Cyprus rarely features on global macro radars. Headlines rarely speak about its economy. But perhaps they should.
The island has re-accelerated growth while inflation has essentially collapsed. Its public finances are in surplus, banks are stronger, and tourism keeps setting records.
What is new is the rise of a real tech engine. For investors, this is a different Cyprus from a decade ago, with clearer upside and a familiar external Achilles’ heel.
The numbers that matter
Real GDP grew 3.3% year on year in the second quarter. The statistical office attributes the gain to wholesale and retail trade, hotels and restaurants, and information and communication.
This is an economy expanding faster than most of the euro area, with a composition that is widening beyond tourism.
Source: Cystat
In addition to strong growth, prices barely moved in July. Harmonised inflation was just 0.1% year on year, the lowest in the European Union that month.
Disinflation is now broad-based. That gives households and firms real income relief as the peak of the price shock fades.
The labour market is tight. Unemployment fell to 4.3% in the second quarter as the labour force grew. A steady inflow of skills supports the services base and counters demographic drag.
Source: Cystat
Policy rates are no longer a headwind. The European Central Bank cut its deposit rate to 2.00% in June and held in July.
Transmission is gradual, but lower debt service should support consumption and housing in the coming quarters.
Public finances are a strength again. Preliminary data show a €840.6 million general government surplus in January to July, equal to 2.4% of GDP. The IMF places public debt near 65% of GDP at end-2024, down sharply from the post-crisis peak.
The banking system looks safer than it used to be. Non-performing loans stood at 5.9% in May, with provision coverage around 61%.
That is a world away from what the islands’ banking landscape looked like a decade ago and frees balance sheets to fund the real economy.
Finally, tourism remains a workhorse for the island. July arrivals rose 6.9% year on year to 589,116. So far in 2025, the island saw higher arrivals in all months except March, in comparison to 2024.
Revenue hit €422.3 million in June, up 9.6%, taking first-half earnings to €1.38 billion, up 21%. Higher spend per visitor helps the external balance and tax take.
Is tech a real growth engine?
The short answer is yes.
Cyprus now sits above the EU average for the share of ICT specialists in employment, at 5.4% in 2024. This is a clear sign that Cyprus is an economy able to export high value services with low import intensity.
Eurostat also puts Cyprus near the top of the EU for the ICT sector’s share of value added.
As a result, its startup ecosystem is gaining shape. In the 2025 StartupBlink index, Cyprus jumped five places to rank 40th globally, the fastest climber in the EU for a second year, with more than 300 mapped startups on their platform.
That momentum could indicate both relocations and a denser local pipeline.
Capital formation is also gaining steam at home. The €26 million Cyprus Equity Fund, managed by 33East and backed by the European Investment Fund and national resources, is investing at pre-seed and seed.
For a micro-market, a local GP is a much needed boost. What Cyprus needs now is to keep founders on the island, speed up funding rounds, and tighten investor networks.
Brain drain has historically been a problem for Cyprus and the President, Mr. Christodoulides, is focused on tackling that issue ever since his election.
Policy is slowly making the right steps. The Business Facilitation Unit acts as a one-stop entry for foreign companies and fast-tracks permits for skilled staff.
The Startup Visa runs to December 2026 with a quota of 150. The Digital Nomad Visa reopened in March. The IP Box offers an OECD-compliant 80% deduction on qualifying IP income, implying an effective rate around 2.5% for eligible profits.
The macro significance is clear. A larger ICT and professional services base raises GDP per worker, lowers volatility relative to tourism, and supports the external account over time. It is the structural diversification Cyprus badly needed.
The external gap that still bites
The current account remains the weak point. Provisional data show a €1.2 billion deficit in the first quarter, wider than a year earlier.
Excluding special purpose entities, the picture is roughly unchanged but still deep in the red.
Goods and energy imports are the drivers, along with primary income outflows from international business services.
Brussels and the IMF have already flagged the issue. The Commission’s surveillance work and the IMF’s 2025 Article IV both note large and persistent deficits, even after adjusting for statistical peculiarities.
In plain language, the country buys more from the world than it sells, and it pays income to foreign investors who came for the services platform.
That is manageable with confidence and growth, but it is a macro constraint that requires a plan.
The near-term buffer is tourism income. The medium-term fix is to keep shifting the economy toward high value services while reducing the energy import bill.
Energy and interconnection can change the math
Two projects carry outsized macro weight.
First is gas monetisation. In February, the government approved the updated development plan for the Aphrodite field with Chevron, NewMed and Shell.
The plan uses a floating processing unit and a pipeline to Egypt. A seabed survey for the pipeline is underway this summer.
In parallel, TotalEnergies and Eni signed with Cyprus and Egypt to route Cronos gas for processing at Zohr and liquefaction at Damietta for export.
If these timelines hold, Cyprus becomes a gas exporter late in the decade. That would lower electricity costs, cut the import bill, and add foreign exchange.
Second is the Great Sea Interconnector, the subsea HVDC link to Crete and, later, Israel. EU funding of €657 million is in place, but governance and cost questions have mounted.
On September 4, the European Public Prosecutor’s Office opened a probe into possible criminal offences tied to the project. The Cypriot government is weighing fiscal exposure while Greece’s grid operator pushes ahead.
The energy case remains compelling, yet execution will determine whether it delivers the promised resilience and renewable integration.
Ultimately, gas and interconnection could be powerful drivers for Cyprus’ economy if they materialise. But for now, it’s the ICT and tourism engines that pay the bills.
Is Cyprus investable?
The overall picture looks good for Cyprus.
Growth near 3% with 2% inflation, a primary surplus, and declining debt is not common in the euro periphery. The ECB is easing, and local banks carry low NPL ratios and high capital.
Spreads on Cyprus sovereigns have room to grind tighter if the fiscal stance holds and the external story incrementally improves.
Ratings are good and stable.
Furthermore, equity and real-asset angles are specific. Banks benefit from lower funding costs and healthier balance sheets, with moderate loan growth as mortgages reprice down.
Hospitality and operators with exposure to higher-spend source markets stand to gain from record tourism receipts.
Office and residential in districts serving relocated tech teams still see support, even as house price growth cools.
The latest data show Q1 house prices up 4.8% year on year on the Central Bank index and 1.1% quarter on quarter on the Cystat index. That looks like normalisation rather than an unwind.
The tech ecosystem gives a new exposure route. Foreign investment is flowing although actual data is hard to prove.
For global allocators, the practical approach is to watch for Cyprus-linked startups raising in larger hubs and for regional funds co-investing alongside the EIF-backed vehicle.
Local funding remains dry but that is also a challenge that takes years to overcome.
Finally, the economy of Cyprus is open and sensitive to UK and EU demand. None of this is hidden, and buffers are better than at any time since the crisis.
The surprise is elsewhere. Cyprus is no longer just a sun-and-services story. It is becoming a services-and-software economy with energy optionality.
That combination is rare in Europe and investable if you know where to look.
The post This is Europe’s most underrated economy appeared first on Invezz
