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.

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[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.