The macroeconomic environment within which the 2026 state budget is planned was published yesterday by the Ministry of Finance, in the framework of the Strategic Framework for Fiscal Policy 2026–2028.
The box lists the nine risks that could affect the baseline macroeconomic scenario on which the fiscal targets are based.
The significant risks to the economy stem, according to the Ministry of Finance:
- From the geopolitical developments in Ukraine, after the invasion by Russia, as well as from the war in the Middle East. Their outcome will largely determine the evolution of the global economy in the coming years.
- In the event of an international trade war, the development prospects of the Cypriot economy may be affected, mainly indirectly and not directly.
- Also, the inclusion of legal and natural persons from Cyprus in the U.S. and U.K. sanctions lists continues to affect the service sector in Cyprus.
- Risks also arise from the termination of the works of the natural gas terminal in Vassiliko and the International Arbitration conducted in England (non-liquidation of the Consortium guarantees, possible demand for payment of the loans granted with a government guarantee, repayment of the amount of the subsidy by the European Commission).
- The gradual implementation of the Scheme for the Replacement of Haircut Depositors and Securities of the Bank of Cyprus and Laiki Bank through the National Solidarity Fund should also be taken into account.
- Risks may also arise from the participation (depending on the decisions taken) of the Republic in the project of the Great Sea Interconnector between Crete and Cyprus.
- Developments in the banking sector continue to be considered a potential source of risk, mainly due to the high (albeit significant progress) ratio of non-performing loans (NPLs).
- Given the invasion of Ukraine, the sanctions imposed, the impact on the real economy and the rise in key interest rates, an increase in NPLs cannot be ruled out. On the other hand, significant steps are continuously being taken towards effectively reducing the level of NPLs, while the banking system is supported by a resilient capital position and excess liquidity.
- In addition, a potential risk is the burden on public finances by the GHS, mainly through the deficits of the GHS, which can be covered by the state during the first 6 years of its operation, whose operations have been particularly burdened due to the pandemic.
- It is also noted that the macroeconomic projections are based on only a partial inclusion of the impact of the investments expected to be implemented under the Recovery and Resilience Plan. Additional new investments beyond the Recovery and Resilience Plan are not fully taken into account in the baseline scenario, as it is difficult at this stage to quantify the annual impact. These investments relate to the energy sector, health and education.
Macroeconomic Forecast 2026 -2028
From the point of view of the real economy, according to the baseline macroeconomic scenario, in 2026 and 2027 the growth rate is projected to be around 3.1% and 3.0% respectively, while for the year 2028 it is estimated at 2.9%.
Inflation is forecast to be 2.1% for the years 2026-2028. The unemployment rate is expected to remain around 4.7% in 2026, then in 2027 to be limited to 4.6% and in 2028 to fall further to 4.5%.
Based on the macroeconomic scenario of the Ministry of Finance, the fiscal balance in 2026 is projected to be a surplus of €1,382 million, while as a percentage of GDP it is expected to reach 3.7%, improved by 0.2% of GDP compared to the forecast for the fiscal result this year.
Over the medium term, the fiscal balance is expected to remain in surplus at 3.7% of GDP on average over the period 2027-2028.
Primary expenditure in 2025 is expected to increase by 9.2% compared to 2024, mainly due to the expected increased expenditure on staff salaries as well as social benefits. At the same time, during the period 2026-2028, public expenditure and primary expenditure are expected to increase by 3.3% and 3.2% on average, respectively.
Taking into account revenue estimates, as well as fiscal targets, the overall expenditure ceiling for central government in the medium term is set at €10,540 million. (2026), €10,730 million (2027) and €11,200 million. (2028).
