BY SHAVASB BOHDJALIAN
In view of the steady deterioration in state finances and with banks struggling to raise the required capital buffers until end of June, it seems more and more likely that Cyprus will have no other choice but to enter the EU support mechanism.
Politicians dread the prospect of entry into the support mechanism claiming that by allowing representatives of the so-called Troika, the European Central Bank, the European Commission and the IMF to approve every budgetary decision, effectively the country will lose its sovereignty.
It is true that the main pre-condition for aid is for the Troika to approve every inclusion in the Budget, but in actual reality for the average person on the street, this is better since it limits the ability of politicians and political parties to pass supplementary budgets without much scrutiny which allows them to reward special groups in exchange for votes or other favours.
Successive finance ministers of the Christofias government have been telling the public they wish to limit allowances that already over-paid state employees earn on the side for a variety of stupid reasons, yet, those allowances are still being paid and nobody seems to have the will or power to stop this. Rest assured, when the Troika representatives come to Cyprus, one of their first acts will be to scrap all allowances.
The Troika reps will also probably scrap the 13th salary for civil servants and order across-the-board pay cuts in salaries and impose new conditions on how productivity is measured as the race begins to find cost savings of EUR 200 mln this year to keep the budget deficit at the promised 2.5% of GDP level. And with the Troika in charge, I’m sure they will succeed in imposing a total hiring freeze that this government has been talking about, but not delivering as it keeps adding to civil service, semi-governmental and municipal staff.
Since the banks have screwed up their finances, it’s only fair for somebody to tell the banks that they need to cut expenses and one of the first things that needs to be done is order salary cuts for all top management, middle-management and lower earning salaried staff. I was surprised when the newly appointed Central Bank Governor did not make such a suggestion at the Bank Staff Union (Etyk) event last week. Banks are paying their staff excessive salaries and working limited hours which limits their productivity and ability to services their clients and stay competitive. By reducing expenses, banks would save up capital and be in a position to lower the bank charges and excessive interest rates they charge their clients.
The re-balancing of salary scales between the civil service and the banks on the one hand with the private sector is long over-due and this can only be done with the help of the Troika.
The only argument against the EU support mechanism is that Germany and other core EU states would immediately dictate Cyprus to increase its corporate tax rate from the current 10% to at least 15%, which is the lower range of the EU average. For Cyprus residents this would not matter, since the effective corporate tax rate for residents is currently 17%-22% if you count the tax on dividends.
As for non-residents who repatriate dividends by paying no additional tax, Cyprus could always copy Malta and other countries which advertise a high tax rate, but then lower the effective tax rate by giving allowances and rebates. You would be surprised to know that some EU countries advertise 15% corporate tax for non-residents but after giving allowances and breaks, the effective rate is lowered to 5%. Cyprus could do the same and thus allow the professional sectors (such as lawyers and audit/tax consultancy) to flourish and maintain their edge.
Cyprus has reached a critical stage. The government is to blame for not taking early measures to balance state finances. The banks are responsible for their gross mistakes and they also need to trim their costs. The last time this country went through a fat-trimming exercise and a genuine determination to prosper through hard work was the period immediately after the 1974 Turkish invasion. Ever since then Cyprus has been adding to its fat and living off the misery of others.
The time has come for us to follow a strict diet to become healthy again and this can only be done with the help of the EU.
Shavasb Bohdjalian is a certified Investment Advisor and CEO of Eurivex Ltd. (www.eurivex.com), a Cyprus Investment Firm, regulated by CySEC, license #114/10 offering forex solutions and portfolio management services. Eurivex is also approved by the Cyprus Stock Exchange to act as Nominated Advisor (Nomad) for listings on the Emerging Companies Market. The views expressed above are personal and do not bind the company and are subject to change without notice. For further information, please contact Shavasb@eurivex.com
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