The toughest econ quiz so far…

Let’s try this:

In March, when the second biggest SIFI was wound up and the biggest went into resolution, Cyprus had a two-week long bank holiday. Since then, and with capital controls imposed, fuel sales dropped 9.8%, a scary level for a country with no public transport and hence very inelastic fuel consumption.



Tourism, a major industry, is down 7% (arrivals), y-o-y, although receipts are still unknown. Disintermediation and bartering have spiked and are growing. Consumption down 23% (total, non-food, non-fuel). Unemployment jumped to 17% from 14%, unprecedented in Cyprus. Inflation is easing and “internal devaluation” is evidenced in the price levels of goods produced locally.

Import duties collapsed by some 66%, while the economy consumes mainly imported goods, as its manufactures are essentially non-existent (35% from outside the EU, and hence liable to import duties). Direct taxes fell by 6%, driven by income tax, while construction turnover (the latest bubble before the crisis) fell by 28%. A credit crunch is also underway and the total banking system has a loans-to-deposits ratio of about 120% and rising, with lower total outstanding loans and with deposit flight. Car sales are down 38%.

Destocking had maxed just before the bank holiday and many firms are unable to keep going because they are too illiquid. Commercial space rentals are dropping like a lead balloon and retail is slaloming down across the board (except for food, alcohol and tobacco).

Before the Ides of March (when disaster struck) Cyprus was already in recession and had the worst Q1 since 2006 in total volume of real GDP.

So here is the catch: How come VAT receipts for July are (slightly) up, y-o-y, when the taxes for March, April and June are due? Other taxes looking flat, y-o-y, as well, or at least they aren’t collapsing as fast as we thought.

Can’t figure it out, and I’m not alone. All explanations are welcome.

Update: So far, we’ve tried:

1) Asset transformation- afraid of a new bail-in in banks, people are transforming cash into other assets (cars, jewelry, clothes etc). But total retail and consumption are down.

2) People running down delayed obligations (eg. to VAT) on the logic that they’d better get rid of liabilities before the banks lose any more of their money. But other taxes don’t behave the same way.

3) VAT rate up from 17% to18%. But strong recession seems unable to counter this.

4) Better tax collection. But nothing of the sort happened. Alternatively, that people are afraid of better tax collection because of Troika/MoU. But other taxes didn’t spike. Alternatively, that patriotic feelings drive people to pay their taxes in the face of fiscal pressures. (Really? But other taxes aren’t doing the same)

5) Bad stats and/or misreporting from authorities (Hmm…but they seem sure, and they are looking for an answer, too).

6) Recession not as large as we thought. But all other indications say it is…

Still working on it…

Update 2:

A couple of variants on (4) above- @PMannaris suggested that in the light of the impending merging of the various tax collection departments, there may exist string incentives for them to overreport/overcollect taxes in an effort to demonstrate their efficiency. Institutional turf wars do make a lot of sense, although the question still is how they get to do this while other indicators (eg. consumption, retail value index etc) remain down.

One other very interesting variant of (4) above is that they might be reporting gross receipts, not discounting state pay-backs of VAT. Not sure how much this can/is happening, but it would jibe with the previous explanation on institutional turf wars and misreporting.

So far, these  are the most promising explanations by far; looking into them. Still a big question, though.


7 thoughts on “The toughest econ quiz so far…

  1. If the number refers to *net* receipts, then it might be usefull to see what was paid back to beneficiaries last and this year.

    • A! I’m assuming the number is net of pay-backs…But this is definitely worth checking out! Perhaps we have a breakthrough here…


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