International businesses and investors are right now wondering whether governments are really up to the task of handling the fallout from the global shutdown. With real GDP in the EU predicted to shrink by 9.3% in 2020, the message from the European Commission is that the speed at which countries will recover depends not only on the evolution of the pandemic, but also on the structure of their economies and their capacity to respond with stabilizing policies.
When it comes to navigating economic crises, Cyprus – one of the EU’s smallest member countries – has written the book. After Cyprus’s financial crisis of 2013 and the subsequent bail-in, we chose to look long and hard at the significant fiscal, banking, and regulatory weaknesses that had derailed the economy. Seven years on, while the Coronavirus crisis is inevitably taking its toll, the tough decisions Cyprus made back then means it is more likely to thrive in the current crisis than many of its competitors.
Before the global COVID-19 outbreak, the remarkable effort by Cyprus to transform its banking, financial, and regulatory structures in the wake of the financial crisis had turned it into one of the fastest-growing economies in the eurozone. Over five consecutive years Cyprus registered growth rates which averaged at 4.4% of its GDP, with surplus budgets, rating upgrades, and unemployment falling to its lowest level in decade. A calculated shift to downsize the banking sector, reduce the concentration of high-risk assets, and impose one of the strictest anti-money laundering frameworks in Europe had renewed confidence in the banking sector, and the island was attracting new international business and FDI.
As damaging as the 2013 financial crisis was to Cyprus’s economy and its credibility, it is the lessons it learned from that experience that are now helping the island to rise to the challenges presented by the global pandemic.
In 2013, Cyprus was an isolated case. Today, there is barely a country in the world that hasn’t felt the impact of the pandemic. Several European countries, including Sweden and Spain, are seeing a resurgence of COVID-19 cases, delaying any recovery plans, while many others went into the crisis with high public debt levels and fundamental fiscal and monetary vulnerabilities which are now limiting their capacity to grow.
Where Cyprus’ previous crisis can be partly blamed on a failure to tackle deep-rooted problems before it became too late to reverse the downward spiral, Cyprus’s response to COVID-19 was swift. Early lockdown and travel restrictions effectively controlled of the spread of the infection and the island has introduced one of the most extensive testing and tracing programs in Europe. As a result, the low number of cases means Cyprus is ranked among the safest destinations globally. While parts of Europe face border closures, Cyprus airports have been open for business since June 10.
This time round the State’s strong fiscal position has enabled it to offer a helping hand to businesses and individuals in a way that wasn’t possible in 2013. This included a €2bn financial support package – one of the largest support schemes per capita in Europe. Cyprus’s GDP in real terms will be significantly lower in 2020, compared to 2019, but is expected to rebound during 2021.
For Cyprus, the long road to recovery after 2013 was only possible by being honest about its past weaknesses – a high percentage of non-performing loans; a system overloaded with high-risk deposits; a weak regulatory framework, and the use of professional intermediaries which had allowed some clients to obscure their identity in the financial system.
In facing up to its challenges, our small island had to be bold. Significant reforms in recent years have included downsizing the banking sector and closing thousands of accounts to reduce the banks’ exposure to high-risk jurisdictions. The sum of bank balance sheets which represented more than eight times the GDP in 2010 is now below three times, less than the EU average.
Another lesson that applies from 2013 is that mere compliance with the letter of the law is not enough. As Cyprus re-shaped its financial frameworks and tax transparency requirements, it had to fully adopt the highest international standards. Without these changes, Cyprus would not be in the place where it is now.
Cyprus is still not out of the woods. A high amount non-performing loans remain a challenge, and tourism, one of the main pillars of our economy, has taken a severe hit from the global travel restrictions. However, by downsizing the banking sector, new sectors have flourished, reflected in the large-scale infrastructure projects that are still underway, and serious investment into healthcare, higher education, technology, and renewable energy.
As Cyprus moves through the unchartered waters of the current crisis, Finance Minister Costantinos Petrides is sticking to the prudent strategy adopted after the 2013 crisis, maintaining the commitment to promote structural reforms with an aim to increase the competitiveness of the economy.
None of the changes Cyprus made in 2013 were easy, but it was the only way to move forward. In the same way, governments now struggling with the fallout from the COVID-19 crisis must not hesitate to take difficult but necessary decisions, going against the flow if required.
As devastating as it has been, the 2020 crisis could be the catalyst that transforms economic activity across Europe, just as the 2013 crisis did in Cyprus. But this will depend on governments underpinning their economies with strong financial and regulatory frameworks and having the agility to grasp new opportunities that will support growth and create jobs.
What is clear is that Cyprus can no longer be characterized by its past failings. Talk to any investor about what they admire most about doing business in Cyprus, and it’s the resilience of the country, the sense of safety and stability, and the pro-business spirit of its people. Cypriots have faced dreadful challenges in the past and came out the other side. Without any doubt, they will do so again.
Harris Georgiades is a Cypriot economist and politician. He is the Deputy President of the Democratic Rally and previously served as Minister of Finance of the Republic of Cyprus (2013- 2019).