Government targets 3.5 per cent budget surpluses over next 3 years

The Finance Ministry on Friday published its strategic fiscal policy framework for the period 2026 to 2028, forecasting stable economic growth and a steady decline in public debt over the next four years.

Growth is expected to range between 2.9 per cent and 3.1 per cent during the period, with the public debt projected to drop to 43.3 per cent of GDP by 2028.

The framework outlines the government’s economic policy goals and strategic priorities for at least the next three years.

In the introduction, the ministry stated that “due to geopolitical developments, the short-term priority of economic policy is to limit the financial impact,” while at the same time structural reforms remain a key focus.

The ministry explained that future budget ceilings for each ministry, deputy ministry and independent authority will be based on macroeconomic and fiscal forecasts and on commitments under the National Medium-Term Fiscal and Structural Plan 2025–2028.

“The goal of fiscal strategy is to safeguard the sustainability of public finances, to achieve policy priorities,” the ministry said.

It added that it also seeks to improve the quality of public finances by reallocating spending to high-value areas and using limited public resources efficiently, effectively and transparently.

The document also sets out policies for managing human resources in the public sector and improving transparency, efficiency and productivity.

According to the Finance Ministry, growth is expected to reach 3.1 per cent in both 2025 and 2026, before easing to 3 per cent in 2027 and 2.9 per cent in 2028.

Furthermore, inflation is forecast at 1.9 per cent in 2025 and is expected to stabilise at 2.1 per cent through 2028.

Unemployment is projected to fall to 4.7 per cent in 2025 and 2026, with a further drop to 4.5 per cent in 2027 and 2028.

The ministry also expects public debt to fall from 54.7 per cent of GDP at the end of 2025 to 52.6 per cent in 2026, 48.4 per cent in 2027 and finally to 43.3 per cent by the end of 2028.

The ministry expects a fiscal surplus of 3.5 per cent of GDP in 2025, increasing slightly to 3.7 per cent annually until 2028.

The primary surplus is forecast at 4.8 per cent of GDP in 2025 and 5 per cent in the following years.

For 2025, the fiscal balance is projected to remain in surplus at €1.24 billion or 3.5 per cent of GDP, compared to €1.43 billion or 4.3 per cent in 2024.

The primary surplus is expected at €1.70 billion or 4.8 per cent of GDP, compared to €1.85 billion or 5.6 per cent in 2024.

The Finance Ministry highlighted that Cyprus’ long-term sovereign credit rating stood at the upper-medium grade in 2024 across all rating agencies.

The annual funding programme for 2025 sets a maximum total financing amount of up to €1.5 billion.

Of the €1.8 billion in long-term debt maturing in 2025, €1 billion relates to a European Medium-Term Note and €350 million concerns the repayment of the first instalment of outstanding debt to the European Stability Mechanism.

The ministry said the main source of funding for 2025 will be a new EMTN bond issuance of up to €1 billion on international markets.

Additional funding will come from bilateral loan disbursements from the European Investment Bank and the Council of Europe Development Bank.

The government will also continue to issue bonds to individuals and monthly treasury bills.

With expected central government revenues of €10.23 billion in 2026, €10.76 billion in 2027 and €10.98 billion in 2028, the ministry has set the total expenditure ceilings at €10.54 billion in 2026, €10.73 billion in 2027 and €11.2 billion in 2028.

“The setting of these ceilings based on current data and projections supports the achievement of fiscal goals,” the ministry said.

It warned that “any deviation from the expenditure ceilings would cast doubt on the achievement of fiscal targets and the credibility of the Cypriot economy.”

The ministry stressed that no new policy proposals creating extra fiscal costs should be submitted to the Cabinet in 2025, unless there are exceptional and unforeseen circumstances, and that any new credits must come from savings without altering the overall budget ceiling.

The document includes a section on risks factored into the 2026–2028 plan. These include geopolitical tensions from the war in Ukraine and the conflict in the Middle East.

“Their outcome will significantly shape the global economy in the coming years,” the ministry said.

A global trade war was also cited as a possible risk, which could affect Cyprus’ economic outlook indirectly.

Sanctions imposed by the United States and United Kingdom that include Cypriot individuals and entities continue to affect the country’s services sector.

The ministry pointed to risks surrounding the closure of the Vasilikos LNG terminal and the arbitration case in the UK, including possible calls for government-guaranteed loan repayments and refunding of European Commission grants.

It also took into account the gradual implementation of the compensation scheme for former Bank of Cyprus and Laiki depositors and bondholders via the National Solidarity Fund.

Other risks include Cyprus’ participation in the Crete–Cyprus electricity interconnection project, the potential re-rise of non-performing loans, and the financial burden of the national health system due to deficits at state hospitals.

On development priorities for 2026–2028, the ministry said its main aim is to build a strong, resilient and competitive economy that supports health, education, welfare and culture.

It also seeks to strengthen climate and energy security and create a modern, digital and rule-based state with transparency and accountability.

Key government priorities remain the implementation of reforms and public investment under the Recovery and Resilience Plan and the Thaleia programme, alongside advancing green transition and speeding up digital transformation.

Other priorities include strengthening ICT, tourism, higher education, agricultural technology, renewable energy, light industry and professional services to support sustainable growth.

The ministry added that priorities will also reflect Cyprus’ upcoming EU Presidency, focusing on a secure, competitive and democratic Europe.

Additionally, public sector reform, local government efficiency and judiciary improvements are also central goals, the ministry stated.

The framework also supports a modern welfare state, housing policy, quality healthcare, cultural promotion, gender equality, education reform, employment stability, research and innovation, entrepreneurship and tax reform.

Additional aims include upgrading agriculture, developing a competitive industrial base, boosting services, and diversifying and expanding the tourism sector.