Cuba Pays $60 Million of Indebtedness to Major Creditor Nations     

The week of October 15 Cuba paid $60 million of indebtiness to 14 wealthy creditor nations. Last year Cuba paid $40 million to the same group. The total debt is $2.6 billion after the creditors in 2015 forgave $8.5 billion of $11.1 billion upon which Cuba had defaulted through 1986 plus charges.[1]

These creditor nations known as the Club of Paris are the following: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Italy, Japan, the Netherlands, Spain, Sweden, Switzerland and the United Kingdom.

Under the 2015 agreement, Cuba agreed for the first time to grant the creditors equity in development projects, in areas like manufacturing and agriculture, in exchange for a portion of their debt holdings. Many of these restructuring agreements include the establishment of so-called counter-value funds, under which a percentage of debt is discounted in exchange for the potential profits stemming from participation by a creditor country’s firms in Cuba joint-development projects.

The counter-value funds have an estimated combined value of around $750 million of the $2.6 billion owed. Japan, Spain, France and Italy – Cuba’s largest Paris Club creditors – are furthest along in negotiating swaps.

  • For example, a $46 million French project to develop cattle ranching and dairy products in central Camaguey province is ready to sign, according to France’s ambassador to Cuba, Jean-Marie Bruno.
  • Another example is Spain which has a project ready to manufacture cardboard and another aluminium structures for construction capable of resisting earthquakes and hurricanes, both involving Spanish companies.

This access to Cuban development projects gives the European countries and companies an advantage over U.S. companies who are banned by various U.S. laws from such projects.

This payment happened during dire economic times for Cuba due to the political and economic crisis in its ally Venezuela, declines in Cuban exports and tourism due, in part, to the damages caused by Hurricane Irma.

Cuba’s payment in these circumstances showed the importance Cuba attaches to the 2015 agreement with this group of major creditor nations.

==============================================

[1] Reuters, Cash-Strapped Cuba Makes Debt Payment to Major Creditors-Diplomats, N.Y. Times (Oct. 18, 2017); Chow, Cuba Reaches Deal to Pay $2.6 Billion in Arrears to Paris Club, W.S.J. (Dec. 12, 2015); Paris Club, Agreement on the Debt Between Cuba and the Group of Creditors of Cuba (Dec. 12, 2015).

Bleak Economic Prospects for Cuba

 Although Cuba has reported a 1.1% increase of Gross Domestic Product (GDP) for the first six months of 2017, the prospects for the rest of the year are bleak.[1] Here are the problems:

  • Possible deepening of Venezuelan crisis and further reduction of its oil exports to Cuba.
  • Possible increased cost of oil from Russia, Angola, Algeria and other suppliers in the Caribbean.
  • Possible reduction of American travel to the island.
  • During the first half of this year Cuba paid $ 2.306 billion on its external debt and still has to catch up on current payments to foreign suppliers.
  • Decreased Cuban nickel production and drops in international prices for this commodity.
  • Reduced sugar production.
  • Elusive foreign investment on the island, and complicated, lengthy Cuban process for approval of same.
  • Recent Cuban government measures to control and stifle the country’s private sector.

=================================

[1] Economists: The picture could complicate Cuba even further this second semester, Diario de Cuba (Aug. 19, 2017).

President Raúl Castro Affirms Importance of Cuba’s Private Sector       

President Raúl Castro

On July 14, Raúl Castro Ruz, Army General, First Secretary of the Communist Party of Cuba Central Committee and President of the Councils of State and Ministers, addressed a session of Cuba’s legislature (the National Assembly of People’s Power).[1]

He first noted that despite “difficult circumstances, encouraging, modest [economic] results have been achieved. The Gross Domestic Product grew by 1.1% in the first half of the year, which indicates a change in the economy’s direction as compared to last year. Contributing to this result were agriculture, tourism, and other exports of services, construction, sugar production, and the transportation and communications sectors.”

Castro then affirmed the importance of the private sector of the Cuban economy in these extensive remarks.

He reported that the Council of Ministers recently had authorized “the expansion of self-employment and the experiment with non-agricultural cooperatives . . . with the purpose of gradually freeing the state from responsibility for activities that are not strategic, creating jobs, supporting initiative, and contributing to the national economy’s efficiency in the interest of developing our socialism.”

This “past June, these forms of property management were recognized as among those operating within the Cuban economy, in an extraordinary session of Parliament dedicated to analyzing and approving programmatic documents for our Economic and Social Model.”

“We currently have more than half a million self-employed workers and more than 400 non-agricultural cooperatives, which confirms their validity as a source of employment, while contributing to an increase and greater variety of goods and services available, with an acceptable level of quality.”

On the other hand, there have been “violations of the legal regulations in effect, such as the utilization of raw materials and equipment of illicit origin, under-declaration of income to evade tax obligations, and insufficient state control at all levels.” To meet these problems, the Council of Ministers has adopted measures that soon will be announced.

The Council, however, has “not renounced the expansion and development of self-employment, or the continuation of the experiment with non-agricultural cooperatives. We are not going to draw back or stop, nor will we allow the non-state sector to be stigmatized or face prejudice, but it is imperative that laws be respected, progress consolidated, positive aspects – which are more than a few – generalized, and illegalities and other deviations from established policy resolutely confronted.”

The “pace and scope of the changes we need to make to our model must be conditioned by the capacity we have to do things well and rectify any misstep in a timely manner. This will only be possible if adequate prior preparation is ensured – which we haven’t done – training and comprehension of established regulations at every level, follow-up and guidance of the process – aspects marked by a fair dose of superficiality, and an excess of enthusiasm and desire to move more rapidly than we are truly capable of managing.”

“What is a state, especially a socialist state, doing administering a barbershop with one chair, or two or three, and with one administrator for a certain number of small barber shops – not many. I mention this example because it was one of the first steps we took.”

The errors of implementation of these changes are mainly “ours, we leaders who developed this policy. . . . This is the reality. Let’s not try to block the sun with a finger. Mistakes are mistakes. And they are our mistakes, and if we are going to consider hierarchies among us, in the first place, they are mine, because I was part of this decision. This is the reality.”

Conclusion

As has been noted in previous blog posts, the Cuban government and people have recognized that entrepreneurs in the private sector are playing increasingly important roles in the Cuban economy and society and that developing a mixed economy is not an easy project.[2]

This is why it is so important for the U.S. Congress to adopt bills confirming the freedom for Americans to travel to Cuba on individual person-to-person trips that are important customers for businesses owned by Cuban entrepreneurs.[3] 

=================================================

[1] Castro Ruz, We will continue to advance along the path freely chosen by our people, Granma (July 17, 2017) (official English translation of the original Spanish).

[2] See posts listed in the “Cuban Economy” section of List of Posts to dwkcommentaries—Topical: CUBA.

[3] See This Blogger’s Reactions to Trump Reversal of Some U.S.-Cuba Normalization Policies (June 23, 2017); Open Letter to U.S. Congress About U.S. Freedom To Travel to Cuba (July 16, 2017).

Cuban Council of Ministers Reviews Cuban Budget and Economy

At a recent meeting Cuba’s Council of Ministers, its highest ranking executive and administrative body, reviewed the government’s budget and the Cuban economy. Here is a Cuban website’s report of the meeting.[1]

Government’s Budget

The State Budget for 2016, which shows a deficit lower than that approved by the National Assembly of People’s Power. This was despite expenditures to restore the damages caused by Hurricane Matthew in housing, schools, roads, waterways, communications infrastructures, among others.

The State Budget for 2017 is projected to have a lower deficit than originally projected, For the first six months “gross income represents 53% of the annual Plan, which is determined mainly by the favorable behavior of tax revenues.”

Cuban Economy

For the first half of 2017, the national economy has performed in accordance with the original forecasts. Production of foods and vegetables has exceeded forecasts while milk and beef are below such forecasts. The drought has had a negative impact on this sector.

By the end of May 2017 the number of foreign visitors exceeded 2,260,000, which represents a 20% growth over the same period of 2016.

Cuban Self-Employment

More than half a million people are now engaged in self-employment, which confirms its validity as a source of employment and increased supply of goods and services with acceptable levels of quality.

 However, there are problems with this sector of the economy: use of “illicit origin” raw materials and equipment; breaches of payment of tax obligations and underreporting of income; Inaccuracies and inadequacies in control; and deficiencies in contracting for the provision of services or products between legal persons and natural persons. There also has been a lack of rigor and exigency in their monitoring and control; tendency to increase prices; and use of bank loans for unauthorized purposes.

However, the Council ratified that non-agricultural cooperatives constitute a means to free the State from the administration of subsidiary economic activities, production and services. Therefore, the Council will continue to advance the implementation of this experiment of self-employment by correcting the deviations.

==============================================

[1] Martinez & Meneses, Council of Ministers analyzes economic progress and other important issues, CubaDebate (June 30, 2017).

Economic Problems Bedevil Cuban Government and President Raúl Castro

A prior post reported that Cubans want greater economic growth and opportunity while also expressing pessimism about that happening. The grounds for that pessimism are highlighted in a Miami-Herald article about the many economic challenges facing President Raúl Castro In the last year of his presidency.[1]

This is the article’s big picture. “Many state enterprises are barely limping along, there are jitters as the economy of Cuba’s Venezuelan benefactor spirals downward, the rules of the road are murky for private businesses, salaries are low, a messy dual currency system still needs to be unified and Cuba is in dire need of much more foreign investment.”

These problems will not be easy to solve. “Many of Cuba’s economic problems are interrelated and the timing may not be good for any drastic moves — especially with Cuba’s relationship with the United States still up in the air.”

Yes, it is true that “Cuban officials are estimating economic growth of around 2 percent this year, but that figure is based on the assumption that oil prices will go up and tourism will keep growing.” According to Cuban economist Omar Everleny Pérez Villanueva, the 2 percent growth objective is “very ambitious.” He could have said “unrealistic” as His model puts the Cuban economy in negative territory with a decline of between .3 percent and 1.4 percent in 2017.”

Here are specifics on some of the economic challenges facing the island:

Maintaining Exports of professional services. Medical services by Cuban health care professionals on foreign medical missions in recent years have provided the Cuban government with a major source of foreign currency. In recent years, however, this source of foreign currency has declined with the implosion of the Venezuelan economy being a major factor.

Coping with Venezuela’s Economic Implosion. Venezuela’s problems for Cuba go beyond the decline in foreign medical mission income for Cuba. Since last July, oil deliveries from Venezuela have dropped as much as 60 percent. Venezuela used to send crude oil to Cuba for blending at the latter’s Cienfuegos refinery, but production at the Cuban refinery has fallen by half with the reduction in shipments from Venezuela.

Eliminating Cuba’s dual currency system. Cuba has two currencies: the Cuban peso (CP), which is generally used by the Cuban population and the Cuban convertible peso (CUC), which used by tourists and foreign companies, and the Cuban government for years has had a goal of eliminating this system. According to Carmelo Mesa-Largo, a Cuban economist and professor emeritus at the University of Pittsburgh, “In 2016, the budget deficit was 7.3 percent of GDP, and because of the already difficult economic situation, they have had to print money. The budget deficit may be even higher this year — perhaps 12 percent — generating even more inflation.”

Increasing public salaries. “There are constant complaints about low public salaries. A private cab driver, for example, can earn more than a physician or other professionals. According to Mesa-Lago, even though salaries went up in 2015, buying power was just 62 percent of what it was in 1989. Nominal salaries could be increased by printing more CP, ”but with inflation, they would have to raise salaries even more to have real wage growth.” And that could set off a further inflationary spiral.

Attracting foreign investment. The Cuban government has made it clear that foreign investment is a cornerstone of Cuban economic development going forward, but so far investment is lagging. “Diplomats, business executives and members of the U.S. Congress who favor lifting the embargo all concur that Cuba needs to reform its legal system to offer foreign investors better legal guarantees, make it easier to sign contracts and allow them to directly hire their Cuban employees.” The Cuban government, however, does not want to do anything that potentially could be destabilizing and cause a weakening of political control.

=============================================

 

[1] Whitefield & Torres, The next year will determine Raúl Castro’s economic legacy, Miami Herald (Mar. 23, 2017)   Previous posts in this blog have discussed many aspects of the Cuban economy as listed in the “Cuban Economy” section of List of Posts to dwkcommentaries—Topical: CUBA.

Cubans Want Economic Growth and Opportunity

A rare and limited public opinion poll of Cubans showed strong support for increased economic opportunity and growth. The poll in Cuba was a national random route-sample of 840 Cubans who were 18 years and older that was conducted between October 3 and November 26, 2016 by NORC, a respected public-opinion organization, at the University of Chicago.[1]

Cuban Economic Issues[2]

Many Cubans feel stuck in the current economic climate. Overall, 46 percent say the current condition of the Cuban economy is poor or very poor while 35 percent say it is fair. Only 13 percent of Cubans describe the condition of the Cuban economy today as good or excellent. Moreover, few Cubans think the economy is going to improve anytime soon: 47 percent say the economy will stay about the same and 8 percent say it is going to get worse while 33% say the condition of the economy is going to get better over the next three years,

Cubans have a slightly more positive view of the state of their family’s finances, though few anticipate improvement in the coming years: 24% rate their finances as poor or very poor while 18% rate the current condition of their family’s finances as good or excellent. Nearly 6 in 10 expect their finances will stay the same in the future.

Looking ahead, Cubans would like to see the government focus on economic growth and maintaining stability over the next 10 years. Fully 95 percent of Cubans say having a high level of economic growth is an extremely or very important goal. Nearly as many (87 percent) say it is very or extremely important that Cuba prioritize maintaining stability over the next 10 years.

Roughly two-thirds of Cubans (65 percent) say there should be more private ownership of business and industry, while 29 percent say there should be more government ownership. Many Cubans have entrepreneurial goals; more than half (56 percent) say they would like to start their own business over the next five years. Sixty-eight percent see competition within the marketplace as positive because it stimulates people to work hard and develop new ideas. One-quarter say competition is harmful and brings out the worst in people.

Over half of Cubans say they would like to move away from Cuba if given the chance. Of those who would leave, nearly 7 in 10 say they would want to go to the United States.

Other Cuban Problems

Crime is seen as the most serious issue facing Cuba today, with 51 percent of Cubans reporting that it is an extremely or very serious problem. Another 4 in 10 say that poverty (41 percent), lack of internet access (41 percent), and corruption (38 percent) are each serious issues in Cuba.

In day-to-day life, many Cubans proceed with caution in placing trust in others and in expressing themselves publicly. Just 21% say they can always express themselves freely, while 76% say they must be careful in what they say sometimes.

Most Cubans get their news from state-owned television stations and newspapers, Cuban radio, and family or friends. Just 1 in 4 use foreign media sources. But, even controlling for other demographic and socioeconomic factors, those Cubans who access foreign media are more positive about the national economy and their personal financial situations, more likely to be critical of some aspects of Cuban society, and more likely to set aspirational goals such as traveling abroad, starting their own business, and buying a car or home.

Cuba-U.S. Relations

Fifty-five percent of Cubans overall say that Cuba-U.S. normalization of relations will be mostly good for Cuba, while 3 percent say it will be mostly bad. Another 26 percent say it will have no impact. Thirteen percent aren’t sure what the impact will be.

================================================

[1] NORC, A Rare Look Inside Cuban Society: A New Survey of Cuban Public Opinion (Mar. 21, 2017); Ahmed, In a Rare Survey, Cubans Express a Hunger for ‘Economic Growth, N.Y. Times (Mar. 21, 2017); Assoc. Press, Rare Poll Finds Cuban Citizens Favor Better US Relations, N.Y. Times (Mar. 21, 2017); A poll concludes Cubans want better relations between Washington and Havana, Diario de Cuba (Mar. 21, 2017).

[2] See this blog’s posts listed in “Cuban Economy” in List of Posts to dwkcommentaries–Topical: CUBA.

 

 

Granma’s Positive Views on Cuban Free Enterprise 

Granma, the official newspaper of the Communist Party of Cuba, recently praised the achievements of Cuban “small business” or free enterprise that have emerged over the five years since the 6th Congress of the Communist Party of Cuba permitted “economic activity by foreign investors, cooperatives, small farmers, those working land granted in usufruct, renters of state property, and the self-employed.”[1]

In those five years “the non-state sector has grown exponentially. While employment in the state sector constituted 81.2% of the total in 2010, it stood at 70.8% in 2015. Likewise, there were 157,371 registered self-employed in September of 2010, and more than 500,000 at the close of 2016.”

As Raúl Castro, First Secretary of the Party noted at its 7th Congress in April 2016, “The increase in self-employment and the authorization to hire a work force has led, in practice, to the existence of private medium sized, small, and micro-enterprises, which function today without the appropriate legal standing, and are governed by law within a regulatory framework designed for individuals working in small businesses undertaken by the worker and family members,” developing is an atmosphere which does not discriminate against or stigmatize non-state work.

The changes over the last five years include “’pay per performance,’” which means that wages for workers in state and non-state enterprises are increasingly linked to results obtained.” In other words, wages will not be equal, but instead will vary based on performance.

The article also emphasizes that the Cuban “economic system would continue to be based on the entire people’s socialist ownership of the fundamental means of production, governed by the principle that distribution (also socialist) would be based on ‘from each according to their capacity, to each according to their work.’”

These changes over the last five years and into the foreseeable future “are taking place within a reality marked by little population growth, with low birth rates and longer life expectancy, a negative migratory balance, increasing urbanization and aging of the population, which imply great social and economic challenges for the country.”

==========================================================

[1] González, Small business in Cuba, Granma (Mar. 16, 2017).  Earlier blog posts about the Cuban economy are listed in the “Cuban Economy” section of List of Posts to dwkcommentaries—Topical: CUBA.