Root of Cypriot economy’s problems not economic but political, experts say

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By Stelios Orphanides

The challenges Cyprus’s economy faces are not the outcome of a series of unfortunate decisions which led to the 2013 crisis but instead are the symptoms of sick political system in which decision making does everything but serve public interest, an economist and a political analyst said.

Five months following the completion of Cyprus’s adjustment programme, the Cypriot economy is growing at the fastest pace over the past eight years, but the political system seems ready to forget what caused billions of euros in wealth to evaporate overnight three-and-a-half years ago and return to the business as usual practices of the past, they said.

MARIOS CLERIDES“The causes of our problems are not financial but have to do with the political system,” economist Marios Clerides said in a telephone interview. “The quality of political decisions leaves a lot to be desired”.

As a result of geopolitical upheaval in recent years which allowed the Cypriot tourism industry –and thus the economy– to perform better than expected, Cyprus’s political system saw little reason for carrying out reforms included in its adjustment programme, which aimed at helping Cyprus improve its competitiveness, Clerides, a former banker who chairs the Cyprus Economic Society said. “It is not something that you can continue relying on. There is no guarantee that this year’s favourable circumstances will continue”.

“While in the adjustment programme, we simply took a few tax measures and fixed to some extent public finances,” he said. “We carried out none of those reforms included in the memorandum of understanding which were to help the economy in the long run. We have forgotten what our previous plight was”.

Debates on how to best utilise existing resources never take place as politicians are traditionally prepared to vote in favour of expenditure benefiting certain groups putting concerns aside how this would be financed “as if the state had unlimited resources,” Clerides continued.

Instead for instance “of granting pay rises (to civil servants), it could be wiser to hire more teachers if their number is lower than needed” or invest in “a better healthcare system or better guaranteed minimum income or better infrastructure to attract foreign investment,” he said. “We never discussed these things”.

To political analyst Christophoros Christophorou, doesn’t come as a surprise. “Generally, decision taking is not based on concrete studies by experts, universities, research centres or the very administration in order to support the rational and course of these decisions,” he said.

Christophoros ChristophorouIn addition, and as a result, politicians decide without taking factors such as “sustainability” into account, said Christophorou, author of the Sustainable Governance report on Cyprus for the Bertelsmann Foundation who served in the past as head of the Press and Information Office. “From the moment on that there is no (underlying) study to look into all parameters and short-term and medium-term impacts, we can never know exactly what they can be”.

In the 2015 Sustainable Governance report, Cyprus scored poorly and ranked 38th among the 41 countries of the Organisation for Economic Cooperation and Development.

On top comes that a number political decisions serve “certain interest groups,” such as the interest of certain organised professional groups and the interests of “the five to ten entrepreneurs we know who finance parties,” as the Paphos municipality scandal demonstrated, instead of the public interest, the political analyst said, adding that a third group benefitting from political decisions are those linked to decision takers.
“The most illustrious example which has determined the course of the economy and life in Cyprus in general, is how land is used,” Christophorou said. “Since 1960 until now and in particular following 1974, wealth has been accumulated in the hands of a few following as a result of changes of zoning which are usually known to the entrepreneurs beforehand”.

While this type of decision making cannot guarantee sustainability on the one hand, it also leads to “so called unexpected results” which an elementary school pupil can predict, Christophorou said.

Political parties do not seem to matter that much as often a party which traditionally has a certain position in a particular issue may take a different position when it realises that nepotism and graft serve its interest in expanding its influence better, he added.

Grand scale land development projects including golf courses, which are generally constructed on agricultural land after a change of zone and propagated by successive governments as an enrichment of Cyprus’s tourism industry, show “that graft is a determining element of all parties,” he said.

Difference in policies are minimal also in other areas, Christophorou continued. While “Christofias delayed the signing of the memorandum of understanding (with Cyprus’s international creditors) in order to preserve wage indexation” and avoid displeasing civil servants, –even as this came at a price–, the Anastasiades administration is also trying to be on good terms with their union PASYDY, Christophorou said. “Now they are talking about restoring all benefits”.

VillaTown planning and environmental standards are often sacrificed to serve the interests of few as the need to overcome the crisis became a convenient pretext, Christophorou continued.

Politicians should take into account that the economy is still not out of the woods even as it is expected to grow more than 2.5 per cent this year, economist Clerides said.

Cyprus’s public debt, 108.9 per cent of economic output, “is somewhat high and the slightest false step could mean serious trouble,” he said. “We were lucky that tourism did well. It’s it good as it helps somewhat the recovery process but it would be a thousand times more preferable to see banks extend loans for investment in the productive sector than mortgages”.

After all, “it is not the size of the debt that matters but why you borrow,” he said. “It’s one thing to borrow 300 per cent of gross domestic product in order to invest in new technologies and robotics and a different story to do so in order to consume or build mansions”.

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