Former IMF-economist from Cyprus sounds alarm on reform complacency

By Stelios Orphanides

Cyprus’s society may have not learned the lessons of the crisis and risks remaining trapped in a prolonged period of slow economic growth if it does not carry out the necessary reforms an economist said.

According to the “weak policy scenario,” Cyprus’s economy, which emerged from a prolonged deep recession last year, will see annual growth rates of up to 2 per cent in the years to come, with unemployment remaining at double digits, economist Mikis Hadjimichael said at a recent panel discussion of the Cyprus Economic Society, in Nicosia according to his power point presentation obtained by the Cyprus Business Mail.

Hadjimichael, a former senior official at the International Monetary Fund and the Institute of International Finance, and currently senior advisor of Bank of Cyprus chairman Josef Ackermann, said that some of the key groups in the Cypriot society reacted in ways ranging from indifference to quick adjustment to the new situation following Cyprus’s 2013 bailout.

Hadjimichael, who was expressing personal views, said that Cypriot political parties do not appear to have learned their lesson from the crisis as they “seem to be returning to the past old practices” of client-based policies, demonstrate an “excessive emphasis on short-term political benefits and populism” combined with “inadequate commitment to medium-term objectives”.

Trade unions also haven’t learned their lesson, Hadjimichael said. They are now “flexing their muscles” and using their “strong political power” after remaining “quiet” following the crisis. Unions offer no strategy which could help bring down the unemployment rate, seen currently at around 16 per cent, which could allow current and new workers benefit from economic recovery and ensure future growth.

Businesses and households, which seem to have understood the causes of the crisis, continue not to serve most of their loans -non-performing loan ration in both cases stand at around 57 per cent- partly because of strategic defaults, he said.

Cypriot businesses, which also operate in a culture where private sector companies avoid paying debt to other private sector companies, are “not unhappy with the past system of influencing policy makers,” he said. On the other hand, households, the Cypriot economist described as “main victims” of the crisis, demonstrate less trust to parties and the government, which initially showed strong commitment in implementing the bailout terms, but then lost its enthusiasm for reforms and sent “mixed messages on strategic defaults, respect of financial contracts, and non-performing loan reduction”.

As a result, Cyprus’s institutions, undermined by appointments based on political affiliations rather than competence, remain weak and ineffective and the system based on connections remains in place, the former IMF economist said.

To reduce unemployment, Cyprus must address constraints to growth which includes serious reforms in the legal system and labour market, dealing with non-performing loans and strategic defaults, changing the non-payment culture, exploiting comparative advantages in tourism, and tackling household and corporate indebtedness via deleveraging. Hadjimichael said that there is a risk for Cyprus to prematurely “declare victory,” even in the absence of structural reforms, growth generating domestic and foreign investment, or of a drop in unemployment and bad debt rates.

Cypriot authorities therefore need to improve the business environment by reducing bureaucracy, overhauling legislation to improve investor and property rights by speeding up dispute resolution in courts, modernising the country’s industrial relations framework, introducing more flexibility, complete the privatisations programme concerning power generation, telecommunications, and commercial ports operations, and urgently carry out sectoral reforms, including the introduction of a national strategy on tourism, he said.