​The 2023 European Commission Country Report on Cyprus offers a comprehensive analysis of the nation's economic performance, fiscal health, and structural challenges within the framework of the European Semester. In 2022, Cyprus's economy demonstrated resilience, achieving a real GDP growth of 5.6%, surpassing the EU average. This robust performance was driven by strong household consumption, increased employment, and a successful diversification of the tourism sector, which reached approximately 90% of pre-pandemic revenue levels. However, growth is projected to moderate to 2.3% in 2023 and 2.7% in 2024 due to anticipated global economic slowdowns, persistent high prices, and tightening monetary policies.

The Cypriot economy has been gradually shifting towards higher value-added sectors, with non-tourism services such as information and communication technology (ICT) and professional services gaining momentum. These sectors have increased their share in total service exports from 51% in 2016-2019 to 64% in 2022, reducing the economy's dependence on tourism. Despite this progress, investment levels remain below the EU average, with a significant concentration in housing and transport equipment. Productivity-enhancing investments, including research and development, are still limited, and labor productivity stands at 85.8% of the EU average.

Cyprus continues to face macroeconomic imbalances, particularly related to high private, public, and external debt levels. While private sector debt has been declining since 2015, it remains elevated, partly due to the presence of special purpose entities (SPEs) that inflate debt figures without significantly impacting the domestic economy. The current account deficit widened to 9.1% of GDP in 2022, driven by high energy prices and robust domestic demand. Although it is expected to improve gradually, it remains a concern for external sustainability.

The government's fiscal position has strengthened, with a general government surplus of 2.7% of GDP in 2022 and a projected surplus of 2.9% in 2024. Public debt decreased from 85.6% of GDP in 2022 to 77.3% in 2023, with further reductions anticipated. However, challenges persist in effectively targeting energy support measures, as many do not incentivize energy conservation and are not specifically aimed at vulnerable households.

The implementation of Cyprus's Recovery and Resilience Plan (RRP), including the REPowerEU chapter, is crucial for addressing structural challenges and promoting sustainable growth. The plan focuses on diversifying the economy, enhancing energy efficiency, and accelerating the green and digital transitions. However, delays in implementing reforms and investments pose risks to achieving the plan's objectives by the 2026 deadline.

In summary, while Cyprus has made notable progress in economic diversification and fiscal consolidation, significant challenges remain. Addressing macroeconomic imbalances, enhancing productivity, and effectively implementing structural reforms are essential for ensuring long-term economic resilience and convergence with EU standards.