Economic Growth Steady – Finance Minister


The economy expanded by 3.6 percent in the second quarter, growing steadily, said Finance Minister Haris Georgiades.

Lost ground is being made up, and unemployment is below 11 percent, he added. The growth was accomplished without excessive bank borrowing or irresponsible government spending, said the minister. Public funds are under control, he said.

The dramatic fall in interest rates and funds from the European Development Bank have helped to stabilise small-to-medium enterprises, according to the minister.

However, he cautioned that the challenges are not over and there should be no return to the excesses of the past.

During the AKEL communist government between 2008 and 2013 the economy was damaged by excessive state spending and a lack of risk management by the largest banks. The Central Bank was virtually unable to do its job because of direct government interference in its powers. The many distortions in the system during this period led to the state’s bankruptcy and the bailout of Bank of Cyprus and the Co-operative banks. Hellenic Bank did somewhat better on its risk management and exposure to Greek Government Debt, but like most banks here was damaged by the recession which lasted several years.

In March 2013 the government changed to DISY. The new government was faced with financial and economic disaster wrought by the communist administration. It had to agree to a EU-IMF bailout or face total bankruptcy. The situation was so bad that in March 2013, the banks closed and government salaries and pensions were not paid – the accounts had been emptied. Even today, over three years later, nobody knows what happened to the emergency banking fund or billions of Euros in state money held in the Social Insurance and Pensions funds.

Many of the biggest problems were solved: Laiki was closed and Bank of Cyprus saved, meaning the island still has a banking system. Some progress was made on reforms in the state sector and government-owned companies.

But many reforms were rejected. Reforms linking increases in state salaries to growth rates, for example. The reforms were part of the modernisation measures to protect the economy from another collapse like the one in 2013, but opposition parties made sure to block the bills during a vote held in the House of Representatives in December 2016.

It means that the unchecked state overspending seen in 2008-2012 could easily be repeated if economic growth slows down again. In layman’s terms, it’s like spending much more than you earn and then expecting someone else to pay your bills.

The state payroll is two billion Euros per year and the state makes income from taxes of around six billion Euros per year. Other than spending on the state payroll, the other big expenditure is around two billion Euros on social insurance payments like unemployment and similar benefits. In other words, one-third of the entire state income goes towards salaries. The whole economy is worth 17 billion Euros per year in terms of what it produces, and is the engine that drives state revenues. If the civil service salaries, bonuses and payroll grow disproportionately to the economy, there is a big problem, as we saw in 2013 when the economy and financial system hit a brick wall and there was no money to pay government salaries and pensions.

Everyone is struggling to survive the aftermath of the recession. Even if unemployment is under 11 percent, the young generations have little hope of finding a job. Cash flow is scarce. The banks have gone from recklessness to fear of lending. If the economy grows for another three to five years, the situation may become healthier, but that is a big IF with the presidential elections coming up in 2018. It is crucial that the voting public remember that the economy must be preserved and grown, not used as a piggy bank for political parties.

Global growth isn’t that robust yet, and the EU is not exactly back to vigorous competitiveness. So even the bigger picture spells out caution and prudent economic management.