How to ease the impact of the global crisis.

Byline: Alexia Saoulli

(Category: news )

CYPRUS has so far been mostly unaffected by the global financial crisis that has rocked industrial economies and emerging markets around the world.

Although the island's growth rate could drop down two percentage points to two or 2.5 per cent next year, it still fared much better than dozens of other countries in the EU-27, said Michalis Sarris.

The former Finance Minister and World Bank director was speaking at a public discussion on the 'International Financial Crisis and its Consequences to the Cyprus Economy' on Monday night. The discussion was organised by the Association of Social Reform and the University of Cyprus' School of Economics and Management.

Sarris' speech focused on how to ensure Cyprus kept the impact as limited as possible in a prudent way.

The fact that Cyprus had full employment and a significant amount of economic migration was a positive start, he said.

Sarris said employers would slow down on employing people from abroad before laying off local labour.

"What is also a saving feature of our economy is that so much of it involves services that we sell abroad," he said.

Clients from Russia, the Ukraine, Romania, Bulgaria and Serbia often used Cyprus' legal and financial expertise.

"Our clients are foreign companies based in all those countries and services are less affected than industrial goods when there is a recession," he said.

Although those countries were expected to be hit by the financial crisis, it was expected to be less severe. However, if something were to change and they were to be heavily affected, then this would also have a detrimental effect on Cyprus.

"If the countries of the ex-Soviet Union and the Balkans suffer a significant recession that means they will buy fewer services from places like Cyprus and we will feel the impact."

Nevertheless businesses would still need to have their accounts published and legal services so Sarris was optimistic that any damage would be limited.

Tourism, however, would not be spared.

"It will clearly be affected from the UK and Russia," he said.

Consumers would cut back on holidays to save money and the government needed to have a clear plan about what markets were most likely to be enticed to come to Cyprus despite the economic situation.

"It's easy to say we're going to spend more on promoting Cyprus, it's harder to see where more promotion will have a positive impact," he said.

"It's good to be sure that the money is used effectively and in ways that can be convincing that will lead to tangible results."

The government recently pledged e1/412 million to support tourism as part of its measures to support the economy.

Construction would also be affected, said Sarris.

"It would be a mistake to encourage more construction because all it will do is to build inventories," he said.

This would happen because as demand dropped, prices would be forced down at a faster rate which could result in the collapse of the housing market.

"Artificial stimulus shouldn't be given to construction so that people build more houses. It's tempting when there is a slowdown in construction but you have to think of the problem of building houses that nobody buys," he said.

Cowboy property developers are already believed to be feeling the pinch, with less established developers likely the first to be weeded out as they have less staying power with their finances and liquidity.

Despite this, Sarris said there was no need for panic or sudden reactions.

"I think there is an adjustment that needs to be made. Like everywhere else, there will have to be a slowdown. There will be a correction everywhere, in the stock market and housing market. We have to monitor the situation," he said.

Any additional spending should be well targeted and temporary so that it wouldn't affect public finances in the long-run, he said. People included in this social expenditure should be from lower income groups such as pensioners and widows.

"This is effective because it encourages people to spend and also helps people who need itC* If you need it you're more likely going to spend it," he said.

The former minister also pointed to Cypriots' tendency for overconsumption.

"There is too much borrowing from private individuals for travelling and other consumer durables. That ought to be corrected. If done gradually over a number of years that is a good thing and won't cause a recession. People will gradually save more and spend less. Incomes will grow and you will be saving a bigger proportion than before but will still be spending. It will be enough to keep the growth rate at two per cent rather than four per cent," he said.

If banks needed support this could be done by encouraging more deposits with some sort of government guarantee, he said.

Large projects should be scrapped for the time being as they were difficult to start up and implement. Instead smaller amounts of money should be injected into communities throughout Cyprus which would allow the money to be more easily spread around.

"Money should be given to community leaders and small town mayors who are able to do small town projects. This is always a good way of encouraging spending and keeping economic activity going through small contractors and keeping employment and construction going, as well as doing projects that are good for the community," he said.

Copyright Cyprus Mail 2008

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