Market Update: The advice George Vassiliou gave on the economy and business in the midst of the pandemic – Full Analysis

George Vassiliou was a visionary and forward-thinking political and business leader, with concepts and a philosophy that were perhaps, in some cases, far ahead of the era in which he presented them.

Usually, the passage of time confirmed their correctness and justified his approaches.

In the midst of the pandemic, which fundamentally shook not only the economy of Cyprus, but also the economies of the entire world, George Vassiliou came forward and, presenting his own documented reading of things, presented specific proposals for how Cyprus should proceed in the unprecedentedly difficult economic environment that had formed.

“I believe in the abilities and, in particular, in the creativity of the Cypriot people who are aware of the fact that the island may be small but its citizens are great. Together with them we will successfully build the future we owe to our children and grandchildren,” he concluded in an article entitled “Addressing the Impacts of COVID-19 for a Secure and Safe Future,” which was hosted in GOLD magazine in 2020.

It was the conclusion of his article, perhaps the epitome of his personality, the recipe for his multi-layered success…

The following is the full text of George Vassiliou’s article, as published in the May 2020 issue of GOLD magazine:

Dealing with the Impact of COVID-19 for a Certain and Secure Future

By Dr. George Vassiliou | Photo by Rinis13

The French Minister for Europe and Foreign Affairs, Jean-Yves Le Drian, told Le Monde on April 20, “My fear is that the world afterwards will be very much like the one before, only worse.” In other words, the coronavirus is not an ordinary illness that comes and goes without any real impact but one whose impact we are gradually seeing as time goes by.

The pandemic caught us all unprepared. Fortunately, the Government acted immediately to appoint a scientific committee and made it responsible for monitoring the situation and advising on what needed to be done. Our readiness to accept the strict implementation of measures aimed at containing the spread of the virus was, to a great extent, successful because everyone understood that it was the right course of action, based on scientific and not political party criteria.

The question that is now understandably being raised by many is “What will the impact of the crisis be?” The hardest part is yet to come, since 2021 will be worse than 2020. This year, amid the containment measures, we have been able to justify the closure of businesses, leisure centres and various types of shops, restrictions of movement for several weeks, and more. All of these have caused unforeseen problems and, in 2021, I expect things to become much worse.

(a) Natural Gas.

We had all believed that Cyprus was going to become extremely wealthy from the discovery of large reserves of natural gas and the influx of enormous revenues. Unfortunately, the COVID-19 crisis has drastically altered this prospect. We are all aware that demand for natural gas and oil has fallen considerably, while at the same time, supply has increased significantly due to efforts by other countries to discover and exploit their own gas fields. As a result, the price of natural gas has tumbled (from $10 in January 2019 to $6 in January 2020 and to $2 now) and it is not expected to rise, at least not in the near future. In practical terms, this means that we have to forget our dreams of future wealth from natural gas. The crisis has already forced major energy companies to change their plans. They are all delaying any activities while ExxonMobil has spoken about drilling towards the end of 2021. No-one can be sure whether, once that time is near, work will not be postponed yet again.

(b) Tourism

2019 was a golden year for tourism in Cyprus and there were hopes that the industry’s importance would grow extremely fast during the new decade. Many in Cyprus are still talking about the tourist season starting in July 2020 and they may be dreaming about last year’s numbers when some 500,000 visitors arrived in each of the months of July, August and September. The fact that, due to the crisis, some of the world’s biggest airlines have either been forced to close or to significantly reduce the number of flights they operate and, at the same time, are appealing for state assistance, is enough to persuade us that any recovery in the sector will be slow and gradual. And this is only with reference to air transport. There are many other issues:

1. The significant restrictions imposed by various countries due to COVID-19.

2. Unlike other Mediterranean countries (Greece, Spain, Italy, Turkey) which are accessible to tourists by land (by car or train), Cyprus is entirely dependent on airlines.

3. We should not ignore the fact that the financial crisis is affecting the whole of Europe and, as a result, those who do manage to travel are going to spend less, on average, than in previous years.

For precisely these reasons, if we think realistically and plan for the future of our tourism industry, we should expect that it will be difficult for visitor numbers and revenue from tourist accommodation and spending to reach 2019 levels by 2022 or even 2023.

(c) Cash Flow, Unemployment and Income Problems

Many wish to believe that 2021 will be a year of recovery and progress but there is a danger of exactly the opposite happening. Unemployment is bound to rise due to the tourism crisis and lower turnover in a range of sectors such as clothing, footwear, furniture, motor vehicles, electrical goods, etc. At the same time, I fear stagnation or even a reduction in revenues from foreign students. The downturn in world trade, due to the global financial crisis, has had a negative impact on the maritime sector. Specifically, while revenues in 2019 amounted to almost €1.3 billion, they are expected to fall by 20-30% in 2020 and still further in 2021. Among so many businesses facing difficulties and recording a lower sales turnover, the only exception may be those in the electronic gaming sector, due to the much greater amount of time that young and old alike are spending at home.

(d) Services

For the same reason, we can expect those providing services to foreign companies in Cyprus to face sales stagnation or reduction. Government ministries are underperforming and a large number of civil servants are working from home with reduced productivity. This impacts customer service. For example, it has been reported that departments that previously required several days to process a task may now take a month or more. Business with the Department of Lands & Surveys and the Office of the Registrar of Companies, of which we were once proud thanks to their progress and fast service, now faces long delays. At some stage, they will undoubtedly have to do more than simply return to their previous level of service and ensure that they improve it. Strange as it may sound, the prevailing view is that the introduction of new technology, computerisation and online service as fast as possible will eventually bear fruit but, in the initial stages, it will lead to delays and no-one knows how long it will take to overcome them.

(e) Administration of Justice

Complaints about delays are well-documented and, unfortunately, due to the crisis, the situation has worsened.

These are just some of the impacts. I could go on but, from what I have mentioned above, the picture is clear. We need to focus all our efforts on dealing with the enormous problems and lay the foundations for a new beginning. Starting now, we must lay the foundations for growth in 2021 and 2022. Below are some of my proposals.

Public Finances

As predicted for Western Europe and the US, Cyprus can also expect a significant reduction to its revenue and a parallel rise in expenditure due to the needs created by the COVID-19 crisis. Increased government spending is expected in the following areas: 

1. Amounts needed to guarantee liquidity of SMEs.

2. The significant increase in social and unemployment benefits.

3. Funding of Municipalities and Communities.

4. Investment in projects to upgrade online access to public services.

Revenue is predicted to fall:

1. From direct taxation, due to lower sales turnover and reduced profitability.

2. From VAT and other indirect taxes.

3. From other sources, e.g. the Office of the Registrar of Companies, the Department of Lands & Surveys, etc.

Reduced income has already forced the Government to borrow €2 billion to help companies which, in normal circumstances, would be able to service their debts but now need to secure liquidity backed by government guarantees. It is expected that many businesses will be forced to close and hundreds of employees will find themselves out of work. However, had the banks undertaken to provide loans to all businesses, knowing that a good number of them would not be repaid, the entire banking sector would have been endangered. We all know that no economy can function without a healthy banking sector.

Responsibility for supporting the unemployed must, therefore, be taken by the Government, which is not something it should fear, even if borrowing leads to a large increase in the public debt, since the loans will be relatively long-term (20-30 years) at interest around 1% and no more than 2%. We shall be lucky if we manage to restrict the public debt to €23-24 billion.

Of course, the European Union will also contribute, through a series of measures aimed at dealing with the increased expenditure due to the crisis, but these will in no way be able to fill the void that will be created.

The Need for Increased Revenue

I have described a situation for Cyprus that is characterised by serious economic/financial problems, which it will be impossible to resolve without increased revenue. We must do everything possible to reduce the state’s burden on the economy. The public sector payroll already represents an excessively high share of GDP. I therefore propose:

(a) A salary freeze for the next 2 years. 

(b) Postponement of recruitment to the public service and semi-government organisations for the next 3-5 years.

(c) A freeze on promotions or, if they are carried out, with no changes made to salaries, temporarily. 

We have no right to maintain a divided society: on the one hand, privileged public sector, semi-government and bank employees with permanent jobs and, on the other, everyone else hoping to remain employed, even on reduced salaries, unless they lose their jobs and have no prospects of work in the immediate future.

I believe that we need to introduce a new type of tax in the form of a temporary 5% cut on all monthly salaries over €2,000, including those in the private sector, for the next 2 years. The revenue received should be used to make productive investments.

The advantages of this approach are:

(a) To show the European Union that we are serious about growth and lending, and

(b) not to place all the burden on the public purse.

New investments

Public Health: We may be proud of the fact that we have successfully dealt with COVID-19 and limited the number of deaths due to the virus but, unfortunately, the fact remains that public health spending in Cyprus lags behind that of the other EU member states. Prior to the introduction of the National Health Scheme, spending on health was 2.7%, the lowest in the EU. Even now, at 4%, it remains the lowest in Europe. In order to secure our future, it is therefore essential that we seriously strengthen the public health system and upgrade our hospitals so as to deal successfully with any future crisis.

Industry: We must adopt a policy of reinforcing certain areas of the manufacturing sector, in particular the pharmaceutical industry, which contributes significantly to the country’s growth and exports, with huge prospects in the immediate future due to the impact of the pandemic.

Agriculture: The potential of the agricultural sector is even greater, thanks to the advantages of Cyprus’ climate as regards the early production of fruit and vegetables. For this reason, I believe that greater state intervention is justified in the form of funding for organic production and livestock farming and to encourage young people to become involved in the sector.

New Sectors: For the future, it is not enough to work hard. Investment in new innovative sectors is required and we should be encouraging our scientists and universities to translate their scientific research into business activity.

We have a duty to reduce public sector operating expenses and to postpone investments that are not essential at this point in time. On this issue, I would like to draw attention to what appears to me to be a delay in how lower oil prices are reflected in reductions to the price of electricity, which would benefit both consumers and business.

Greater Security through a Settlement

As a result of the crisis, there has been a considerable increase in both economic and political insecurity. If Cyprus is not reunited, no-one can guarantee the future or the security of foreign investments, not can the UN peacekeeping force be expected to remain here indefinitely.

Therefore, once circumstances allow, we must play our part in (a) reopening the crossing points, (b) improving relations between the two communities and (c) taking initiatives to restart talks on resolving the Cyprus issue on the basis of a bizonal, bicommunal federation and encouraging the international community to contribute to this effort. 

Our Role

In this article, I have attempted to describe the impact that the pandemic may have but, at no point, am I suggesting that we should be intimidated by the magnitude of the duty we have to undertake. To succeed, however, we need to start now. We must not accept indifference and mediocrity. We must not justify bureaucracy or accept no answer when we call a public service department. As Italian Foreign Minister Luigi di Maio stated in April, “Without the present, the future does not exist. The future is being built now.”

I believe in the abilities and, in particular, in the creativity of the Cypriot people who are aware of the fact that the island may be small but its citizens are great. With them, we shall successfully build the future that we owe to our children and grandchildren. 

Info: Dr. George Vassiliou is the former President of the Republic of Cyprus (1988-1993).

(Sources: GOLD magazine, InBusinessNews)