“The lifting of the capital controls has been the ultimate confirmation that stability and confidence in our banking sector has been restored.”

In the first half of 2015 Cyprus recorded two consecutive quarters of growth – breaking 14 quarters of recession – in addition to the complete lifting of capital controls in April. In your view how far is Cyprus along in terms of stabilising the economy and restoring confidence?

The Cyprus economy has been rebounding strongly and is emerging stronger from the crisis. A very ambitious programme of economic reform, fiscal consolidation and bank restructuring has been implemented since 2013 and is delivering tangible results. Essentially, we took the decision that we would transform crisis into opportunity. I believe we always knew what needed to be done, but for years we were hesitating, postponing politically difficult decisions. Complacency was predominant both in the public and the private sector. But since the crisis there has been a different mind-set. The current Cyprus government, which took office at the height of the crisis, rose to the challenge and has been leading the effort of stabilising the economy and promoting economic reform. Through the implementation of this programme major imbalances and problem areas are being tacked, whilst at the same time preserving everything that was healthy and strong in our economy. And it is fortunate that most key sectors of our economy, including tourism, business and financial services and shipping never lost their potential but actually retained their competitive edge. Even the hardest hit real-estate sector has been recovering. It is the resilience of these productive sectors which allowed us to withstand the shock and which are today driving the economic recovery.

 

The capital controls appear to have had less of an impact and duration that many commentators expected, why do you believe this was the case?

It’s all about confidence. Regrettably during the previous years confidence was shaken and this had a devastating effect on our banking sector. Capital controls had to be imposed and I will not claim that this did not have a negative impact on economic activity. But through decisive action on all fronts confidence was gradually re-established. A key confidence-building development was the arrival of foreign investors who injected new capital into our largest banking institutions. This, together with the broader stabilisation of the economy, enabled us to fully lift restrictions much sooner than many expected. The lifting of the Capital controls has been the ultimate confirmation that stability and confidence in our banking sector has been restored.

 

What are your targets, goals or conditions in relation to Cyprus’ exit from the bailout programme?

What we are interested in is exiting the programme on time. And already, a few months ahead of its completion, we have essentially established all conditions which will enable us to do so. The economy has exited the recession and is back on growth. Market access has been re-established. We shall of course be maintaining the reform momentum. Requesting support from the IMF and the ESM was inevitable but we can take it from here.

 

You recently stated that Cyprus must record another 2-3 years of growth, and continue its reform process in order to consolidate the progress made since the crisis.

Indeed. In fact let me clarify that our objective is not simply to face off the crisis. That’s done already. But what we are aiming is the creation of solid foundations for our economy and the establishment of conditions that will ensure sustainable growth. That is exactly why we are determined to maintain the reform momentum. We will work hard to create an even more competitive and productive economy. Let us also not forget that unemployment remains high, higher than the Eurozone average, and if we are to create new opportunities and new jobs we need healthy and sustainable growth over a longer horizon.

 

What would you highlight as the key milestones that need to be achieved over that period to create a platform for sustainable growth?

I could mention a few priorities. Firstly, we need a smaller, leaner and more effective public sector. Over the past decades our public sector became inefficient and costly. We acknowledge that red-tape is probably one of our major problem areas. We want to do away with red-tape and offer red-carpet services to our fellow citizens but also to local and foreign business. We are now engaged in a major public administration reform. We have put a halt to new hiring and are instead enhancing mobility within the administration and re-examining structures, operations and procedures. We shall be investing in IT and we shall try to create a more business friendly administration.

Secondly, we want to attract new foreign investment and in this direction we are presenting several new opportunities. Our privatisation programme includes telecoms, sea ports, real estate and the Stock Exchange. We shall be opening up the gaming-industry through the licencing of an integrated casino resort and also through the privatisation of the State Lottery. And we are creating new opportunities in the up-and-coming energy sector including those related to the recent Natural Gas findings in the East Med but also in the Renewables Sector. Opportunities are also offered in tourism related infrastructure, primarily Marinas.

And thirdly, we want to maintain a stable and attractive tax regime and this is yet another reason why we are determined to stick to the policy of fiscal consolidation. Raising taxes to cover the excesses of the state is out of the question.

 

The issue of an extremely high level of NPLs held by the banking sector remains the biggest long term challenge to growth. What are your expectations and what has been done to assist the sector?

It is true that NPL’s are particularly high. There are several reasons for this and in a way it is an inevitable leftover of the banking crisis, the banking holiday which ensued, the imposition of capital controls and of course of the property boom and bust. Let me clarify that if a loan is categorized as an NPL it does not necessarily mean that it is one which is not serviced at all. More often it involves a loan which is behind by an instalment or two. Still it is a challenge and that’s why we have improved our legal framework in a manner which will encourage viable loan restructurings but also, if necessary, foreclosures. But ultimate, the ultimate remedy to NPLs will be time and a recovering economy.

 

You have said that the 2016 Budget will be the last under the Memorandum, but not the last rational or realistic one – with an eye on not burdening the private sector, businesses or households. What can we expect from the budget and what are your priorities?

The 2016 budget bears all the hallmarks of a very successful fiscal consolidation effort. The difficult work took place during the last couple of years when we had to contain and reduce spending. We are now enjoining the benefits of a balanced budget with a healthy primary surplus, with some additional fiscal space for new infrastructure projects and a marginal overall increase in primary expenditure. And most importantly, the balanced budget was achieved without having to raise taxes. I consider this as a good example of a growth friendly fiscal consolidation and an answer to the false dilemma between growth and austerity. We’ve balanced staying clear of the worst kind of austerity which a state can impose on households and enterprise, in the form of additional taxes. The automatic stabilizers will now be put to work and this will definitely encourage growth.