LONDON - Talk of the need for the Cyprus government to form a new economic growth model is well under way beyond the island’s borders as well, and it involves the international press, economists and analysts.
A common theme is the acknowledgement that along with the banks a very large part of the rest of the services sector will be affected – a serious blow for a country where the tertiary sector makes up 80% of the GDP, tourism included. It’s not all doom and gloom though, as the ongoing debate reveals choices and possibilities.
As far as the banks are concerned there is a new landscape and a new equilibrium of sizes and opportunities. “It will be an opportunity on the one hand for the subsidiaries of foreign banks to expand their operations, and on the other hand it will be difficult for them to compete with the Bank of Cyprus, an institution which will have a huge share of the market,” Professor of International Finance at Cass Business School, Kate Phylaktis told CNA.
Looking further afield in the services sector, the Cypriot professor sees no reason why the international business model cannot continue to attract business services, including insurance, shipping and legal services: “A substantial number of the drivers of this model, which include institutional stability, low levels of corruption and bureaucracy, highly educated labour force, well established legal system based on the British standards, good geographical location, good communications infrastructure, which made Cyprus attractive in the past will continue to be there. Of course, the favourable corporate tax rate has been raised. However, Cyprus still has the extensive network of double taxation treaties.”
At the same time, the reduction in salaries, which will result in the lowering of prices, should make Cyprus more competitive and attractive.
“Emphasis should be given to encouraging other services, such as medical and educational. The fact that currently Cyprus is more politically stable than other countries in the region adds to its attraction,” added Kate Phylaktis.
Any discussion about new growth models tends to focus on sectors with already significant contribution to the national economy. There could be competitive advantages, though, that have not been developed to the maximum. “I think that there is something missing from the discussion on growth in Cyprus, as it has been missing from the same discussion over in Greece, and that is the industrialisation of the agricultural production, food processing-manufacturing,” pointed out Dr Vassilis Monastiriotis, a Senior Lecturer in the Political Economy of South Eastern Europe at the LSE. Speaking to CNA, the Greek economist explained that there is the possibility of trademarked and other products acquiring such a status that could secure them their own niche in the international market. For such products, a light processing-manufacturing industry could be developed offering quantities big enough to sustain an export model.
What’s more, this light manufacturing could support other sectors such as construction, finance or legal services. “In order for these auxiliary services to be supported after the banking sector overhaul, Cyprus needs to come up with other production sectors that require such services. I don’t think for instance that tourism could contribute to that extent as much as manufacturing could,” said Dr Monastiriotis.
Tourism has inevitably emerged as a main point of reference in the new growth model dialogue. Experts in London highlight the strong regional competition that Cyprus has to fend off as well as the need for some adjustments, for instance in the costs of the tourism product; but there’s hardly anyone who doesn’t recognise the potential for further development and financial gains from tourism. As Britain’s most revered travel expert, Simon Calder wrote in his newspaper column only a few weeks ago, despite any outcome of the crisis in Cyprus “the sun will still shine, the mountains will look glorious and you’ll still be warmly welcomed.”
Tourism is often accompanied by shipping as the other obvious growth prospect for Cyprus (as it happens in the case of Greece as well). In a recent interview with the CNA George Mouskas, head of London based Zela Shipping and President of the Cyprus Union of Shipowners remarked that shipping could become a growth engine. “(What) we can do is try to promote the flag even more, especially in Greece. Cyprus is cheaper than the other countries (in registering a vessel),” he told CNA.
A hindrance in Cyprus’s efforts to expand its economic activities and recover is its economy’s size and the island’s location, according to Vassilis Monastiriotis. “Cyprus cannot depend on a large scale production that would allow it to become competitive. Being small means that it would need to excel in a high expertise sector. This production sector could be built within a supply network involving other countries, but that would be difficult for the island, as the main partners are Greece and the other EU countries which are not very close,” explained the LSE economist.
However, the country’s size and need for small scale competitive expertise could open up another window, namely active pursuit of new technology products, especially in ICT (Information and Communication technology), financial products, software etc. “Given that Cyprus has an advantage with its potential human capital, through the possible repatriation of able graduates, something like that could be developed. There could be a small enterprise of ten people with a relatively small capital base and a competitive product,” elaborated Dr Monastiriotis.
Another economic factor that could not be overlooked is the island’s natural gas reserves. Most commentators at least in the UK believe that Cyprus faces a rare economic prospect, albeit one that would be very hard to rely on immediately. “We still don’t know how soon the gas revenue will start coming in and how much it will be. If Cyprus is tilting towards the Norwegian model of managing revenue, then that means the money will not be put to immediate use, but will be kept as a future guarantee, something which is good and useful and could fund growth,” said Dr Monastiriotis.
Christopher Coats is an expert on energy issues in the Mediterranean, currently working on a new paper on energy and growth in Southern Europe. Speaking to CNA, he mentioned that any real impact on the Cypriot economy is too far down the road to affect the country’s current economic challenges. “In the short term, natural gas will likely play a larger role as a negotiating tool than a real driver of immediate economic growth or recovery. Without a transport infrastructure in place to deliver potential gas reserves to a viable market, which is expected to cost billions that Nicosia simply doesn’t have, Cyprus just cannot rely on expected revenue to help meet its near-term economic needs,” he said. Coats also referred to the need to deal with the domestic demand in Cyprus and a “volatile regional political environment” before turning attention towards export potential.
The energy analyst also believes that the natural gas will be used by the government of Nicos Anstasiades as a means of ensuring financial support from Europe in exchange for future cooperation and production involvement. “For now, the gas is remaining under local control but given the scope of the country’s economic problems, it’s not really clear how much longer they can keep it off the table,” commented Coats.
Regardless of specific economic sectors, Vassilis Monastiriotis stressed the need for a multidimensional economic strategy, with a diversified economic activity: “Monoculture is not a good guide. There should be at least two or three central sectors, but that does not mean the rest should be left unattended. The balance between incentives for the central sectors and how these affect the rest of the economic activity is also a matter of great importance.”
The question in everybody’s mind is when will Cyprus “find its legs”, as President Anastasiades put it in his televised speech after the Eurogroup agreement. “How quickly we come out of the catastrophic impact of the crisis depends very much on how innovative the government is in implementing innovative policies, which encourage the restructuring of the economy,” said Kate Phylaktis.
“The Cyprus government did that successfully once before after the 1974 Turkish invasion. The question is can it do it again? Of course, at the time it was not part of a monetary union, with more flexibility in its policies. Perhaps this is a lesson, which it might force it to reconsider its membership to EMU, and remain only a member of the EU,” added the Cass Business School professor, referring to another issue of economic nature dividing economists at least in the UK who look at not only Cyprus but the whole of the eurozone periphery.