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 answer will be an

overwhelming ‘YES’.

However, when it comes down to specifying and

implementing the actual reforms the picture is not so

rosy.

Most institutions, departments, industries, want to

reform others, but refuse to accept reform 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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