The Cyprus Economy and Unemployment Today

RESTORE CREDIBILITY
What it took us decades to build following the disaster of 1974 faces imminent risk of getting torn down because of the intrinsic problems in our economy as well as external factors such as the debt crisis that the euro area is facing, particularly in Greece where our banking system has a high exposure.
To overturn the current situation we have to restore our lost credibility within the EU. Then we must restore the confidence of the rating agencies, investors and the markets in order to reduce the bond yields in the financial markets and regain access to international money markets.
To achieve these objectives we should first of all reduce our fiscal deficit and bring it within acceptable levels by the European Commission. Although a deficit of less than 3% of GDP possibly will satisfy the EU, it will not solve the problems of our economy. What will be achieved is to halt further deterioration and to induce the rating agencies to revise the horizon of our economy from negative to stable.
But to achieve the necessary upgrades by the rating agencies and ensure access to international money markets, much more will need to be done as the slowdown of our economy has given rise to another major social problem.
For the first time after 1974, unemployment in Cyprus is a major problem in our economy and in our society. From a position of full employment a few years back, we now have over 37,000 registered unemployed persons. From 3,6% of the workforce in January 2008, unemployment has gone through the roof and in December 2011, 9,3% of the workforce was registered as unemployed. This corresponds to a percentage increase in unemployment of 158% in just a four year period. In the same time period unemployment in the Euro-zone has increased by 44%. This means that in Cyprus unemployment has increased by more than 3½ times as much when compared with the average of the eurozone.

CREATE JOBS, GROWTH
The only way to create new jobs and to resolve the unemployment problem is by means of development and growth. Only by offering generous incentives to local businesses can we persuade the private sector to invest so that new jobs are created, or by attracting foreign direct investment from abroad. However, with the current situation in the financial sector, this can prove more difficult in practice than in theory. And this is because of the current state of interest rates for business loans and the problem of liquidity that the banking sector is facing. Lending rates of about 3 percentage points higher than the eurozone average are making the financing of new projects much more expensive and lower the return on investment.
2012 will prove a decisive year. The Cypriot economy needs a new strategic direction in order to tackle the big challenges that lie ahead, and the current crisis should be treated as an opportunity to achieve this rather than a threat. The Cypriot economy, despite its weaknesses, has many strengths and we should concentrate on them. These include a more flexible and more educated workforce than most EU countries, an attractive tax system, and most recently the discovery of vast amounts of natural gas.
The current crisis has to be seen as an opportunity to correct things and restructure the public sector. The introduction of pension contributions for employees in the public sector was a major step forward, but more needs to be done. The degree of competitiveness of our economy that keeps deteriorating needs to increase. An indication of this is the large current account deficit and in order to correct this we need to cut production costs. The COLA system that allows for wage increases to be linked to inflation, rather than productivity, also needs to be reformed as a way to boost competitiveness, as well as the privatisation of state companies such as Cyprus Airways, the Pancyprian Bakeries and Forest Industries. Also, the government has to seek strategic investors for the large state enterprises such as Cyprus Telecommunications, the Electricity Authority and the Port Authority. The public sector has to limit itself to its supervisory and regulatory role.

SERVICES AND ENERGY
The government needs to focus on sectors of the economy that have an excellent growth potential such as services and of course energy. This does not mean that the government should get involved directly in these sectors but simply to lay the right conditions for growth. In order for this to be achieved, the government has to offer generous incentives for the private sector to be persuaded to invest so that new sustainable jobs are created. We have to draw examples from other countries that have similar economies and a great success story is that of Malta; smaller than Cyprus, with also a high skilled workforce and an economy that centres on the services sector and tourism.
So far, we have not managed to convince the rating agencies that we are determined to do what it takes to improve our ratings. Europe, however, is already promoting measures to safeguard the euro. Some of these measures are the introduction of consolidated state budgets and the debt brake. Maybe we ought to act pro-actively and consider adopting these measures ourselves in a way to show that we are serious and determined about what we publicly declare. It would be a great way to demonstrate that we wish to remain a regional financial centre by adopting all the necessary corrective measures in order to restore our credibility and regain access to international money markets.