By Dr Nicos Koussis
Seven years after the financial crisis that severely hit the banking sector and Cyprus receiving a €10 bln international bailout, the economy has for many, exhibited a remarkable recovery.
Cyprus has managed to reduce unemployment from 13% in 2016 to 7% as of the end of 2019, reduce bank vulnerabilities (e.g. with the sale of the Cyprus Cooperative Bank to the private banking sector) and enter the financial markets with government bond yields that show the risks have faded.
Still, according to the most recent IMF report published on the 9 December, the Cyprus economy faces several challenges ahead.
I will focus on the following two challenges: a) Slow productivity growth and b) Banking sector risks.
Other major challenges that loom are; maintaining public spending efficiency, keeping the NHS system operational and facing the political and economic risks concerning Turkey’s aggressive behaviour that limits the exploitation of oil and gas reserves within Cyprus’ economic zone.
These risks should also be addressed with great care as they are of tantamount importance.
Slow productivity growth and the banking sector present challenges that are much more subtle and may have more interconnections that one can see at first sight.
According to the IMF report, Cyprus’ below-par productivity is significantly driven by low productivity in the financial sector.
According to the same report, the way forward is to increase the use of technology and digitalization, especially in the banking sector.
The much anticipated national policy for the digitalization of public sector services is also expected to create a significant improvement in the public sector productivity with significant positive side-effects to the overall economy.
Importantly, the IMF suggests that low productivity can be enhanced by STEM training, an education system that focuses on the interrelation between Science, Technology, Engineering and Mathematics providing an integrated approach that improves student learning.
One can clearly see the links of the need to improve the productivity growth with recently announced government efforts for reforms in the education system of Cyprus.
While the government’s (and media’s) attention has been in reforming the system of primary and secondary education, much less attention has been placed in creating the environment to allow for improvements in the education system to have a real impact in the Cyprus economy and improved business productivity.
Improvements in the education system cannot stand alone.
A real impact can only be achieved if the economy’s focus also shifts away from the traditional emphasis on low productivity services (such as traditional banking) and into higher productivity sectors such as information technology and services that require a certain level of expertise (e.g. financial analysis, risk management, use of big data, digital marketing etc).
Thus, to be able to harness real benefits in education reforms, the students need to foresee a real benefit in education where knowledge is appreciated in high-paid positions and career prospects outside the traditional realm of the public and banking sector.
How can these new job opportunities be created in non-traditional sectors?
Prepare for the digital age
This, in my view, is a major challenge of the Cyprus economy going forward. Besides improvements in the resolution of non-performing loans (such as an efficient judicial system and a credible foreclosure framework), the IMF sees the need to reduce the cost to income ratios of banks (to create a sustainable banking sector).
Obviously, this can be achieved by an acceleration of digitalization of the banking sector and diversification of financial services provided by banks.
This will inevitably lead to further shrinkage of the need for people employed under traditional banking services and the risk of rising unemployment.
But it also places an opportunity for the Cyprus economy to shift focus in other non-traditional sectors that would provide new career prospects, in particular for the youth.
The government needs to encourage banking reforms and to combine these efforts by creating an entrepreneurship mindset to students within the school education system, as well as opening up opportunities for jobs with a more innovation focus.
Investment in primary and secondary education in Cyprus is much above the EU average but the effectiveness of this sector needs also to be improved.
However, as pointed out above, this is only one side of the coin since education advancements need to be combined with new opportunities for the youth in innovative sectors.
A much-neglected statistic shown in the IMF report is that investments in tertiary-university education in Cyprus are below the EU average.
The government should boost its investments in university education with more money injected for the creation of research centres with links to industry and establishing a reward system for private and public universities that promote research and innovation advancements.
This is the most promising step forward in moving away from the vicious circle of low productivity of the Cyprus economy.
As pointed out by the IMF, Cyprus has a severe mismatch in employment positions in relation to the true skills of its labour.
It appears that a significant part of the workforce and possibly the youth are entrapped in pursuing low productivity positions in traditional sectors.
Let’s give them more opportunities ahead with a further push for university education, innovation and entrepreneurship. But can we meet this challenge?
The writer is Assistant Professor of Finance, Head of the Department of Business at Frederick University Cyprus