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Socio/Economic Challenges facing Government of President Elect Nikos Christodoulides

Socio/Economic Challenges facing Government of President Elect Nikos Christodoulides

23/02/2023

In his campaign to become President of the Republic of Cyprus Nikos Christodoulides promised that his government would be one of “broad social acceptance” and would represent a “unifying force”.

Media, have pointed out that bringing together “disparate political forces” and opposing views in dealing with key issues, including the Cyprus problem, will be very difficult.

Even on the economy there are diverse views on how the economy should be managed and resources allocated in addressing the socio/economic challenges facing the incoming government. In terms of socio/economic performance what is meant by broad social acceptance? Surely, it means a situation where all citizens can benefit from economic growth and investments in the “care economy”[i] And in this sense, the administration of Nikos Christodoulides should aim at achieving equitable growth, that is an economy which works and cares for all.

 In contrast, economic performance under the Anastasiades administration has been characterized by the inequitable and uncaring allocation of resources by inefficient and seemingly corrupt institutions. Wasteful use of resources and corruption over the last ten years has been highlighted by the excessive construction of towering apartments and in many cases their illegal sale under the discredited golden passport scheme, developments that have enriched the very few. Furthermore, government revenues mainly derived from a regressive and poorly administered tax system have been primarily used for current expenditures such as in bloating its payroll rather than in productive investments like substantially increasing the capacity of the electricity power grid.  And with the implicit business model of the Anastasiades government promoting property development, mass tourism and consumerism, activities that mainly employ persons earning low wages, most workers in the private sector have not experienced any increase in their real incomes over the past 10 years.

In addition, the excessive construction of properties in coastal areas and the fossil-fueled consumer economy are contributing to the destruction of the physical environment.

Thus, the government of Nikos Christodoulides will face not only the challenge of dealing with immediate problems such as negotiating cost of living adjustments for employees and deciding on the extent to which the Akamas peninsula should be protected, but will have to reverse the inequitable, uncaring, and environmentally unfriendly policies of the Anastasiades administration.

Business Model

Hence, the implicit business model pursued by the Anastasiades government that has significantly widened income, wealth and other inequalities and damaged the environment will need to be replaced.

In this connection the “Recovery and Resilience” (R&R) plan agreed with the European Union featuring 58 reforms and 76 development investment projects and centered around the much heralded green and digital transitions offers a blueprint, that can be the core of a new business model.

And to gear the business model toward the attainment of equitable growth there has to be a markedly modified R&R plan that places greater emphasis on the creation of decent job opportunities and the provision of adequate social protection. Indeed, maximum use should be made of the skilled workforce of Cyprus in the preparation and implementation of investment projects. And given the ageing of the Cyprus population and the damaging socio/economic effects of the Covid pandemic and the cost of living crisis there needs to be greater investments in building a robust care economy.

Undeniably, in Cyprus as in many European countries the crises of a lack of good care and adequate social protection and a lack of good jobs co-exist, and, consequently, investments in the care economy including giving higher wages to underpaid and undervalued care workers would create positive feedbacks allowing families to find quality care and care workers to find quality jobs.

It is very well to have a good plan or business model on paper and even the political will to execute it, but adequate resources and competent and moral institutions are required to ensure its effective implementation. With tax evasion rife and minimal revenue derived from property taxation it is highly unlikely that the government despite the availability of considerable grants from the EU would have the funds to support the timely implementation of a modified R & R plan. And there is the question of whether the Ministry of Finance and banks have the expertise to identify economically viable investments and to arrange appropriate financing for such projects. Furthermore, would the government have the competent administrators and care workers to provide quality social assistance and efficiently process and distribute social benefits to deserving applicants?

Taxation

In order to have sufficient revenue to enable financing of the government’s spending plans in accord with a new socially-oriented business model, the tax system and its administration should be substantially reformed. The tax system needs to be made more progressive and fairer through, among other things, re-introducing  a central government, progressive, high-yielding tax on immovable properties.  

In addition, a serious overhaul of the grossly inefficient and corrupt tax administration system is required so as to substantially reduce tax evasion and in turn provide and redistribute revenue (official tax arrears at end-2021 of over 2 billion euro, which is the tip of the iceberg of tax evasion) for the prompt implementation of spending priorities such as those on development projects and social protection.

Finance

For sustained economic growth investments in economically viable projects are essential. However, both public and private investment rates in Cyprus, apart from those for the property sector, are very low by international standards. While finance for public investments is crowded out by excessive current expenditures, Cyprus banks have largely failed in using their huge cash holdings (24.5 billion euro at end- September 2022) to help finance productive investment projects including public private partnerships. It appears that banks have not had the capability to identify and arrange financing for economically viable investments and continue to have an asset portfolio dominated by loans secured by property collateral.

 Accordingly, there is a need to establish an institution that can more productively use bank depositors’ and taxpayers’ money. In consequence, the setting-up of an independent development finance agency is recommended that would employ competent and moral professional staff and be tasked with identifying and arranging the financing of large-scale economically viable projects including those involving public private partnerships. Technical assistance and capital for the bank could be provided by international organizations such as the European Investment Bank and other institutions.

Furthermore, Cyprus banks have been pre-occupied with removing non-performing loans (NPLs) from their balance sheets mainly though selling such loans and their property collateral at large discounts to third parties rather than helping to relieve households and small businesses of their heavy debt burdens by productively restructuring their debt obligations. Such loan transactions involving collateral purchases by predatory investment and equity funds (mainly so-called Credit Acquiring Companies licensed by the Central Bank) have not only resulted in a transfer of wealth from the original borrowers, but have kept households and businesses heavily indebted. As a result, very high private sector indebtedness amounting to nearly 60 billion euro or 240 per cent of GDP at end-September 2022 continues to be a drag on equitable growth as many indebted households and businesses do not have the discretionary income or borrowing power to support domestic demand.

Thus, at a minimum any proposed offer to be given to third parties for purchasing NPLs at a considerable discount should first be put to the original borrowers from the bank so as to grant them some financial relief, while most importantly giving debt delinquents the option to outlay money to retain their properties.

Corruption

The Christodoulides government faces the challenge of stamping out corruption which has seriously distorted the allocation of resources and harmed the environment of Cyprus. In particular a blind eye has been turned to property developers who have violated environmental regulations and building codes.

To stamp out corruption the strict, even-handed, and prompt enforcement of laws and regulations is required. However, with the current legal authorities reluctant to even investigate and bring alleged cases to court, means must be found through instituting judiciary reform so as to initiate the investigation, prosecution and quick trial of alleged law-breakers, including top officials and politicians.

In addition, there needs to be greatly improved supervision of banks and non-bank financial institutions by the Central Bank of Cyprus so as to detect money laundering and other illegal transactions that enable corruption and the abuse of resources for the benefit of the few. And in view of financial stability concerns, the ties and even incestuous relations between the two leading Cyprus banks and the lightly-capitalized Credit Acquiring companies needs to be closely monitored.

But, substantial progress in combatting corruption is unlikely to succeed unless there is significant reform of domestic institutions including most notably the judiciary system, tax administration, and the financial activities of banks. 

[i] The care economy involves paid and unpaid activities and work caring for children, in supporting the elderly, and in providing physical and mental healthcare, as well as in supplying paid and unpaid personal, social and domestic services.