Cyprus in a time warp - Our new eco­nomic model

Financial Mirror (Cyprus) - - FRONT PAGE -

The Euro group “res­cue” of Cyprus was an eco­nomic catas­tro­phe with few equals. In the space of a few days the econ­omy of this coun­try was de­mol­ished and put on life sup­port. Since then, the coun­try has made sig­nif­i­cant progress, sur­pass­ing the ex­pec­ta­tions of many, in­clud­ing the IMF. That still leaves the Cyprus econ­omy a long way from any­thing which might be con­sid­ered eco­nomic pros­per­ity. Un­em­ploy­ment is un­ac­cept­ably high. Much re­mains to be done.

In the con­text of the nec­es­sary re­build­ing, there has been much talk of a new eco­nomic model. In­deed there was ev­ery rea­son to be­lieve that along with the pain of the fi­nan­cial cri­sis, there was also an op­por­tu­nity to start afresh. To de­velop new in­dus­tries. To aban­don much of the out­moded and ar­te­rioscle­rotic cus­toms and reg­u­la­tions of the pre-2013 model.

But, with the ap­pear­ance of even the mod­est re­cov­ery the is­land now en­joys, many of the di­nosaurs of the past are rais­ing their heads, rush­ing to re­assert de­struc­tive and out­moded prac­tices. Con­sider the is­sue of shop open­ing hours. The cur­rent de­bate in par­lia­ment turns about the in­ter­ests of large shop keep­ers ver­sus small re­tail­ers. The in­ter­ests of the gen­eral pub­lic do not even fig­ure into the de­bate.

Ap­par­ently, it does not oc­cur to the ma­jor­ity of our par­lia­men­tar­i­ans that so­ci­ety has changed. The typ­i­cal mar­ried cou­ple is now one where both hus­band and wife are em­ployed. Dur­ing week­days, most wives are at work. Al­low­ing the stores to stay open on Sun­days pro­vides an enor­mous con­ve­nience for such fam­i­lies. But this gets lit­tle at­ten­tion com­pared to or­gan­ised self in­ter­est groups which can swing a few votes.

Adding to this trend to re-es­tab­lish the past is the prospect that the Troika may soon de­part. Of course, it is not pleas­ant to have the coun­try’s elected leg­is­la­tors sub­ject to colo­nial style sub­servience. But it is in­creas­ingly ob­vi­ous that what­ever progress has been made to­ward a new eco­nomic model owes much to over­sight and pres­sure from the Troika. Pri­vati­sa­tion of our na­tional in­dus­tries, bring­ing them into line with such mea­sures taken many years ago by most of our Euro­pean peer groups was to be part of a new Cypriot econ­omy. This has been fiercely op­posed by the unions that have ben­e­fit­ted vastly from na­tion­ally owned in­dus­tries. In an at­tempt to dis­guise their ob­vi­ous self-in­ter­est they re­fer to such com­pa­nies as our “na­tional wealth”.

Even though the govern­ment had agreed to the pri­vati­sa­tion of most of the coun­try’s na­tion­alised in­dus­tries, there are now sig­nif­i­cant signs of back­track­ing. Un­der enor­mous pres­sure the govern­ment has buck­led. It has an­nounced that the Elec­tric­ity Au­thor­ity (EAC) will not be pri­va­tised as pre­vi­ously agreed. Sim­i­larly, the de­na­tion­al­i­sa­tion of Cyta has met with the same strong op­po­si­tion. The govern­ment is vac­il­lat­ing. Its at­tempts to abide by its agree­ment to pri­va­tise have met with cries of out­rage from the usual sources. Here again we hear the “na­tional wealth” ar­gu­ment. What will hap­pen to the prof­its which th­ese in­dus­tries con­trib­ute to the coun­try?

Ex­am­in­ing the per­for­mance of this na­tional wealth and its con­tri­bu­tions to govern­ment is in­struc­tive. In 2014, the EAC gen­er­ated 42 mil­lion euros of profit. This was ac­com­pa­nied by a bill to the govern­ment of 244.3 mln euros to cover the short­fall in that com­pany’s pen­sion fund.

Cyta is not far be­hind. Ac­cord­ing to re­ports, there is a 161.5 mln euro de­fi­ciency in that com­pany’s pen­sion fund which, here again, the law re­quires the govern­ment to guar­an­tee. It goes with­out say­ing that no such guar­an­tee ap­plies to the hun­dreds of pen­sion funds which have been sub­ject to the “hair­cut”.

Let’s not for­get that the govern­ment is now in the bank­ing busi­ness. The Co-op­er­a­tive Cen­tral Bank is the lat­est ad­di­tion to our na­tional wealth. Par­lia­ment has re­cently ap­proved a do­na­tion by the tax­payer to that bank of 175 mln euros to make up a re­cently dis­cov­ered short­fall.

Th­ese three na­tion­alised in­dus­tries alone re­quire the tax­payer to pay 580 mln euros. This does not in­clude the 1.4 bln that the govern­ment has agreed to pay as the pur­chase price for the Co-op bank. This bank al­ready has more non­per­form­ing loans (rel­a­tive to its size) than the large pri­vate banks. Now that the Co-op bank is in govern­ment own­er­ship steady losses are al­most guar­an­teed.

It was only a short while ago that the pub­lic was also told of the des­per­ate need to save the coun­try’s na­tional air car­rier, Cyprus Air­ways. With­out a govern­ment con­trolled air­line how would tourists reach the is­land? The govern­ment’s at­tempt to save the air­line from bank­ruptcy by in­ject­ing 103 mln euros was re­jected by the Euro­pean Union as a vi­o­la­tion of its rules. Bank­ruptcy of the air­line fol­lowed. Nat­u­rally the govern­ment is still on the hook for the short­fall plus gen­er­ous pen­sion and other ben­e­fits. Cyprus Air­ways is no more but tourist ar­rivals have ac­tu­ally in­creased as have the num­ber of des­ti­na­tions served. In­creased com­pe­ti­tion has low­ered many air fares.

With the an­tic­i­pated de­par­ture of the Troika, the rise of the spe­cial in­ter­est groups which have ham­pered the coun­try’s de­vel­op­ment in the past, un­der­min­ing the ef­fec­tive­ness of the is­land’s schools, health pro­grammes and in­dus­tries are pre­par­ing for a re­turn to busi­ness as usual. Their suc­cess in­di­cates that much needed change will be ham­pered and even re­versed. Th­ese groups will fight to main­tain their priv­i­leges and out­moded prac­tices. More of­ten than not, they have suc­ceeded. The dan­ger is that Cyprus will even­tu­ally find it­self in a time warp, a coun­try in the 21st cen­tury with a 20th cen­tury eco­nomic model.

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