Management of Cyprus Economy Since 2013: Most Citizens Not Benefiting

The Cyprus Government under the leadership of President Nicos Anastasiades has done a poor job in managing the economy with respect to benefiting most of its citizens over the past 10 years. Policies of the government have been directed mainly at enriching the politically connected few and placing many incompetent persons on its bloated payroll. While there has been a recovery in real GDP growth beginning in 2015, inclusive and equitable growth whereby most of the population benefit from real growth and participate in production has not been achieved.

In retrospect the Cyprus authorities wasted the crisis of 2013 and the resultant financial and technical assistance from the troika of international institutions in not taking the opportunity to implement many of the policy measures and reforms agreed with the troika. Indeed, a weak labor market, characterized by falling real incomes of private sector employees and the biased management and poor quality of the government finances, attest to the failure of economic and financial policies of the Anastasiades administration to generate equitable and inclusive growth.

Labor Market Developments

The implicit business model of the Anastasiades government has focused on promoting property development, mass tourism and consumerism, areas of activity where many jobs are low-paid and insecure, especially for those employees in the retail and hospitality sectors. And the Cyprus government, also, has been very luke-warm in supporting private sector employees’ rights for a decent income, adequate social protection, and safe work conditions, particularly since the passing away of the former Labor Minister, Zeta Emilianidou.

Employees, especially those in private sector, have suffered during the Anastasiades administration. Indeed, compensation of employees as a share of GDP have fallen from 48.3 per cent in 2012 to 44.3 per cent in 2021 and surely declined further in 2022, as increases in wages lagged well behind price rises. In contrast, the share of net operating surplus or profits of companies rose in GDP rose steeply from 18.9 per cent in 2012 to 26.7 per cent in 2021. And most strikingly profits of companies increased by a whopping 82 per cent between 2012 and 2021, whereas compensation of employees rose by just 13 per cent.

Furthermore, it is roughly estimated that the average real incomes of private sector employees, excluding those in the financial sector, fell by over 10 per cent between 2012 and 2022. Only real incomes of public sector employees and those in the financial sector rose over the last decade, thus, further widening the large gap (more than double) between the compensation of public and private sector employees.

It is argued by President Nicos Anastasiades and the Minister of Finance Constantinos Petrides that the sharp fall in the rate of unemployment from 15.9 per cent in 2013 to 7.5 per cent in November 2022 is indicative of a robust labor market. But despite a sizable increase in the number of persons employed, decent work opportunities that offer a fair income, security in the work place, and social protection have, if anything, worsened, especially for the younger generation seeking jobs commensurate with their education and skills. And within the labor-intensive retail and hospitality sectors there are many businesses that are part of the very large informal and untaxed economy of Cyprus (estimated at over 20 per cent of formal GDP), where most workers are employed at very low wages without any social protection.

Management of the Government Finances

 Management of the Cyprus government finances has been inequitable in that the questionable implementation of fiscal policies has been geared in many ways to benefit wealthy property owners and big companies at the expense of ordinary citizens. For example, in the aftermath of the financial crisis of 2012/2013 which, was caused partly by the abuse of bank loans by property developers and hoteliers, households and small businesses were disproportionately hurt by the imposition of excessive fiscal austerity.

Thereafter, greater reliance has increasingly been placed on regressive taxes, such as the VAT, and large borrowings from abroad to finance surging current expenditures highlighted by a mounting payroll bill for less competent workers. In this connection less growth-unfriendly property taxes were scrapped with DYSY party members orchestrating the abolition of the progressive immovable property tax by the House of representatives in 2017. In addition, with the deliberate maintenance of a grossly inefficient system of tax administration, the government has implicitly encouraged tax evasion. And it is the wealthier property owners and self-employed professionals that have benefitted disproportionately from an increasingly regressive tax system and poor and corrupt tax administration.

Given that government revenue resources are severely limited by massive tax evasion and the absence of high-yielding property taxes, funds available for providing an adequate level of social protection for all Cyprus citizens have been far from sufficient. Furthermore, with the government giving priority to the employment of large numbers of connected persons the quality of public services such as in the processing of applications for social benefits is not only diminished, but resources available, including capable staff and funds for efficiently implementing worthwhile investment projects, are crowded out.

Policy Recommendations

There is an urgent need to reform government institutions including the tax department, the Ministry of Labor and Social Insurance, and the Directorate for European Programs, Coordination and Development so as to speed up, respectively, the processing of tax returns, the distribution of social benefits to deserving applicants, and the effective implementation of EU financed projects and programs. And reforming these institutions will require the employment of moral and competent managers and staff as well as enhanced digitization to greatly improve the quality of public services and investments.  

But the implementation of the aforementioned reforms and recommendations may not significantly improve the situation of lowly-paid and insecure private sector employees, many of which constitute the younger generation. In this connection the government must ensure that employers pay at least minimum wages to workers earning low incomes and that minimum wage legislation is extended to sectors not covered, such as agriculture. Furthermore, arrangements should be made so that all employees earning less than 4,000 per month should be eligible for cost-of-living adjustments (COLA); workers earning less than 1,500 euro per month should get the full COLA, those earning from 1,500 to 4,000 per month should receive 50 per cent of COLA, while those employees with incomes above 4,000 per month should be excluded from COLA.

But the best way to improve the current depressing situation of a large number of private sector employees would be to give them the opportunity to secure decent jobs. This is easier said than done and would require a fundamental change in the government’s business model. A new model for the Cyprus economy should aim at catalyzing public and private investments into new or improved products, services and practices. And with 76 investment projects envisaged under the Recovery and Resilience Plan agreed with the EU and as well as harnessing technological innovation associated with the proposed “green” and “digital” transitions, there should be ample scope for supplying new products such as renewable energy, enhanced technical education services, and new digital practices, that in turn should create many decent jobs, particularly for the more computer literate younger generation. In addition, using considerable EU funding aimed at promoting research and innovation should provide some decent jobs to the underemployed scientists in Cyprus.

Of course, a key question is whether the new government will effectively implement the Recovery and Resilience Plan (already lagging) following the Presidential elections, or will it be business as usual with the focus on promoting high-end property development, mass tourism and consumerism as well as continuing to expand the government’s bloated payroll.