Cyprus in a time warp - Our new economic model
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.