Economic Impact of Cyprus Reunification under the
UN Annan proposal for the solution of the Cyprus question

ON PRESENTING the first version of the Annan peace plan some 15 months ago, United Nations officials took pride in the fact that this was the most comprehensive settlement plan for Cyprus ever drafted. It offers compromise solutions on every single issue that had been raised over decades of on-off negotiations, as well as on matters that could arise after a settlement had been agreed. It also proposes practical ways of resolving disputes so that the functional problems experienced in the 1960s could be avoided this time round. Many top professionals had worked extremely hard putting together what they believed to be a comprehensive plan.

While this may be true about the constitutional, territorial and security aspects of a settlement, there is one area in which the work of the UN mediators leaves a lot to be desired – the costs of implementation of the plan and the effects its provisions would have on the island’s economy. An examination of the provisions directly affecting the economy suggest the technocrats who drafted the plan were not economists. Matters were not helped by the fact that the Greek Cypriot negotiating teams, past and present, consisted of lawyers incapable of recognizing the debilitating economic consequences that many of the provisions would have if enforced.

The main economic problems that would arise from the implementation of the Annan plan were explored in a discussion paper written by Constantinos Lordos for a TESEV workshop held in Istanbul last month. They do not make for pleasant reading. For instance, compensation to those who will lose property as a result of the plan would amount to about £10 billion. If reparation was given in the form of long-term property bonds, with an annual yield of about 3.5 per cent that could be converted after 10 or 15 years, the effects on the economy would be devastating.

First, the issue of the bonds would be akin to printing money, fuelling inflation. Second, the large increase in the supply of land would push down real estate prices, destabilizing the banking system, which uses real estate as security for loans. Third, the cost of servicing the bonds plus the cost of management of the Property Board would amount to some £400 million every year. Fourth, after 10 or 15 years, the bonds would be converted, putting even greater strain on state coffers and the economy. While the Property Board may have generated some funds, most of the £10 billion compensation would have to be paid by the taxpayer.

But the financial burden does not end there. According to Lordos’ paper, the cost of reconstruction would amount to about £3.6 billion over the next 10 years (£350 million per year). Add to this the £350 million required each year to service the existing debts of the Republic, £350 million for the annual development budget plus £100 million for the economic alignment of the Turkish Cypriot constituent state and the picture looks far from rosy.

And it gets worse. Both the republic and the regime in the north boast very large and costly public sectors, to which will be added a federal civil service to handle matters relating to the two states.

On the plus side (though a drop in the ocean compared to what is needed), the National Guard would be disbanded saving about £200 million a year and the European Union would contribute some 250 million euros over the next three years. There will also undoubtedly be a donors’ conference immediately after an agreement, but it would be a mistake to put too much faith in this. Admittedly, the market will expand and there will be business ventures and investment opportunities in a united Cyprus, but it would be over-optimistic to think these would raise the massive funds needed to finance a settlement. The international credit rating agency, Standard and Poor’s, in its latest report about Cyprus, noted the poor public finances (fiscal deficit for 2003 is six per cent of GDP) and noted that a settlement would put an additional burden on them.

This is not said in order to make a case against an agreement, but to draw attention to what we regard as fundamental weaknesses of the Annan plan, which, if not addressed, will put the very future of a settlement at serious risk. We assume the better-off Greek Cypriots will be forced to finance the settlement and that this would be done through the imposition of higher direct and indirect taxes, which are certain to stir resentment. It is perfectly understandable for people to be indignant at having to pay higher taxes in order to compensate themselves for property they have lost in a settlement and for the economic development of the north. It is morally unjust to expect the Greek Cypriot taxpayer to pay compensation to people who had been deprived use of their property for 30 years by Turkey. Why is Turkey not made to contribute to the settlement cost by the plan?

A settlement that places such financial strain on the economy would never last. This is why it is of critical importance for President Papadopoulos to negotiate radically improved arrangements for the financing of a settlement at the current talks. Alvaro de Soto and his advisors must recognize that only if a solution improves people’s living standards – or, at worst, leaves them unaffected – could it last. If people are better off, they will not care about constitutional provisions; if they are worse off, these things suddenly become an issue.

Under normal circumstances, peace and stability are prerequisites for growth, but in a post-solution Cyprus, the opposite will be true. Economic growth and material well-being will be necessary for peace and stability.