Lessons from Cyprus

A few years down memory lane, who would’ve thought that Cyprus – the Russian tax haven and the hub of a massive banking bubble – would bear such a mammoth fiscal crash? But such is the nature of the European debt contagion that virtually no one’s immune in the eurozone.

This agreement between the Cypriot government and the troika (the European Commission, the International Monetary Fund, and the European Central Bank) might have parried away the worst fears, but it comes at the expense of the main depositors and the second biggest bank in Cyprus. Since they would be bearing the brunt of a $7.5 billion worth tax imposition needed to match the funds for a $13 billion rescue package, worth more than half of Cyprus’ GDP.

Just like the Russian bailout of 2011 – the ghost of which still looms over Cyprus’ economy – the current ‘quick fix’ is precisely that: a short-term solution. In the long run, with Russian banking investment steering clear of Cyprus, the onus is now on the country’s geopolitical assets to come up with the salvation act for the national economy. And herein lies a crucial lesson for Pakistan.

Pakistan’s economic troubles are no secret. Towering inflation, escalating commodity prices, shrinking foreign exchange – worth around two to four months of imports – sliding exports, and diminishing remittances – clinging onto the $11 billion mark after hitting notable highs during 2007-2011 – all paint a gloomy fiscal picture. While the eurozone ‘troublemakers’ Greece, Spain, Portugal, Italy and now Cyprus have had billions of dollars worth of rescue acts when they were hanging on to life by the skin of their teeth, Pakistan as things stand has been given IMF’s thumbs-down on further loans, despite the fact that these loans have already been factored into official budgetary plans.

The reasons cited for this retraction being failure in fulfilling objects and corruption, with the reason not cited being US dillydallying over withdrawal from Afghanistan, which has massive economic repercussions for Pakistan, and the region as a whole.

While Cypriot investors rushed to their banks and ATM machines to queue up in number to extract their deposits before the tax net spreads, in turn generating fears of a massive banking run in Europe, a la Great Depression 1929, Pakistani banks, conversely, do not even have enough cash to cater to a deposit withdrawal rush. The primary reason for this is the SBP’s mandatory bonds, needed to meet debt servicing and current operations.

And so while the Cypriot financial crisis hogs the global limelight since the stakeholders are prodigiously bigger global players, the fact of the matter is that Pakistan’s economic situation is considerably worse off, especially when one factors in the internal turmoil. Even so, regardless of the magnitude of the respective financial crises, the long-term solution for both Cyprus and Pakistan is the same: cashing in on national assets.

Eastern Mediterranean has around 200 cubic metres of gas with the Levant Basin, extending across the Israeli, Lebanene and Cypriot seabed, possessing around 3.45 trillion cubic metres of natural gas in addition to 1.7 billion barrels of oil. These resources when extracted can give Cyprus a massive lift, dragging it out of its debt quagmire.

Meanwhile, Pakistan has 175 billion tonnes of coal – equal to 618 billion barrels of crude oil – in addition to 885.3 billion cubic metres of natural gas lying in the wait. Thar coalfield, the sixth largest coal reserves in the world, and Reko Diq, the fifth largest gold mine in the world with gargantuan copper reserves as well, are just a couple of examples that showcase the abundance of resources in Pakistan. Petroleum Policy 2012 was a step in the right direction in that it aimed to extract hope for Pakistan, by tapping into untouched natural resources through better price offers to excavation firms.

In addition to banking on the resources, another important lesson to be learnt from the Cyprus’ crisis is of regional cooperation. The geographic location of the Levant Basin connotes that the only way the reserves can be extracted is through inter-state cooperation with Israel and Lebanon.

Israel and Cyprus enjoying healthy relations and economic ties following their energy sharing manoeuvres is a lesson for Pakistan that can further bolster its ties with Iran through Iran-Pakistan (IP) Pipeline, and with Central Asia, Afghanistan and even India through the Turkmenistan-Afghanistan-Pakistan-India (TAPI) Pipeline. Furthermore granting MFN to India – along with the completion of TAPI – would further help Pakistan lessen the unnecessary fiscal burden that indirect trade through Dubai brings and in turn bolster Indo-Pak relations as well.

Resource encashment and regional cooperation are pivotal for any economy to survive in the global market. With Cyprus’ fiscal crisis giving the European nation a timely reminder, Pakistan can take a cue or two as well.

The writer is a Lahore-based journalist. Email: khulduneshahid@gmail.com Twitter: @khuldune