Day After II

Ληψη: 

Download: Day After II - Reconstructing a reunited Cyprus

This report does not aim to propose any specific solution to the Cyprus problem. Rather, by examining a range of scenaria, it attempts to answer some of the key questions uppermost in Cypriotsʼ minds: “How much will the solution cost? How can it be financed? What will be the impact on jobs and growth?”

In order to answer these questions, we first examine four different scenaria to estimate the amount of new housing, renovation and infrastructure investment by the public and private sectors that will arise as a result of a settlement. We focus our examination on investment that will be necessary to implement a solution, rather than on other, longer-term development goals. We conclude that the amount of new housing, renovation and infrastructure investment by both the public and private sector that will be made necessary as a result of the settlement would range from €6.3 billion to €8.6 billion depending on which scenario is taken, or an average of €7.2 billion over five years. Spending by the public sector would amount to €4.3 billion, while spending by the private sector would amount to €2.9 billion.

For the purposes of our financing forecast, we also make a rough estimate of property compensation, although in practice this will depend greatly on the details of the property settlement. If the government were to assume the cost of interest payments (rather than the property agency that issues and sells title deeds), this could amount to interest payments of €900 million per year at an assumed interest rate of 6% per year.

In order to assess whether this kind of expenditure is affordable, we study a wide variety of domestic and international sources of financing. We find that EU non-repayable grants could amount to more than €600 million if Cyprus were to be redefined as two or more statistical regions for the purposes of EU financing and that this could significantly reduce total financing costs. For other sources of income, we pay heed to the probably still difficult financial environment by 2010, and make cautious forecasts for Cyprusʼs capacity to borrow, based on historical borrowing trends. Interestingly, we find that the institutions with the greatest lending capacity could be the local Cypriot commercial banks, which remain highly capitalized. For the purposes of our forecast, we have assumed that the regular funds from Turkey currently flowing to northern Cyprus will continue to be spent on longer-term development projects, rather than on the immediate needs of a solution.

However, even with a substantial input from the domestic and international markets, we still find a funding shortfall of just over €1 billion in the first five years. According to our estimates, therefore, a reunited Cyprus would require €205 million per year from international bilateral donors for the first five years after a settlement, in addition to that which could be financed from domestic and international markets.

Investing in the day after should not only be seen as a cost. In our first day after report,1 we highlighted some of the main commercial opportunities that could arise out of the reunification of Cyprus. In this second report, we go further, by extending our analysis to the whole economy. We find that the construction boom that a solution would entail, the boost to manufacturing of producing construction materials, together with the impact of a settlement on tourism, transport, higher education, and financial and business services, would raise the real GDP growth rate by 3 percentage points in the first five years. We estimate that this would create more than 33,000 jobs in the first five years. The positive economic benefits of the reconstruction boom will be considerable, with very long-lasting effects that will benefit all Cypriots.