The Central Bank of Cyprus (CBC) has identified climate risk in Cyprus as one of the country’s most significant threats to financial stability, warning that water scarcity, heatwaves, wildfires and other extreme weather events could have far-reaching economic consequences.
In its 2025 Financial Stability Report, the CBC says climate-related risks can affect economic activity, the value of assets, and the quality of loans and collateral, with potential consequences for households, businesses and financial institutions.
Climate impacts spread through the economy
The report highlights that the effects of physical climate risk can be transmitted to the real economy and, in turn, to the financial system, particularly through the agriculture and tourism sectors.
In agriculture, reduced water availability, increased irrigation needs and higher temperatures could undermine productivity, raise production costs and reduce farm incomes, weakening businesses’ ability to meet their financial obligations.
For tourism, rising temperatures, drought, wildfire risk and the possible degradation of natural and coastal areas could reduce the attractiveness of Cyprus as a destination, affect hotel operations and lower the value of tourism-related assets.
The Central Bank says these channels are important for financial stability because they could impact both the wider economy and the quality of lending to businesses operating in climate-sensitive sectors.
Wildfires pose growing financial risks
The report also identifies wildfires as a significant component of Cyprus’ physical climate risk profile.
According to the Central Bank, the 2025 wildfires demonstrated how extreme natural events can cause substantial damage to homes, businesses, infrastructure and local economic activity.
Such events can also reduce the value of loan collateral, increase insurance claims and weaken the financial position of affected households and businesses.
Water scarcity remains a key concern
The report says water scarcity continues to be a major aspect of Cyprus’ climate risk, despite an improvement in hydrological conditions during the early months of 2026 compared with the previous year.
However, the Central Bank cautions that underlying vulnerabilities remain.
Although reservoir levels have improved in the short term, the island’s major dams are still only around two-fifths full.
Eastern Mediterranean expected to become hotter
Looking ahead, the Central Bank points to climate projections for Cyprus and the wider Eastern Mediterranean, which indicate further temperature increases, more frequent heatwaves and a greater likelihood of drier conditions.
It warns that these trends are particularly significant for Cyprus because critical sectors of the economy, including agriculture and tourism, remain heavily dependent on reliable water supplies and stable climate conditions.
Also read: Latest weather forecast sees Cyprus temperatures climb to 39°C
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