The Reactivation of the Economy and the NPL’s “Red Loans”

September 10th, 2015 → 4:40 pm @

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We have recently hailed, and justifiably so, our successful ‘exodus’ to international financial markets and the securing of oversubscription of the issue of European bonds of ten-year duration by the Government. Though it was a welcoming development it should not lead to complacency as to the work ahead. It should not be ignored that this development was not entirely satisfactory. The interest rate charged is neither particularly low compared to what other Countries succeeded after their exodus from the Memorandum nor particularly attractive compared to that charged when borrowing from the European Stability Mechanism. Yet it was a very important development because it creates also the necessary confidence climate for the good prospects of the Cyprus economy. Prospective investors will view more positively the possibility of investing their money in Cyprus either in the form of real investment projects or in financing others to do so.

This development creates the suitable conditions for a real exodus from the stagnant situation of the Memorandum towards growth, which is what we are looking for. It is now that we need a plan, a concerted effort with concrete actions and movements, with priority settings and persistency in order to utilize the good climate created. The aim should be to promote investment, preferably the most productive ones, which will serve the longer-term developmental objectives and targets of the Country.

Personally, I believed that this was what we should have done long time ago. The characteristic phrase I used right from the beginning of the Greek crisis, which I repeated when it came to us, was: With a Memorandum of Understanding or without it growth is the solution. At that juncture the problem, though not insurmountable, was finding the funds to finance investment and developmental projects. Now that there is no such problem we could more easily follow that path. When the economy starts reactivating, within acceptable public financial conditions, we could easily secure more external financing until we can stand on our own feet, with our own resources.

In economics ‘everything depends on everything else’, we say. Foreign and Cypriot analysts consider the high proportion of the Non Performing Loans at the Banks, the ‘red loans’, as the barrier to the reactivation of the economy. Without any intention to undermine their prohibitive role, now, with the above developments, we are in a better position to overcome this barrier and proceed ahead. Why should we try to invent ‘artificial’ ways and means, e.g. by selling NPLs, with the danger of creating other more difficult problems to the Cypriot economy and society, whereas with the reactivation of the economy, together with a more systematic rescheduling of these loans, we could open the road towards a healthy solution of the problem?

The reactivation of the economy will not only solve the problem of the ‘red loans’. It will first of all contribute to the alleviation of the tragic problem of unemployment. In addition, the creation of additional incomes and business turnover, further to enhancing economic activity, will help the improvement of public finances through increased revenues.  In fact, if there is a correct selection of the Government projects to be promoted, there might be a severe economizing in expenditure as well as improvements in the productivity and efficiency of the Government and the economy in general, as shown by some examples below:

I have pointed out on another occasion the huge burden on the annual Budget because of the rents paid by the Government to house its various Services in rented premises. I would have considered it as a very appropriate action if the old plan for the erection of new Government buildings started been implemented after the necessary readjustments have been effected. On the one hand it will give a push towards the reactivation of the construction sector, which, as known, has the widest interconnections with most other sectors, whereas the Government will start economizing on rents. In fact this project will be self financed, because of the consequential savings in rents, but in addition it will lead to increased efficiency of the Civil Service as a result of the concentration and better cooperation between Ministries and Departments.

Another series of projects in which the Government could take the lead are those promoting growth through the utilization of new technology. It is an opportunity to break through in this domain since the future of the Cyprus economy depends on it. First priority for such an undertaking we placed since the 1980’s on the establishment of an International Technological Park to lead the effort to raise the technological standards in various economic activities in Cyprus as the basic ingredient for the production of competitive industrial and other products. I am not sure whether the decision to ask private businessmen to undertake the setting up of such a crucial project is the most opportune one. The operation of the project could have been entrusted to the private sector instead.

Moreover, there are also other opportunities for Government’s involvement in projects utilizing and promoting new technology, such as those which have to do with the use of the sun and wind as alternative sources of energy. In addition to speeding up the processing of the issuing of relevant permits and solving other operational problems and the securing of European funds for the financing of planned private photovoltaic and wind parks, the Government itself could take the lead in promoting such programs. Cyprus has been one of the first countries in the World in the utilization of solar power for the heating of water for domestic needs through solar heaters. Despite many efforts to utilize the sun for housing heating and cooling purposes as well, it is only recently that this has become possible. One complete example, I know, is the construction of a three storey building by the Cyprus Institute near its main headquarters in Nicosia on these prescriptions. Right from the beginning I have suggested that this method should apply also to the Government buildings starting with the Presidential Palace. This method could be also extended to the private sector. This is an excellent opportunity also to start utilizing in practice the findings of research activities by our Universities and Research Centers. Unfortunately our academic researchers are not pushing hard towards practical applications of their findings having no problem in securing research funds mainly from relevant European programs. Perhaps the Research Promotion Foundation should pay more attention in this direction.

Dr Iacovos Aristidou

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