President Anastasiades may be starting to realise that his second term is set to be much more difficult than the first even though the country is in much better shape today than it was five years ago. In 2013, because he inherited a state on the brink of bankruptcy, a failing banking system and an economy deep in recession, people’s expectations were not very high. Bringing some stability would be an achievement in itself. It was enough for the state to become solvent again, the banking sector to be stabilised and the economy to return to some kind of normality in spite of the recessionary conditions.
In 2018, the country is in a much better place, which makes plotting a path for the future more challenging as expectations are different. It is not enough to stabilise the economy now nor will it be considered a big achievement if government bonds move out of junk status. Anastasiades cannot continue playing the ‘success story’ card of his first term, which he justifiably used for his re-election, because now there are different conditions requiring new thinking if the country is to build an economic and political future. Given that during the first term, with the troika pushing, he did the absolute minimum he had to do to put the economy on the right track it is unrealistic to expect brave new thinking from him in his second term. Even the development model is essentially the old one – construction-driven and relying on foreign ‘investment,’ which usually involves buying overpriced properties by third country nationals in exchange for citizenship.
Three months into his second term, all evidence suggests the government’s objective is the return to the old, pre-crisis model of construction-driven economic growth. Encouraging foreign ‘investors’ to buy overpriced properties in exchange for passports may have been a good idea when the country was in the depths of recession and in desperate need of money for the stagnating economy but it is not a sustainable development model. It is the old, opportunistic, short-term approach primarily benefiting the big law and auditing firms and the developers, while at the same time giving the country a bad name.
After all the good work that has been done to clean up Cyprus’ reputation for money-laundering and for attracting dirty money from the East, the citizenship by investment scheme suggests a return to the old ways. The US government has already sent a Treasury official to warn our government about the citizenship scheme because it is primarily used by Russians and nobody knows for how long the European Commission will tolerate the marketing of EU passports, especially now that Cyprus is out of recession. The economy would automatically fall into recession if the government is at some point forced to terminate the scheme or scale it down.
The worst consequence of the scheme is the complacency it breeds. As long as the cement factories are operating at full capacity and the construction firms are busy buying services and goods from other businesses the government believes it is doing its job and does not have to consider alternative ways of stimulating growth and job creation. It is wrong to rely so much on construction-driven growth and a big mistake not to use the latest construction boom, which will not last forever, to develop other parts of the economy. Anastasiades though, like all his predecessors, knows no other path to development than construction. Even when he was doing his electioneering tours of the districts all his promises related to the building of roads, roundabouts, school gyms, stadiums etc.
Next month he will lay the foundation stone for the casino resort, a very big construction project that, when finished, will also boost tourist arrivals and push property prices in Limassol even higher than today’s unaffordable levels. The creation of the casino was one of Anastasiades’ election promises and there is no doubt it will give the economy a boost. The fear is that it will also give the government’s complacency a boost and offer another excuse for not pursuing longer term, innovative development projects. The economic policy of the government remains the easy buck – the maximum, quick return on the minimum investment – regardless of the many long-lasting problems this thinking has caused the country over the years.