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By Shavasb Bohdjalian
Certified Investment Advisor and CEO of Eurivex Ltd.
President Demetris Christofias wants to proceed with another round of tax increases as he struggles to close the budget gap and negotiate a massive loan package from the so-called Troika, the European Central Bank, the European Commission and the IMF, but yet again, no attempt is being made to reform the labour market, which over the past decades has become unproductive, uncompetitive and very expensive.
The Cyprus government plans to cut public payroll by around EUR 250 mln through the end of 2016 mostly through voluntary redundancies, hike pension contributions for civil servants and decrease pension payouts as well as impose hefty tax hikes to achieve EUR 1 bln in savings/new revenue to close the budget gap.
Press reports suggest that the Cyprus government will seek between EUR 12 bln to EUR 13 bln bailout from the Troika, of which EUR 4 bln will be used to cover the financing needs of the state until 2016 and the rest to recapitalise the island’s two largest banks.
If the loan request turns out to be EUR 12-13 bln, that would represent more than 60% of Cyprus’ annual GDP output of around EUR 18 bln and increase the overall borrowing of the state to EUR 25 bln, placing Cyprus in the top league of borrowers.
President Christofias insists that the 13th salary should be paid for 2012 and says the automatic indexing of wage increases to the rate of inflation (CLOA) should also be kept. He believes that there is room for higher taxes, including the proposed increase in the VAT from 17% to 18%.
It is true that at least until 2010, Cyprus had a 35.7% ratio of tax revenue as a share of GDP, which compared well with the 40.2 EU average and 45 rate for Belgium, the highest tax collecting country according to Eurostat. But since 2010, Cyprus has endured two rounds of tax increases and if the new tax proposals are implemented and combined with declining GDP, Cyprus should have reached the EU average by the end of 2012. This means we are dangerously close to the point of forcing the population to resort to tax evading methods rather than investing resources to become productive.
The alternative is to proceed with salary cuts combined with painful labour market reform incentives, which will open the closed professions and allow for healthy competition in the labour market resulting in more productive labour. Under the Christofias government, Cyprus has priced itself into a very expensive labour destination as evidenced by the minimum wage, which is now more than 25% higher than the minimum in Greece and close to 40% higher than those of Spain and Portugal.
Since no Cypriot politician (includes all 3 main Presidential hopefuls) has the stomach to implement urgently needed labour market reform incentives, our only hope rests with the Troika to make Cyprus competitive and productive again.
The Troika has become an easy scapegoat in all the countries receiving aid or close to negotiating a bailout, but the Troika is painfully and slowly making all the peripheral EU members competitive again. Just take a look at Greece which after pricing itself out of world markets through stupid pay increases is now becoming competitive again.
Over the past decades, successive Cypriot governments have secured votes by dishing out jobs in the civil service, the semi-governmental organizations and municipalities as well as the banks and awarding them with lavish pay increases, allowances and more perks. Now, it’s payback time.
Cyprus labour costs need to drop by a minimum 30% to bring our costs close to those of Greece and perhaps as much as 40% to get closer to wage levels in Spain, Portugal, Bulgaria, Slovakia and some of the Baltic States. In addition to wage cuts, Cyprus also needs to open up the closed professions and allow for Cypriots and other EU citizens to compete without restrictions and in the process make this country competitive again.
Fortunately, the Troika is coming and soon Cyprus will be governed by the Troika!
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(Eurivex Ltd. is a Cyprus Investment Firm, authorised and regulated by CySEC, license #114/10 and approved by the Cyprus Stock Exchange to act as Nomad and by the Vienna Stock Exchange to act as Listing Agent for listings of shares, bonds and funds. The views expressed above are personal and do not bind the company and are subject to change without notice)
