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Victoria Mindova

The more stable the Cyprus economy, the more likely the country to defend its political positions, explained the president of the Hellenic Bank Group Makis Keravnos. He spoke at the forum on the effect of global economic crisis on the economy of Cyprus and the measures to be taken to avoid the crisis deepening.

Makis Keravnos stressed that Cyprus has had positive economic growth between 4% -5% for 35 years. The island country was also affected by the worldwide economic collapse in late 2008. It registered negative growth of 1.7% in 2009. "Despite the financial collapse worldwide Cyprus banks remain strong, because their main source of funding are not banking markets, but deposits and they have never been exposed to the toxic financial products, unlike the U.S. banks."

Cyprus banks are stable because they maintain higher capitalization according to the rules of the new EU requirements for capital adequacy and liquidity of banks established by the Basel Committee 3 for 2012. Macroeconomic indicators of Cyprus noted a certain decline after the global crisis - the budget deficit for 2010 reached 5.3% of GDP and external debt rised to 60.6% of GDP. Economic growth is restoring but with extremely slow pace. It is around 0.9% for 2010 and it is not expected to exceed 1.5% in 2011.
 
"Rapid and bold government reforms are required in order not to find ourselves in the difficult position of Greece today," said the banker. He stressed the salaries of state employees should be frozen for at least three years and their social securities should be changed. Civil servants should also bear part of the social security burden and should participate in the formation of pension contributions rates as in other European countries.

He assessed the government's decision to increase the VAT on food and medicines by 5% as positive. Salary costs should also be revised. "As for state spending, the state pays 15% of GDP for pensions and salaries - this is unbearable high cost for our small country and it should be reformed," said the expert. A programme for development of employment should be prepared immediately to enable young professionals in the country to develop their abilities.

The main economic sectors in Cyprus are now in recession. Companies are closing, unemployment is increasing. Package of measures should be implemented which was delayed a lot, noted Keravnos. "7% unemployment or 29 thousand people of working age are a luxury that we can not afford." Makis Keravnos was clear that Cyprus should prepare medium-term action plan for the next five years to outline the new economic policy of the country. It is not enough to sell agricultural land to build luxury villas for wealthy Russians or Englishmen, said the banker.

The new economic model should be based on human capital. The significant entrepreneurial experience of Cyprus businessmen should be used to attract new investment. At the same time, the tax burden should be limited because it could only worsen the situation in times of recession.

The government should seek the formation of primary budget surpluses after three years when the deficit would be reduced to 3% of GDP, because it is the only way to achieve stable economic growth. Given that the local economy still relies on the real estate market the fees in the field should be reduced. "The state could lose from the reduction in fees, but it will support the market which is extremely important to our economy and will benefit from VAT. It takes vision to revive the positive growth."

The banker said that the country has proven reserves of natural gas and other important resources that could be effectively utilized if placed as national priority. There is interest from foreign companies that want to participate in bilateral projects for the development of these resources and this will make Cyprus stronger and will consolidate its geopolitical position in the region.