Economic concerns are gradually replacing the healthcare concerns of Covid-19 as it seems likely we will be facing an unprecedented economic downturn. At the core are problems on the global supply, demand and mass layoffs.
In Cyprus, the economic effects of Covid-19 have yet to be strongly felt, mainly due to the government’s swift action to support businesses with employee subsidies and postponement of loan repayment. However, as in any country, government support can only run for so long.
In attempting to foresee the risks that the local economy faces, one should perhaps start from the primary income sources of the country and the GDP drivers. And it is no secret that the Cyprus economy relies heavily on foreign investment, which substantially comes from tourism, investment in real estate and construction and professional services. The first two are primarily affected by the restrictions on flights and the viability risks faced by airlines, while the third, the professional services sector, already dealing with inefficient, time-consuming and costly banking support, has to now cope with the Russian Federation’s suggested changes on the double tax treaty between it and Cyprus,
So, what should Cyprus do? Several organisations have provided proposals, but the answer is not an easy one, and perhaps a specialized committee should be formed with economists and business leaders that would be appropriately equipped to form a strategic plan. Our urgency is a high-risk factor in introducing measures without an overall strategy considering well thought of short-term, medium-term and long-term objectives. While being agile is vital, Covid-19 should also be seen as an opportunity to build a better future by making long-delayed but necessary reforms.
As to the short-term targets, it is the author’s view (as submitted to the Paphos Chamber of Commerce) that the government should aim to incentivize the circulation of money and the flow of foreign investment in the Country. Cheap credit on its own seems like an inadequate response in an economy reliant on foreign investment.
The priority should perhaps be to (i) quickly issue construction, immigration and other pending permits, (ii) give incentives for investments in Cyprus in new and traditional industries such as renewable energy, technology and real estate (such as providing building density in agricultural land) (iii) properly incentivize employers to retain employees after the support measures expire (one proposal by a member of the board of the Paphos Chamber of Commerce, is to give employers as an allowable expense 150% of an employee’s salary) and last but not least (iv) to take bold action to deal with the inefficient, prolonged and costly banking system especially when dealing with money transfers from abroad.
The banking sector itself is an open wound. The excessive and inefficient processes cause significant delays in money transfers deterring a number of foreign investors from doing business while unreasonably increasing the costs of those who do. A quick solution (but not a complete one) could be to avoid double due diligence checks where the money to be transferred are in a European Bank which has conducted its own anti money-laundering controls. At the moment, a bank in Cyprus would conduct a new due diligence check to receive money already in another bank in Cyprus. Such double checks seem at odds with the free movement of capital in the EU and the countries’ overall co-operation in economic, tax and legal matters.
In the medium and long term, we can turn Covid-19 into an opportunity to change our economy. We can strategically review and promote the next pillars of the economy. We can and perhaps should incentivize investments in renewable energy and technology. In any case, effective business support and transparency is crucial and as such we should prioritize the faster digitization and change of governmental and other authorities starting with the key sectors such as the land registry, the planning authorities, the Companies registrar and the Courts.
Our economy relies heavily on foreign investment. We should incentivize and make it as easy as possible. And above all, we should keep in mind that Covid-19 can be turned into an opportunity to build a better future for Cyprus. The key is to be strategic in setting and executing objectives.
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This article has featured in the Cyprus Mail on the 26th of April 2020.