Government officials, academics and other commentators contend that the failure of politicians to support reforms will be the main obstacle in preventing the successful implementation of the much publicized Recovery Plan for Cyprus. While it is agreed that there is a persistent reluctance of politicians to back serious reforms in areas such as education, the judiciary, taxation, and government services it is the ongoing lack of institutional capacity and government resources which are likely also to be of crucial importance in hampering the effective execution of the Recovery Plan.
Indeed, the claim that the value of the Recovery Plan amounts to 4.4 billion euro and would add 7 percentage points to GDP and create 11,000 jobs over the next 6 years is premised on the key assumption that all of the 3 billion euro in funds available to Cyprus will be fully and productively absorbed in undertaking 134 targeted measures, 58 reforms and 76 development investment projects as well as in inducing the carrying out of 1.4 billion euro worth of related investments by the private sector.
Lack of Institutional Capacity
Does the government have the capacity (essentially competent human resources) to evaluate, prepare and contract out a great multitude of investment projects which are eligible for financing from the EU? And will the successful applicants for EU financing punctually fulfill their contracts? Past experience has demonstrated that the government, especially since 2013, has failed badly in effecting the timely execution of public investment projects with the implementation rate for the pitifully low level of development expenditures in recent years being around 60 per cent. This has been particularly the case for projects funded by the EU. Most notably during the previous EU budget period over the years 2014 to 2020 Cyprus only used or disbursed 56 per cent of the 1.17 billion euro of the allocated structural and investment funds in implementing projects and programs albeit some wastefully. Such expenditure shortfalls can be attributed importantly to the lack of institutional capacity and competence reflected in inadequate and poor project preparation and evaluation as well as in the gross inefficiencies and corruption in the tendering process for the contracting out of Government projects.
And without significantly improving institutional capacity through among other things raising the resources and competence of the Ministry of Finance’s Directorate for European Programmes, Coordination and Development and reforming the Tenders Review Authority with the removal of inefficient and subjective procedures, there is unlikely to be any profound improvement in performance in productively implementing EU-financed projects.
Furthermore, the Cyprus Government needs to have sufficient resources to finance its normal budgetary operations plus increasing fund allocations for social protection as well as for the costs involved in the joint financing of many projects with the EU. Projects financed from the EU’s Structural and Investment fund require matching contributions from Cyprus up to 42 per cent, while loan-financed projects from the R & R facility carry interest costs. Indeed, the ongoing collection of tax revenues is being not only severely strained by the downturn in the economy and the ongoing suspensions of certain tax payments and returns, but also by an increasingly regressive and narrowly-based (only meagre taxes on property) tax system. In fact, government revenues fell by 7.1 % in 2020 and continued to decline in the first 3 months of 2021 despite much higher contributions to the National Health Scheme. These actual developments compare with budget forecasts of a decrease in government revenue of just 3.4% in 2020 and a spectacular rise of 9.2 % in 2021.
Against this challenging background the Government needs to make more realistic projections of government revenues and expenditures for the 2021 to 2027 period and take early action to alleviate the large expected revenue shortfalls by reforming the low-yielding, regressive and inequitable tax system as well as revamping tax administration to combat prolific tax evasion. It is noted that in the draft Recovery and Resilience plan that 32.9 million euro is allocated “for improving the collection capacity and efficiency of the tax system”.
Prioritization of Reforms
A major weakness of the Recovery Plan is that no priority in terms of timing and importance is assigned to the great number of targeted measures, reforms and development projects listed in the plan. And given the above view that the lack of institutional capacity and government revenue will seriously hamper the implementation of the plan, reforms in these two areas of deficiency will require priority. That is, there is an urgent need for the Government to fundamentally enhance the capacity of its units dealing with the preparation of and contracting out of EU- funded investment projects and programmes, including the Tenders Review Authority, as well as reforming the tax system and its chronic administration, so that the human and financial resources necessary to begin effectively implementing the Recovery Plan are in place.