6th Nicosia Economic Congress The State and Prospects of the Cyprus Economy “2016: A Breakthrough Year for the Economy?” Structural Reforms Transforming and Developing the Economy Constantinos Petrides, Deputy Minister to the President Thursday, 26th May 2016 Ladies and Gentlemen, Allow me first of all to thank the organizers for their invitation. It is a pleasure and an honor to join such an impressive list of speakers. “Structural Reforms: Transforming and developing the economy”. This is the topic of the intervention I was asked to make. But before talking about structural reforms, allow me to say that our priority in the midst of the unprecedented crisis of 2013, was to take immediate and urgent action to avoid the total collapse and secondly to stabilize the economy and regain its long-lost credibility.
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To achieve that, policies had to aim in two major pillars; strengthening government finances and stabilizing the financial system. That by itself was a titanic effort. As soon as we have arrived in calmer waters, the government, also forced on the implementation of the third pillar of our policy. On the longer-term challenge of how to strengthen our economic fundamentals so that the Cypriot economy can grow sustainably and raise the living standards of our people. And the only way to do that is by implementing a bold structural reform agenda. Because one thing the crisis did expose, was the structural weaknesses of the Cypriot economy. When the easy credit ended, the lack of productive sectors and exports that could balance out the shock became evident. Growth was cyclical, heavily dependent on credit and government and consumer spending, while the economic activity was highly concentrated to a very limited number of sectors such as the financial and professional services, tourism and construction.
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Since its accession to the EU, Cyprus had the biggest trade deficit in the EU, and was steadily declining in both competitiveness and productivity, which is reflected in the chronic
deterioration
of
all
relevant
international
benchmarks, revealing the major structural weaknesses of the economy. Structural weaknesses that were hidden by the
non-sustainable
spending,
but
left
the
country
vulnerable and unprotected to external shocks, economic downturns, and wrong corporate strategies of individual businesses, especially in the banking sector. So structural weaknesses is the primary cause to Cyprus’ economic ills, then there is only one cure. To address the economic ills that create bubbles which at some point burst, leading the economy into recession, rising unemployment, diminishing incomes, and lowering the living standard of the society as a whole – and I’m sure that all these phenomena sound familiar to us Cypriots the cure is Structural Reform. But what is Structural Reform, and why is it important? In simple words, structural reforms imply changes to the way the government works, at all levels.
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It is important because it is those changes that power economic growth by correcting distortions and making the markets work more efficiently.
Therefore to improve Cyprus’ long-term growth prospects, comprehensive structural reforms are needed to boost competitiveness and support job creation.
Ladies and gentlemen, Is structural reform a slogan or is it real? From the very beginning of our administration, our government has set out an ambitious structural reform agenda across the majority of policy areas. Some reforms have already been made, such as • the gradual implementation of the Public Financial Management reform, which while safeguarding fiscal discipline introduces impact assessments and Key Performance Indicators in the civil service and offers a flexibility to ministries to manage their staff and other resources and to focus on improving the quality of public services that in many cases lag behind out counterparts in Europe.
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• A tax administration reform with modern tools in combating tax evasion and tax avoidance • A radical pension reform for the civil service, from defined benefit to defined contribution. • A major welfare system reform which streamlines the number of benefits and offers better targeting and a Minimum Guarantee Income for all those in need.
Other reforms are under-way but not complete, such as a comprehensive local government reform, a bold civil service reform, a privatization program, an education reform, plans to improve active labour market policies, an e-government reform.
We also covered a long way in reforming the public procurement system, which has been a massive source of corruption in the past, and as you know, tackling corruption is a structural issue directly related to growth and development.
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Still more structural reforms are in the pipeline, such as a judicial reform, an institutional reform which will introduce sound governance in Key sectors of economic activity such as tourism and shipping, a tax reform, a comprehensive reform in the tourist industry and reducing unnecessary regulation.
Ladies and gentlemen, These are not just headings. Anyone who is following the program of this government knows that there are actions and
concrete
proposals
for
each
and
every
sector
mentioned. For the first time in the history of the Republic of Cyprus there has been such a multidimensional and ambitious reform effort. And most of it outside the framework of the MoU with our international lenders. The World Bank issues an annual ranking of how efficient governments are, and how easy, or how tough is to do business in each country. The latest tables were released in October. Cyprus climbed 13 places in the ranking of countries in relation to last year, and is included in the top ten performers out of 189 countries included in the report.
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The achievement is indeed a result of substantial reforms in five areas of transactions between the government and the businesses. Cyprus improved access to credit information, made paying
taxes
easier
for
companies,
made
enforcing
contracts easier by introducing a fast-track simplified procedure, made resolving insolvency easier and made getting electricity easier by reducing the time required for obtaining a new connection.
Are we content for that achievement? Yes we are. Have we finished the job? No. Cyprus is an economy in transition and we have a long way to go if we want to transform it into a modern and competitive economy. We are not satisfied being ranked 47th out of 189 economies, or lagging behind in important areas such as the length of period for obtaining a construction permit. We are returning to the international markets but we have not yet reached the investment grade. We still suffer from red-tape and we don’t have an effective one-stop-shop for investors.
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But we have a program to implement. We have an action plan for growth which has been adopted by the Cabinet of Ministers and has been endorsed and praised by the European Commission. It was only last week that the European Commission, in the context of the European Semester, issued its Country Specific Recommendations for Cyprus, noting that it is the implementation of our own action plan for growth that will address the remaining macroeconomic imbalances of the economy of Cyprus. And the only way to move forward is to continue our reform effort, our structural reform program. Because it is a program that is delivering. It is a program that has persuaded the international investors to place a vote of confidence in our economy and pour fresh money into the economy, the credit rating agencies to successively upgrade our economy, and Cyprus to register an EU record for declining unemployment. Cyprus, as well as other countries have demonstrated that Economic recovery and growth is indeed a structural issue,
and
does
not
always
require
continuously
increasing public expenditure.
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If that was the case, the excessive spending and unrestricted borrowing of the past years would have paid off by creating sustainable growth. As we all know, this did not happen. On the contrary it increased the vulnerabilities of the economy and left it with no ammunition left when the crisis came. We followed a different policy path. By placing a leash on public expenditure we were able to avoid the need for imposing any new taxes. And maintaining a stable and competitive tax regime is a key element of success. It is a key element of creating a business friendly environment and for attracting foreign direct investment. The lesson is that there can be no sustainable growth without bold structural reforms that place greater emphasis to the tradeable goods sector, as an engine of growth. Regarding our reform program, I admit that in some areas we proceeded faster than in others. In some we are behind our original planning. We faced anticipated or many times unpredicted problems which cause delays or even
sometimes
compromise
the
substance.
Legal,
technocratic, political problems. We can not escape making mistakes.
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Ladies and gentlemen, If one makes a poll, and asks everybody whether they support
structural
reforms,
the
comes
down
answer
will
be
an
overwhelming ‘YES’. However,
when
it
to
specifying
and
implementing the actual reforms the picture is not so rosy. Most
institutions,
reform
others,
departments, but
refuse
industries,
to
accept
want
reform
to for
themselves. • Some local archons want to keep issuing the same number of permits even if they do it inefficiently. • Some
government
departments
or
semi-
governmental organisations refuse to acknowledge that they cost more than they benefit the society or that their services could be provided more efficiently by somebody else. • Some people refuse to accept that they will lose some
social
outlays
because
they
earn
higher
incomes. • Some civil servants will object having someone else promoted
due
to
his
better
performance
and
achievements because they entered the service earlier.
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The examples are endless and it’s a global phenomenon. Reforms change the status quo and the world is full of its advocates. They influence vested interests. They take away
power
from
existing
power-centers,
from
traditional decision making centers. They upset the balance of power, usually to the benefit of the silent majority of the people.
Political parties – all over the world - find it themselves difficult to accept reforms, because they are subject to pressure from organized lobbying groups within their own electorate. Or they are faced with the possibility of the loss of their own power as structural reforms usually erode the power of traditional political patronage.
Sometimes, policy makers or legislators find it easier to define reforms, as protection or the redistribution of existing incomes and wealth, ignoring the effects on competitiveness and capital movements and eventually on the overall income level of the economy.
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They
propose
‘growth
agendas’
which
only
entail
increased public expenditure, ignoring the fact that this ‘easy solution’ is in fact the recipe for the worst form of anti-growth austerity, as it leads to a spiral of tax hikes which eventually erode the purchasing power of the consumer and kill the business environment.
Action a structural reform agenda is always politically difficult and demanding, in any part of the world. It often requires
a
change
in
the
mentality
of
the
people
themselves. It requires confrontation with different and influential interest groups.
But we must openly acknowledge that this is the way forward and this is where we must improve.
Because unfortunately there are no magical solutions to generate growth, the job we have to do is to correct, reform, consolidate our economy
and it is by that way
that we lay the foundations for a more viable growth model for Cyprus, relieved room the ‘sins of our past’.
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Ladies and gentlemen, We are midway in transforming Cyprus. In my opinion, we are entering a new era of growth and prosperity, but most importantly an era of sustainable prosperity. Not a cyclical one based on more debt. The transformation of Cyprus will be determined by our success in implementing our structural reform agenda which upon completion will enhance the competitiveness and the growth potential of our economy. We are aware that the full benefits of structural reforms will be reaped in the long-run, and as far as Cyprus is concerned, well after the term of this government. But they are also important in the short run for one single reason; They act as a catalyst for the credibility of the economy and investors’ confidence. Especially for an economy that is rebounding from a deep recession. And as you know, the economy is all about confidence and expectations. And by implementing our program we won the uphill battle of the restoration of international confidence, with tangible results.
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We
should
be
very
careful
not
to
undermine
the
confidence we earned with so much work and effort by reversing our reform agenda. On the contrary, we should enhance it by pushing it forward. The pre-requisite to achieve our goal is a determined government that will continue with the same pace to submit and implement the reforms, and an equally determined
Parliament
that
will
transpose
the
proposals into legislation. From our side, we will keep trying to reach the necessary consensus that will allow us to move the country forward. Structural reform means change, and we should not fear change.
Thank you very much.
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