Dispute rages over how important the citizenship scheme was to Cyprus while the government has already hinted of a different scheme, as called for by business groups
Questions have been raised about the importance of the citizenship by investment (CBI) scheme to the economy a few days after the government’s announcement of its termination as business groups, which have described the move as “catastrophic”, have already started calling for a new programme.
In an announcement issued on Tuesday, immediately after the government made its decision known, the Cyprus Chamber of Commerce (Keve) said “there will be negative effects on the entire economy, especially the sectors dealing with foreign investment.” The same view was expressed by the Federation of Employers and Industrialists (Oev), which called on the government “to undertake, without any delay, the formulation and operation of a new investment programme, without gaps and weaknesses.”
The decision to terminate the programme was taken at an extraordinary meeting of the Council of Ministers on Tuesday, a day after Al Jazeera showed a film of the House president and a deputy, both of whom have since surrendered their seats, and a lawyer telling the representatives of a fictitious Chinese businessman with a criminal record that they could secure a Cyprus passport for him through dubious means.
Keve chairman Christodoulos Angastiniotis saw the effects of the termination of the programme unfolding in two phases – a slowdown of the economy and rising unemployment followed by difficulty in attracting investment funds. “The whole business circle will be seriously affected because of the country’s reputation,” said Angastiniotis, whose organisation also called for “a new more credible scheme.”
Former Finance Minister Harris Georgiades, who is now deputy leader of Disy, does not share the doom and gloom of the business world, arguing that the importance of the scheme to the economy had been overstated. “We overvalued its importance,” he told the Cyprus Mail, suggesting that both the supporters and detractors of the scheme were making the same mistake. Neither would the economy collapse, as the former claimed, nor were we extremely dependent on the scheme as the latter claimed.
He used figures to make his point. “Economic impact assessment in 2019 showed that the contribution of the citizenship scheme was 0.3 per cent to the GDP’s real growth rate,” said Georgiades. “Considering the growth rate in the last few years was about 4 per cent, the programme was just below 10 per cent of the official growth rate,” he explained. In other words, without it, the growth rate would have still been an impressive 3.7 per cent in the last few years.
“There will be an impact on the construction and real estate sectors and a very big impact on some businesses in these sectors. Some developers might go bankrupt, but this is how an economy works,” said Georgiades.
According to a report prepared by EY for Oev last year, between 2013 and 2018 the CBI scheme contributed between €7.6bn and €9.7bn to the economy and was responsible for about 10,000 jobs. The construction and real estate sectors were the main beneficiaries, taking 41.6 per cent of the pie while banking and financial/professional services (lawyers and accountants) took 22.1 per cent. About 25 per cent of the money went to the rest of the economy the EY report said.
Economists in the academic community welcomed the end of the programme. “It is very important for the programme not to come back,” said University of Cyprus professor Marios Zachariades who believes such programmes “create distortions in the economy, give bad incentives and feed corruption.” The earnings were “economic rent, not profit, and the returns have nothing to do with the factors of production,” he told the Cyprus Mail. The scheme primarily benefited a small group of people with access to information and connected to land, giving rise to corruption, he said.
“Economic development must be viewed as long-term project. When we talk about development, we mean policies that have satisfactory growth over a period of time,” said Zachariades, acknowledging that politicians were not interested in the long-term, invariably opting for quick fixes.
But short-term solutions like the CBI have negative consequences over the long-term, he said. “Programmes affect entrepreneurship, why start a business that requires time and effort to give a return when millions are earned by selling real estate,” he asked. “These are bad economic incentives and because these programmes feed corruption, they also give the country a bad reputation.”
Speaking on radio Trito on Wednesday, Professor Stavros Zenios of the Accounting and Finance Department of the University of Cyprus also believed that the programme was “correctly terminated,” but recognised that it would create problems. “Now that it is stopping, it creates a vacuum, because a small country like ours, in the situation it is in today, needs foreign direct investment.”
Zenios was also critical of the programme which benefited only developers. “Unfortunately, we created a programme by which all the money went to housing, with a small circle benefiting and the corruption we witnessed,” he said. He did not rule out another programme, pointing out however that “citizenship should be given to people that invest in setting up a business in Cyprus and creating jobs for the long-term.”
A new programme seems to be already on the cards. Under-secretary to the President Vasilis Palmas said on Friday the government was already working on this. Did this mean that as soon as the existing programme is terminated on November 1 there would be another one to take its place?
A close associate of President Anastasiades from the business community did not think so. “For now, we should stay put and let the dust settle,” he said. “At this stage nothing will happen, but maybe in six months the government would sit with the European Commission and seek its approval for a new programme, because the programme as we know it is finished,” he told the Cyprus Mail.
“Should the programme be reinstated, it will have to be much more transparent so that no-one could have doubts over whether it will revert to an illegal activity,” added retired banker and former chairman of the Cyprus Securities and Exchange Commission Marios Clerides. “In order for the country to redeem itself it is now necessary to convince everyone that laws and rules are followed to the letter,” he said.
The country had to restore its reputation first. “What kind of investments can the country attract with such a reputation,” asked Clerides also giving a reply: “Foreign investors should not be able to think they will do business with unreliable and shady people.”
Zachariades believes that a bad reputation would still attract investors but not the type a country would want. “No reputable company would want to be linked with a corrupt country,” he said, highlighting the importance of restoring the country’s reputation.
The scandal might also affect Cyprus’ efforts to attract investment funds, EMIs and insurance companies that were looking to move out of the UK because of Brexit. Two weeks ago there was a large digital conference for Britons organised by Invest Cyprus to promote Cyprus for headquartering and what is known as EU passporting. The news of the last week will have undermined this effort.
“We are worried about this,” said CEO of Invest Cyprus George Kampanellas, “especially as we have seen a 206 per cent increase in the value of investment funds being managed from Cyprus.” Some three years ago investment funds were valued at €3 billion whereas now they were €8-9 billion, Kampanellas said. “It is still a long way from the trillions managed in Ireland and Luxembourg,” he said but there is growth potential.
“Why would an investment fund move to Cyprus when there is no serious supervision and rules are flouted,” asked Anastasiades’ associate. “The fund manager would be reluctant to move here because his investors would not want him managing their money in a place with lax supervision and a bad name,” he said.
“We missed a big opportunity after 2013, when everyone abroad was praising the Cyprus success story,” said Georgiades and added: “We could have used this to try to attract more investment funds and banking as well as pursuing the headquartering idea. Instead we persisted with the citizenship programme, which became a big liability to the country and prevented it from attracting new business.”
Georgiades believes there is no need for a citizenship programme, the scrapping of which would not cause great harm to the economy. “The damage would be much greater if we kept it going,” he said.