The Minister
of Finance, Mr Harris Georgiades, gave a speech today at the 9th Cyprus Summit
of the Economist entitled “Cyprus on the mend? An open discussion with
Government, the Troika and business”. In his speech the Minister of Finance
stated the following:
“Ladies and Gentlemen,
Thank you for the invitation and for the
opportunity to participate in this open discussion.
Let me also welcome once again the
Troika mission chiefs to Cyprus but especially let me welcome Christos
Staikouras, the Alternate Finance Minister of Greece, and to comment him on the
efforts and determination of the Greek government and the Greek people.
Dear Friends,
Is Cyprus on the mend, we are being
asked…?
Is the stability programme leading
Cyprus to growth and prosperity?
One could say that this, in fact, is the
20 or the 23 billion Euro question. That’s the total of the bail-in imposed on
uninsured depositors, together with the financial envelope of the programme and
the top-up expected from privatisation and the asset-to-debt exchange. So one
could say, it better work!
But let us take a step back. Because, if
we are to determine if Cyprus is on the mend, we must ask: What was the problem
in the first place. What is it that we are trying to mend?
The problem of the Cypriot economy
relates, on the one hand, to the unsustainable course of our public finances.
The public sector was spending more and more, even as revenues started to
contract due to the dampened economic activity.
The direction of public expenditure was
not well-thought either, as it primarily and increasingly comprised of payroll
and pensions related expenditure and also of rising but non-targeted and rather
inefficient welfare spending. Successive tax hikes started being imposed to
maintain the rising public expenditure long before there was a Memorandum of
Understanding. And this, of course, further dampened economic activity.
But there were problems in the private
sector also. The private sector was also spending more than it was earning or
producing. And this relates directly to the oversized local banking sector and
to the unsustainable credit expansion of the past decade.
The banking sector was financing not so
much real investment that would in turn boost the productive capacity of the
country but rather consumption and a property bubble. Lending was offered not
so much on the basis of well-thought business plans and an assumed ability to
re-pay but on the basis of collateral. Collateral, which, by the way, until now
was practically impossible to seize.
So the problem was, in fact,
multidimensional and it was major. Even the loss of access to the markets for
Cyprus, back in spring 2011, was met with indecision and hesitation. Unwise
political decisions were coupled with outright negligent and possibly criminal
acts in the banking sector. The point of no return was reached earlier this
year.
And here is where the economic
adjustment programme or to refer to its full name, the Memorandum of
Understanding on Specific Economic Policy Conditionality, comes in.
This is an ambitious and demanding
programme with very tight timeframes and very specific policy directions. Let
us highlight the word conditionality because it should be clear to everyone
that the lending from the ESM and the IMF, even though attractive in servicing
and repayment terms, is only offered on the basis of this policy of
conditionality. In any case, it is a
programme which we are committed to implement fully and effectively.
The first pillar relates to the
restructuring, recapitalisation and enhanced supervision of the banking system.
Considering that the banking system was on the brink of collapse just a few
months ago, and despite some regrettable delays that followed, the progress
done so far has been quite remarkable.
The second pillar deals with fiscal
consolidation. Here also we have been very determined to do whatever is
necessary to bring public finances on a corrective course, from an early stage.
A final and important pillar has to do
with measures of structural nature such as public sector reform, health care
reform, welfare reform and of course the privatisation prospects.
On all these major reforms we are ready
to consult and to consider all options. But we are determined to proceed. It is through such reform that we shall be
laying the foundations of a new, more viable and more sustainable economic
model for Cyprus.
Ladies and gentlemen,
We may not all agree on all the
provisions of the MoU. It’s my signature on the document but I also have some
doubts on a few things.
For instance, I am not happy with all
the taxes that were included in the original MoU. Once agreed and imposed it is
not so easy to go back and reverse them. But, at the very least, the emphasis
of this Government when it comes to fiscal consolidation, is and will be on the
expenditure side. We shall not be raising taxes further and this is a clear
message which I would like to repeat.
There are other provisions where much
depends on the implementation details. As
a Finance Minister I will not be offering my consent to a National Health Plan
that will run the risk of creating a new fiscal black hole. But I will be ready
to offer my full support to a National Health Plan that will streamline
expenditure, maximise efficiency and autonomy of public hospitals and ensure
best utilisation of resources both public and private.
I could mention one or two additional
issues but I will refrain from doing so because I think the facial expressions
of the Troika representatives are already changing.
More importantly it should be clear that
no policy document and especially no such a wide and inclusive policy document
could meet the full agreement of everyone. Even if we were left without the
Troika intervention we would not be able to agree fully between ourselves. Come
to think of it, if we were left without the Troika we would never agree on
anything between ourselves.
So we should move ahead. We have an
action plan. It includes much of what should have been done in Cyprus a long
time ago. It is a plan that aims to fix the public finances and the banking
system and not only. It is up to us to complement it with initiatives that will
encourage entrepreneurship and investment.
We have a plan, let’s stay focused and
let’s do the job.
Thank you very much.”
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