He who rides a tiger is afraid to dismount – the capital controls dilemma – Cyprus Mail

  He who rides a tiger is afraid to dismount – the capital controls dilemma – Cyprus Mail

Since their introduction in March of this year capital controls, although preventing a run on the bank deposits, in particular Laiki and Bank of Cyprus (BoC, have had several unwelcome effects.
Among them are: the hoarding of cash by bank customers; an expansion in the informal (cash) economy leading to reduced tax revenues, and a crippling effect on private sector cash flow where the controls meant companies have been unable to meet payroll, pay creditors and otherwise run their businesses.
There is the question of how effective the controls are. A leading Cypriot economist, in a recent interview with the Wall Street Journal, estimated that despite the controls banks are losing (leaking) deposits at the rate of some €30 million per day.
Although in recent months the controls have been relaxed to some extent and a “road map” published by the ministry of finance, the situation remains unclear. To quote from the IMF (Country Report No. 13/293 September 2013): “While motivated by real economic needs, the relaxation of restrictions to date has not been anchored within an overarching strategy, leading to uncertainty in the markets and a hoarding of cash by the private sector.”
Both the president and the minister of finance have indicated that capital controls will be lifted by the end of January next year, though the minister of finance wisely added the proviso that transfers out of the country will continue to be restricted, effectively de facto exchange control. We can only hope in four months time confidence will be restored in BoC and there will not be a run on deposits. If there is a run, all bets are off and the bank will have to be rescued again. The alternative of allowing the bank to fail will mean the government guarantee, on all deposits up to €100k, will have to be honoured which at the present time will put intolerable strains on the exchequer. Should this happen, some form of exchange controls will have to remain in place for some considerable time.