Managing the Cyprus Economy towards sustainable growth Praxoula Antoniadou-Kyriacou Minister of Commerce, Industry & Tourism, Cyprus London School of Economics Friday, 10 February 2012 1
Structure of Cyprus economy before the financial crisis A small open economy with services sectors acquiring greater importance over time At earlier stages, overdependence on tourism Later, overemphasis on financial sector Construction a main growth sector all along shipping gaining growing importance Heavy dependence on imports of oil, burdening the current account, inflation and the environment 2
Way crisis affected the Cyprus economy No initial exposure to toxic instruments Fall in external demand for goods & services Tourism initially dropped (2008-09) Fall in FDI -purchases of 2 nd homes Adversely affecting construction sector Gradually feeding in on Domestic demand Drop in real growth Gradual increase of Unemployment 3
Tight credit conditions SMEs turned to banks for financing to wither the crisis Unfortunately money remained tight at this crucial initial stage, where accommodation of requirements could have made a difference At a time when the ECB was lowering interest rates and pouring liquidity into the system 4
Bank Liquidity Banks which were loaded with liquidity turned to investment abroad And to those sovereign bond instruments which bore the highest return Hence exposure of part of the domestic banking system to Greek debt increased. 5
Cyprus Macroeconomic Profile 2007 2008 2009 2010 2011 GDP real growth % 5,1 3,6-1,9 1,1 +ve GDP-PPS -% EU27 92 99 100 99 Inflation % 2,2 4,4 0,2 2,5 3,5 Unemployment % 3,7 5,3 6,2 9,3 Current Account deficit % 11,8 15,6 10,7 9,9 10-11 Fiscal balance % 3,5 0,9-6,1-5,3-6,0 Fiscal Debt % 48,9 58,5 60,8 67-68 6
Way out of Recession Cyprus at the border of a world of recession with a world of rapid growth Hence E possibility to return to sustained +ve growth more quickly than rest of Europe Capitalise on pockets of increasing external demand Encourage domestic demand Plan responsibly the way of building the new Long Term, incorporating prospects created in Energy sector but maintaining diversification at the same time, ie keeping focus of other sectors where we also have a competitive advantage 7
Energy novel opportunity Medium term benefits: building of infrastructure Long term benefits: revenue from sales of hydrocarbons Short Term: Investors flowing in to position themselves at the beginning of the new era for Cyprus & the area 8
Long Term Benefits (continued) Revenue from exports of hydrocarbons benefiting current account and GDP Use of natural gas initially in electricity production Reducing CO2 emissions Causing costs & prices to fall increase in competitiveness 9
Human Capital Education system needs to develop & broaden to encompass skills and fields of study that will enable a greater proportion of the local population to partake in economic activity in new sectors Strengthening of domestic labour force Avoid brain drain and retain youth in the country 10
In meantime Fiscal discipline is not sufficient In the ST to MT need to create & sustain growth Some personal suggestions Combined tourist destination Eastern Mediterranean Reduce capital gains tax on property sales Reduce liquidity ratio on resident bank deposits Enhance air & sea communications with rest of world Move on implementing digital agenda 11
Enhancing energy security of Europe At a time when Europe is actively seeking for new sources of natural gas After shift in energy mix And as a bridging solution until renewables can assume a significant share of energy generation 12
Challenge ahead Policy making by visionary leaders should concentrate on utilising new variable (energy) in the equation of the Eastern Mediterranean in a way that will contribute to the sustainable attainment of peaceful, productive economic cooperation that will benefit both the peoples of the area as well as those of our wider European family. 13