Back in February 2019, I published an article in the Successful Business Magazine in Cyprus on the Cyprus Citizenship by Investment Programme. This was later republished in English on my company website. The article concluded with four warnings, which I recount here:
I would like to conclude this article with four warnings.
My first warning is that it is clear that, as in the US sub-prime credit meltdown in 2008, the Cyprus government is socialising the risk of the CIP while privatising the benefits. Nearly 100% of direct financial costs of CIP go to developers and intermediaries. The government benefits only from a small application fee and subsequent taxes. Yet the national reputation of Cyprus citizenship is affected, which creates significant public costs.
In the 2013 financial crisis in Cyprus, it is interesting to note that in the years running up to the depositor haircut, angry declarations among German and other journalists, members of Parliament and other policy-makers and politicians were left unanswered. This led to a situation where, in 2013, Cyprus became the first EU country to feature a depositor bail-in, under the grounds that it was a “non-systemic” country, or a “casino economy”, or a haven for “dirty” Russian money.
The opinion of this consultant is that unless Cyprus implements a very strong programme of public affairs and transparency, the decisions that are being made now in regards to the CIP may become, at some point in the future, a major liability at a time when Cyprus needs international assistance the most.
My second warning is that the Government should review where the financial income from these investments is taking place. There are credible reports that some property owners and developers are not fully accounting for the value of each transaction in Cyprus, and that some funds from the wider development and sales process are being held offshore, unreported in Cyprus. This tends to take place before the final sale of a property to the foreign investor under CIP.
My third warning is that Cyprus still has a huge problem of non-performing loans (NPLs) as well as re-profiled loans. The CIP-fuelled activity in the property market has been sufficient to allow major developers, who often have debt in the hundreds of millions, to keep servicing their debt. As such, CIP is really less about government revenue, than about keeping developers and the banking system afloat. It is not clear how long this can continue on a sustainable basis. Rather than solving a problem, we risk exacerbating one.
My fourth warning is that allowing unchecked development of the property sector is one of the surest and quickest methods of alienating the population and creating distortions in the real economy. This has been seen time and time again in the United States, the United Kingdom, France, Italy and other countries. Cyprus already has a highly fragmented Parliament with a relatively high inclusion of radical parties on the left and right. Allowing housing prices to rise, and creating one law for the rich and another for the middle class, will only increase political polarisation.
It gives me very little comfort that these warnings materialised when Al Jazeera published the first of a series of videos on the Cyprus Citizenship by Investment programme. This led to the immediate cancellation of the programme.
I continue to feel that such programmes are useful and an issue of national sovereignty.