Corruption and the Cyprus Economy

According to the Euroborometer survey of July 2022 94 % of respondents were of the view that corruption was widespread in Cyprus and that political parties were seen as being particularly vulnerable to abusing their power. And more recent opinion surveys of samples of the Cyprus population indicate that corruption is the most important issue facing Cypriot voters in the forthcoming Presidential election. Furthermore, the Corruption Perceptions Index of Transparency International shows that Cyprus relative to 26 other EU countries and 180 countries overall was perceived as becoming more corrupt over the last decade. Among the 180 countries Cyprus was ranked 52nd in 2021 falling steeply from 29^th position in 2012 and had a lower ranking than 20 other EU countries, with Greece the only euro area member below Cyprus.

And in recognition of the increasing corruption in Cyprus an official “Anti-Corruption Authority” was established in late 2022 to investigate complaints regarding bribery and corruption.

Economics literature reveals that corruption defined as the abuse of power for private gain has a significant negative impact on economic growth, worsens inequalities, and corrodes culture and society. There is overwhelming statistical evidence that corruption hinders economic growth by reducing domestic investment, discouraging foreign direct investment, and distorting the composition of government spending away from investment in education, healthcare and social housing and toward less productive and manipulable public projects including Public Private Partnerships

(PPPs). And corruption in turn affects the equitable distribution of resources across the population, increasing income and wealth inequalities and undermining the effectiveness of welfare programs.

Corruption impedes efficient resource allocation

Much corruption is associated with rent-seeking[1] by economic agents to gain competitive advantage.  Companies and individuals in Cyprus spend considerable amounts of money attempting to convince government officials and politicians to grant monopolies or restrict competition so that some company or individual can realize a rent. And in seeking rents some bureaucrats and people in authority are often bribed for issuing a license, granting a building permit, approving an expenditure, or allowing a shipment across a border.

The classic case of rent-seeking and alleged corruption in Cyprus in recent years involved the morally degrading implementation of the so-called golden passport scheme, whereby powerful officials and politicians and their collaborators benefited privately from a monopoly in the illegal issue of limited EU passports to shadowy characters, that were prepared to pay very large amounts of cash for the obtaining of such passports.

 Government resources have often been squandered by corruption in relation to the purchase of property from individuals and private companies by public sector entities at prices well above the market value. Furthermore, in the arrangement of certain PPPs projects, such as waste disposal plants, bureaucrats have given generous concessions to private partners and passed risks onto the public sector, with monopolies and cartels created that in turn drain taxpayers’ money. And corruption in the form of tax evasion also reduces budgetary revenue curtailing funds available for productive spending on healthcare, education and research and development as well as in providing adequate social benefits.

In addition, the unhealthily close relationship between politicians and bankers, which many people blame for the 2013 banking crisis, has and continues to contribute to corruption in certain areas. Bankers have extended huge loans to developers through over-valuing their collateral security and not properly assessing their repayment capability. And when certain developers have incurred repayment difficulties large amounts of their debts have been written-off through property exchanges at overvalued prices and/or been extended new credits without any serious assessment of their ability to repay their loans.

While the effects of corruption in Cyprus in terms of providing large financial gains and benefits to politicians, government officials and collaborating professionals is much criticized in the media, especially on the social networks, the impact of corruption on the macroeconomy and inequalities has received little attention and publicity.

In Cyprus, corruption relating to the property sector has led to a grossly inefficient allocation of resources, which has been detrimental to society with the adverse consequences being increasingly felt. Instead of using resources for the excessive construction of luxury apartments and commercial offices, the building of housing to meet the demands of lower-income earners and students would have been better for society. And surely more resources should have been devoted to the construction, maintenance and staffing of infrastructure facilities, such as hospitals, schools and kindergartens.

Moreover, corruption and the failure of justice system in Cyprus to punish and make most culprits accountable for their actions tarnishes the reputation of Cyprus as being a worthwhile destination for foreign direct investments, and results also in potentially productive investments often being postponed or even cancelled because of long delays in the final award of contracts by the inefficient Tenders Review Authority and in the obtaining of licenses and permissions from corrupt bureaucrats.

Corruption fosters inequalities

While the powerful and rich politicians and companies, including large developers and hoteliers can abuse the regulatory environment and laws in Cyprus with their corrupt practices and failure to be punished, most of the population generally comply with laws and regulations and are usually penalized for delinquent behavior. This biased and favorable treatment of the rich and powerful allows them to gain income and wealth handsomely from corruption, thus widening inequalities. For example, whereas the politically-connected rich and powerful are treated generously by banks with respect to their immense debt obligations, many ordinary citizens and small businesses that delay loan repayments have their houses and properties repossessed by banks and sold to predatory third parties at large discounts, that in turn usually results in the transfer of wealth from poorer persons to richer ones.

And with its tax policies and deliberate maintenance of inefficiencies in tax administration, the Cyprus government and its political leaders have fostered tax evasion and inequalities. Indeed, political party leaders have been at the forefront in promoting and delivering the abolition of the central government progressive property tax and in proposing tax amnesties, with the former measure benefitting most inequitably large property owners and the latter blatantly spurring on tax evasion.

Furthermore, the huge time lag between the submission of income tax returns and their processing by the tax authorities, now around five and one-half years, encourages tax evasion, especially by persons not subject to automatic tax withholdings. Also, it is reported that the rich and the powerful, that have benefited from corrupt practices, are very favorably treated by the tax authorities, with their tax returns and payments only known to very few persons in the tax department. Indeed, it is rumored that some members of the House of Representatives did not even submit tax returns in recent years.

What can be done?

For stamping out corruption the strict application of laws and regulations is indispensable. And this must begin with action against the top leaders. Until the new “Anti- Corruption Authority” gets into gear, the main body investigating bribery and corruption allegations and complaints is the police, which cooperates with specialist financial intelligence units such as the Unit for Combatting Money Laundering (MOKAS). The Office of the Attorney General examines the findings of the police and decides whether a case should be heard by a court. The Auditor General may also refer incidents of bribery and corruption to the Attorney General for investigation. However, under the current administration these bodies apart from the Auditor General have shown little interest in investigating bribery and corruption allegations.

In Cyprus and most other countries many bureaucrats maneuver themselves into positions for lengthy periods where they have a tiny monopoly and can be bribed for issuing a license, granting a building permit, approving an expenditure etc. Accordingly, there should be greater mobility of civil servants in the Cyprus public service as well as better supervision of these employees to help counter corruption at lower levels.

In addition, for employment in the Cyprus Government there is a need to attract moral high-quality civil servants rather than relatively unskilled workers with political connections who are more adept at dispensing favors rather than providing good service in compliance with government regulations and standards.

And it should be legislated that persons with criminal records relating to corruption and tax evasion should not be able to stand for election to the House of Representatives and key positions in the municipalities.

But an anti-corruption campaign in the increasingly corrupt Cyprus is highly unlikely to succeed without reforming domestic institutions, most notably the judiciary system, tax administration, and the Tenders Review Authority. And the setting-up of new institutions such as a Development Bank that has the independence and the moral and competent staff to invest resources efficiently without being bribed and required to dispense political favors should be a priority as well.