IN CYPRUS when the politicians are unwilling to take the necessary measures to put things right, either in the economy or other areas of life.
They need to find a scapegoat this time it is large companies and individuals not paying tax.
The latter has become the target of the Finance Ministry in their effort to reduce the budget deficit. In pursuit of increased revenues companies have been asked to expedite their VAT payments and the unions, in an unholy agreement with the employer’s associations, are singing the same mantra asking for taxing the lawyers and doctors among other professional classes.
‘Eureka ‘ one might say. But this is living in fantasy land if the Finance Ministry thinks it will sort out the budget deficit and encourage unions and employers to campaign on its behalf.
It is noteworthy at this point to look at the measures being taken by any serious EU member state, which has had to reduce its budget deficit.
None have succeeded when they tinkered with such measures, and the countries that had done so such as Greece and Italy are suffering from chronic fiscal problems. Instead of the Finance Ministry taking note of what happens in other good examples, resort to politically motivated measures.
The concerns expressed by the Governor of the Central Bank of Cyprus about the trajectory of fiscal imbalances together with the issue of the funding of pensions identified by the EU Commission should be the guiding light of the Finance Ministry.
Instead they pretend that the economy will recover based on their prediction of development projects and consumption by the private sector. The early payment of the 13th salary is symptomatic of the thinking at the Finance Ministry.
The high leverage of Cypriots, both private and corporate, has no bearing on this thinking. If 60,000 public servants (enough to govern a country much bigger than Cyprus) will spend their 13th salary in December so what? Most of this will be on consumption of food, presents and drink and some may be wagered on a game. If this monthly splash is enough to kickstart the economy then the economists may have to look for another job.
In the opinion of the author the Finance Ministry has not still understood that the crisis which has hit the world has led to trillions in wealth destruction and that banks WILL not lend like before for consumption.
In fact the recent crisis in Greece should be a reality check, and the the banks, which are bound to have increased non-performing loans, will have a problem creating more credit, which was the engine of growth.
If anything banks will continue to reduce lending since their primary concern should be to strengthen balance sheets and allow for more restrictive capital adequacy requirements from the regulators.
It is vitally important that the Finance Ministry concentrates on a medium-term structural deficit reduction programme that will see Cyprus enjoy low deficits and low debt payments so that productive investment is made in sectors in which Cyprus may enjoy a comparative advantage.
If the economy will continue to rely on tourism and accountancy/legal/banking services there will be more serious problems down the road. Instead, the opportunity to attract investment in areas such as renewable energy, healthcare, environment and high value added products has to be the way forward.
In terms of tourism Cyprus is a victim of the high euro and the high costs of eating and transport. Tourism is a global industry and visitors simply do not get value for money. Health tourism though could be an attraction given the mild weather for most of the year.
Incidentally what happened to the President’s inaugural speech commitment to make Cyprus a health tourism centre? What have the government departments responsible for putting in place a policy to attract such visitors done?
Have the necessary regulations/laws been introduced or was this another area where lip service seems to be the order? Lastly, instead of Cyprus being at the forefront of research in solar thermal, there are still hopes of wind farms solving the reliance on fossil fuel. In most countries wind farms are being designed for offshore construction and maybe the Institute of Energy should look at incentives for this development rather than handing out more permits.
- Erol Riza is the Director of Euromed Corporate Advisors and rormer Managing Director of DEPFA Investment Bank Limited in Nicosia
