Cyprus Mail

A development plan for growth

Legalising cannabis would channel funds from criminals to the government

By Costas Apostolides
IN MY FOURTH article in my series outlining how Cyprus can emerge from its present crisis, I focus on appropriate policies for achieving economic growth.
The government position is that Cyprus can get back to growth by meeting the conditions of the Memorandum for the loan funds from EU, European Central Bank and IMF, and restructuring the banking system, increasing bank liquidity and lowering loan interest rates, as well as improving efficiency by restructuring the public sector and reducing costs through austerity measures. In the medium term growth is to be achieved by the development of natural gas deposits, and introducing one large casino resort. It is stated that there are no public funds available for a Keynesian type spur to the economy through state expenditure; instead, the state has its hands full trying to meet the public sector deficit targets of the Memorandum, and is cutting expenditures.
The official projections are that GDP will fall massively this year by -8.7 per cent and more modestly in 2014 by -3.9 per cent, and recover slightly by an estimated -1.1 per cent in 2015 and- 1.9 per cent in 2016. As a result unemployment will increase from 11.9 per cent of the labour force in 2012, to 17 per cent this year, and 19.5 per cent in 2014. Even if growth is achieved at the very low levels envisaged in 2015/16, that growth is within the margin of error, and will have little impact on unemployment rates. Consequently the government and the troika are convinced that unemployment will remain high over the next four years.
Irrespective of these dire predictions, it is possible that the economy is holding up better than expected with GDP estimated at -5.4 per cent up to June, and registered unemployment at 15.9 per cent. But other indicators are more in line with the troika predictions with retail sales, for example, more than -10 per cent down and building permits at over 20 per cent. We shall have to see, but it is possible that GDP may be down eventually by around -7 per cent in 2013 and that next year, as the redundancies at banks and other places proceed, at around -5 or 6 per cent.
My view is that these projections are unacceptable, and that a growth plan has to be grafted onto the Memorandum conditions so that Cyprus can meet its obligations and get out of this current situation. A major state investment programme of €500 to €1000 mln a year, over and above current levels, could be funded by the following type of measures:

Creation of savings for investment projects
It should be possible to find additional funds for job creation projects, aiming at €500 mln over the cuts planned by the government. Additional cuts could be made through the following: elimination of student grants for those with scholarships at state universities (worth €70,000 over four years), unification of the welfare support system by eliminating assistance for displaced persons, and unifying criteria for all in need. Other cuts could include reducing eligibility for support for old age homes by making assistance related, and re-examining all grants to ensure they are targeted for the needy etc.

Raising state revenue
Making all government support for everything (university places, employment schemes, scholarships, welfare support etc.) conditional on the submission of inland revenue statements and payment of all taxes due. Another measure could be a €1000 charge per person per year on all employers of non-EU labour. Yet another is to consider scrapping the agreement with Greece for OPAP the lottery and games company operations in Cyprus, and publishing a call for proposals for a new lottery system. This could raise revenues of between €60mln and €100mln (as against present assistance levels of €2 mln a year today).

Sales of state property
The troika has correctly insisted on an inventory and valuation of all government property with a view to raising funds where appropriate. For example the prime property held by the police force around police headquarters in Nicosia could be worth perhaps a €100mln or more. One plot on the Limassol Avenue dual carriageway must be worth more than a couple of million, and has been developed as a play area for children to learn the highway code. Surely there is cheaper land for this use.
Development loans
There is a lack of funding for investment from the banks. In 1974 all the banks were forced by law to put aside 8 per cent of deposits for investments by the private sector. Bringing back this programme would kick start investment and counter the troika’s -21 per cent projected reduction of Gross Fixed Capital Formation.
Introduce the controlled cultivation of marijuana for medical use, as well as limited consumer use on the Amsterdam model. In addition reorganise the marketing of agricultural products, and introduce high value crops such as spices and quinoa, while also coordinating agricultural research with marketing and product prospects.

Taking marijuana out of the hands of criminal elements will give a boost to manufacturing both for medical use and Amsterdam type café use. The pharmaceutical industry is now the major product exporter, and the sector needs to be consulted as to how it can be promoted and encouraged. While innovative companies such as Engino and others should be encouraged to develop production and marketing.
Construction/real estate
This is the key industry to get unemployment down, but it is weighed down by the stock of unsold properties going back to 2008, and the lack of foreign buyers arising from the recession in other countries, the high level of the euro, and VAT introduced at the beginning of the recession. To clear unsold stock all VAT on new houses should be cut to 5 per cent, something that should lead to increased sales and higher state revenues. In addition construction will be a major beneficiary from the proposed public investment programme. Major programmes such as the marinas should be promoted by using funds held by state corporations and others. The issues arising from the hotels that have become apartment blocks should be resolved, and the market should improve if the problem of the non-issuance of title deeds for the over 100,000 buildings is resolved.

Tourism is doing reasonably well, and the grand casino resort will certainly help. The policy of open skies will also bring tourists from new markets. The sector should be upgraded by both state and private investment, and the markets diversified to reduce dependence on the UK and Russia.
Funds were cut owing to the recession, but both state grants and private sector funds need to be increased if new sectors are to be developed. A new plan for technological development and innovation needs to be introduced, on basis of consultations with industry and universities.

International business centre
The Registrar of Companies must be modernised and reorganised, and should take over the two Laiki Bank buildings on Makarios Avenue Nicosia, and improve its performance to outdo the opposition. A study needs to be carried out on how Cyprus can actually achieve its aim of being a bridge between the EU and the Middle East. It should include training in Arabic, and the languages of the region, improvements in communications and transport, and consideration of the competition. A similar study should be undertaken for the Russian and Ukrainian markets. Consultations should begin with the ship management companies, foreign exchange companies, and other international companies in Cyprus to see what improvements they need here for the island to continue to be an attractive location.
This outline demonstrates the type of planning approach that should be considered. All economic sectors should be examined. New ideas are needed so that we can diversify into a more resilient and diversified economic model.
Costas Apostolides is Chairman of EMS Economic Management Ltd ([email protected])

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