It’s been a rough month for Cyprus, having to manage the fallout from revelations that it granted passports to people with dubious backgrounds through its citizenship through investment scheme.
The government has admitted to making mistakes, but it assured that vetting procedures and the criteria were now stricter to ensure that such cases were a thing of the past. Officials also admitted that damage has been done to the island’s reputation, which Cyprus worked hard to restore following the economic collapse of 2013.
Some observers fear the citizenship programme is as good as dead since the way it had been initially set up it essentially made it easy for someone to buy an EU passport. With stricter rules in place, who would seek one now?
People argue that it had been deliberately designed from the onset as a bailout of sorts of the flagging construction sector but it also made it easy for some to make a quick buck and in the process harm the country’s reputation.
Some experts, however, believe that the scheme, coupled with certain other factors, can still be beneficial to the country over the long term.
Interior Minister Constantinos Petrides admitted in an interview with Kathimerini last Sunday that damage was done but things were not as bad as seven years ago when the island’s reputation was in tatters, being branded a money laundering centre.
“With the specific practices employed by certain people, the Cypriot investment programme has caused damage to the country despite its benefits,” Petrides said.
He added that authorities must be extra careful and get rid of all those practices that do the country harm.
“Because credibility is hard to build but it is easily lost,” the minister said.
He reiterated that the economy is not reliant on the programme but admitted that without it the construction industry could have collapsed.
Petrides said the programme served a purpose without this meaning it would be forever or not shift to other more productive sectors of the economy.
Shifting it to other sectors abruptly could have unwanted effects on the construction industry though, as there are still unfinished projects. Still, the risk is still there after the stricter criteria were put in place although there had been a rush of applications before they kicked in.
A finance ministry report showed that 50 per cent of all investment as part of the programme went to real estate. Investment in shares, bonds, and bank deposits was markedly lower.
“… the impact of the CCI is positive but relatively small on the economy as a whole and quite significant on the real estate/construction sector,” the report said.
Between 2016 and 2018 the cumulative effect of investment in real estate reached 1.2 per cent of GDP.
During the same period, the programme helped create 2,000 jobs in the construction sector, the report said.
Experts believe disconnecting the scheme from the property market and mandating the physical presence of the investor on the island would be an improvement. As it stands, the scheme essentially attracts passport buyers and not investors.
“An investment programme is not something bad,” said Andreas Assiotis, Head of Economic Research at Hellenic Bank. But “we have a programme that is not exploited properly.”
He said Cyprus needs to promote other sectors also beyond construction, adding that there was fertile ground in sectors like shipping, manufacturing, and health, to name a few.
The government must afford investors with incentives like tax breaks and tax holidays to attract productive investment, Assiotis told the Cyprus Mail.
His views were echoed by University of Cyprus Professor of Economics Sofronis Clerides.
“We need to remove real estate from the scheme and give passports to people who want to make real investments,” he said.
Right now, the scheme benefited only a small number of people and the government must broaden its scope to extend into other areas like new technologies and innovation, Clerides said.
He said attracting good investors needed work and the recent damning publications didn’t help in encouraging them to come to Cyprus.
Creating a good environment to attract serious investors would also need changes in other areas, however.
The interior minister has recently introduced an investment law in a bid to cut red tape that was a solid step in the right direction.
But one area that impedes investment is the island’s notoriously slow justice system.
“It’s a big issue that we have been debating since the beginning of the crisis,” Clerides said, adding that serious investors want swift justice and law enforcement.
Without reforms in other areas, Cyprus would still have a difficult time attracting serious investment even with the changes in the scheme’s criteria and shifting its focus to other sectors, according to chairman of the Fiscal Council Demetris Georgiades.
The delay in issuing permits, opaque procedures, inefficient and slow justice, inelastic job market, closed sectors of the economy and professions, and weak supervision are all factors that discourage serious investment since they are more important than securing citizenship.
Even changing the criteria, without reform in these sectors, Cyprus runs the risk of continuing to attract dubious investors.
“Cyprus must become attractive to investment and individuals who want to stay permanently for the substantive advantages it offers and not mainly because it offers citizenship,” he said. “Without correcting and improving all that was mentioned before and all those things recorded by various international competitiveness and entrepreneurship evaluations of Cyprus, no plan would have the desired result.”