6th nicosia economic congress 26 may 2016
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Transcript of 6th nicosia economic congress 26 may 2016
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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