Cyprus must implement reforms, boost competitiveness, maintain budget surpluses and reconsider its passport for investment scheme, Fiscal Council president Demetris Georgiades said on Wednesday.
Presenting the Fiscal Council Autumn Report, he argued external risks such as Brexit, which could affect Britain’s purchase power, trade wars and a change in EU’s favourable interest rate policy could adversely affect the Cypriot economy, although the slowdown of the world economy will not allow for interest rates to rise.
“Cyprus is a small, open but indebted economy and a sharp deceleration of the world economy or a change of the European Central Bank’s monetary policy would lead to a significant increase in financing costs for households and companies…with huge consequences,” said Georgiades.
He also pointed out internal risks such as the upward trend of the cost of the state payroll, the low competitiveness of the economy, red tape and delays in awarding justice.
Besides, lack of transparency and a cumbersome justice system is putting off quality investors from eyeing Cyprus as an investment destination.
“An investor could spend years lost in the labyrinth of the state bureaucracy, as they have to issue an unnecessarily large number of permits, which in many cases overlap.”
But the biggest turn-off for investors is the lack of transparency and the delays in the justice system.
“The be-all for setting up a business-friendly environment is a country’s justice system,” said Georgiades.
While Cyprus is considered to be an attractive investment destination, “when the call for tenders was made for the casino, we had only one bidder”.
He said investors want to feel safe, knowing that deals and contracts signed with local counterparts will be kept, but what they see is a slow justice system which takes years to deliver a verdict on disputes.
“Serious investors are put off. What does that leave us with? Investors with a dodgy background who know how to play the system. That’s what happened with Laiki Bank.”
Commenting on the growing public payroll, Georgiades noted that in the first 8 months of the year it has grown marginally compared to the corresponding rate of increase in government revenues.
According to the 2020-22 Strategic Fiscal Policy Framework, government payroll and primary spending for central government this year will increase for the first time in recent years, at a rate well above the revenue figure.
Also, the increase in the state payroll may be accelerated if the post-crisis policy is reversed, namely the replacement of permanent staff with temporary staff and hourly pay. From 2013 onwards the needs of the central government were mainly met with the recruitment of temporary staff.
“It is expected that as the numbers of temporary staff increase, so too will the pressures for changing their status, demanding permanent appointments, which will burden public finances.”
On the ESTIA scheme, Georgiades said the Council is disappointed as recent data showed minimal interest from distressed borrowers, highlighting the little progress made in tackling the problem of NPLs while risks to the sector and the economy have not been eliminated.
“Despite the drop in the percentage of NPLs in the banking system, the NPE ratio of the Cypriot banking system remains extremely high compared to the European Union average.”
The progress achieved is mainly due to the packaging and sale of loans to organisations outside the financial system, which suggests that success in tackling the problem has been significantly lower than expectations, said Georgiades.
“At a time when unemployment is dropping significantly as household income is increasing, one would expect to see an increase in loans being paid off.”
The Fiscal Council monitors state spending and advises the government on macro-economic policy.
