Interview with Socratis Ioakim, first published in Greek.
Having been consigned the tripartite of maintaining fiscal discipline, cleaning up the banking sector and promoting structural reforms started by the Anastasiades government, President Christodoulides underlines that he will attempt to add a more people-centric approach to his policies during his term.
In his first interview with Forbes focused exclusively on economic matters, he reflects on the government’s plans to address rising prices and the policy axes that will be followed in relation to tax reform. He also refers to the actions that his government will take to shrink the shadow economy, and also on how they will ensure the sustainability of the social insurance fund. Finally, he reveals his plans for tourism and how environmental sustainability and Cyprus’ climate neutrality will be achieved.
Based on what we heard from you before the elections, should we assume that you will continue the course followed by the government of Nicos Anastasiades concerning the economy?
The outgoing Government was called upon to manage the financial crisis of 2013 as soon as it took over. The political will for quick implementation and the successful completion of the Memorandum of Understanding with the lenders was a catalyst for the recovery of the Cypriot economy. At the same time, the tripartite of maintaining fiscal discipline, consolidating the banking sector, and promoting structural reforms proved successful in dealing with the challenges that followed, as we saw, for example, in the case of the pandemic. Our own governance aims to go further, having at the same time, people at the centre of our policies.
The recent crises have once again highlighted the need to protect the economy, but also the need to preserve the path of development and support the most vulnerable groups of the population. Continuing to operate with fiscal discipline and through a people-centric approach, we aim to promote, through a series of investments, targeted measures, and reforms, the expansion of the productive base of the economy, utilising research, innovation, and technology and above all, the valuable human resources of our country, which I consider to be our most important advantage.
Having mentioned the above, as a Government, we fully adopt the “Vision 2035” long-term strategy, having as an aid the “Cyprus Tomorrow” and THALEIA 2021-2027 flagship public investment programmes, the total amount of which amounts to approximately €4 billion. In this context, actions are planned to accelerate our transition to a low-emissions economy, both for businesses and for the general public (public buildings, housing, electric mobility). At the same time, we are promoting the digital transformation of our country, both in terms of state-citizen relations and transactions, but also in the wider business world. The export potential of our country, supporting extroversion, and also the connection of research and industry are also placed high on our list of priorities.
Finally, I believe that our political relations with the countries of the wider Middle East offer opportunities to attract significant investments, along with the possibility of creating highly paid jobs for our young people. I consider our political relations with the USA, India, and Japan to be equally important efforts in this direction.
Managing high prices
We see high prices and inflation surging ahead, loan instalments increasing, and, by extension, the purchasing power of households and businesses decreasing. How will the government help without affecting fiscal discipline?
Over the past two years or so, both internationally and domestically, inflation rates have risen significantly as a result of the pandemic and Russia’s ensuing invasion of Ukraine, mainly due to increases in energy and food prices, with knock-on effects in all sectors of the economy.
Nevertheless, it is worth noting that compared to the rest of the EU member states, inflation in Cyprus has been maintained at a lower level. Specifically, in March 2023, harmonised inflation in Cyprus decreased to 6.1% compared to 6.7% in the immediately previous month. For the whole of 2022, inflation in Cyprus showed an increase of 8.1% compared to 2021, which was lower than the increase in the EU27 and Eurozone of 9.2% and 8.4% respectively, while among the member states of the EU, Cyprus had the 4th place in relation to lowest inflation. Regarding the prices of food and energy products, in 2022 they showed an annual fluctuation of 7.7% and 32% and compared to the rest of the EU member states, Cyprus occupied the 4th and 13th lowest positions, respectively.
The government, of course, fully recognises the negative impact that inflation has on households and businesses and has implemented measures to mitigate the impact of rising prices without jeopardising fiscal discipline. In particular, the Council of Ministers decided to extend the subsidy for the increase in electricity bills until June 2023. The measure in question, which has been in force since September 2022, provides for subsidising the increase in electricity bills in stages and according to electricity consumption, from 50% to 80% for residential, commercial, and industrial consumers, while for vulnerable households there is a subsidy of up to 100% Furthermore, the measure to reduce excise taxes continues until June 2023, while through the payment of the Cost of Living Allowance (CoLA) for the whole of 2023, the staff of the public and the wider public sector, as well as a significant part of the private sector, are being replenished the loss in the market value of their income by about 50%, though earnings being increased by 4.36%.
In the same vein, the recent Council of Ministers decision to amend the Scheme for the production of electricity from Renewable Energy Sources, which introduces the “virtual net billing” virtual offsetting of accounts, as well as consideration to reduce certain VAT rates in particular for daily basic goods based on a recent relevant European Commission Directive, will mitigate the effects of high prices on households and businesses.
On the increases in loan instalments, the state is already subsidising an interest rate of 1.50% on more than 6000 housing loans granted in the 2020-2021 period. More broadly, the banking sector, given the significant profits they are expected to make in the next two years, should also take initiatives to reduce lending rates and charges to households.
Tax Reform
In your pre-election campaign programme, there was a reference in the context of the tax reform to increase the tax-free income to €24,500. What other measures are you working on besides this one?
Within the context of my pre-election programme, I referred to the need for an integrated tax reform, which aims to modernise the tax framework, with the main axes being the increase in the competitiveness of Cyprus’ tax model, the reduction of the administrative burden for tax-paying citizens and businesses and, at the same time, the provision of a fairer redistribution of the tax burden, while also maintaining fiscal neutrality.
The competent ministry, the Ministry of Finance, is already working toward conducting of an in-depth expert study that will evaluate the existing tax system, keeping in mind Cyprus’ commitments in the context of the National Recovery and Resilience Plan, other European obligations, as well as the digital and green transition of our country. Subsequently, after evaluating the expert suggestions, the planning for the integrated tax system will be finalised, taking into account the good practices of other states.
The proposed reform aims at the real improvement of the economy with increased growth rates, while ensuring social cohesion. Our ultimate goal is to achieve better living conditions for the country’s citizens and to create a business environment that favours the increase of investment activity, towards further development and prosperity.
The shadow economy phenomenon
How will you shrink the shadow economy which, based on the latest available data from Eurostat, amounts to 30% of the GDP?
The shadow economy is a phenomenon that brings about grave consequences for the economy and society, such as, among other things, lower tax revenues for the State and the deepening of social and economic inequalities between citizens.
To address and reduce the phenomenon of the shadow economy, we will follow a combined approach with specific horizontal and vertical actions. First of all, the proposed tax reform, through the simplification of procedures, digital transformation, and the introduction of modern technology systems, will improve the State’s tax collection capacity. Also, in the context of digital transformation, with the creation of a fully digital state and the strengthening of the digital economy, transparency, and information will be reinforced and lead to the easier recording of financial transactions. And finally, an especially crucial element is the measures that will be promoted in the context of the reorganisation of the State, to strengthen transparency and battle corruption, including the special proposal to criminalise the failure to submit a tax return.
During the pre-election campaign, you also referred to an economy that would innovate, and be resilient, sustainable, expanded, and less prone to external factors. Through what structural changes and reforms will you achieve this?
The diversification, or better yet, the expansion of the development model, through a focus on knowledge, innovation, and the green transition, is a necessary condition for strengthening competitiveness and, by extension, strengthening the resilience and sustainability of the Cypriot economy, which, as a small and open economy, today is greatly influenced by external factors.
The expansion of the development model concerns both the development of new knowledge-intensive productive sectors, but also the strengthening of traditionally important sectors for the Cypriot economy through the increase of investments in the digital and green transformation of businesses. The details of these objectives can be found in the content of the Recovery and Resilience Plan and in the “Vision 2035” Long-Term Strategy for the Sustainable Development of Cyprus, which I mentioned earlier.
The Recovery and Resilience Plan has a medium-term character, with a timetable of completion by 2026, with structural reforms and landmark investments in all sectors of the economy and society. Indicatively, I would like to refer to the investments in e-government and in research and innovation, through the Programmes of the Research & Innovation Foundation and the Equity Financing Investment Fund, the establishment of a National Development Organisation, the extensive subsidies to businesses for digital and green investments, the programmes to upgrade the skills of employees as well as important reforms such as the modernisation of the Companies Law, the reform of the justice sector, the Tax Reform, the reform of the civil service and the modernisation of state hospitals. In addition, we will proceed with the creation of a Business Development Agency (BDA), based on similar agencies in other European countries, with the main objective of improving access to financing for sustainable and promising business activities.
The successful completion of the structural reforms and implementation of the major investments we are promoting requires the mobilisation of all parties involved and coordination between them. In this context, we are proceeding immediately with the establishment of a Government Project Support Secretariat within the Presidency of the Republic, which will decisively contribute to achieving our common vision of creating a model state, with a prosperous and resilient economy and a fair and exclusive society.
In relation to the Social Insurance Fund, how will you ensure its sustainability and the achievement of a dignified living for pensioners?
The sustainability of insurance and pension systems is a major challenge faced by many Governments worldwide, especially due to the phenomenon of population ageing.
Safeguarding the Social Insurance Fund and achieving a dignified living for pensioners are key priorities for the Government. Therefore, we will move forward with the modernisation of the Pension System framework, which will include providing financial and other incentives for the development of private funds, following best practices and trends from the rest of Europe. At the same time, it is important to ensure that the best practices are followed in the management of Provident Funds, and towards this, we will seek the establishment of a strong relevant Supervisory Mechanism. And finally, we will promote the creation of an actuarial service at the Ministry of Labor and Social Insurance, with the aim of supervising and developing both the Social Insurance Fund and the private pension sector, aiming to upgrade the lives of Cypriot pensioners.
Becoming a year-round tourism destination
Regarding tourism, what actions will you take as a government to strengthen the sector?
Tourism has always been one of the most important sectors of the Cypriot economy and is directly linked to the well-being and quality of life of all the inhabitants of our country.
The Governance Programme that we have drawn up includes specific and diverse actions that specifically concern the tourism sector, and which have already begun to be implemented by the relevant Deputy Ministry. Among others, these actions include:
- Updating the National Tourism Strategy, which was drawn up by the previous government and concerns the period 2020-2030. The update will cover the time frame up to 2035.
- The resolution of pressing issues that concern the country’s tourism sector such as the modernisation of the relevant legislation that regulates the licensing and operation of leisure centres, the implementation of an effective legislative framework to limit noise pollution, and others.
- The further utilisation of digital technology for purposes of promoting Cyprus abroad, the creation of a digital application for the convenience of visitors and others.
- The further strengthening of our country’s air connectivity.
- The promotion of major infrastructure projects such as the integrated development of the Port and the Larnaca Marina, the continuation and completion of the process to find an investor for the construction of the Paphos Marina, the successful completion of the Paralimni Marina and the regeneration of the mountainous areas.
- In the first phase, the extension of the tourist season with the further improvement of air connectivity and the upgrading of promotional actions, and in the second phase the implementation of actions, such as the continuous enrichment of the tourist product with the aim of making our country a year-round tourist destination.
- Strengthening the resilience of the tourism sector while simultaneously promoting sustainability by implementing actions such as the utilisation of renewable energy sources, the use of the circular economy by tourism businesses, the protection of biodiversity, and others.
The EU aims to reduce greenhouse gas emissions by 55% compared to 1990 by 2030 and to be climate neutral by 2050 – what actions will you take to achieve this goal?’
Achieving environmental sustainability and climate neutrality is a goal of utmost importance for us. Therefore, Cyprus supports the adoption of the very ambitious goal of reducing emissions at the European level and is committed to contributing to its implementation, to the extent that it is responsible for.
As I have repeatedly stated, decisions on critical environmental issues must consider the scientific knowledge available. In this context, an impact analysis has been conducted by the Government’s Academic Advisors, using special energy and economic models, to assess the effects of the harmonisation of the Republic of Cyprus with the objectives set by the 14 Legislations of the “Fit for 55” Package for the 2030 emissions reduction. From this analysis, it has become clear that the green transition is a major challenge for Cyprus and requires significant investment and the transformation of the entire economy.
It is worth noting that the appropriate utilisation of the European Financial Instruments has already been planned, in order to implement many green projects. More specifically, investments related to the promotion of energy efficiency measures and the reduction of greenhouse gas emissions, the promotion of Renewable Energy Sources (RES), the sustainable management of water, the enhancement of biodiversity, the promotion of sustainable transport, and adaptation to climate change are planned, as well as the prevention of risks from natural disasters and promotion of the transition to a circular economy.
Of course, additional measures will be needed to achieve the targets of reducing emissions by 55% compared to 1990 levels. At this stage, the National Energy and Climate Plan, now the legislatively designated national planning tool to achieve climate neutrality, is being revised. All the Ministries involved are working together to select the appropriate and most efficient measures to achieve our goals, based on scientific assessments. At the same time, measures are being considered to help vulnerable households and businesses, also making use of European resources.
Preventing climate change is anticipated to bring about great benefits to society and the economy in the long term, but it may initially come at a cost. Our effort is to make the green transition in a fair manner.
(Photographs by Demetris Vattis)
