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Wednesday, 20 August 2014

Get Up, Stand Up

Cyprus and Jamaica - a tale of two island bailouts

Being an island is tough. Cyprus and Jamaica both have a tourism-led economy with GDP around $25 billion on a purchasing power parity basis, and both are in line for about $1 billion in help from the International Monetary Fund. The twin island bailouts show that no euro shackles are needed for low growth and declining productivity to make it hard to keep on moving.

Cyprus’ GDP per capita peaked at some $27,000 at purchasing power parity compared with Jamaica’s $9,000. Their populations are in the opposite proportion - 2.7 million for Jamaica versus 900,000 for Cyprus (excluding the Turkish part of the island). Much of Cyprus’ greater wealth derives from its offshore-heavy and now crumbling banking system, which has deposits roughly five times GDP.

Jamaica’s banking sector might look more like Cyprus if it had shared the tax haven ambitions of its neighbors Bermuda, the Bahamas and the Cayman Islands. Instead Jamaica’s banks were nationalized in the 1970s, privatized in the 1980s and bailed out between 1997 and 1998. They now boast assets of only about $6.7 billion - less than 50 percent of GDP. The island’s principal export is the aluminum ore bauxite, and its once dominant global market share has declined.

Tourism features heavily in both islands’ economies, but Jamaica has the disadvantage of a high crime rate while Cyprus is hampered by high costs, partly the result of being in the euro zone. The net result for GDP has been an average decline of 0.5 percent a year in Jamaica between 2008 and 2012. Cyprus has done a bit better with average annual growth of 0.2 percent, but that’s now set for a reversal.

Cyprus’ help from the IMF is coming as part of a euro zone rescue. In Jamaica, by contrast, the fund is on its own. The latest bailout plan follows a long period of low growth, declining productivity and falling competitiveness. Without a big banking system of its own, Jamaica’s government has racked up foreign debt to the tune of 100 percent of GDP.

Despite the differences, both situations show the challenges faced by small, relatively narrow economies when global conditions go against them. Being islands where the sun is (usually) shining makes them great places to visit - but managing their finances is more of a rat race.

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Context News

The International Monetary Fund on April 8 agreed to submit to its executive board a $958 million bailout loan for Jamaica. The Jamaican government agreed to an exchange of domestic debt that would reduce near-term interest and principal payments.

Jamaica had a 2011 GDP of $25 billion at purchasing power parity according to the World Bank ($14 billion at official exchange rates) and GDP per capita of $9,100 at purchasing power parity. GDP declined an average 0.5 percent a year between 2008 and 2012, based on World Bank data for 2008 to 2011 and Bank of Jamaica data for 2012.

Cyprus had a 2011 GDP of $24 billion at purchasing power parity ($25 billion at official exchange rates), a GDP per capita of $26,900 at purchasing power parity and an average GDP growth rate of 0.2 percent from 2008 to 2012, using World Bank data for 2008 to 2011 and Central Bank of Cyprus data for 2012.

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