Panayiotis Rougalas
The contact circle with the banks has not been completed, and there will be a new one to adopt measures that will provide relief to borrowers regarding the increased interest rates.
In his first interview with print media, the new Minister of Finance, Mr. Makis Keravnos, talks about interest rates, accuracy, sanctions, inflation, rumors about restructuring, and the past.
At the same time, he explains the effort of tax reform, which, as he emphasizes, is a two-year project. He explains that the only option is for Cyprus to have a prudent policy within the framework of strict fiscal discipline and financial stability.
- You were the Minister of Finance in 2004-2005, 20 years ago. What is the connection between the Cypriot economy then and now?
The problems back then were enormous, and the problems now are equally significant. At that time, we had a very specific goal, both economic and political, which was for Cyprus to join the European Union. The main objective was to adopt the euro as our currency. I took over Cyprus under supervision, and the economy had to meet the Maastricht criteria so that we could apply for the integration of the pound into the exchange rate mechanism 2 and maintain economic stability there for two years. It was a challenging period and a significant commitment from the coalition parties to avoid implementing new taxes. We achieved these goals by managing the economy efficiently, improving resource allocation, and closely monitoring the implementation of the economic program. We adopted the pound, the mechanism, and managed to have a surplus budget.
Now the difficulties are equally numerous and significant, stemming primarily from the Russian war in Ukraine. The problems it has created are focused on the supply chain of goods and the production of goods, leading to a high level of inflation. At the same time, the response to inflationary tendencies by the European Central Bank, with the continuous increase in interest rates, also leads to various other problems. There are countries in the EU with inflation rates of 15%. Therefore, the difficulties are many, but so are the challenges. The only choice we have is to pursue a prudent policy within the framework of strict fiscal discipline and financial stability.
Interest rates and accuracy
- Since you have opened the chapter on interest rates, have you sounded the alarm for Cypriot banks regarding interest rates? Have you sent messages for them not to rejoice only about the profits they make?
For banks, it is a golden era due to the interest rates. However, the banking sector is globalized and independent. It falls under the ECB, and the systemic banks are regulated by the SSM. Therefore, the Ministry of Finance cannot intervene in the banking system as it could have done in the past. However, what can be done and is being done by the Ministry of Finance is to provide "strict guidelines" and make a "strict invocation" of their corporate social responsibility.
- So, in the meetings you had with bankers in the recent period, can I assume that you did the above? Therefore, the measures being implemented to reward responsible borrowers are a result of this effort?
As major organizations, they should have sensitivities towards society and the economy, especially considering that they received support in the past when they needed it. The Cypriot people, through their sacrifices, helped them to continue to exist, and now they should respond to the calls of society during a period when their profits are increasing without much effort. From the careful discussion we had, each bank will implement its own mechanisms. Thus, in combination with the Central Bank, each bank will take actions that suit its own model. It is clear that the rewards for responsible borrowers announced by the banks are a result of the efforts of the Ministry of Finance as well. The response of the banks was within the timelines we set, with measures and incentives, as well as the creation of products for deposits. I want to emphasize that the cycle of communication with the banks has not been completed, and there will be further engagement.
- Voices of people struggling due to prices and interest rates have reached your ears, and what actions are you taking?
I am aware that the European Commission and the European Central Bank cannot implement specific policies for each country. The increase in interest rates by the ECB occurs when there is increased liquidity in the economy with the aim of tightening it and, in general, reducing inflation. In the case of Cyprus, there is liquidity, but it is trapped within the banks and difficult to escape from the banking system. Therefore, the increase in interest rates does not significantly contribute to reducing inflation. That's why we have taken additional actions and measures, and we continue to address the issue of affordability and inflation. We announced some measures last Wednesday, and we have implemented a zero rate on essential everyday products for households. We continue to subsidize electricity through the Electricity Authority, and we are reducing the consumption tax on fuels.
Here, I would like to emphasize that we have prepared a new catalog of products and services with reduced VAT rates, from 19% to 3% and from 5% to 0% for certain items. This catalog is currently undergoing legislative processing and will soon be passed by the Ministry. Additionally, on Wednesday, I presented a proposal to the Ministry for capital discounts to companies that adopt measures to reduce energy waste and utilize energy sources that are environmentally friendly. It is an encouragement for businesses to move in the direction we want to promote, that of the green economy.
A 2-year project
- Now you give me an opportunity to address the tax reform. Please elaborate on your thoughts regarding the upcoming project.
Any tax modification is related to tax reform. As for tax reform, we have assigned the task to the University of Cyprus, which can utilize any experts it desires from abroad to proceed with the modernization of the tax system. The goal is to modernize the legislative framework of tax reform, a tax reform in which I was directly involved in 2002 and 2003. After 20 years, as you can imagine, it needs to be differentiated according to the dynamics of the new economy. I believe it was a system that helped and "worked" quite well until now since 2003.
- The tax system also "worked" for the services sector until now, a sector that has experienced significant growth. Where is the new tax system heading?
A tax reform leverages the data of the new economy, the emerging sectors, etc., but its main objective should be to encourage businesses to invest and ensure fairness in the taxation of individuals. This reform should also involve income redistribution in a fair manner, avoiding concentration. Among other things, the current tax reform aims to benefit the middle class. As a government, we have a people-centric approach and genuinely care about the middle layers of society and the working class.
- When will it be completed?
It is a major project that will take two years to complete. However, there will be interim reports along the way, based on which decisions will be made and adopted. In other words, it will be gradually implemented. By the beginning of the new year, we will have an initial proposal from the experts we have assigned to the task. After careful study, certain measures may be taken.
- What do you consider to be the most significant fiscal challenges facing the Cypriot economy today?
The fiscal challenges at this stage can be summarized primarily into three pillars: migration, energy costs, and interest rates. Regarding migration, it entails significant expenses, and while we provide assistance to the best of our abilities, considering our capacity and the size of the state, we have reached our limits. As for energy costs, they are high for the operation of businesses and industries, resulting in increased prices for our products. This is why the government is making efforts to introduce gas to Cyprus and utilize it for energy production. Lastly, the discussion returns to the issue of interest rate hikes, which inevitably pose a fiscal challenge affecting borrowing costs. While we managed to secure a favorable interest rate with the recent issuance of sustainable bonds, we closely monitor the process for upcoming debt issuances and take action to prevent significant increases.
- How concerned are you about the issue of natural and legal persons from Cyprus included in the sanctions list, and how do you handle the blocking of companies that have been affected but have no direct connection to the sanctioned individuals?
The sudden issue of sanctions by the United States and the United Kingdom caught us unprepared, but the government responded promptly and decisively. We saw it as an opportunity to cleanse Cyprus' name. We immediately contacted the governments of both countries and requested and received information on the reasons for imposing sanctions on specific individuals. The information provided is being examined by the Legal Service to determine if there are any other criminal matters involved. Through diplomatic channels, arrangements have been made to appoint a liaison person who has a connection with these countries, facilitating the exchange of information and functioning preventively.
Regarding the "blocking" of companies, through diplomatic channels, the request has been accepted so that each affected party can take actions and measures to make exceptions through procedures documented on the websites of the foreign Offices of Economic Sanctions Enforcement of each country. Exceptions can be made, similar to those made in European sanctions, for purposes such as payments, salaries, taxes, and healthcare. Additionally, in the Ministry of Finance, we have given the green light to the company registrar to release companies that do not have a direct connection to the sanctioned names. Already, several companies have been released. At this point, I want to emphasize that based on the experience of British experts, it has been decided to establish a Unified Supervisory Authority.
- Are you afraid of a wave of new Cypriot names being added to the sanctions and the impact it will have on the economy?
The intentions of the British and US authorities are not to punish specific professionals but to stop the system that has been created in recent years with the assistance of various Russian oligarchs through passports. I believe that not many names will follow because we are now in good cooperation with these authorities. They have recognized that Cyprus has responded promptly and seriously, and its intention is to build infrastructure that will prevent these issues from recurring.
- Are you considering the possibility of leaving the Cabinet in light of a potential reshuffle that President Christodoulides might undertake in September, as rumored?
I have no information regarding whether the President of the Republic is considering such thoughts. However, every minister, from the moment they are appointed, should be aware that they should be ready to leave if asked to do so by the President.
- When it was announced that you would assume your duties under Mr. Christodoulides, there was some "noise" about the fact that you had left as a minister in 2005 and immediately took a senior position at the Greek Bank. How do you comment on that?
What I can tell you is that I had no intention of leaving the Cabinet at that time. However, it was a unique economic situation, and I needed to move into that position for the benefit of the Cypriot economy at that time. And that's what I did, for the benefit of the Cypriot economy.
[This article was translated from its Greek original]
