Cuba Announces New Regulations for Private Business

On July 10, Cuba announced new regulations, effective December 7, 2018, designed to allow new private restaurants, bed-and breakfasts and transportation services.[1]

The new regulations are designed to control such growth and to collect more tax revenue from these businesses by requiring them to move all of their cash through state-run banks. A related objective is to reduce tax evasion and illegal purchase of stolen state materials.

The government also recognized that the work of the self-employed workers (TCP) has increased the supply of goods and services to the population with acceptable levels of quality, together with the payment of taxes, which are a source of income for the municipal budgets in pursuit of local development. In addition, the TCP sector has facilitated the reordering of the national labor supply and the reduction of inflated staff in the state sector and freeing the State of some productive activities and non-strategic services for the development of the country.

Cuba’s Deputy Minister of Labor and Social Security, Marta Elena Feitódo Cabrera, said, “there is no going back on work on its own; we must preserve this economic activity, but in an orderly manner.” She noted that while there were 157,351 registered self-employed workers in 2010, now there are 591,456, which constitutes 13% of the country’s employment.

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[1] Yudy Castro, Tax adjustments: Official Gazette publishes new regulations on self-employment, Granma (July 9, 2018); Yudy Castro, What changes with the new rules? (+ Videos), Granma (July 9, 2018); Update, correct . . . strengthen self-employment (July 9, 2018); The government decrees new taxes for the private sector in Cuba, Diario de Cuba (July 10, 2018); The authorities will lift the ban on the most coveted licenses of the Cuban private sector, Diario de Cuba (July 10, 2018); Issue New Provisions for Self-employment (+ PDF), Cubadebate (July 10, 2018); Assoc. Press, Cuba unfreezing growth of private tourism businesses, N.Y. Times (July 10, 2018).
Previous posts about Cuba’s private sector are listed in the “Cuban Economy” section of List of Posts to dwkcommentaries.com—Topical: CUBA.

Is Cuba Concealing Bad Economic Data? 

The Cuban government  has not yet released 2016 data on the country’s gross domestic product, exports, money supply and debt even though in June-July 2017 it did release other statistical information. The government even failed to respond to a Reuters question in January 2018 as to when this 2016 information would be released. [1]

Many speculate that this omission is deliberate to facilitate the Cuban government’s claims in late December 2017 that the economy grew in 2017 by 1.6%[2] when Moody’s and the Economist’s Intelligence Unit had projected that the Cuban recession continued in 2017, while the Economic Commission for Latin America and the Caribbean (ECLAC) had projected Cuba would have for 2017 an anemic growth of 0.5%.

“The abnormal delay in macroeconomic indicators for 2016 casts doubt on the official estimate of GDP growth in 2017,” said Carmelo Mesa-Lago , professor emeritus of economics at the University of Pittsburgh and author of numerous books on Cuba’s economy. This opinion was echoed by an anonymous Cuban economist, who said, “Whenever things are bad the response from the government is to hide information.”

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[1] Frank, Cuban economy even more opaque as data omitted from 2016 accounts, Reuters (Jan. 15, 2018); Havana omits economic data in its 2016 accounts, Diario de Cuba (Jan. 15, 2018); ONE, 2016 Statistical Yearbook of Cuba.

[2]  Cabrisas: The Economy grew 1.6% despite ‘adverse situations,’ Diario de Cuba (Dec. 21, 2017).

Another Perspective on Cuba’s Current Elections 

A friend has provided me with an illuminating article on Cuba’s current round of elections and the upcoming transition from the Castro brothers presumably to Miguel Diaz-Canel, that was written by William LeoGrande, a professor of government in the School of Public Affairs at American University in Washington, D.C. and a noted author and commentator on Cuba.[1]

LeoGrande emphasizes that the elections come “at a delicate political moment. Castro’s ambitious economic reform program, the “updating” of the economy, is still a work in progress and has yet to significantly raise the standard of living of most Cubans. Moreover, it is encountering resistance from state and party bureaucrats who are loath to lose control over the levers of economic power and the perks those provide. The economy has also been struggling because of declining oil shipments from Venezuela, which sells oil to Cuba at subsidized prices, helping to ease Cuba’s chronic shortage of hard currency. . . . The resulting energy shortage has forced Cuba to impose drastic conservation measures and pushed the economy into a mild recession last year.”

Hurricane Irma has been another major problem for Cuba. According to LeoGrande, it inflicted “several billion dollars’ worth of damage as it tracked along the north coast before turning toward the Florida Keys. The storm hit some of Cuba’s most lucrative tourist resorts, cutting into the one sector of the economy that has enjoyed sustained growth in recent years. Most of the major hotels predicted they would reopen for business quickly, but the storm did enormous damage to the power grid, leaving large swaths of central Cuba in darkness.”

All of these problems have fueled “popular discontent over the economy and impatience with the slow pace of improvement . . . . In an independent opinion poll taken in late 2016, 46 percent of Cubans rated the nation’s economic performance as poor or very poor, 35 percent rated it as fair, and only 13 percent rated it as good or excellent. Solid majorities reported not seeing much economic progress in recent years for the country or themselves, and they had low expectations for the future.”

Moreover, Cuban people have “become more vocal in expressing . . . [their] discontent. The expansion of internet access, the ability of Cubans to travel abroad without state permission and Raul Castro’s own calls for more open debate about Cuba’s problems have fueled an increasingly robust public sphere.”

This discontent, however, faces major hurdles in electing candidates with these views. They have “formidable obstacles. First, no overt campaigning is allowed, so it is hard for candidates to run on an alternative policy agenda. In the absence of a formal campaign, people learn about candidates by word of mouth.” And the Communist Party of Cuba has the ability “to influence elections by mobilizing its members against candidates it regards as dissidents.”

Nevertheless, the next president, presumably Diaz-Canel, will face the challenge of balancing “the need for economic reform with the fear of change prevalent within key sectors of the political elite.”

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[1] LeoGrande, Cuba After Castro: The Coming Elections and a Historic Changing of the Guard, World Politics Review (Oct. 17, 2017). A previous post set forth an overview of Cuba’s elections in 2017-2018.

 

 

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.

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[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.

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[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] 

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[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.

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