The Republic of Cyprus has a market economy dominated by the service sector, which accounts for 76% of GDP. Tourism and financial services are the most important sectors; erratic growth rates over the past decade reflect the economy's reliance on tourism, which often fluctuates with political instability in the region and economic conditions in Western Europe.

Nevertheless, the economy grew a healthy 3.7% per year in 2004 and 2005, well above the EU average. Austerity program, which has cut the budget deficit to below 3% but continued fiscal discipline, is necessary if Cyprus is to meet its goal of adopting the euro on 1 January 2008.