Austerity or bust

STANDING between an increasingly impatient Ankara and battle-ready Turkish Cypriot trades unions, Ersin Tatar is in an unenviable position. As ‘finance minister’ of the breakaway north, he is powerless to defy the Turkish government’s newfound insistence that he bring his notoriously lax economy into order.
And while Ankara squarely tells him he must either implement austerity or face bankruptcy, the unions threaten to thwart Ankara’s plans at every turn. It looks like he is in a lose-lose situation.
But Tatar is not giving up. As he goes through last minute preparations before a visit to the Turkish government in Ankara the following day, the 51 year-old Cambridge business graduate looks only a little concerned.
Since taking office nearly two years ago, Tatar has never had it easy. When taking the job, he knew that Turkey, having itself gone through its own painful IMF-imposed austerity measures, now had its eye on reshaping how aid to the north was spent. A report quietly published by the World Bank in 2006 on the Turkish Cypriot economy had fuelled opinion in Ankara that north Cyprus was a financial black hole into which the Turkish taxpayer’s money simply disappeared. Armed with the report, Ankara persuaded Tatar’s predecessor Ahmet Uzun to implement austerity, but unfortunately for him and Ankara, the unions took on the ‘government’, eventually bringing it down. Now Tatar’s National Unity Party (UBP) faces the same possibility.
Although coming to power on the understanding it would not implement Ankara’s austerity package, Tatar and the rest of his administration now insist there is no choice but to see it implemented.
“Over three years Turkey will be spending 2.5 billion dollars in Cyprus. We either face austerity and get this money, or we don’t and get nothing,” Tatar says.
Put that way there doesn’t seem to be much to think about, especially if you, like Tatar, believe Turkey’s assertion that the massive investment will include the piping of cheap and plentiful supplies of water and electricity to the island.
“Turkey’s aid has been increasing over the years, but it wants discipline,” the pragmatic Tatar explains. Ankara now wants to see its aid to the north set at 600 million dollars per annum and to see the breakaway state transforming its economy from one that spends over 80 per cent of Turkish aid on covering public sector salaries to one where two thirds of it is spent on private sector investments and incentives.
Ankara may right now be cross with north Nicosia for spending so much of its hard-earned money, but there are excuses, or rather reasons, for the ever-growing budget deficit. After 1974, Tatar explains, public sector jobs were handed out to a conflict-weary community in an effort “to keep people on the island”. At first there were no pensioners to pay for because no one had yet retired from the new born ‘state’. However, “the chickens have now come home to roost”, Tatar says, with nearly all of those who took up work back then now retired. In fact, there are 13,000 retired public sector workers currently receiving pensions. Plus Tatar has to pay social security to another 28,000 retired private sector workers, meaning that he pays more than twice as many retired people than he does working ones.
Tatar cites “political reasons” for the mess and gives ‘state’ broadcaster BRTK, which has 700 people on the payroll for “a job that could be done by 200”, as an example of how things have gone awry.
Debts of around 1.5 billion euros to local banks and to funds the ‘government’ borrowed from workers’ deposits compound Tatar’s misery, added to which is a further 1.5 billion euros it owes Turkey. While in the past one may have laughed off the notion of the north being able to or even trying to pay it back, Tatar looks grave when he says “Turkey will come knocking at the door”.
“Turkey is like our IMF (International Monetary Fund). It aims to increase efficiency in the public sector and increase competitiveness in the private sector,” he says, repeating the mantra he has undoubtedly repeated time and again to unsympathetic union leaders.
“Like the IMF, Turkey says, if you do it, it’s going to be good for you. It shows a lot of carrots. But if you don’t do it, you’ll hit the wall. Then there will be a day when you won’t be able to pay your salaries. And if you keep borrowing, there is the danger that you’ll disturb the banking sector,” Tatar explains. He says the protocol his government signed with Ankara will cap ‘government’ borrowing and raise taxes in order to reduce a budget deficit that currently runs at around 300 million dollars annually. The figure makes up 11.6 per cent of the north’s 3.5 billion dollar GDP, and currently Turkey foots the bill for two thirds of the deficit. The other third it expects the ‘TRNC’ to come up with.
“It’s been hell,” says Tatar of his efforts to come up with that third. But despite the stomach ulcer he may now have from the pressures of balancing the demands of Ankara and the unions, he says he has managed some degree of success.
“We have managed to raise the income from taxes from 1.5 to 1.8 billion dollars in a year”. He said he’s done this by cutting back on expenditure, and by cutting state sector workers’ salaries by delinking them from inflation. He says his success at collecting taxes is “not bad by EU standards”. He is also happy to report that his ‘ministry’ has recently spent five million dollars creating a new tax office.
Unfortunately, much of the increase in taxation has come from indirect taxation on imported products rather than on incomes. However, Tatar’s ability to lay on the taxes, even indirectly, are limited by the ability of Turkish Cypriot consumers to cross the Green Line and do their shopping in supermarkets in the south.
So naturally, Tatar is hounding out new sources of tax income, and one source he knows exists is undeclared income, in particular for service sold by professionals like doctors and lawyers.
“We also tried to tax the super pensioners, but the constitutional court overruled it, so we couldn’t”. One thing he was able to do however was cut starter salaries in the public sector.
“This we did to encourage people to take jobs in the private sector”. Parity between the two sectors is the Holy Grail as far as Tatar is concerned.
Perhaps most importantly, at least for the longer term, is the protocol’s stipulation that allows only one new ‘state’ employee be taken on in replacement for each two that retire or leave their jobs. In this way Tatar aims to reduce the number of public sector employees from 17,000 to 14,000.
Another contentious part of the austerity protocol also calls on the breakaway state to enact a programme of privatisation, starting this year with the selloff of Ercan (Tymbou) Airport, which Tatar says can raise the authority’s tax collector around 300 million dollars.
He will also seek in the coming months to launch the privatisation of the north’s telecom facility, but this time not because of losses (apparently it isn’t losing money) but because of a vision emanating from either his office or one in Ankara that as a private enterprise the body would be “more innovative and more open to new technologies”. Furthermore, Tatar believes, the north’s phone network could feasibly become a hub for telecommunications between Turkey and the Middle East. While accepting that bids for these selloffs would almost exclusively come from large Turkish-owned companies, Tatar insisted a non-Turkish outfit had shown interest in buying Turkish Cypriot Telecomm, which he hopes to sell “within a year”.
He also hopes to sell off the electricity provider KIBTEK, although he acknowledges this is “going to be difficult”. The union representing KIBTEK workers is already threatening to “plunge the TRNC into darkness”.
While Tatar says he accepts the concerns of Turkish Cypriots who feel the community’s assets are being sold off to Turkish big business, he insists Turkish Cypriot businessmen can “join together” to make bids against or in partnership with their mainlander competitors.
“What’s the alternative?” he asks. “At the end of the day, you can’t quarrel with Turkey.”