Economist nicosia economic congress 25 4 2017

7th Nicosia Economic Congress Steps towards transforming and developing the Cyprus Economy Constantinos Petrides, Deputy Minister to the President of Cyprus Tuesday, 25th April 2017, Hilton Park Hotel

Ladies and Gentlemen,

Allow me first to thank the organizers for their invitation.

I will start by commenting on the title of my intervention and note that the objective of the transformation of the Cypriot Economy should be “Growth” and not “development”, and this for two reasons:

The first and most obvious is that Cyprus, is a developed country in the traditional sense of the term; in infrastructure, institutions, rule of law.

The second reason is that the term “development” has been widely misused in the past decades, both in Cyprus and the rest of the developed world, and now is implicitly understood as increased government intervention and spending as the answer to all economic ills; A false perception which hides behind many of the flawed policies of the past which turned into major sources of instability and economic crisis.

So yes, Cyprus is a country in economic transition but the target of this transformation should be to turn Cyprus into a modern economy that will be able to generate real and ‘sustainable’ growth through “competitiveness” as opposed to the bubble-led growth which comes easier but most of the times ends with a crisis.

We know that fiscal and monetary expansion have dictated both the European and the Cypriot economic policy in the past 2 decades in the name of “development”. But it seems that there is a general realisation now that we should return to price stability, fiscal consolidation and

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structural changes. A difficult but rather necessary return to the basics, to the fundamentals of growth.

And this is the lesson we learnt from the recent Cypriot experience;

After a couple of decades of being what considered to be one of the most dynamic and fastest growing economies in Europe, by 2013, Cyprus was faced with an unprecedented crisis. A crisis that came as a result of policies been driven mainly by public and private over-consumption which was financed by public and private debt, until both became unsustainable.

Excessive credit-led growth steered an unsustainable increase of private debt and inevitably led to a very severe banking crisis.

Continuous and excessive public borrowing, paradoxically even in the years of high growth, led public debt to soar, and inevitably Cyprus lost confidence was cut off from the international markets.

Recession followed, unemployment quadrupled within 5 years and our EU and Eurozone membership was put at stake.

Three years later, Cyprus is rightly considered by foreign analysts as the comeback kid of the Eurozone. This early transformation is attributed to the fact we followed the correct policy prescription, based on a three-pillar program:

The first pillar has to do with the “painful� restructuring of the banking sector. We now have a smaller, but well-capitalised, better managed, and better supervised banking sector.

The second pillar deals with the fiscal situation. The successive excessive deficits have been substituted by balanced budgets and primary surpluses. Having focused on the expenditureside allowed us to retain our status as one of the lowest tax-burden economies of the EU, thus maintaining a stable and competitive tax regime, which, as you all know, is a key element for attracting investments.

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A third but very important pillar has to do with the implementation of structural reforms.

There can be no sustainable growth without structural reforms that increase competitiveness.

Reforms that place emphasis to the tradeable sectors of the economy as an engine for growth and include, amongst others:  the creation of an enabling business environment  a public administration reform  cutting back on red tape and advancing on e-government and the digital agenda  Reforms to tackle tax evasion.  Privatizations, which should be seen as a reform for boosting competitiveness and attracting foreign investment in key sectors of the economy.  An institutional reform for strengthening and modernizing the governance in selected sectors such as tourism, shipping, and the management of the microeconomy.  Reforms in education, tourism, the Research and Innovation and other sectors where we identified big unrealized potential and distortions.

It is this third reform pillar which is now the catalyst for the future transformation of the economy of Cyprus. I admit that despite the significant progress made, this third pillar, is far from being completed.

Unavoidably reform in the first two pillars had to precede.

Structural reform also requires difficult, many times unpopular decisions, which are hard to implement or even transpose into law in a difficult political environment like ours.

Structural reform also takes time and often requires a change of mentality and culture both within the government or the civil service and the society. In the case of Cyprus it often meets constitutional constraints arising from a rigid constitution whose main aim at the time it was drafted was to safeguard the bicomunal balances rather than to allow flexibility for change.

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But economic transformation and growth is a structural issue and until now we did much more than just planting the seed for this structural change. We will not abandon our reform agenda and we will continue with the same determination because our program has and is delivering.

We are steadily improving our competitiveness indicators, our economic performance has rebounded quickly, and Cyprus is currently amongst the fastest growing economies in Europe.

It is the recognition of progress made in all those areas, in such a quick time, that brought successive rating upgrades and an impressive improvement of our bond yields. In turn, it is this strategy that led international investors to place a vote of confidence and to pour fresh money to our economy.

In the past three years we have seen foreign investments in the banking sector equal to 10% of our GDP. We have seen a big international investor winning the bid for the privatization of the main port of Cyprus, opening new horizons for Cyprus as a transport hub. We have seen sizable foreign investments in the tourist, energy, commercial sectors.

New sectors with huge potential are also on the rise like the investment funds industry and the gaming sector, with the first-ever American Type of Integrated Casino Resort in Europe to be underway in Limassol.

Our policy restored confidence in the Cypriot economy and as you all know the economy is all about confidence. A loss of confidence from domestic or international investors means that they invest somewhere else, we live in a competitive world.

Cyprus has what it takes to be transformed into a real regional ‘hub’. It has diverse comparative advantages that allow it not to me “monothematic” when it comes to investments, it now has a stable economy, an effective legal system and an attractive tax regime. The puzzle of transformation can only be completed with advancing further on the structural reform agenda.

I will only indicatively refer to the huge prospects of the tourist sector. International analysts estimate that real revenues would triple within the next years if we implement our new Tourist Strategy and the reforms that come with it 4

Ladies and gentlemen,

Reform is always politically difficult and demanding, in any part of the world, and perhaps even more difficult in the Mediterranean Region. But that there are no easy answers to the ‘growth-question’.

The only effective strategy is the economic transformation dictated by economic orthodoxy; Economic freedom, a healthy banking sector, sound public finances, and structural reforms to enhance competitiveness.

The only successful strategy is to have policy driven by reason instead of populism, a curse for which the country has paid a huge price; and not just in the sphere of the economy.

We have achieved a lot, but we also acknowledge that we still have some way to go, especially in the structural reform agenda. We are determined to continue the effort as it is bearing results.

Ladies and Gentlemen, I would like to conclude by addressing the regional dimension, which is also very important for the country’s transformation. In the past years we have built political bridges with almost all our neighbors. Bridges that reinforce Cyprus’ role as a regional Hub in the Mediterranean.

Geopolitical stability and economic cooperation is a win-win phenomenon; for enhancing interindustry trade, for reducing geopolitical risks to investments, for expanding markets for foreign investors, for reaping the benefits and the economies of scale, for all those parameters that determine prosperity.

And it is within that transformational context that the the solution of the Cyprus Problem should be seen, as Cyprus can not utilize its full potential with the Cyprus issue remaining unresolved.

Thank you very much.

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