Lessons in recovery from Cyprus
Nation has gone from bust to boom in less than 4 years and now has a thriving economy
With the highest rate of economic growth and employment in the eurozone, and a boom in business, Cyprus has entered a period of optimism and confidence.
Cyprus is clearly emerging from the financial crisis that began in 2011 when its economy was downgraded, starting a downward spiral that forced it to seek help from the European Support Mechanism in 2012. The Republic of Cyprus signed a memorandum with the European Union and the International Monetary Fund at the end of the same year, securing bailout loans in exchange for tough austerity measures including salary and benefit cuts, tax hikes and privatizations.
The Cyprus crisis peaked in the spring of 2013 after banks suffered heavy losses from the haircut on Greek sovereign debt. This led to a haircut on deposits of above 100,000 euros and the introduction of capital controls.
Today, some four years on, everyone in Cyprus – from bank executives to cab drivers and hotel workers – is optimistic about the future. The crisis, they say, just made them stronger and more determined to succeed.
A walk around the seaside city of Limassol certainly suggests that the economic crisis is over in Cyprus: It has a new 650-berth marina, 236 new residential units and mushrooming restaurants, cafes and bars. The sounds of life and construction are all around, as dozens of hotels are undergoing facelifts and old hotels are being turned into luxury apartments for the foreign market. One of the many ongoing projects in Limassol, a 36-story complex that aspires to become the highest residential building in the Mediterranean, will consist of 84 super-luxurious condos that are expected to fetch as much as 15,000 euros per square meter. Rumor has it that the penthouse has already been sold for 17 million euros to a Chinese national, while Russians, Israelis and Arabs are snapping up other units in the complex for as much as 1.5 million euros. Limassol is also slated to get a casino on its outskirts, which will include a luxury hotel, restaurants, shops, etc.
Over in Ayia Napa, construction is currently under way on a new marina that is 80 percent owned by foreign investors. The coastal revamp foresees a 600-berth marina, 29 villas and two rotating residential tower blocks with 190 luxury apartments.
But investors are also putting their money into education, with the creation of dozens of new schools, while the University of Nicosia currently has 11,000 students from 70 countries enrolled in its mostly English-language courses. In fact, 500 new universityrelated jobs have opened up since 2011.
Health is another area attracting investment.
So how did Cyprus manage to go from bust to boom in less than four years? Experts agree that there were three key factors at play. The first was political consensus, as all of the country’s parties backed the agreement with the troika. The second was that Cyprus took ownership of the program and implemented it with consistency, as Cypriots understood the need for the measures being dictated by the lenders. The country survived eight bailout reviews without a single delay. Unlike in Greece, the reviews were treated as a matter of routine.
Finance Minister Harris Georgiades has been described as being actively committed to making a success of the bailout program. He was also in constant discussions with the government’s social partners, listening to and adopting suggestions that could help the country exit the crisis faster. The third pivotal factor was the implementation of measures to revive the econ- omy. For example, legislation was passed in late 2013 encouraging construction, and parties that purchased property assets during the crisis were exempt from capital gains tax for life. This has boosted the hotel sector in particular.
Moreover, foreigners who deposit over 5 million euros in Cypriot banks – and keep that amount there for a minimum of three years – as well as those who make investments of more than 2 million euros are entitled to a Cypriot passport.
These measures and others have helped Cyprus to bank some 4 billion euros, or 20 percent of gross domestic product.
The government also resisted pressure to raise corporate tax, putting the emphasis on cost-cutting measures and structural reforms. It was thus able to win back the trust that became the key to attracting investments.