Demetrios Theophylactou, High Commissioner Of Cyprus To India

Although India and Cyprus have enjoyed close cultural ties since several centuries, bilateral trade between the two has always been abysmally low.The Dollar Business caught up with Demetrios Theophylactou, High Commissioner of Cyprus to India, to find out what the countries are doing to improve the situation and to figure out the state of his economy post the last financial crisis.

Interview by Vanita Peter D’souza | December 2015 Issue | The Dollar Business

TDB: Has Cyprus completely recovered from the financial crisis that engulfed it a few years ago?

Demetrios Theophylactou (DT): Since 2011, the Cyprus economy exhibited a contractionary path due to the global economic crisis. Unemployment followed a rapidly increasing trend. Moreover, there has been a significant and abrupt downsizing of the banking sector, following its relative huge expansion observed in the pre-crisis years. In the real economy, the signs of economic recovery are evident as positive growth of the magnitude of about 1.5% is already anticipated in 2015.

Labour market developments exhibited considerable flexibility, as wage levels and employment conditions adjusted to economic conditions rapidly. This led to the containment of unemployment rate, albeit still at high levels, at 16.1% in 2014. More recently, there are signs of stabilisation, with the unemployment rate declining to 14.7% in Q2 of 2015 compared to 15.4% in the corresponding quarter of 2014, giving rise to expectations for a lower unemployment rate of about 15.5% in 2015.

In terms of public finances, fiscal targets have been met with considerable margins, mainly due to the prudent budget execution and a better-than-expected macroeconomic environment. These positive developments prevailed in 2014, whereby the budget balance was marginally negative, falling to 0.2% of GDP. Similarly, in 2015, the budget balance is expected to widen and reach a deficit of the order of 0.5% of GDP, attributed to one-off temporary factors. Given the positive fiscal results, the public debt to GDP ratio is now expected to have peaked in 2014 to about 108%, well below original projections. The debt sustainability analysis indicates that the debt-to-GDP ratio will decline to about 80% by 2020. These are good developments.

In the financial sector, the banking institutions have been adequately recapitalised and restructured, resulting into stabilisation of the amount of deposits in the banking system. It should be noted that the complete removal of the remaining capital controls back in April 2015 had no negative impact on the banking sector, highlighting the gradual return of confidence in the sector.

Overall, the Cyprus economy is considered to be on the right path, with full recovery expected to materialise in the near future.

We Are Working With India To Find Ways To Enhance Our Bilateral Trade And Internal Ties

TDB: How are the economic ground realities back home?

DT: Currently, the Republic of Cyprus is implementing a Macroeoconomic Adjustment Programme, agreed with programme partners, which undeniably has produced positive results. This is projected by a series of positive assessments of the programme implementation, the upgrading of the sovereign by Rating Agencies and also from the significant drop of the secondary market yields (currently the 10-year bond is trading at below 3%).

However, the economy of Cyprus still faces a number of major challenges, pointing to the fact that full recovery has not been achieved yet.

In the real economy, the level of unemployment is still unacceptably high even though it has stabilised and shows signs of abatement. Based on past experience, we expect this level to gradually follow a declining path as economic activity is entrenched and training and retraining of the unemployed bear fruits.

In the financial sector, the level of NPLs (non-performing loans) is very high and for that reason a series of actions have been implemented, the most recent one being the introduction of an effective Foreclosure and Insolvency Framework based on international best practices. The said framework, along with the revised arrears management directive of the Central Bank of Cyprus, introduce the right incentives for lenders and borrowers to agree on the best possible way for restructuring loan obligations by supporting delinquent borrowers.

TDB: Cyprus is seen as a tax haven by many. What do you have to say on this?

DT: The characterisation of Cyprus being a tax haven country is ‘unfortunate’. The tax regime of Cyprus is transparent, simple, broad-based and there are no significant tax exemptions or credits allowing for the adoption of a low rate, which often result in allegations that Cyprus is a tax haven.

First of all, it has to be noted that the Republic of Cyprus is a member of the European Union and the euro area, implementing a comprehensive legal framework as well as a simplified tax regime to ensure, inter alia, the avoidance of unfair competition in tax matters, ensuring transparency, combating tax evasion and avoidance.

Moreover, Cyprus being part of the countries that have signed Multilateral Convention on Mutual Administrative Assistance in Tax Matters, is committed to exchanging complete information related to tax matters, signalling its determination to work together and with all other signatory countries towards moving to the next phase of full transparency and exchange of information in a globalised world.

Along the same lines, Cyprus, since June 24, 2014, has been a member of the Automatic Exchange of Information, which is under the Global Forum mandate, aiming to tackle tax evasion and safeguarding transparency. Cyprus has also signed the Multilateral Competent Authority Agreement (MCAA) that provides two or more parties to mutually agree for exchanging information automatically on an the annual basis.

All these measures ensure that Cyprus offers a transparent tax system, ready to curtail tax evasion and effective exchange of information. Therefore, the Republic of Cyprus cannot be considered a tax haven jurisdiction.

TDB: How has the haircut on uninsured bank deposits affected the flow of capital in and out of Cyprus?

DT: The bail-in of deposits did impact significantly the confidence levels of investors in our banking system resulting in a sustained outflow of deposits from the system. As economic conditions improve, with banking institutions being restructured and recapitalised, resulting in a gradual improvement in the confidence level to the Cyprus economy, we expect that capital will start flowing back in near future.

TDB: India-Cyprus economic ties have always been more about investments and less about trade. Given this, tell us what’s Cyprus’ take on India blacklisting it for not sharing information on tax evaders?

DT: Cyprus and India share similar pasts and traditionally have had good relations, in economic, commercial and political issues, and have cooperated in all aspects. We believe that rescinding the Notification (blacklisting) and concluding and signing the Double Taxation Agreement will expand business opportunities between our countries and at the same time will further develop and diversify relations between Cyprus and India.

Cyprus exerts every effort to provide useful information to Indian authorities under Exchange of Information Provisions. From the blacklisting date (11/2013) until today, Cypriot authorities have put significant degree of efforts to resolve the issue. These efforts have resulted in responding on time on information exchange requests to the Indian authorities, something that is also acknowledged by them.

TDB: With the Government of India promising to bring back black money stashed by Indians abroad, do you expect more friction between Indian and Cypriot governments in the future?

DT: We appreciate the Indian government’s firm commitment to combat tax evasion and money laundering, along with streamlining the flow of investment into India and we assure Indians authority of our government’s pledge to work closely with the Indian government to this end. In this respect we stand ready to support this initiative in line with our commitments arising from the OECD Global Forum’s standards.

TDB: Apart from investment, in which other economic areas do you think India and Cyprus can cooperate? Can trade between the two countries increase to respectable levels in the foreseeable future?

DT: Trade between our countries remains very low. However, there is great potential for an increase in trade between Cyprus and India. A number of activities that could be undertaken by both sides could make this possible. Also a number of seminars as well as trade delegations could be organised in both countries to this end. This would lead to an increase in awareness for products and services that each country offers and ultimately, it could lead to greater co-operation between individual companies as well as the respective Chambers of Commerce of the two sides.

TDB: With India walking out of FTA negotiations with EU, are talks for the FTA to become reality over?

DT: India is an emerging global economic power and an important trade partner for EU. Negotiations for an FTA were launched in June 2007, and there were 12 full rounds of talks. Cyprus considers that a trade agreement between EU and India will be of particular importance, both in terms of the size of the economies and the volume of trade between them, as well as the growing importance of India in the global arena. Therefore, Cyprus supports the efforts towards finding mutually-acceptable solutions to the outstanding issues in the negotiations, with the aim of concluding an ambitious agreement leading to the strengthening of trade and investment flows.

TDB: Since tourism is an integral part of the Cypriot economy, tell us what your plans are to attract more Indian tourists to your country?

DT: Although tourism from India is low (around 2,000 visitors a year) compared to other countries, we pay particular attention to the opportunities that arise. The friendly traditional relations between Cyprus and India will form the basis for further development in this sector. For the time being, we are concentrating on business and incentive travel where Cyprus can be a competitive destination. In the past, we have organised educational visits to Cyprus for Indian travel agents, and we do this again in cooperation with the airlines serving Cyprus. Although there are no direct flights, there are frequent and convenient connections between Cyprus and India through Qatar, UAE, Jordan, etc.

TDB: How is the immigration crisis in Europe affecting Cyprus? Since the country has agreed to meet its quota of asylum seekers, do you think its economy is capable of handling the situation?

DT: Like other EU countries, and in line with relevant decisions taken at the highest level in Brussels, Cyprus is joining forces with its partners within the EU to help manage the crisis in the best possible way. To this end, the Government of the Republic of Cyprus has agreed to host a number of migrants, based on the quota that has been agreed upon collectively. The economy is capable of handling this extraordinary situation, particularly in light of the steady improvement that has been recorded and widely acknowledged as far as the overall performance of the Cyprus economy is concerned.