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Address by Minister of Finance Harris Georgiades, Economist Conference 2014

Ladies and Gentlemen,

Allow me first of all to thank the organizers for their kind invitation. It is a pleasure and an honor to join such an impressive list of speakers and panelists, but especially to have the opportunity to address such a distinguished audience.

Restoring confidence. That’s the theme of this conference. But more than that, that’s the key to the recovery of the economy of Cyprus.

That’s the main priority of our policy in the Finance Ministry. That’s where we have already managed quite a bit. And that’s exactly where the focus of our attention should remain. In fact, it was the loss of confidence which resulted in a negative spiral of events which lead our economy into an unprecedented crisis. There was a loss of confidence in our banks, which started losing deposits and could not raise capital. There was a loss of confidence in the state, which could no longer borrow from the markets. There was a loss of confidence on behalf of rating agencies, which responded with successive downgrades. There was a loss of confidence from the consumers, who had to bring down their spending. There was a loss of confidence from local business, which stopped hiring and started to lay-off. There was a loss of confidence in the eyes of our EU partners, who may even have considered the exit of Cyprus from the Eurozone. There was a loss of confidence towards the left-wing government of Cyprus, for its apparent inability or unwillingness to act, which eventually lead to its electoral defeat. And let this be a message to anyone considering political gain from shying away from difficult decisions.Of course, there was hardly an exaggeration behind this breakdown of confidence.

When it comes to public finances, for instance, and at a time when international spotlights were increasingly directed towards the economies on the geographical periphery of the EU, we kept running excessive deficits year on year.

Going back even further, we now realize that there was never a year when our public sector did not grow significantly in size, due to continuous hiring by successive governments.

There was never a year when public sector wages did not grow way above the rate of growth of the GDP, due to automatic and multiple pay rises for the civil service.

When it comes to our banks, they were running an unsustainable credit expansion for the largest part of the previous ten years, fuelling consumption and a property bubble.

The political decision regarding the haircut of the Greek debt, a decision at EU level with the consent of the then Cypriot government, was final blow which made the recourse to the ESM and the IMF inevitable, after of course, we another two years were wasted.

This delay was probably the most devastating of a succession of mistakes and we all know what the eventual result was.

Ladies and gentlemen,

Since then, we have come a long-way. But at the same time we still have a long-way to go.

For the last 20 months we are implementing a program of economic reform and fiscal consolidation. It is a program that has been agreed with the Troika institutions but one for which we are and we should be claiming ownership.

It is a program which basically includes what we should have done in Cyprus a long-time ago, on our own initiative, but we always avoided.  

And it is a program which is, in fact, working. It is already delivering results. It is restoring confidence.

Since 2009 our economy has gone through a typical double-dip recession. The second phase of the recession started mid-2011 and saw 8 consecutive quarters of deteriorating, negative GDP growth. For the last 4 quarters however, GDP performance has been improving. The long recession seems to have run its course and we expect modest growth as of next year.

This improving economic performance is without doubt a result of the stronger than expected resilience of key productive sectors of our economy: tourism, business and financial services, shipping.

But it is also a result of the confidence which has been reestablished through the implementation of a demanding, politically difficult, but absolutely necessary reform and consolidation program.

This reflects on the most sensitive of issues, that of unemployment. Some are arguing that program implementation is resulting in high unemployment. Well, check out the facts: In 2008 it stood at an envious 3.6%. Since then it grew each and every year climbing to 15.8% by Q1 2013, ahead of the commencement of the program. It inevitably peaked at 16.9% but since then it has de-escalated and now stands at 15.1%.

Still unacceptably high, no doubt, but this is the first downwards trend in unemployment in six years and this is happening whilst we are implementing the program.    

The improving economic performance is also reflected in our public finances which are now under control. We are expecting exit from the excessive deficit situation, that’s the 3% overall deficit as of this year, two full years ahead of the target. Likewise with the primary balance which is expected to be on a marginal surplus as of this year.

What is even more important is that we are restoring the soundness of public finances without having to burden the private sector with additional taxes. Some complain about austerity. First of all I am not sure if a budget which is still on overall deficit can be regarded as an austerity budget. But for me the worst kind of austerity is the one imposed by the state on households and business in a policy of tax and spend.

There was indeed a succession of tax hikes between 2011-2013. Fortunately the attractiveness of our tax regime has not been jeopardized and we shall do whatever is necessary, through our budgetary planning, to maintain the stability and competitiveness of our tax regime.

This is a clear and personal political commitment, a clear message to local and international business, which I have been repeating from the day I took office.

Fiscal discipline places our overall debt on a downwards trend and this means that it is less of a burden to the growth prospects of the economy. It also facilitates public debt sustainability which is now already established following the recent GDP adjustment and the good stress test result. The current peak of 105% is well below the initial expectation of a debt of 126%.

It is such tangible results which are already restoring international confidence to the economy of Cyprus. It is under such circumstances which we have been able to reverse the trend of rating downgrades to one of rating upgrades. This is how our banks were able to raise strategically important foreign capital. This is how we have been able to borrow from the markets for the first time since the end of 2010. And this is exactly how we shall fully re-establish our ability to finance our needs without the support of the ESM or the IMF.

But it is absolutely necessary that we continue the effort of reform and consolidation with the same vigor and determination.

And we do need the Troika institutions for a little while longer. For me, what’s even more important that the cheap financing, that also of course, but what is even more valuable, is the seal of approval of the IMF and the European institutions which comprise the Troika.

Having third parties interfering in the domestic political process of a democratic society is never pleasant. But we are trying to rectify the mistakes of the past. We need their confirmation that we are doing what is necessary to correct our economy. This is how we can fully restore international confidence. This is how we can lay the foundations for a more viable economic model; this is how we shall attract new investment, this is how we shall create new jobs and opportunities.

The MoU is part of this very effort. But it is not enough. My colleague the Deputy Minister to the President will present during the afternoon session an outline of a growth strategy towards which we shall now be focusing. It includes further action on reform of the public administration, the simplification of procedures and the curbing of bureaucracy and red tape.

More than anything else, however, we should stay clear of the temptations of populism and the false comfort of indecision.

What is good for the society and what is beneficial to an economy is not always popular. Not with everyone, and certainly not at the beginning. And that is a real problem if ones horizons start and end with the next election.  

The economy of Cyprus is currently in a correction phase. It is not an easy situation. It was never meant to be easy. But it is necessary.

And let us always remember the wise words of C.S Lewis:

“If you look for truth, you may find comfort in the end; if you look for comfort you will not get either comfort or the truth, but only soft soap and wishful thinking and in the end despair”.

So let us keep a steady course. Let us finish the job.  

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