Commission outlines five key reforms for Cyprus until 2026

Cyprus is no longer considered a country with macroeconomic imbalances, according to the European Commission’s 2025 Spring Package under the European Semester.

This decision follows a sustained reduction in vulnerabilities related to external and private debt, supported by strong economic growth.

At the same time, the European Commission has issued targeted policy recommendations to guide the continuation of reforms and investments, as Cyprus still faces significant challenges in areas such as innovation, the green transition, education, and long-term care.

A senior EU official explained that the commission identified five positive trends in the Cypriot economy.

They said that “economic growth in Cyprus remains strong despite a fragile international environment.”

Public finances are recording large surpluses, and public debt is falling at a rapid pace.

The steady reduction of vulnerabilities related to external and private debt led the commission to remove Cyprus from the list of countries facing macroeconomic imbalances. In addition, the country’s efforts to diversify its economy are beginning to show results.

Cyprus has also improved its performance in most of the United Nations sustainable development indicators.

Despite these positive developments, the commission identified ten major challenges that Cyprus must address.

It warned of the risks linked to rising public expenditure and urged the government to adhere to the agreed annual fiscal trajectory for 2025, noting a slight deviation at this stage.

A significant weakness was identified in research and innovation. Cyprus remains among the lowest investors in this field across the EU, with spending at just 0.29 per cent of GDP compared to the EU average of 0.72 per cent.

The commission mentioned that the national innovation system suffers from weak links between universities, the financial sector, businesses, and the state.

The commission stressed the need to strengthen the national research and innovation strategy with clear goals, indicators, and monitoring mechanisms.

It also called for improvements to the legislative framework that governs the commercial use of research.

Cyprus was urged to further develop its financial system beyond the banking sector and to enhance financial literacy among its population, which remains below the EU average.

Serious obstacles were also found in the regulatory and administrative environment, with 68 per cent of businesses reporting that procedural complexity hinders their operations.

The governance of state-owned enterprises was also deemed below international standards.

In the field of energy, the commission noted, Cyprus faces high hurdles. The transition to cleaner energy remains slow, with carbon-based products still dominating energy consumption.

This, combined with the country’s heavy reliance on energy imports, makes Cyprus vulnerable and energy-isolated.

Electricity prices for households are among the highest in the EU, with cooling costs contributing significantly.

Environmental performance also lags behind. There is insufficient use of water resources, especially treated water, and a lack of investment in this area.

Moreover, recycling rates remain low. Cyprus has the highest per capita food waste in the EU, producing more waste than it recycles.

In terms of climate change adaptation, Cyprus invests significantly less than the EU average.

The commission called for stronger governance and better coordination among responsible bodies to ensure effective implementation of the national strategy.

The labour market and skills development also present challenges. The basic skills of young people in Cyprus have declined more than in any other EU country since 2018. Furthermore, participation in STEM education remains the lowest in the bloc.

Elsewhere, access to long-term health care services for the elderly is limited, and public spending in this area is the lowest in the EU.

What is more, the commission set out five recommendations for Cyprus for the period 2025–2026.

The country is advised to increase defence spending while complying with EU fiscal rules and expenditure limits under the revised economic governance framework.

Cyprus is also urged to accelerate implementation of its Recovery and Resilience Plan and the cohesion funds to absorb available EU resources and boost competitiveness by the end of 2026.

Priority should be given to strengthening the structural environment for productive investments and innovation.

Cyprus is also called to increase public and private research and development investment, promote the commercialisation of results, and strengthen cooperation between academic institutions and businesses.

The commission recommends improving access to alternative financing tools, promoting financial education, easing participation in capital markets, and developing non-bank funding sources for businesses.

It also called for the simplification of regulations and reduction of administrative burdens, particularly in licensing procedures and starting new businesses.

The governance of state-owned enterprises should be improved by adopting best practices in board management, ownership, and efficiency.

Reducing dependence on fossil fuels is another priority. Cyprus is advised to develop interconnections with neighbouring countries, increase funding for energy efficiency, and promote sustainable transport.

The electricity grid and energy storage infrastructure should be upgraded to improve the penetration of renewable energy and reduce energy poverty.

Investments in water, sewage, and waste management infrastructure must be strengthened, alongside the promotion of sustainable water use practices. Waste prevention and sorting policies must also be improved.

The commission also highlighted the need to upgrade the institutional framework to ensure better implementation of climate adaptation policies.

The final two recommendations focus on addressing structural challenges in the labour market and developing skills.

Cyprus must tackle labour shortages and the mismatch between available and in-demand skills.

Emphasis should be placed on increasing youth participation in the labour market and vocational training.

Additionally, lifelong learning should be promoted, green and digital skills enhanced, and participation in early childhood education and STEM programmes increased.

Regarding long-term care, Cyprus is asked to establish a comprehensive and adequately funded model to meet the needs of its ageing population.

The commission concluded that Cyprus stands to benefit significantly in these areas from projects funded by the Recovery and Resilience Facility. However, the country must accelerate efforts to fully utilise these resources by the end of 2026.