Speech by the Deputy Minister to the
President
of the Republic at the 5th
Economic Congress
Allow me first of all to thank the
organizers for their kind invitation. It is a pleasure and an honor to join such
an impressive list of speakers.
‘How to redevelop the Growth Model for
Cyprus’. - That is the theme of the speech I was asked to deliver.
I would, on my behalf, make one addition. The question is how to
redevelop the Growth Model for Cyprus in order to achieve sustainable growth.
Because this is the only kind of Growth
that creates – through productive jobs and higher incomes - lasting prosperity.
As opposed to bubble-led growth, which creates
public and private over-consumption, usually through private and public
borrowing, and creates short-term but temporary and artificial increase of
incomes and prosperity. It subsequently brings inevitable disaster to the
economy and society when the decades-old bubble bursts.
And this is partly what happened to
Cyprus. After a couple of decades of being one of the most dynamic and fastest
growing economies in Europe, by 2013, we were faced with an unprecedented
crisis.
A severe banking crisis, created by
reckless credit expansion led to a collapse of one of our systemic banks and a
significant bail-in of deposit of the second bank. It shook the whole economy
and left it struggling with the heavy burden of NPLs.
An equally severe fiscal crisis created by reckless
public and non-sustainable borrowing in ‘ good times’. Which left the
government with no access to the markets and with practically no fiscal ammunition to find the
necessary remedies when the ‘ bad
times’ came. Something, which contradicts the philosophy of even the
biggest advocates of Keynes.
With unemployment increasing to
unprecedented levels.
Ladies and gentlemen,
Two years passed since the “perfect storm”. Our newly ‐ elected - at the time - government quickly came to
an agreement with the Troika institutions on a conditions ‐ based support programme.
A support programme that offered us
valuable breathing space and enabled us to focus towards the implementation of a
programme of economic reform and consolidation. Since then things have improved
significantly. We have implemented an economic consolidation and reform program
which is delivering results.
A difficult program that allows us, two
years later, to see our economic performance rebounding and international
investors placing a vote of confidence to our country and bringing fresh money
into the banking sector and our economy.
But have we finished the
job?
The answer is simple and it is negative. I
consider Cyprus to be an economy in transition. We still have a long way to go if we want to turn
Cyprus into a modern competitive economy, able to produce more, able to sustain
growth.
So what has to be done ? How do we redesign the growth model of the Cypriot
economy?
Well, the answer is simple and straight
forward; We have to continue applying the rules of economic orthodoxy . Economics, is the painful elaboration of
the obvious. And it is the obvious that most of the developed economies
recognised and acted accordingly. The economies that succeeded in raising the
level of income and the welfare of their people.
In my opinion, there are no magic
solutions. Any effort to generate sustainable growth should always lay its
foundations on three main
pillars;
The first pillar has to do with the banking sector, I won’t spend much
time here. After all that happened we inevitably we have a smaller banking
sector, but without the excesses of the recent past. Built on healthy grounds.
Better capitalised, better managed, and better supervised. Its main challenge
now is to handle the big burden of the NPLs, which is perhaps the single most
negative factor restricting our growth potential. It is not easy and it will
take time. But at least the tools are now in hand.
The second pillar deals with the fiscal
situation. Public expenditure and the excessive deficit did come down and was
eventually eliminated in order to reduce the overall debt burden from our
economy. We did make significant progress but more has to be done.
We have to ensure that public finances
and the payroll will remain on a
sustainable path. That their rate of increase is not immuned by the economic realities
and the performance of the overall economy. That they will not keep crowding-out other public
expenditure and developmental policies in the future, as they did in the past.
More importantly, we have to ensure that the financing needs of the public
sector will remain in control as to avoid the need of any future tax hikes.
Because maintaining, not only a stable,
but a competitive tax regime and low
taxes is a key element of
success for a sustainable growth model for an economy like Cyprus. It is
a key element for creating an attractive business and investment environment
which by itself is a sina qua non for growth.
Because the most severe form of austerity are the
continuous tax hikes which erode the purchasing power of the consumer;
which kill the business environment and drive investments away.
It is of course an ‘ easy solution’ for any government
when faced with fiscal problems. But it is an anti-growth policy which we have
succeeded to avoid during the time of deep crisis and it is something that we
are determined to avoid in the future. We actually want to create those exact
conditions that will allow us to move to the opposite direction! We are still
not there yet but this is the direction we are moving through the gradual
implementation of the Public Financial
Management reform and the civil service reform.
Nevertheless, there is much more to be done.
We do acknowledge that these two
pillars, although necessary, are not
sufficient conditions for becoming competitive or for creating what we
call a sustainable growth model.
They need to be complemented by a
‘ comprehensive national structural
reform program’ which goes beyond the basic requirements of the support
program.
They need to be complemented by more strategic interventions in the economy through administrative,
regulatory and procedural reforms.
And this is what I consider to be the third but
extremely important pillar of economic reform
.
There can be no sustainable growth
model without structural reform. Structural reforms such as:
- Strengthening the governance for Growth in key areas of the economy such as the Research and Innovation sector, shipping, tourism, or agriculture. A huge task that requires the creation of new structures - political and technocratic – and change of competences between government ministries, departments and semi-governmental organisations. Sound governance has a catalytic role in the design and implementation of pro-growth policies.
- Design new, comprehensive, medium term and long-term National Strategies in all of those key sectors of the economy which will include concrete actions and not just yearly subsidy programs.
- A bold public administration reform which will create a more efficient and more growth-friendly public service.
- Deregulation in over-regulated sectors of the economy such as land administration, tourism and urban planning.
- Creating the necessary institutional and regulatory environment for promising sectors of the economy which suffer from a lack of a modern institutional and legal framework. Sectors such as innovation and start-ups, Funds, and professional services.
- Privatisations , which should be seen as a reform that will boost competitiveness, attract foreign investment in key sectors of our economies, and bring fresh money into the economy.
- Streamlining of procedures , cutting back on red tape and changing the whole framework for the licensing of strategic investments, amongst others through a new investment law.
- A local government reform that will also re-address the role of the municipal authorities in promoting growth.
- An education reform, a more long-term investment to the most valuable asset of any country, our people, our human resources.
- Liberalisation in key sectors of the economy such as the electricity and the energy sector.
- A judicial reform with the establishment of an administrative court that will lead to a more effective enforcement of contracts.
These are not just headings . They are parts of a very detailed, comprehensive national reform
program that will transform Cyprus and its economy.
For every reform there is an action-plan and a time-framework. There are expert
studies being conducted; It is a huge project and an enormous effort is
undertaken both at technocratic and at political level.
I don’t think that since the
establishment of the Republic there has been such a multidimensional effort. I would only
compare this to the pre-accession to the EU period and the harmonization
process, and that only in the legal context, with less technocratic and
political challenges.
Any action in these areas is
politically difficult and demanding , in any part of the world. It is
even more politically difficult usually in Southern Europe and especially if put
forward by a minority government
like ours.
The reform effort requires a change in
mentality and more rational thinking.
It takes time.
It requires confrontation with different interest
groups, both in the public and the private sector. As the American economist
Tomas Sowell said, ‘ The first lesson of economics is scarcity: There is
never enough of anything to satisfy all those who want it. The first lesson of
politics is to disregard the first lesson of economics
’
Well we try not to disregard this reality. It
is politically difficult and it requires bold political decisions but it is
indeed necessary.
There is always reaction to change by
the advocates of the status quo. By those who see their interests threatened by
the change of affairs.
In some reform areas we proceed faster than in other areas. In some others we are behind
our original planning. We face anticipated or many times unpredicted problems
which cause delays or even sometimes compromise the substance. Legal,
technocratic, political problems. We cannot escape making mistakes.
We are fully aware that these
politically difficult but necessary reforms will not bear fruits immediately,
during our term in office, they have more long-term effects. But we must finish
the job. We must openly acknowledge that this is where we must improve.
We should not shy away from the
problems but remain committed to doing our best in resolving them. And it is
those reforms which we will have to implement in our remaining time in office.
Ladies and gentlemen,
This combination of fiscal
consolidation, a healthy financial sector, and the implementation of a national structural reform program of our own
ownership is instrumental . It is instrumental when it comes to meeting a
key policy objective, fundamental to any growth effort, of any country, of any
government;
Confidence . And as we all know the economy is about confidence.
It was the loss of confidence in the banks that
led to deposit outflows and less credit to the economy. It was the gradual
regaining of this confidence that allowed banks to be fully recapitalized, pass
the stress test, and for Cyprus to abolish all capital controls early. But at
the end of the day it is this confidence that allows an investor to safely
invest in any country.
It was the loss of confidence in the state, which
led to our exclusion from the markets and subsequently into a support program.
It is the fiscal consolidation program which led to successive rating upgrades,
an impressive improvement of our bond yields and will give the final signal to
the markets to start lending us again cheaply.
It was a loss of confidence from the
consumers that brought down
spending and lay-offs and it is the gradual regaining of their trust that will
allow jobs to be created and incomes to rise.
A loss of confidence from investors means that they invest somewhere
else. We live in a competitive world. And coming to the ‘theme’ of
this panel, a sustainable growth model is at the end of the day where the
investors chose to go.
And they will go somewhere where they
will find a stable and attractive tax regime, a healthy financial sector, but
also an open economy with a high degree of economic freedom. With a transparent,
business and investment friendly environment that does not suffer from
bureaucratic distortions. They seek an ecosystem where the private sector can
create. And that’s where they will create jobs and higher incomes.
Ladies and
gentlemen,
I chose not to integrate in my intervention
the prospects created by the existence of hydrocarbons in our Exclusive Economic
Zone. We all know that the prospects are there and they are significant.
Nevertheless, I believe that we owe it
to our country to design a sustainable Growth model despite those prospects. Because
Cyprus has many comparative advantages and a big unutilized potential in many
economic sectors
We ought to free this potential by implementing the right reforms and we should by no means see the
energy prospects with an opportunistic eye or as an excuse to avoid the
undergoing through the difficulty of implementing those reforms.
Nevertheless, let me conclude, by adding another, very significant
pillar of Growth and prosperity. The solution of the Cyprus problem. A
solution that will reunite the island, its people, the economy, and will
establish good relations with Turkey.
Peace, regional stability, and open markets not obstructed by political
barriers are the key factors conducive to economic development, business and
investment . Free and voluntary trade between people and neighbours, not
handicapped by political problems are conducing factors to prosperity in a
sustainable manner. This is how the EU achieved half a century of peace and
prosperity for its people despite the recent economic problems. This is the
example we have to follow in this part of the world.
Achieving peace, stability and regional
cooperation, by reaching an agreement on a carefully designed Federation, will
definitely act as a catalyst for the economic development of Cyprus for the
decades to come.
With huge potential benefits for many
sectors of the economy; commerce, energy, tourism, shipping or transport. It
will allow Cyprus to fully utilize its unique geographical location in all
sectors of the economy. And this is where our political efforts should aim.
The solution of the Cyprus problem will
be the most significant growth reform that we can hope for.
Ladies
and gentlemen,
Let me conclude by repeating once again
my main message. There are no magical solutions to generate growth. The answer is found in the obvious. In
taking advantage of the country’s comparative advantages, in a healthy banking
sector, sound public finances, and bold structural reforms, in peace and
stability. It works.
And this is the job we have to do. By
correcting, reforming, and consolidating our economy we lay the foundations for
a more viable growth model for our country, relieved from the ‘sins of our
past’. We should not fear the
change.
Because Cyprus is indeed an excellent
place. To live, to do business, to invest, to prosper. As long as we allow it to
utilize its full potential.
Thank you very much.
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