Taxation on windfall profits would harm the economy, CBC Governor says

New Governor of the Central Bank of Cyprus (CBC), Christodoulos Patsalides, has said that he was against the imposition of taxation on windfall profits, explaining that such a move would not help the economy, but rather it would be harmful, since it would disrupt the fiscal predictability which is necessary for attracting foreign investors to a small open economy like Cyprus.

The Governor, who gave his first press conference since the assumption of his duties, spoke about the need for the CBC to be transformed and added that broad responsibilities will be given to the executive members of the bank's Board of Directors.

Regarding interest rates in Cyprus, Patsalides said that following the first reduction of key interest rates by the European Centarl Bank, the gap between lending and deposit rates is moving in the right direction, but at a slow pace.

Asked about the acquisition of Hellenic Bank by Greek Eurobank, the Governor said that this is positive, noting that it will strengthen competition. 

The Cypriot economy, Patsalides said, records "very good growth rates" and highlighted the big fiscal surpluses, but also the downward trend of the public debt, which, as he stressed, is very important for Cyprus and this will become more evident in the course of time, when in many other EU countries they are still making efforts to converge with the Maastricht criteria.

Asked about proposals to tax the windfall profits of banks, the Central Bank Governor said that he had a meeting with the parliamentary party AKEL which handed over such a proposal. He noted that it was a serious proposal, adding however that such a tax "would not help the economy, but would rather hurt it."

"The unwanted gap between deposit and lending rates should be managed, not through taxation but through measures which will help mitigate the problem," he said.

Such ad hoc taxes cause side effects on the economy without offering solutions, he noted, adding that any tax reform should be predictable since the Cypriot economy depends on investments and in particular on foreign investments which would also help with reducing the deficit of the current account balance. 

At the same time, he noted that in other countries where this tax has been imposed consumers had to pay the extra cost as banks passed it on. 

Patsalides said that banks are performing very well and have high capital ratios, large return on equity ratios, high liquidity and a significant improvement in assets.

He added that non-performing loan ratios, however, are above the European average.

"We are not out of the woods" the CBC Governor said, pointing out that Cyprus cannot afford to be outside the EU average ratio.

Noting that Cyprus is a small open economy, he urged everyone to do all that is necessary for the economy to become more resilient.

Meanwhile, asked about  applications for granting a banking license to financial technology companies (fintechs), the Governor confirmed that there are indeed such applications. 

"New banks in Cyprus, if and as long as there is interest and it concerns serious banks, which will comply with the supervisory criteria and provided they have a sustainable plan, then they are welcome," he said, pointing out though that Cyprus is too small to attract a large number of banks.

Also read: CBC Governor: Banks showing increased interest in securing licences in Cyprus

(Source: CNA)