Though resilient to geopolitical headwinds, Cyprus’ economy this year will likely slow down due to higher energy prices and lower tourism arrivals, the International Monetary Fund said on Tuesday.

The IMF’s latest assessment comes under what’s known as an Article IV Consultation – an annual, in-depth health check of a country’s economy. IMF staff visit the member country to review economic and financial policies, assess risks and advise local authorities on how to maintain stability and growth.

“Growth is expected to moderate this year as higher energy prices and geopolitical tensions weigh on real incomes, tourism and confidence,” the international organisation said.

GDP is anticipated to roll back to around 2.6 per cent this year, down from 3.8 per cent in 2025. In the adverse scenario – a continuation of the crisis in the Gulf – the economy would grow by just 1.7 per cent.

Inflation, which last year dipped due to favourable energy and goods price developments, has started to pick up as higher energy prices linked to the war in the Middle East feed through.

“Inflation is projected to rise in the near term before easing. Risks are tilted to the downside, notably from a more prolonged war in the Middle East, tighter global financial conditions and weaker external demand. Medium-term prospects are more balanced, supported by strong fundamentals and reform momentum.”

The harmonised rate of inflation, which fell to 0.8 per cent in 2025, is projected to climb up to 3.5 per cent this year, leveling out at 1.5 per cent in 2027.

“Tourism is also showing signs of softening. Fiscal performance has remained strong, with continued surpluses and public debt declining below 60 per cent of GDP. The financial sector is sound, with strong capital and liquidity buffers and improving asset quality.”

Nevertheless, Cyprus’ economy continues to perform strongly, said the IMF, with 2025 growth among the highest in the EU, supported by robust domestic demand and strong services exports, particularly ICT and tourism.

The IMF commended Cypriot authorities’ strong fiscal performance, which has rebuilt buffers and put public debt on a firm downward path.

It noted that Cyprus has rebounded remarkably since the 2013 banking crisis. Per capita GDP, in relation to the EU average, has returned to pre-crisis levels.

But the Washington-based organisation also stressed the importance of improving the efficiency of spending and taxation, prioritising high‑quality public investment and maintaining discipline in public wage growth.

Measures to support households should be temporary and well targeted. The IMF welcomed the recent comprehensive tax reform and the proposal to build financial assets in the social security fund.