15 SUNDAY MAIL • July 1, 2012
Opinion Whatever the Troika’s plans for Cyprus, implementation is the key since getting legislation through is not enough
uotes of the week
Comment Erol Riza
D
ESPITE all the theatrics of politicians in Cyprus and the anathema that some politicians considered an application to the EU to be, the government has formally applied. The government may seek to blame the application on the banks’ bond exposure to Greece and the increase of the banks’ non performing loans (ala Bank of Cyprus), resulting from Greece’s economic situation, are what has pushed for the EU bailout; these may not be the entire story. We will only know the true position of the banks when an independent audit of the banks’ loan portfolios takes place. I believe, as do distinguished Cypriots such as former President Vassiliou, the problems of the public sector and lack of structural reforms are very much the issues that bother the EU since these make Cyprus’ debt trajectory unsustainable. This article will try to consider what the EU will require as conditions for its assistance. In the first instance, as the Central Bank governor has explained, it will be important to find out how much the banks in Cyprus will require as support both for the Greek exposure and also if there are problems with loans in Cyprus which have been restructured and have land as security. If the banks need to take up more support from the EFSF/ESM it would be a welcome development as a recapitalisation of the banks could mean that banks would be able to resume their lending and boost growth. This is the easy one to resolve since it will mean that the EFSF/ESM provides the funding and following the meeting of EU leaders this will be direct to banks and not impact the public debt. However, the need to reform will still be important for the Troika in order to mend the structural problems of the public sector for debt sustainability. Based on the EU and IMF recommendations, it is clear that a serious problem has been the cost of the wider public sector in Cyprus; principally the payroll and the pension benefits of the broad public sector. This issue was also raised by the former Minister of Finance Charilaos Stavrakis at a presentation he made at the Hilton which showed that if no action was taken (this was in 2010) the public debt would grow to be approximately 80 per cent of GDP by 2015. The other issues that the Troika could propose are privatisation of selected public entities such as CyTA and EAC, broadening the tax base and tightening up on tax evasion, and of course regaining competitiveness via higher productivity and reform of the automatic CoLA payments. On competitiveness, the EU will recommend that in order to regain this and improve
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Former President George Vassiliou: long at the forefront of urging public sector reform
EU bailout: better late than never the current account deficit it would be necessary to reform the CoLA system and seek measures to increase productivity. The Cyprus Chamber of Commerce and Employers’ Federation as well as the former Central Bank governor called for these measures two years ago. The current governor of the Central Bank calls for more use of information technology to increase productivity. The economy needs these reforms and it is for the wider benefit if the government of the day works in the direction of such reforms. These reforms do not require cuts in salaries and would result in a more viable economy as the current account deficits have been linked with a loss of competitiveness. The public sector cost to the budget is surely to be discussed. The civil servants in Cyprus enjoy some of the most generous benefits in the
world, in terms of the hours and days in the year they work, their non contribution towards their pensions, their non contribution towards medical treatment at hospitals and worst of all their pay (with a 13th salary) is higher than the private sector; former President Vassiliou’s report clearly showed this to be the case. This is a problem which has accumulated over the years as no president has attempted seriously to take on the civil service union. Thus, it would be reasonable to expect the Troika to insist on a more sustainable pension system where civil servants contribute to their pension and pay for the medical treatment; the latter is likely to happen if the National Health Insurance system comes into force. In the case of taxation it would be interesting to see what the Troika will suggest since the government has
‘The other issues that the Troika
could propose are privatisation of selected public entities such as CyTA and EAC’
looked at increasing taxes on “wealth” without much success. Increasing taxation is not always the best solution, especially on the corporate sector if one wants this sector to invest. The corporate tax rate at 10 per cent is not negotiable in the eyes of many although I believe there should be no sacred cows if the economy is to be put on a sounder footing. The EU Council recommendations mention tax evasion and a more efficient tax collection to increase tax revenues. This should be welcomed if the corporate sector is evading tax. The proposal to privatise the EAC and CyTA will be on the cards since these two organisations have severe problems in sustaining the generous benefits to existing and retired employees and investing in their infrastructure needs, especially the EAC. There is a need for the government to raise revenue and partial privatisation will not suffice. The government should have a regulatory role but cease to be the investor. If the negotiations between the government and the Troika lead to reforms which are implemented the Cyprus economy would be better served for the benefit of all. Implementation is the key since getting legislation through is not enough.
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