Learning from the Cypriot experience

Joseph F.X Zahra's article on Newsbook

There are a number of similarities between Cyprus and Malta. Both are small Mediterranean countries. They are members of the European Union and the Eurozone. They were both British colonies. Some could say that the similarities stop here. Cyprus suffered a Turkish invasion that left the country divided between the northern part which is occupied by the Turks and the rest of the country which is the Cyprus which is recognised by the international community. In the nineteen seventies and eighties, Cyprus experienced a reconstruction boom with its economy growing at a steady speed. I remember that in the eighties when I started visiting the island on a regular basis, the differences in the pace of economic development between Malta and Cyprus were clearly visible and they were remarkable. Cyprus had better roads and general infrastructure, the capital city Nicosia had already a number of modern high rise buildings, and the standard of living of the people in general was better than that of the Maltese. When Malta was inward looking, depended on state controlled investment and implemented protectionist policies, the Cypriots were looking outwards, attracting global companies to open regional offices in Nicosia, and Cypriot businessmen and professionals invested in projects of construction and services in the Gulf and the Middle East.

Twenty years forward, the financial and economic crisis of 2008 and the debt crisis of 2012 have left Cyprus in a dire state, with a shrinking economy and drastic increases in unemployment. The Cypriot government is now following strict instructions from the Troika (the International Monetary Fund, the European Commission and the European Central Bank) as the country is being bailed out and assisted in its journey towards recovery. Malta has sailed through both crisis without much pain and this as a result of the robust economic policy of the nineties and the noughts during which the country’s infrastructure was modernised, education was given priority,  and the economy was further diversified with new growth sectors in finance, ICT and transhipment. All this have served to strengthen the Maltese economy’s resilience to external shocks.

So what went wrong with Cyprus and what can we learn as a country from their experience to avoid a similar situation. The Cypriot crisis is essentially a banking sector crisis with wrong decisions taken by the Central Bank, and by the two major commercial banks (the Bank of Cyprus and the now defunct Marfin Laiki Bank), which considered themselves to be “too big to fail”.  Strong concentration in investments, indiscriminate giving of loans on property and a continuous inflow of Russian deposits had made the banking sector and the economy vulnerable to both market and political risks. Cyprus has also a large public sector which grew even further during the left-wing presidency of Demetris Christofias (2008-2013). The public sector is heavily unionised and pampered by subsequent administrations. Trade unions in the country have not  yet woken up to the new social and economic reality and they are more concerned to retain the status quo and protect their members, even in sectors that have lost their competitiveness,  rather than accept policies that encourage the employment of newcomers into the labour market.

These three impeding factors have contributed in a big way to the economic crisis in Cyprus. They also serve as a warning signal to Malta. We cannot take for granted the economic policies of the past and believe that the momentum of the last ten to fifteen years will continue. We need to safeguard the strengths of a robust banking system, a modernising public service and the vigilance of our regulators, but we are also to look ahead and strategize for the next fifteen to twenty years, considering that the State is bound to become smaller and that private enterprise and initiative will take a central role in economic development.  Shed off the status quo mentality and welcome an era of public service reforms, efficient public investment in the areas of ICT infrastructure and education, incentives for entrepreneurship and an aggressive campaign to attract foreign direct investment.

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