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Courtesy of Gold News

Two years on from Cyprus’ now infamous bail-in – an event which shook the island’s economic foundation to its core – the future appears brighter, with significant progress having been secured through the collective effort for recovery. Despite consecutive positive evaluations of the country’s implementation of its economic adjustment programme, however, substantial risks to this recover still remain. 

Speaking exclusively to Gold News, three Cyprus economists underline that these threats, if left unaddressed, may yet prove to ruin the island’s prospects and leave its future in the balance once again. 

“Despite the tragic events of March 2013, Cyprus’ economy has showed resilience and the country was able to return back to stability and regain some of the lost confidence from international markets and investors rather quickly, which is necessary for a return to growth and gradual reduction of unemployment,” says George Theocharides, Associate Professor of Finance at the Cyprus International Institute of Management (CIIM). 

This was an outcome of a number of factors, he explains, including a recession much milder than expected, stabilizing unemployment, achieving sustainable public debt levels, diminishing budget deficits, and securing a primary surplus well before onlookers had predicted. 

This was then reflected in five successful Troika reviews, consecutive credit rating upgrades by all three international rating agencies, a substantial reduction of the yields on government bonds, and the influx of foreign direct investment which recapitalized the local banking sector. 

However, “many risks still remain that can easily put us off track and stop us from returning to the coveted growth,” Theocharides cautions.

“A year ago I used to describe the Cyprus economy as out of intensive care but not yet out of the hospital. Now I would describe it as out of the hospital but still walking with a limp and still requiring treatment,” Fiona Mullen, Director of Sapienta Economics Ltd tells Gold.

Although Cyprus has clearly come a long way since March 2013 and the economy did not decline as fast as expected, this has much to do with the small size of the economy, she explains.

“When 95% of your businesses have fewer than 10 employees, as Cyprus does, it is easier to cut costs rapidly and remain in business. I cannot think of any friends who have not taken a pay cut since 2013.” 

Such remuneration reductions are painful – “of course” – however this is one reason why unemployment did not rise so rapidly, together with repatriation (or emigration elsewhere) of EU citizens from Romania and Bulgaria, as well as the job-support schemes managed by the Human Resources Development Authority. 

For the future, however, Mullen worries about how we may move from a "smaller decline" to positive economic and employment growth. 

The economy will not return to growth until we see an increase in confidence, she underlines. One precondition of this confidence is a return to the financial markets – “and as we all know, that requires implementation of the foreclosure and insolvency laws.” 

“As we all know, the progress of our adjustment programme is on hold since last summer (that was the last successful Troika review) mainly because of the successive extensions by the parliament of the suspension of the foreclosure law,” Theocharides explains.

Parliament must concurrently pass a package of some five insolvency bills, he adds, explaining that this delay is costing Cyprus greatly, and puts its economy in danger. 

We are also facing two main external risks that can have a big impact on our economy and the prospects for 2015, the first of which, he says, is the negative impact from the recession that the Russian economy is facing.

“The collapsing Russian rouble will have a big impact on both tourism and professional services this year and we do not have anything else to offset that. It turns out that we barely have enough gas to sell to Egypt, let alone other markets,” Mullen concurs.

Secondly, Theocharides continues, Cyprus is dealing with the issue of the Greek economic uncertainty, which will inevitably have a negative impact on the island, despite the separation of the countries’ respective banking sectors. 

“Although it’s difficult to protect our economy from the external risks, what we can do at least is make sure that we solve our internal problems that exist right now that put an obstacle to any sort of future growth,” he stresses.

Ultimately, to get back to growth, elected deputies need to work together for the good of the country, instead of “playing micro-politics,” says Mullen. This has only given them a bad reputation and has damaged the economy in the process, something which has not gone unnoticed, notes Alexander Apostolides, Chairman of European University Cyprus’ Department of Accounting, Finance and Economics.

“The Economist one mocked Cyprus that it "never misses an opportunity to miss an opportunity". Sadly the events of the recent two years have once again confirmed the dictum,” he quips.

The bail-in, if anything else, presented a golden opportunity to change issues that were dragging the Cyprus economy down. From an inadequate foreclosure bill, to the weaknesses in checks and balances in independent institutions such as the central bank, the momentum of change after March 2012 was lost through a combination of a reluctance by governance to tackle the really hard issues (such as civil service reform and privatization), Apostolides tells Gold.

“On issues where the government did try to push important reforms (foreclosures and extension of shopping hours) the recalcitrance of the opposition to pass them through parliament punished the economy, just as the fallout from the Ukraine crisis was becoming evident in Cyprus.”

“I feel that the government could have a successful second half of its term only if it becomes braver about changing the ills that trouble Cypriots, focusing on opening up closed professions to competition and reshape the civil service to the interest of the citizens,” he concludes.