labor market.

Unemployment continues to decline

Employment continued its upward trend, while unemployment decreased to 5% in the first quarter of 2025 from 5.8% in the corresponding quarter of 2024.

“This rate remains close to full employment conditions, reflecting the steady trajectory of economic growth,” the Governor notes. For the period 2025-2027, unemployment is expected to stabilise at around 4.7%.

Falling inflation trend

Inflation slowed to 1.6% in the first half of 2025 compared to 2.3% in the corresponding period of 2024. According to the CBC's forecasts in June 2025, inflation in Cyprus is projected to decline further to 1.5% in 2025 compared to 2.3% in 2024, mainly reflecting developments in energy prices and the impact of the single monetary policy which continues to have a suppressive effect on demand, albeit to a weakened extent.

For the years 2026 and 2027, domestic inflation is expected to increase to 2% and 2.4%, respectively. The projected increase in inflation in 2026 and 2027 compared to the forecast for 2025 is mainly due to the development of energy and food prices, as well as the continued strong, albeit slowing, development of services prices.

Stable public finances

Public finances continue to present a positive picture. In 2024, the fiscal surplus reached 4.3% of GDP, with revenues showing a greater increase than expenditures.

According to the Ministry of Finance's forecasts, in 2025 the surplus is projected to remain high at 3.5% of GDP, despite increased spending on infrastructure projects.

The debt-to-GDP ratio fell to 65.3% in 2024, while by April 2025 it had further decreased to 61.9%. For the whole of 2025, it is projected to fall to 57% and to 52.6% in 2026, below the 60% threshold set by the Stability and Growth Pact.

"What distinguishes the overall, positive course of the economy is the depth of its structural transformation," says the Governor, noting that the Cypriot economy is now diversified, both in terms of sectors and export destination markets.

At the same time, Patsalides notes that the growing presence of foreign businesses, particularly in the technology and services sectors, is boosting the productivity of the economy, stating, however, that vigilance is required due to the increased global uncertainty, which is at levels comparable to those of the pandemic.

In the case of Cyprus, although the direct exposure through trade in goods with the US is limited, there may be indirect impacts on services and investment activity through external demand, says Patsalides. “This reinforces the need for continued vigilance, both at the level of fiscal policy and in the financial sector,” he adds.

Banking sector

The Governor of the CBC also characterises the progress of the banking sector as "remarkable", as it maintains its robustness and resilience, with banks recording strong capital adequacy, high profitability as well as significant progress at an operational level.

According to the latest available data, the common equity capital ratio (CET1) strengthened further in December 2024, reaching 24.7%, the highest rate in the EU and significantly higher than the European average of 16.1%. This strengthens the stability and protection of the system against any future and unexpected losses.

Regarding the profitability of the Cyprus banking system, it remains strong with net profits in 2024 reaching the very high level of €1.2 billion. At the same time, the return on equity (RoE) reached 21.1% — almost double the EU average, while the cost-to-income ratio decreased to 38%, reflecting significant progress in digital transformation and operational efficiency.

Nevertheless, Patsalides points out that profitability must be used properly and prudently, so as to contribute substantially to the further shielding of banks in the long term. Regarding liquidity reserves, these were maintained at very high levels, confirming the increased resilience of the system.

Specifically, the Liquidity Coverage Ratio (LCR) stood at 333% and the Net Stable Funding Ratio (NSFR) at 188%, levels that far exceed the minimum supervisory requirements and indicate a stable and diversified funding base.

The non-performing loan (NPL) ratio also fell to 6.2% in 2024, continuing its steady downward trend. While this rate remains higher than the European average, the progress achieved is notable, the Governor said, adding that there are no signs of a general deterioration in credit behaviour, which strengthens confidence in the resilience of the sector.

Nevertheless, there remains a need to closely monitor and take further actions to deleverage banks' balance sheets, with particular emphasis on less significant institutions that need to intensify their efforts in this regard.

Strengthening supervisory control

The Governor states that the CBC has strengthened its supervisory framework, both organisationally and institutionally. “We have created a special Directorate for the supervision of Electronic Money Institutions and Payment Service Providers (EMIs and PIs), which are growing rapidly — 39 institutions are now under supervision, which is carried out with specialised staff and mechanisms.”

Furthermore, recognising the significant importance of the risks posed by climate change, the CBC implemented enhanced ESG standards, introduced uniform criteria on issues related to governance and environmental strategy, as well as implemented new transparency requirements within the framework of the European Sustainable Finance Directive.

Regarding Money Laundering and Terrorist Financing, it is noted that the new Anti-Money Laundering Directive (AML 2025) is fully aligned with the guidelines of the European Banking Authority. It improves the regulatory compliance framework, while facilitating the provision of services through simpler and clearer procedures, it added.

Particular emphasis is also placed on the integration of artificial intelligence in the banking sector, resilience against cyberattacks and strengthening investments in digital infrastructure and specialised personnel.

Click here to view the bulletin in full. Please note that, at the time of writing, it was available only in Greek.

(Sources: InBusinessNews, Central Bank of Cyprus)