NPLs and strict credit rules affect productivity, UCY’s Economic Research Centre says

The University of Cyprus’ Economic Research Centre (ERC) has warned that the large number of non-performing loans which has in turn led to stricter standards for the provision of loans by banks has affected labour productivity.

In a productivity analysis released today ECR writes that in the recent years, as the domestic economy has been emerging from the earlier crisis, and output has been growing strongly, labour productivity has failed to follow suite, jeopardizing the short- and long-term prospects of the economy.

According to its data over the period 2015-17 output per hour worked slowed to an average of 0.5 percent, from 1.9 over the course of the decade to 2006.

As collective efforts to increase the economy’s efficiency have paid out, and total-factor productivity has been back growing following its marked decline throughout the 2007-2014 period, the slowdown in labour productivity is exclusively attributed to a shift towards labour intensity.

Over the post-2015 period a significant reduction in the use of capital services has occurred, and the slowdown can be traced back into the reduction of the capital deepening rate, it says.

The large number of non-performing exposures that built up since the financial and sovereign debt crises, have forced banks to tighten their standards and keep turning down requests for new credit lines to companies, it points out.

According to the analysis as Cypriot businesses are primarily funded by bank debt, tighter regulations for new loans imply that companies find it harder to finance the acquisition of new fixed assets, translating to weaker investments.

Since labour productivity growth can be achieved by intensifying the use of the non-labour input, weaker investments depress capital deepening rates, pronouncing the negative effects on labour productivity.

Impediments to obtaining credit, not only contribute to lower capital deepening, but also to lower total-factor productivity as it hinders the potential expansion of productive firms, it points out.

At the same time, it notes that cross country comparisons of multifactor productivity among European countries, have highlighted the need for Cyprus to find ways to increase its productivity in order to improve its relative position in comparison to advanced European countries.

To the path towards higher productivity growth, policies that target on increasing economic efficiency are of utmost importance, it stresses.

Studying the underlying constituents of country rankings measuring national competitiveness can assist in identifying the factors that hinder productivity.

In order for Cyprus’ productivity to improve and the country to be able to catch up with western and central European countries efforts to clean up the balance sheets of credit institutions should be intensified, and alternative methods of financing should be encouraged.

It also expresses the view that further reforms in the public sector to eliminate wasteful administrative procedures and to integrate digital technologies into government practices are needed.

The ECR further calls for enhancing the efficiency of judicial system and eliminating delays in settling disputes.

Policies that target in eliminating other institutional rigidities and enhance competition must be promoted, it says.

It also points out that policies that encourage investment in ICT and human capital, and promote RandD should also be encouraged.

Source: Cyprus News Agency