Keeping a close eye on proceedings since capital controls were introduced to the island in 2013, our Cyprus expert brings the happy news of a recovery in full swing.
Cyprus President Nicos Anastasiades said today (3 April) that all capital controls imposed on the island in 2013 to stem a cash flight will be lifted on Monday. He declared during a news conference that the "lifting of the last restrictions marks the final restoration of confidence in our banking system".
Cyprus introduced the controls in April 2013 to prevent outflows after a chaotic bailout forced the closure of one bank, and a second bank seized deposits to recapitalise. It was the first time controls were imposed in the history of the eurozone.
Comprehensive recovery
This news reaffirms that Cyprus has been making significant progress towards a comprehensive recovery. Only last week S&P revised its outlook on Cyprus to positive in view of the faster-than-expected reduction in Cypriot general government debt, supported by less adverse economic growth prospects than previously. It paints the picture of a dramatic recovery for an economy that only two years ago almost became the first country to leave the single European currency.
Unprecedented experiment
In 2013 Cyprus had no choice but to impose capital controls since Cypriot banks would have gone under. As it was, capital flight - financed by other eurozone central banks - continued until spring 2013, when the abuse of the eurozone's emergency protocols grew too large to ignore. It was an unprecedented financial experiment: imposing controls on money transfers in an economy that doesn't have its own currency.
Countries from Argentina to Iceland had used similar measures in the past to defend against devaluation. However, being part of the eurozone made it harder for the Mediterranean island to enforce restrictions, as any money that left the banking system could be taken out of Cyprus without losing value. At the time many experts wondered how temporary and how damaging the controls would be, based on Iceland's experience. The longer controls exist, the harder they are to abolish. Icelandic capital controls, which have been 'temporary' since 2008, deeply damage the economy by discouraging investment.
More Australia than Iceland
It seems that Cyprus is successfully taking the long hard road back from financial distress through austerity. Surpluses, generated by cuts in expenditure and increased taxes, have been used to pay down debt. Australia set this as a goal during the Howard era, paying off its entire public debt within a decade. If Cyprus is to write similar history it will need to sustain the current pace of reforms. The next couple of months will prove how determined Cyprus is; parliament will vote for an amended foreclosures legislation and Cyprus will launch privatisations for Cyta, the national telecommunications provider, and EAC, the Electricty Authrity of Cyprus.
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