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Cyprus has applied for a bailout and representatives from the Troika – made up of the European Commission, the ECB and the IMF are in Cyprus to commence the negotiations leading to the signing of the deal paving the way for a loan package to be provided to Cyprus to rescue its banks and cover its financing needs in exchange for structural and other changes that the country and its banks need to implement.
Fortunately for Cypriots, the Troika is well aware of the shortcomings of our economy, the messy situation of the banking sector and the structural reforms that are desperately warranted to overturn the loss of competitiveness that the Cyprus economy has endured over the years by successive governments.
For decades, successive governments have ignored and thrown away the findings of the IMF reports on Cyprus. Every government has said “the IMF does not know what they are talking about” and insisted that COLA is the best way to maintain industrial peace on the island. But they have not asked at what price? They have never bothered to check the stats on how Cyprus industry has been steadily losing its competitiveness through lack of productivity.
For years successive governments have ignored the warnings from independent agencies on the dangers of allowing the structural problems to pile up and why their policy of benign neglect would eventually come to haunt the economy. Since 2004 when Cyprus became a member of the EU, the Commission has been sending warning signs to Cyprus but all of the recommendations have been swept under the carpet.
The seven-point plan that the Commission has been recommending to Cyprus will now become the basis of the structural reforms that this country will need to implement in order to qualify for the loan package to rescue its banks and cover its financing needs.
One of the first tasks will be to achieve a primary budget surplus, a rare phenomenon and the last time it happened was because of millions in capital gains taxes that the government of Tassos Papadopoulos collected in the period leading to the property bubble.
The government has suspended COLA for the public servants for 2 years but COLA now needs to be scrapped and instead pay increases given only when productivity rises and not because of inflation.
The Coops are being merged and that is a step in the right direction but personally I don’t understand the benefit of bringing them under supervision of the Central Bank. After all, the banks were under Central Bank supervision when they managed to create a mess through highly speculative investments in government bonds – most of which were lost- and for relentless speculative property lending in Greece and in Cyprus, which now risk to be classified as non-performing as repayments have stopped. I hope the new Governor of the Central Bank will manage to bring some order to the banking sector and make banks accountable for their actions.
The government will probably agree to start passing legislation opening the many sectors of the economy to more competition but similar to Greece, there is an acute risk that the laws will never be implemented. Almost all the professional sectors in Cyprus are closed to outsiders and in the process all of them have managed to become uncompetitive, expensive and offering a very bad service.
Until now, the government of Christofias has increased taxation in its effort to balancing the budget, but this has to change. We hope the Troika Representatives will order the government to scrap the 13th salary and the millions of additional allowances that civil servants receive and also proceed with across the board cuts in high earning pensions and civil servant salaries.
The Troika has to bring the salary and pensions of civil servants close to the level of the private sector through deep cuts. This effort by itself will balance the budget in record time, lead to a primary budget surplus and allow the government to resume its development budget covering many sectors (and not construction only) which will be a major stimulus for the economy.
The problems of Cyprus can be fixed very quickly. All that is required is for the reform process to start in earnest and for the programme to be implemented in full without deviation. In such a case, a turnaround may be achieved within 3-5 years, which will coincide with the receipts from the offshore gas exploitation allowing this country to become an economic paradise that it deserves to be.
(Shavasb Bohdjalian is a certified Investment Advisor and CEO of Eurivex Ltd., a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10 and approved by the Cyprus Stock Exchange to act as 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)
