Speech
by the Under
Secretary to the President,
Mr
Constantinos Petrides,
at the 4th
Nicosia Economic Congress
“The
State of Cyprus Economy- One year after the Euro Group Decision”
First
let me thank the organizers for putting
together this meeting of professionals and experts today, to discuss
the current state of the Cyprus economy.
My
intervention
will concentrate on the state of the Cypriot economy one year after
the Eurogroup decision.
But
let us take a step back. It
was just a couple of weeks after taking office, in March 2013, that
our Government was called to cut the Gordian knot of a full-blown
economic meltdown, without, if I may say so, as much as a Swiss knife
at hand.
So what was the problem
in the first place?
- The structural imbalances of our economy.
- The unsustainability of our public finances, with an oversized public sector.
- The fact that the private sector was, for years, spending more than what it was earning. Credit was not given for productive investments but for consumption. The levels of private debt were the highest at EU level.
- The over-concentrated economic structure of our economy and the over-reliance to offshore banking and real estate industry, which created a property bubble.
It
was a multidimensional problem which led to the loss of access to the
markets for Cyprus back in spring 2011. That problem, coupled with
the
decisiveness of the IMF and the EU to change the model of rescuing
economies, starting from a non-systemic country, did not leave the
Government much room for maneuver.
Admittedly,
things would be easier had Cyprus joined
a programme at the time of the Greek haircut in Autumn 2011.
For
us, last March, the objective was to avoid the total collapse and
prevent the exit of Cyprus from the Eurozone, and possibly from the
EU itself. That would be catastrophic.
After
the first Eurogroup agreement was rejected by the Parliament, the 2nd
agreement package included a massive bail-in – over 50% of the GDP
– including the two major and systemic banks of the island.
The
shock to
the economy was huge. Even with the programme in place, the loss of
confidence in the financial sector and the whole economy, the sudden
reversals on trade and FDI flows were such, that many were predicting
a total collapse of the Cypriot economy. At best, they were expecting
strict capital controls and a deep recession for many successive
years.
Where do we stand 14
months later?
Today,
I am in a position to say that we have been able to withstand the
shock. Both politically and economically. We are on the way to
recovery. We have come a long way in addressing the imbalances of the
banking system which has already been recapitalized, and is also at
an advanced stage of restructuring.
Capital
controls are gradually being relaxed. Our
main challenge now is to raise additional capital from private
sources and to secure foreign participation in our banking sector.
That would decisively re-establish confidence. The prospect,
unthinkable a few months ago, looks very promising today.
A
smaller but better regulated and functioning banking system that can
inspire confidence and serve the needs of the productive sector of
the economy is what we aim
at. It seems we are at an advanced stage in this development.
In
terms of public finances, our efforts have been equally determined.
We
have drastically cut public expenditure and our fiscal performance is
already much better than expected. We have created fiscal buffers,
beyond the targets set by the Troika.
Taking
control of public spending
enables us to send a clear message to investors and the markets. Our
proven policy orientation is not to correct fiscal imbalances by
raising taxes.
For
this Government,
maintaining a favourable tax regime and tax stability is much more
important and more conducive to growth prospects and eventually to
public revenues. We shall not be raising taxes further and this is a
message I would like to repeat.
Yes,
we have a long way to go. But for the first time during the last few
years there is a sense of direction.
Over
the next two
years, the Government intends to implement wide-ranging structural
reforms; civil service reform, health care system reform, welfare
reform, tax administration reform as well as an ambitious
privatization programme. It is through these reforms that we aim to
create a new, more viable and sustainable economic model for our
country. It is through these structural reforms that we aim to make
our country more competitive and productive.
As
regards the productive
sectors of the economy, key sectors such as the tourist industry, the
shipping industry, and the business services industry are
demonstrating a stronger than expected resilience.
We
are
encouraging the emergence of new sectors of economic activity such as
the energy sector – hydrocarbons and renewable energy – and the
careful and well-planned emergence of a gaming industry.
At
the same time, we are moving according to plan with the
privatization of the Semi-Governmental Organisations (SGOs), and we
hope to have the first results by Spring 2016.
Ladies
and Gentlemen,
Let
me categorically say that the situation is far from perfect. And
there is no quick fix solution. We suffer from high unemployment,
17%, and it will take time until it drops again to a single digit.
The recovery will be gradual and the main benefits of the reforms
will only be felt over the next years, probably the term of another
Government. Yet, compared to where we were one year ago, I can safely
state that we can see the light at the end of the tunnel.
We
have a plan, and we are proceeding strategically for its
materialization.
Our strategy is bearing
fruit.
- After more than 40 consecutive downgrades, the economy has received three upgrades in a period of just a few months.
- We are heading for a forth positive review by the Troika that has repeatedly expressed its satisfaction with the implementation of our economic adjustment programme which is being implemented without serious delays and problems.
- The recession in 2013 was 2% lower than expected by our creditors, and we expect to return to growth in 2015, much earlier than expected.
We do acknowledge that
the recent crisis has revealed not only the banking sector imbalances
but the limitations of the growth model we followed during the last
two decades.
We
do acknowledge
that in order to be able to compete in global markets we need
businesses to be more vibrant. They need to be able to invest,
innovate, and integrate into more domestic and global value chains.
Faster and more
sustainable growth, beyond restoring the fiscal and financial
stability, rests on adopting reforms that will boost private
investment and adopt business friendly regulations.
While
the tax regime and the investment climate is favourable
to investors, regulatory and institutional shortcomings lead to
implementation gaps that need to be addressed.
Although
we have taken important steps to strengthen the economy’s growth
potential and stimulate growth, we are now considering
more radical reforms. We are consolidating responsibilities for
economic growth under one single authority.
A
single authority which will be responsible for
creating a more attractive business environment, addressing
administrative complexity, implementing more streamlined and simpler
procedures, and establishing more effective coordination of sectoral
growth strategies designed and implemented by line Ministries.
Our aim is to develop a
new growth model that allows for high, sustainable growth and shared
prosperity.
Our
vision is to bequeath
the next generation a country they will be proud to call their own, a
dynamic business and investment friendly state that takes care of its
citizens’ needs, and which rests on rock solid economic and
structural foundations. With dedicated partnerships in the EU, the US
and Israel, and with friendly and dynamic relations with all its
neighbours, including hopefully soon Turkey. We have a plan, we will
stay focused, and we will do the job.
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