Council urges policy action to protect economic gains

Outgoing Cyprus Fiscal Council president Michalis Persianis warned on Wednresday that the current positive trajectory of the economy must be supported by a conscious policy aimed at preserving its fundamental strengths.

In his address during the presentation of the annual report for 2025, Persianis stated that while the economy maintains the momentum of the past two years with healthy figures and resilient growth, risks are emerging on the medium-term horizon that could reach a crisis point in the near future.

Economic growth remains restrained compared to previous years, yet “the engine of the economy still has steam” despite facing mainly external pressures, according to Persianis.

Employment remains at full capacity, and inflation continues to stay within expectations, despite predicted upward pressures during 2026.

Public finances continue along a successful path characterised by increased revenue, debt reduction, the continuation of surpluses, and comfortable liquidity, according to the council.

The council previously warned that costly needs are emerging in areas including climate, defence, energy infrastructure, natural disasters, housing, and transport.

A significant concern involves the long-term sustainability of a structure that finances recurring, permanent expenditures through non-recurring revenues, as noted by the council.

Careful management of foreign direct investment, the diffusion of benefits such as wage and technological improvements, and the retention of these investments in Cyprus remain crucial factors, particularly if external pull factors emerge.

Financing these needs while exhausting development expenditure will represent a significant planning challenge, the council explained.

“The design and implementation of plans and strategies over a medium and long-term horizon remains a timeless weakness of the Republic of Cyprus,” underlined Persianis.

Despite some developments, such as the political decision to manage the Social Insurance Fund more appropriately following council recommendations, the broader picture remains largely unchanged, he added.

“Cyprus is doing well, but the risks lie in the coming years,” stated Persianis.

Rational handling of the Social Insurance Fund, through mechanisms that isolate future pension generations from current interests and political needs, will be of critical importance.

External factors are now contributing significantly to risks, as imbalances in the global economy and international markets continue to grow, with early signs already visible in Cyprus.

The rise of shadow banking and financial systems operating outside regulatory limits is a notable concern, Persianis stated.

“Nowadays, bank lending to such entities has exceeded 10 per cent of the total, forming a channel that transfers risk from high-profit, high-risk businesses to traditional institutions,” the report mentioned.

Persianis also explaiend that although Cyprus does not yet feel pressure on government debt markets due to successful management in recent years, such pressures are being recorded elsewhere.

Markets increasingly reflect the general health of economies less and less, having become detached from the real economy and serving less as intermediaries to guide savings toward healthy investments, according to Persianis.

Public finances are gradually facing increased pressures in international markets, and these imbalances must be corrected, a process that cannot leave Cyprus unaffected, he added.

High resilience and inherent strengths must be reinforced because “the good course to date is not enough if it is not accompanied by a conscious policy to preserve the positive elements of the economy, such as the recent rapid increases in foreign direct investment,” explained Persianis.

Development driven by foreign direct investment without a clear strategy brought high risk, worsened inequality, and increased social pressures, while also exacerbating problems in the energy, housing, and transport sectors, the report noted.

These outcomes were not inevitable and could have been mitigated if a specific policy for managing and diffusing these investments had been adopted.

“What is missing is better organisation and a less short-sighted, even myopic, horizon of analysis and policy,” emphasised Persianis.

“It is essential to develop a specific strategy with explicit goals for energy, demographics, foreign investment, and development policy, which could be achieved with relative ease while time still permits,” he warned.

“As the council enters a new period with new leadership and an accelerated maturation process, it will continue to provide analysis without political or party colourings, operating independently and with integrity to serve the interests of the country,” the outgoing council president pointed out.

“The council will continue to act as a factor of analysis without political or party colourings, which operates independently and with integrity, serving the interest of the country, and based on the above, its role is rendered even more important in the coming years,” Persianis concluded.