Eurobank Research sees upside risk to IMF’s Cyprus deficit forecast

Cyprus’ current account deficit widened in 2025 and increased further in the first half of 2026, with Eurobank Research warning that the latest figures point to mounting pressure on the economy’s external balance despite continued growth.

“The economy continues to expand, but the widening imbalance in its external accounts deserves closer attention,” the research team said.

The Central Bank of Cyprus (CBC) has revised the 2025 current account deficit to 8.8 per cent of gross domestic product (GDP), up from the previously reported 6.4 per cent.

The deficit for 2024, meanwhile, was revised down to 5.5 per cent of GDP, from an earlier estimate of 8.2 per cent.

“These changes show that the gap widened in 2025, reversing the earlier picture of improvement,” Eurobank Research said, adding that figures for the first six months of 2026 showed further pressure.

The current account tracks earnings and payments between Cyprus and the rest of the world, including trade, investment income and transfers, such as funds received from the European Commission.

The revisions increased the 2025 deficit by €870 million to €3.21 billion, with the largest adjustment involving the income balance.

The estimated income deficit was raised by €1.42bn, mainly because of net investment income, while the goods deficit was revised upwards by €201m and net current transfers abroad by €108m.

These increases were partly offset by an €855m upward revision to the services surplus, mainly reflecting higher estimated net earnings from information and communication technology (ICT) services.

“The changes were partly offset by an upward revision to the services surplus,” Eurobank Research said, pointing to the contribution of higher net earnings from ICT services.

In the first half of 2026, the current account deficit reached €2.42bn, equivalent to 12.8 per cent of GDP for the period, compared with 10.1 per cent in the same six months of 2025.

The gap widened by €635m, with almost all of the increase occurring in the second quarter.

“The goods trade deficit increased by €441m, while the services surplus fell by €432m,” the report said.

Although services exports continued to grow, payments for imported services rose more quickly, reducing the surplus that helps Cyprus offset its goods trade deficit.

ICT services recorded a €212m fall in their surplus, despite higher export earnings, while the surpluses from travel and financial services declined by €183m and €230m respectively.

“The pressure therefore extended beyond tourism to other important sources of earnings from abroad,” Eurobank Research said.

Higher net earnings from licensing, royalties and other business services provided some relief, while a €333m improvement in the income balance partly offset the pressures.

However, a €94m deterioration in secondary income added to the deficit.

Eurobank Research said strong household spending and investment helped explain the increase in imports, with detailed trade figures showing that transport equipment and parts accounted for around 77 per cent of the rise in goods imports during the first six months of the year.

“Such purchases can help businesses expand and support future growth,” the report said, suggesting that the import increase should also be viewed in the context of investment and economic activity.

Tourism, meanwhile, provided less support to the external balance, with revenues falling by 6.2 per cent year-on-year in January to August to €2.32bn.

A 4.6 per cent increase in tourism receipts in July was followed by a 3.4 per cent decline in August.

The August fall was mainly attributed to fewer visitors, while average spending per visitor remained broadly unchanged.

“Based on provisional Statistical Service data, the goods trade deficit widened further compared with a year earlier in July and August,” Eurobank Research said.

The International Monetary Fund’s (IMF) October 2026 World Economic Outlook projected a current account deficit of 7.7 per cent of GDP for Cyprus in 2026, based on information available before the CBC’s latest revisions.

“In light of the updated figures, we see significant upside risk to these projections,” the research team said, indicating that the deficit could be larger than the IMF estimate.

The report said the developments underscored the importance of strengthening and diversifying Cyprus’ earnings from abroad as the economy continues to grow.

“Household spending and business investment create demand for imports, while profits belonging to overseas investors also affect the figures,” Eurobank Research said.

It added that international businesses contribute to exports and jobs, meaning the current account deficit should be assessed alongside their wider contribution to the economy.

“Attention should focus on how the gap is financed and whether investment helps generate future income,” the report said.

“Over the long term, a gradual narrowing of the external deficit would strengthen economic resilience and support more sustainable growth,” it added.

Eurobank Research identified several ways Cyprus could build on its expanding services economy, including stronger export earnings by helping businesses develop skills, introduce new products and services, and reach customers in overseas markets.

It also called for more opportunities for local businesses to supply goods and services to international companies operating in Cyprus, allowing more firms to benefit from expanding sectors.

“Less dependence on imported energy” was another area highlighted, with the report advocating viable investment in renewable energy and more efficient energy use to reduce reliance on imported fuels over time.

The research team also urged efforts to encourage financial education and saving for the future, alongside access to finance that helps businesses invest and grow.