Architects of Revival - Exclusive Interview with Harris Georgiades, Minister of Finance, Republic of Cyprus

19 April 2016
Harris Georgiades, Minister of Finance, Republic of Cyprus. ©Business Intelligence Unit
Cyprus is lauded for turning the page on one of its most painful episodes in recent history. On March 7th 2016 Cyprus successfully exited the international bailout program. Only three years prior, in March 2013, the country’s economy was in shambles because of the toxic mixture of bankrupt banks, record unemployment, sky-rocketing deficit and the inability to access financial markets, having its bonds downgraded to junk status. The island was heavily affected by the exposure to Greece, which represented almost 150 percent of its GDP, and by the local real estate bubble burst. 
The Minister of Finance talks to us about the manner in which Cyprus managed its way out of the crisis, the importance of taking statistics with a grain of salt and his emphasis on a sound fiscal policy and welfare reform, granting tax incentives instead of imposing tax burdens, opening new sectors of economic activity and concessions to the private sector as part of his action plan.
Business Intelligence Unit: Cyprus has managed its way out of the crisis quite admirably and the major banks were recapitalized with international participation, such as that of the American investor Wilbur Ross and the Belarusian gaming company Wargaming. The four major banks passed the European Central Bank (ECB) stress test and the three sovereign bond issues over the past two years have been oversubscribed and are being reimbursed ahead of time. What reforms are currently being implemented to insure sustainable growth and dismiss the possibility of a similar crisis occurring in the future?
Harris Georgiades: I would like to start by confirming that we’re not in a crisis situation anymore. This doesn’t mean that all the problems have disappeared, but no economy is problem free. We are in a stage of recovery which has been achieved more rapidly than originally expected due to the right policy mix, which ensured that we did not continue along a spiral of recession, which would have meant lower public revenues, more taxes and further recession. We made it very clear to the local and international investor community that there would be no new taxes, that we would maintain a competitive tax regime and any fiscal consolidation would target the spending side. That’s what we did.
We didn’t follow a typical austerity policy, because the worst kind of austerity is the one that takes the form of an added tax burden; there was none of it. We did indeed cut public spending, but we were able to identify those areas where this could be done without negatively affecting the real economy. It was a growth-friendly fiscal consolidation. We were also careful not to disrupt key productive sectors which were not seriously affected by the downturn of the economy. As such I could mention tourism, the shipping and the services industries which are outward-looking. We nurtured and maintained everything that was healthy in the economy.

We also acknowledged long-lasting problem areas and we decided to tackle them by implementing reforms targeting both specific and broader issues. I will give you one example which I consider very important: the reform of the welfare system. We’re not spending more on welfare now, we’re not spending less, but we have completely changed the way we spend.  We now have a much more efficient system on the basis of credible criteria and the objective is ultimately making the best use of available resources. We call it the “reform and growth strategy”.
BIU: This is a powerful message to bring back investor confidence. Do you think that the Greek crisis, on top of the past Cyprus crisis, could have implications on the investors’ appetite for the region and could therefore negatively affect Cyprus once again?
Harris Georgiades: No, I don’t, because the difficult  but necessary decisions we have taken over the last three years have already changed perceptions and international investors’ confidence has been restored. Let’s take a look at the one sector which sustained the biggest reputational damage - almost a total loss of confidence at the height of the crisis – the banking sector. We have seen the largest foreign investments ever in Cyprus coming to our banking sector. Our banks now are essentially foreign-owned. This is something we consider a positive development because it’s a signal of confidence. This is the ultimate confirmation that things have improved and stabilized. And one step leads to the other.  We have also re-established access to international capital markets – at the height of the crisis we were not even able to borrow to finance our needs. This has also been corrected.
BIU: In the wake of a crisis, the unemployment is the most difficult indicator to remedy, given that it relies on job creation. With a level of 15.3 percent (a slight decrease from last year’s 16 percent) how will the government encourage the process of getting people back to work?
Harris Georgiades: It is an indicator that needs time to correct itself and there is no solution other than maintaining a steady course, ensuring that the economy achieves growth rates again. We are above the European Union (EU) average which is 11 percent. In 2008 we had one of the lowest unemployment levels of the EU, around 3.4 percent and then in 2013 we took a dive. We started to work on the program of economic reform and consolidation mid-2013 which provided the economic growth of 1.6 percent at the end of last year [2015]. We are implementing a program that is delivering. The unemployment has reached its peak and is now gradually decreasing. Essentially we want to create new opportunities for the economy. They require stability and confidence to become sustainable opportunities. And through opportunities come new jobs.
BIU:  What will happen with the nonperforming loans (NPL) of the banks’ balance sheet?
Harris Georgiades: They will be there for a while and there isn’t a very quick solution to this problem. It is a leftover of an unsustainable credit expansion. It fueled a bubble which burst. However looking at the ratio only could be misleading, because not all NPLs are the same. Many of them are only a couple of installments behind, which is not at all unusual, keeping in mind the severity of the crisis in the previous years, but it doesn’t mean these loans have gone bad once and for all and they will not be serviced eventually. We have also introduced new legislation, including a new insolvency law, a foreclosures law, banking mediation and sale of loans framework. These legal instruments are already facilitating a viable restructuring process.
BIU: Cyprus is now aiming at becoming a destination of choice for funds. How does it fit in your overall strategy?
Harris Georgiades: I think it encompasses very well our approach to new sectors of economic activity. It is a private sector led initiative, one with which we have worked very closely. We drafted a number of new laws which essentially opened up the prospects for the sector. It’s a recent example and a good one of how we have been working in close collaboration with the industry, mutually supporting each other. Our role was to get the legislation through, to determine how the funds industry will be regulated. Cyprus is ready and well positioned to be an attractive destination for funds.
Our overall strategy as a government is to meet the requirements of the private sector and to ensure that a proper and attractive infrastructure for business is in place. If you ask me what the biggest problem is, regrettably it is bureaucracy. We know it, we acknowledge it, we’re not shying away from it and we’re tackling it. That’s what the government should do: remove or at least reduce the obstacles such as bureaucracy, high taxes, and barriers to economic economy, and provide smart incentives.
BIU:  Could you give an example of a recent incentive?
Harris Georgiades: In real estate, transactions will benefit from a tax incentive until the end of 2016. So we’re saying if you buy property now, you will have a tax break in the future, whenever you will sell, as long as you have bought now, you will have a tax break. This is a time when we need to boost demand in the real estate sector.
We are also offering a tax break for new capital formation, which was not tax exempt before. If you took a loan to invest in your company, the interest on that loan is a tax deductible expense. If instead of taking a loan, you invested your own capital you didn’t receive a tax deduction. There is now a notional interest system on all capital formation. So if for example you bring one million in capital in your company (that’s capital formation), on that one million a 3 percent interest will be assumed, so you receive a 3 percent tax deductible.
This is what I mean by fine-tuning in the sense of offering incentives to the private sector.

Born in Nicosia in 1972, a graduate of University of Reading, UK, Harris Georgiades has held multiple positions within the Democratic Rally party in Cyprus. During 2009-2013 he served as Press Spokesman and Deputy Head of the Economic Policy of the party. In 2011 he was elected to the Parliament and was a member of the Committee of Financial and Budgetary Affairs, the Watchdog Committee and the Committee of Communications and Works. From March 1st 2013 he served as Minister of Labor and Social Insurance and from April 3rd 2013 he was appointed to the office of Minister of Finance that he currently holds.
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