Current Economic Situation of Northern Cyprus within Sustainability

1
Current Economic Situation of Northern
Cypruswithin Sustainability Convergence
Framework

• The Wolfson Cyprus Group Conference
• 27-28 May, 2005
• Nicosia
• Isilay Yilmaz

2
Sustainability in Economic Development and
Convergence

• Convergence Criteria for the achievement of EMU,
  as defined by EU, includes in fact, those fiscal
  and monetary policy issues that are prerequisits
  for sustainability of economic development, if at
  all exists.
• Gov.deficit ratio to GDP (3),
• Gov.debt ratio to GDP (60),
• Price stability and an average inflation rate
  band,
• Long term nominal interest rate band, and
• Fluctuation margins for exchange-rate mechanism.
• Considering this basic framework, and after
  giving some facts and figures about the Northern
  economy, I shall try to pinpoint strategic
  problems and then conclude on sustainability.

3
Sustainable Economic Development is a Strategic
Priority in Northern Economy

• As this conference focuses on the sustainability
  of the economic development of the North, towards
  economic convergence and reunification in Cyprus,
  we can define the sustainability issue as a
  strategic priority.
• Within this convergence and reunification
  perspective, there exists too many internel and
  external actors, whose policy decisions are not
  always consistent with economic viability
  principles.
• While evaluating the recent economic
  conditions/developments, I would like to stress
  those factors that are,at least to some extend,
  endogenous in our system and therefore help to
  improve the economic policies and procedures.

4
Facts and Figures about Rescent Economic
Developments in North Cyprus

• After two years of severe economic depression in
  2000 and 2001, GNP real growth rate have
  increased. In 2002 and 2003 growth rates were
  6.9 and 11.4 consecutively and in 2004,
  increase in real GNP is estimated to be over
  9.6.
• The rate of inflation (CPI) has been declining
  since the year 2002 and it is expected to fall
  below 10 after three decades of 60 average. TL
  being the legal tender, inflation is an important
  exogenous factor that affects the economy.
• Although fluctuating over the years, total
  investment rate have not reached 20 of GNP.
  However the rate of increase in private
  investments is a little bit higher than the
  public investments.
• For the period 1998-2003, in USD terms, public
  revenues have increased at an annual average rate
  of 8.5 but there has been almost no change in
  the rate of public disposable income. The problem
  lies within the fact that, for the same period,
  annual average rate of increase in total
  transfers was 16.2

5
Facts and Figures (contd. 1)

• Although the Public Sector revenues amounts to
  more than 40 share in GNP, share of the public
  disposable income remains only 18 of GNP and
  the public deficit remains over 13 of GNP.
• The Budget Deficit is over 22 of GDP and to a
  great extend it is financed by aid and credits
  from Turkey.
• Hence the most striking fact about the general
  macroeconomic balances, is that public sector
  balances are not sustainable. High dependancy on
  foreign aid and credit is a real threat for
  sustainable economic development.
• The credits from Turkey are not being paid back
  and hence public balances does not reflect the
  actual figures. Furthermore the system works as
  if there is no debt financing problem and
  accordingly no debt management policy.

6
Facts and Figures (contd. 2)

• Considering the Private Sector Balances,we can
  see that for the period 1998-2003 the annual
  average share of the private disposable income is
  82. Of this amount, Private savings rate is
  almost 25 . On the other hand private investment
  rate remains at around 14.
• Although the private savings rate is considerably
  high, due to the fact that, public savings stand
  at a very high negative level total domestic
  savings rate remains at an average of 14.
• As a result we can stress the fact that, the
  investment climate is not attractive for private
  sector investors. High real interest rates,
  property problems, political uncertainity, trade
  embargoes, insufficiency and inefficiency of
  infrastructural investments are among the major
  bottlenecks for flourishing the investment
  climate.

7
Main Problems of The Northern Economy

• Athough the economic policy have been dictated to
  be enhancement of free market economy since
  1986, institutional and legal structures were not
  subject to appropriate changes. We still have
  public economic enterprises, reluctancy in
  privatization and although technically prepared,
  rules and regulations for free market and
  competetion are not enforced.
• Due to the non recognition problem and embargoes,
  enlargement potential of the market is limited
  mainly with the local demand forces. Increase in
  externel demand, hence increase in potential
  production capacity, had always confronted with
  external limitations. History of our exports is
  full of such examples.That is why, the amount of
  exports in USD terms stays within 50-60 millions
  limit, and net tourism revenues vary within
  100-200 USD millions range. In 2004 the upper
  limits were exceeded ( 62 mil for exports and 271
  mil.USD estimate in net tourism revenues).

8
Main Problems of The Northern Economy (contd.1)

• Public sector has a three dimentional negative
  effect on the economic activity. Being a producer
  and an employer (20 of total employment) it
  creates distortions in the market. With 23
  share of GNP for transfer payments, it is eroding
  more than half of the total public revenues and
  left with a insufficient share for public
  disposable income. As a result, negative public
  savings and public deficit remains to stay as a
  threat for sustainability.
• Inflow of unqualified and outflow of qualified
  workforce, creates erosion on human capital and
  hence restricting the growth potential.
• Recent growth in GNP, mainly stimulated by
  property construction and increased number of
  commuting workers, have limited effects on
  developing the growth potential. On the contrary,
  excessive investments in construction sector
  created a threat of misallocation of resources to
  non productive investments and Commuting
  workersto South resulted in a loss of qualified
  workforce.

9
Main Problems of The Northern Economy (contd.2)

• This increased growth rate is not sustainable
  since it was mostly affected by optimistic
  expectations about peace and EU vision, but not
  accompanied by structural policies for
  institution building and capacity building.
• Productivity is low in general. Long duration of
  protectionist policies and subsidies, have
  resulted in low productivity in the private
  sector as well.
• Geographical distribution of economic activity is
  not sufficient for fostering rural development.
• Structural problems of the financial sector
  remains a threat for the reel sector and the
  economy in general.

10
Conclusions

• Sustainability being the strategic goal,free
  market economy should be enchanced and conditions
  for increased competetiveness should be improved.
  With the restructuring of local business units,
  private sector should be given the lead.
• Public sector reform is vital . And this reform
  should entail administrative reforms that will
  improve the capacity of the public sector and
  help institution building. Expenditure and tax
  reforms are vital for improving the
  sustainability of public sector balances .
  Effective debt management policies should be
  adopted and although it may not be politically
  viable, privatisation should be considered as an
  economically and financially viable policy
  issue. Transfer expenditures policy would
  necessiate reforms in the social security system
  and revisions in agricultural and export
  subsidies.

11
Conclusions (contd.1)

• Public investment policy should focus on basic
  infrastructural invesment requirement both for
  upgrading and capacity building in energy,
  water, telecom and transport sectors that stand
  as basic bottlenecks for potantial growth.
  Furthermore regional infrastructural difference
  should be minimized as a prerequisite for
  regional development and improving regional
  economic convergence. Public investments should
  never be substitutes for private investments
  they should always be supplementary.
• Restructuring of private business units for
  generating efficiency, productivity and improving
  professionalizm for greater economic activity.
• Financial sector should be strengthened for
  further efficiency and reduced potential risks.

12
Conclusions (contd.2)

• Public policies in general should be congruent
  with economic sustainability and aim at
  convergence with EU.
• For convergence of economic performance,
  EU Treaty foresees
• Increasing the standard of living and quality of
  life,
• Improving economic and social cohesion and
  solidarity within EU and
• Congruent with these tasks, creation of
  Structural and Cohesion Funds.
• These objectives and arrangements of the Treaty,
  is giving a very important message
• Economic integration and presence of market
  forces does not necessarily promote regional
  convergence. An external external dynamic is
  always required. Therefore North Cyprus cannot
  attain the convergence objective alone.There is a
  vital need for a common economic vision and
  effort among North, South and EU. This
  necessiates the political will of all parties,
  for a more constructive and comprehensive
  approach.