HAVE OUR politicians, in their great wisdom, decided that they no longer want Cyprus to be an international business centre? Or have they not realised yet that their unpredictable decisions combined with their failure to provide a financially stable environment could eventually force international businesses to re-locate. The consequences of an exodus would lead to a drastic contraction of the economy, as the sector is by far the biggest net contributor to our GDP.
So far, the authorities have ignored the negative signs and the low key complaints from associations representing foreign firms. However they could not possibly ignore the warning issued at the House finance committee last Monday by a representative of the Association of International Banks. He said that if the House approved the bill for the financial stability fund which envisages a tax on all bank deposits, foreign banks would either leave or scale down their operations here. He warned that two big foreign banks were already currently looking for countries to move their operations to.
Anyone with a modicum of intelligence would not have needed a warning to realise that our authorities – out of short-sightedness, incompetence or indifference – could eventually force foreign businesses to pack up and leave. Would any business go out of its way to alienate a customer who gave it 20 per cent of its annual revenue? It would go out of its way to keep such a customer happy. But a state, run by blinkered incompetents, seems perfectly capable of alienating customers who contribute 20 per cent of its GDP and account for almost €20 billion of the country’s bank deposits as we have been witnessing in the last few months.
First, the finance ministry toyed with the idea of an annual contribution of €1,000 per year from all companies. Admittedly, this was a very small amount, but it still created the impression that the government had no qualms about turning to foreign companies when it needed cash. Then it came up with the idea of increasing the tax on bank interest from 10 to 15 per cent. There is also the plan of a 0.6 per cent levy on all bank deposits (this was what foreign banks were objecting to on Monday at the House), the proceeds of which would go to a stability fund for banks.
In the last 10 days, the finance minister, in an attempt to appease the unions, proposed to take 0.5 per cent of the annual turnover of companies with local operations, irrespective of whether they were making a profit or not. He excluded the foreign businesses that are based here but do not operate in the Cyprus market, for obvious reasons, but whether he could do this, without the state being guilty of discrimination is another matter. The 16 foreign banks, without a high-street presence would not be exempt which is why their representative objected to it.
But apart from giving foreign businesses specific causes to be unhappy – they are here because of the financial incentives, which are gradually being eroded, and not for the sunshine – there is also the broader economic picture. How safe could the shareholders of a foreign company feel in a country whose government bonds are one notch above junk and faces possible entry into the support mechanism?
Can a country be a credible financial services centre when it is in the support mechanism because it cannot borrow money from the markets? How many foreign companies would feel safe to use the financial services centre’s banks, when the government is in no position to support them if and when the need arose? And what would the government do if the Commission set the doubling of Cyprus’ corporate tax as a condition for bailing out the country?
This is the nightmare scenario which our politicians do not dare think about, but was mentioned by the Governor of the Central Bank in comments reported by Phileleftheros yesterday. “The role of Cyprus as an international financial service centre is at stake,” he warned.
It is high time politicians started giving this matter very serious consideration because if there is a mass exodus of foreign businesses, our banks, the assets of which are six times our GDP, will be in very big trouble, our economy will contract substantially and living standards will plummet.
We desperately need to get our priorities right. We chose an economic model that depends on foreign businesses being based here. It has been a successful model and safeguarding it must be our number one priority, regardless of the political cost.
