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“We chose to treat the crisis as an opportunity. An opportunity for change”

Interview - August 7, 2015

As Cyprus returns to growth with pro-reform, pro-market agenda and a growth-friendly fiscal consolidation, Minister of Finance Harris Georgiades looks back at the on-going recovery and prospects for future growth.


You came to the Ministry of Finance at a particularly tumultuous time in Cyprus. However many have lauded the ongoing recovery internationally; going from quite a deep recession, to now, in the last quarter, a positive growth estimate of 0.4%. What was the core of this quicker than expected recovery?

I believe there was a combination of factors behind the recovery, which indeed exceeds expectations.

The number one factor was the resilience of key productive sectors of the economy. The fact is that the core competitive advantages of our economy were never questioned by the crisis.

The crisis was essentially a banking crisis and a fiscal crisis. Indeed two and a half years ago when we were taking over the administration, we were dealing with a collapsing banking sector and public finances on the brink of exhaustion.

But this did not lead to the derailment of the key productive sectors of the Cyprus economy.

The competitive and comparative advantages of these core industries remained intact. The key sectors of tourism, shipping and services spearheaded the recovery.

We have always been a very attractive tourist destination. We also have a very significant shipping industry.

We are a major ship management center in the EU and we didn’t lose a single company through the crisis, mainly because of the strong advantages of having unrivalled local expertise, a competitive tax regime and excellent professional services.

Banking was a problem, it had over expanded, but we showed that our business and financial services were much more than banking.

These include legal, audit and fiduciary services, as well as new areas like the fund management and the Forex industry, were key drivers of the recovery of the economy.

The second reason which contributed to the economic recovery was government policy. We are a pro-business and pro-investment government and we had a very clear plan, an ambitious plan of economic reform and fiscal consolidation.

From day one we started implementing it in a very steadfast manner. Throughout that time, my main message was that whilst we would cut spending and consolidate public finances, we would not raise a single tax.

Taxes ultimately dampen economic activity. This conveyed a positive message to traditional and new sectors, and to both local and foreign investors. As the records show, the economy has gradually been recovering.

There is much debate at the EU level about the growth versus austerity dilemma; we said that there is no dilemma, we would implement a growth friendly fiscal consolidation and the proof of its success is that we exceeded most targets that were set by the IMF and EU institutions.

We have also been very honest in identifying and admitting that we had problems. I have never presented, nor am I saying now, that everything is good with our economy.

Of course, we have problems, particularly in the banking sector and in the civil service.

As you mentioned, reform is something that is central to the recovery, however these are tough decisions, and not always popular. In terms of assessing these reforms, particularly with regards to foreclosure and insolvency, what kind of progress has been made in terms of passing legislation?

Our reform for growth strategy has a number of pillars and directions and you have mentioned foreclosures and insolvency, which is very important if an economy is to operate with maximum possible efficiency.

It should be easy to set up a business and it should be as easy to close down a business, as that is how an economy can keep adapting and evolving. In this respect we are identifying and tackling bureaucratic obstacles to setting up a business.

The insolvency law provides for a new bankruptcy framework, as well as efficient liquidation procedures for companies.

Whilst these are not sexy issues, they are key elements that form the foundations of an economy that is adaptive and competitive.

The benefit will not become visible tomorrow, but this is something that will be of long lasting benefit.

I must mention that just today, we had two important pieces of government legislation ratified by our House of Parliament. One is a law, which will enable the creation of an integrated casino resort.

We have never had a casino here before, and actually our gaming industry is underdeveloped. We have a green light and we shall speed through to the next phase of the process by seeking an investor.

We are already in preliminary discussions with key players of the gaming industry globally. The second law passed today was a tax reform.

We are not changing our tax system, and as I said before, my basic mantra is “no new taxes”. But that is not to say that we cannot refine and fine-tune our tax system and this is what we have now done by offering incentives to new business and new investments.

There is for instance as of today a tax incentive on the new capital formation for companies. There is also a tax break for transactions on the purchase of real estate, which was one of the hardest hit sectors during the crisis.

It is clear that these tax and business incentives will put Cyprus back on the radar of investors. However, we mentioned earlier the challenges within the banking sector, in particular tackling non-performing loans (NPLs). What are the main challenges for this key sector moving forward?

I would say that the main challenges moving forward are the still high level of unemployment and the equally high level of non-performing loans in the banking sector.

But all our actions are geared in the direction of dealing with these problems. We are addressing these issues through the promotion of much needed reform and ultimately by creating conditions for economic growth and renewed economic activity.

The NPLs are left over from the so-called good times, when we were riding a bubble. That was a time when economic activity was driven by an unsustainable credit expansion.

This effectively fuelled the property boom and as always, a boom is followed by a bust. What is left behind is a high level of non-performance loans related primarily, but not exclusively, to property.

This will take time to correct, it cannot correct itself from one day to the next, however having a new legislative framework is important and having an economy back on positive growth rates is also essential.

I should mention that the problem is probably not as grave as the number suggests, because one also has to look at the quality and the composition of non-performance loans; they are not all dead and buried loans. Sometimes a loan may fall behind by an installment or two, but it will become a performing one given some time and restructuring.

There has been good progress in many of the banks with regards to NPLs, and I read that the largest lender in Cyprus, Bank of Cyprus, has returned to profit. Would you say that there has also been a change of culture in the banks?

There has definitely been a change of culture. The unsustainable credit expansion, the recklessness with which loans were offered to help households and businesses, has come to a sudden end and credit has become much tighter, primarily on the basis of tighter supervisory rules.

I should mention that essentially the banking sector has undergone a complete transformation. We have completely changed rules, regulations, and supervision. We encouraged and brought in new foreign investors.

Our banking sector is completely revamped, recapitalized and under new management. The presence of credible foreign investors is a clear demonstration of confidence.

This, together with the new supervisory framework, which is now at the European level through the ECB, creates new confidence. As I have mentioned, not all things can be completely corrected over a year or two and that is why we remain down to earth and we are maintaining the reform momentum.

Our publication will be going out in London, the heart of the financial world. What would you say for investors is the main advantage of investing in Cyprus?

Firstly, it is the tax system, which remains very attractive and competitive, and which we have retained and are refining in order to keep it attractive.

Secondly, it is the human capital; we have become a hub of expertise and we are very competitive. Investors and entrepreneurs can receive City-level services at much more competitive rates.

We also have a well-developed and credible legal and institutional framework. And finally, this is a Mediterranean island! Ultimately, Cyprus is a very nice place to live, to spend holidays and do business.

So there is an array of advantages.

Your colleagues have spoken about what brand Cyprus means; Minister Demetriades suggested that it was linked with a dynamic economy and resilient people. What does the Cyprus brand mean to you? 

The Cyprus brand has sustained severe reputational damage, a few years back, due to the magnitude of the crisis and resulting bail-in in the banking sector.

More than 10% of total deposits were lost. Since then, we are essentially rebranding Cyprus. We are maintaining everything that was healthy and strong but we are changing everything that was holding us back.

We chose to treat the crisis as an opportunity. An opportunity for change. This effort is already delivering early results. We are back on positive growth rates and Cyprus fast becoming an island of new opportunities.

I think this is the Cyprus story.

I would like to ask specifically about the G20/B20 event that is taking place in Antalya on November 14. The leaders of the largest economies of the world will gather and discuss seven priorities that are based on three guiding principles: inclusiveness, investment and implementation. Given the remarkable achievements in implementing reforms, what would be your message to the leaders of the G20 economies in terms of inclusiveness and what they can learn from Cyprus?

I should probably mention two things. Firstly, we need global coordination and leadership in implementing safeguarding the soundness of our economies and promoting a reform agenda.

That would be an obvious lesson from the global financial and economic crises of the recent years.

Secondly, I would convey a message relating not to the G20 itself but to its venue. The beautiful city of Antalya is in our very own region, on the southern shores of Turkey.

This is a region of huge potential which regrettably is not fully exploited. We urgently need to work through our political divisions and differences; we need to find solutions, in order to create a completely new state of play in the entire Eastern Mediterranean region based on inclusiveness, cooperation, commerce, travel and investment opportunities.