European authorities this week confirmed Cyprus’ financial and economic stability in their 17th post-programme surveillance mission.

The latest report, released on Tuesday from the European Commission, European Central Bank (ECB), with input from the European Stability Mechanism (ESM), praised Cyprus’ solid fiscal framework.

However, it also cautioned about significant risks in key sectors of the economy and potential threats arising from global geopolitical tensions.

The country’s economic fundamentals remain strong, supported by strict fiscal discipline and a resilient banking sector.

“Economic growth accelerated to 3.7 per cent year-on-year in the first half of 2024, driven by strong investments and a recovery in net exports,” the report stated.

“Household purchasing power and savings rates continue to improve, bolstering private consumption,” it added.

Inflation is expected to stabilise around 2 per cent, aligning with the ECB’s price stability target, while unemployment approaches a decade-low level.

However, the report also said that there are potential vulnerabilities.

“Geopolitical tensions pose a significant risk to the economy,” it said.

In pointed out that disruptions in supply chains and rising production costs could negatively affect critical sectors such as tourism, which is still recovering from past crises.

Energy dependence is another area of concern. “Cyprus relies heavily on fossil fuels and has limited integration into the European electricity market, making it susceptible to energy price volatility,” the report stated.

The fiscal outlook remains positive, with Cyprus projected to achieve a surplus of 3.5 per cent of GDP in 2024.

Moreover, public debt is expected to decline to 56.7 per cent of GDP by 2026.

However, delays in major infrastructure projects, such as the liquefied natural gas terminal in Vasilikos, could strain the budget.

The report warns that these delays “may add up to 1 per cent of GDP to the budget”.

Public expenditure pressures are increasing, particularly in wages, pensions, and healthcare.

The report urged vigilance, saying that “rising public spending could challenge fiscal sustainability”.

The report also mentioned that Cyprus’ banking sector remains resilience, with stable profitability and reduced non-performing loans (NPLs).

However, challenges persist. The report said that smaller financial institutions still struggle, stating that “less significant institutions (LSIs) had an average NPL rate of 21 per cent in June, unchanged from December”.

Limited appetite for new lending also hinders growth. “Cypriot banks held 32 per cent of their assets in central bank deposits and 42 per cent in loans and advances, compared to the EU average of 12 per cent and 63 per cent, respectively,” the report said.

Interest rate hikes have led to loan renegotiations, but repayment capacity remains robust.

Meanwhile, the report also mentioned that the current account deficit remains high, reflecting reliance on imports and significant profit outflows by foreign companies.

“While foreign direct investment inflows are strong, a large portion involves special purpose entities with limited contribution to local production and employment,” the report stated.

Risks from climate change, geopolitical tensions, and cyberattacks were also flagged.

The report highlighted investments by banks in cybersecurity and called for vigilance against physical and transitional climate risks.

Despite these challenges, the report concluded that Cyprus maintains a strong debt-servicing capacity.

However, it cautioned that “geopolitical uncertainties and sectoral vulnerabilities require continuous attention to preserve investor confidence”.

Finally, it should be noted that the first repayment to the ESM is scheduled for 2025, with annual repayments averaging €0.99 billion until 2031.