By Costas Apostolides
I often get asked for my opinion on the economic situation in Cyprus and what I think will happen, the implication being that I will share in the general pessimism that pervades the island.
I am, however, a perpetual optimist and have also lived through 1974 as a member of the Cyprus Planning Bureau. I always reply that we can get through this current mess if we work together and agree on a plan. The key is to agree on what we must do and work out a consistent strategy and series of measures required to achieve growth and bring confidence back.
The strategy for economic recovery should be based on the following:
1 Achieving agreement on the plan of action between the president, the Central Bank governor, the political parties, the trade unions and business interests.
2 Implementing the Memorandum of Understanding with the troika and Eurogroup.
3 Mitigating the damage to the economy that has been and will be done by the memorandum.
4 Developing a fall-back position in case the effects of the memorandum are such that they cannot be implemented.
5 Reforming social policy to create safety a net for those in need while excluding present beneficiaries that can do without (announced for implementation in 2014).
6 Developing a plan and appropriate policies for achieving growth, without which the whole strategy will fail, because the international crisis may not go away and the memorandum owing to its inconsistencies could cause further misery and fail.
Two steps are required to implement the strategy.
Step 1: End the War:
The war between the government, the ruling party and the governor of the Central Bank must stop. It was the conflict between former President Demetris Christofias and former Governor Athanasios Orphanides that got us into this mess, and the present tactics on both sides is too risky for the financial sector. It is President Nicos Anastasiades who must show the way forward, but the governor should respond, and together they must find ways of cooperating and exchanging information so that appropriate policies can be agreed on and implemented. In the final analysis it must be remembered that a failure of the banking sector will have extremely serious implications on the economy, and cause even greater social distress than at present. The final responsibility for the banking sector lies with the governor, so he cannot take orders from the president or any politician. He has to do what he thinks is best under pressing time constraints. But they should both work together to establish institutional mechanisms for exchange of information and dialogue, and once agreement has been reached, they should play their parts in implementing it. That means the blame game has to stop.
Step 2: Implement the troika Memorandum
The “Memorandum of Understanding on Specific Economic Policy Conditionality” with the troika and Eurogroup which provided bailout funds for the government in return for the bail-in (theft) of the banks, should never have been agreed to. Unfortunately it was, and the present and previous governments did not produce alternative policies. But that is in the past, the memorandum was signed and Cyprus must now implement what has been agreed in the most appropriate way possible. To everybody’s surprise the rather weak Council of Ministers appointed by Anastasiades has done quite well in mitigating the negative side. The detailed arrangements in health, education and agriculture are working well and in some cases are actually improving the situation, raising money and reducing costs (i.e. reduced queuing in hospitals). So the memorandum is not all bad.
However, Cyprus is not free to develop its own economic objectives, as was the case before membership of the European Union, while the memorandum has important economic objectives of its own.
- To (supposedly) restore the soundness of the Cypriot banking sector and rebuild depositor’s and market confidence by restructuring and downsizing the financial institutions, strengthening of supervision and addressing expected capital shortfall.
- To continue the ongoing process of fiscal consolidation in order to correct the excessive government deficit (notably reduce public sector costs, increase revenues and improve efficiency).
- Implement structural reforms to support competitiveness and sustainable balanced growth, allowing the unwinding of macroeconomic imbalances (reform wage indexation, remove obstacles to entry in service sectors).
These objectives should be included in the agreed-on strategy for growth, but their inconsistencies should be addressed, and their negative aspects ameliorated. For example, the memorandum’s bail-in has destroyed depositor confidence in the banking sector which now has to be rebuilt. How can you rebuild the sector if you have stolen depositors’ money? The memorandum does not answer that because the troika does not know how it can be done when the banking sector is, as it states, 350 per cent larger than the economy. Furthermore what does unwinding mean? The Oxford Dictionary says to “draw out after having been wound (up)”, Collins Thesaurus puts it more simply: “unravel”. Whichever definition you prefer, the basic meaning is clear: lots and lots of change.
The above article is the first of three. Costas Apostolides is Chairman of EMS Economic Management Ltd ([email protected])