The small Mediterranean island of Cyprus could witness unprecedented change thanks to an ambitious six-year plan to transform the country’s fortunes.
The fabled birthplace of the goddess Aphrodite, Cyprus has applied for €1 billion (US$1.16 billion) in European Union recovery grants to build health-care capacity, modernize education, reform the judicial system, digitize government services and increase energy efficiency, among other modernizing projects.
According to documents seen by the national English-language newspaper The Cyprus Mail, the funds and plans are already in place. The only stumbling block is finding a collective political will among the island’s famously quarrelsome politicians.
The huge EU handout is dependent on certain structural reforms, and for those reforms to take place, a change in legislation will need to pass through parliament.
Last Thursday, Finance Minister Constantinos Petrides met with the main opposition Progressive Party of Working People (AKEL) to help secure a smooth passage for the economic future of the country. Given the devastating blow the Covid-19 pandemic has dealt the island’s economy, insiders remain hopeful.
The coronavirus hit the island’s fortunes hard this year, with gross domestic product shrinking 11.9% year on year in the second quarter of 2020. It was the sharpest contraction on record, and was mainly attributed to the pandemic’s impact on the tourism industry.
Little surprise, then, that the island has been working to diversify its economy, aggressively courting foreign investment as politicians set their sights on making the country a regional hub for education and business. Compared with the powerhouses within Europe, it might seem that the Republic of Cyprus – population 1.189 million – is punching well above its weight, but the country is holding its own in relative terms.
In the 2020 Index of Economic Freedom published by the Heritage Foundation this month, Cyprus scored a respectable 7.84 out of 10, placing 22nd on a list of 162 countries. This was an overall score increase on the previous year of 2 points, primarily thanks to improvements in government integrity, the US conservative think-tank said.
Within the Europe region, Cyprus is ranked 20th among 45 countries, creeping ahead of seemingly bigger players such as the Netherlands, Austria, Finland and Spain. The island’s overall score is also well above the world average.
Although the rankings for the 2020 Index come from 2018 statistics, it is not GDP that has pushed Cyprus into the top “mostly free” category, but rather the significant reforms that have taken place in recent years.
These have included a new insolvency and foreclosure framework, a reformed supervisory and regulatory banking framework, reforms to boost the efficiency and liquidity of banks and initial steps to fix a dysfunctional title-deeds transfer mechanism.
Marios Christou, who heads the Center of Economic Studies at the University of Nicosia, said: “The Cyprus economy, along with the country’s political and legal system have undergone seismic reforms over the past seven years, which are well reflected in its index score.
“It is important to mention that during the same period, the economy benefitted greatly from these reforms, improving its efficiency in large part on account of the resultant reduced bureaucracy, which was previously one of the main obstacles to the effectiveness of investments, especially FDIs [foreign direct investments]. In parallel, the banking-system regulatory framework improved and strengthened substantially.
“Coupled with the reduced volume of NPLs [non-performing loans], this strengthening helped uplift the indexes of the sector, palpably reflected in the upgrades by the rating agencies both of the major domestic systemic banks and the economy as a whole.”
Despite recent gains, additional reforms are still needed to improve the speed and efficiency of the judicial system, according to the Index report – and that is also one of the areas the €1 billion in EU recovery grants is dependent on.
At this stage, the Finance Ministry’s Directorate General for European Programs is finalizing the details of the six-year business plan that will include proposals for projects from every ministry. This preliminary draft will then go to Brussels in November, and discussions will begin with the European Commission. The final deadline for this process is April 30, 2021.
Most of the funds are mandated to the EU’s Green Deal and digital transition with at least 37% of expenditure directed toward environmental and energy-saving projects, and 20% going toward the digital transformation of Cyprus’ business and industry.
In return, terms demanded by the EU are expected to include the reform of the judicial system, digitization of public services, and the modernization of the education system.
Once these foundations are set, the Cypriot government and the private sector will collaborate on the completion of projects. All projects must be signed by contractors by December 31, 2023, and all payments must be concluded by June 30, 2026.
George Campanellas, chief executive of Invest Cyprus, welcomed news of the EU recovery grant. He said: “This is a great opportunity for Cyprus to capitalize on the huge gains already made in the transformation of its banking, financial and regulatory structures that saw the island become one of the fastest-growing economies in the eurozone prior to the Covid pandemic.
“Cyprus’ standing in the Index of Economic Freedom is further proof of the country’s commitment to the promotion of economic opportunity.”