Cyprus can hope that economic growth will match the finance ministry’s 2 per cent forecast this year provided the government remains on its reform course, a business group official and an economist said.
“Growth can come from the private sector provided the situation with respect to non-performing loans improves, which will help towards job creation,” Marios Tsiakkis, secretary general of the Cyprus Chamber of Commerce and Industry said on Friday in a telephone interview. “The public sector has to remain disciplined with its finances and reduce bureaucracy in order to facilitate investment”.
Tsiakkis said that while “one should not underestimate that the economy returned to growth” last year, it continues to face challenges even after growing 1.6 per cent, which was the highest growth rate since 2008.
Public sector reforms require regulation in hiring and transferability of civil servants as well as payroll, which will make it possible to keep the cost of the government apparatus cost under effective control, Tsiakkis said.
An economist who spoke on condition of anonymity said that while a 2 per cent growth rate this year “is within reach,” certain risks related to geopolitics and the euro continue to remain. The referendum in the U.K. over the country’s European Union membership may affect the strength of sterling, a major determinant of demand for holiday packages in Cyprus by British tourists, he said.
The economist’s comments came a day after the European Central Bank announced a cut in all three interest rates and further expanded its asset purchase programme which aims at fighting deflation in the euro area to €80bn a month from a previous €60bn a month.
Reducing public debt will help markets gain more confidence in the prospects of the economy, which makes going ahead with the government’s privatisation programme necessary as well as an asset-to-debt swap between the government and the Central Bank of Cyprus, the economist said, adding that markets will monitor Cyprus’s policies after it completed its adjustment programme.
“Markets will want to see fiscal discipline continue” which in turn will help growth, he said.
The Tsiakkis, the CCCI’s secretary general, also asked unions to refrain from demanding pay increases “beyond what private sector companies and the public sector can afford”.
He said that while companies cannot restore wages to pre-crisis levels, as the recent increase in exports of goods and services was to a large extent the result of exogenous factors, such as geopolitical tensions in the area which increased demand for tourist services, and the drop in energy prices which boosted industrial production. “The problem with electricity prices is still there, it’s just the lower oil price which makes it cheaper,” he said.
The drop in wages that followed the outbreak of the crisis, showed that Cyprus had much more potential to sell goods and services to the world market compared to before which remained unexploited, Tsiakkis said.
Michael McBride, a lawyer at the Limassol-based law firm Chrysses Demetriades, which services inter alia local and foreign investors and shipping companies, said that “business continues to remain strong,” even as it remains “fragile” due to exogenous factors.
“I do not share the view that China or Asia are the main reasons for these economic uncertainties,” McBride said. “The problem is much more serious in my opinion. I believe that the world economy has entered a phase of deflation and will take time to reverse”.