Tag: Cuba’s dual currency system (CP and CuC)

Economic Challenges Facing Cuba’s New President 

According to John Caulfield, a former Chief of Mission of the U.S. Special Interests Section in Cuba (before the 2015 reopening of the U.S. Embassy in Havana), Miguel Diaz-Canel, when he becomes Cuba’s President of the Council of State on April 19, “will face serious challenges from the moment he takes over. Cuba’s Soviet-style economic model is not working. Raul has acknowledged as much and in 2011 began to implement economic reforms that allowed many Cubans to become self-employed and buy and sell residences. These changes have allowed some Cubans to achieve relative prosperity, while the majority is stuck in low-paying jobs.”[1]

Caulfield added, “Their success caused a negative reaction from inside the Communist Party that saw the rise of these non-state workers as a threat to the system. Recognizing these concerns, Raúl [Castro] told the National Assembly last summer that he took personal responsibility for ‘errors’ and froze the concession of most new business and self-employment licenses.”

This will present Diaz-Canel and the Cuban Communist Party with a dilemma:

  • Pull “Cuba from its economic morass” by introducing “urgent reforms to eliminate economic distortions such as the use of two national currencies and inefficient state industries,” by attracting “private foreign investment to generate new exports and rebuild Cuba’s decaying infrastructure” and by allowing “Cuba’s incipient private sector to grow.”
  • Or reject this reform agenda and thereby halt the creation of private wealth and a threat to the Communist Party’s domination of the island.

The case against reform may have been strengthened by the apparent success of the Mariel Special Development Zone, a deep-water port and adjacent land for industry and distribution businesses on the north shore of the island west of Havana. Currently 10 projects are operational, related to several sectors, including industry, biotechnology and pharmaceuticals, logistics, construction, food processing, and real estate, and this year another  six (Richmeat, Profood Service, Devox Caribe, Bouygues Construcción Cuba, Engimov Caribe, and Nescor) will begin operations while another 18 have been approved and await implementation.along with construction of an Agricultural Terminal, a second business center and other infrastructure.[2]

The Mariel Special Development Zone received another foreign investor on March 29 when a Vietnamese entity signed an agreement to develop an industrial park of 156 hectares in the Zone. Another eight agreements with such entities were signed that day at the conclusion of the visit to the island by Nguyen Phu Trong, general secretary of the Communist Party of Vietnam. One of these agreements called for the construction of a 50 megawatt bio-electrical plant and an agricultural development combined with the use of renewable energy to generate electricity.[3]

On the other hand, as noted in a prior post. Secretary-General Trong in a speech at the University of Havana emphasized the need for the incorporation of market economic measures in communist systems.

At the end of last month there was a public debate in Havana about Cuba’s emerging private sector. A survey of the 200 attendees revealed that those with the highest monthly incomes of 20,000 CUC (roughly $20,000) were the owners of rental houses, paladares (restaurants), musicians, small farmers, and, on a smaller scale, scientists, miners, ministers, workers in the sugar industry, lawyers, and doctors. Havana, Ciego de Ávila and Matanzas, were considered the provinces with the highest incomes in the country. On the other hand, at least 25% of the Cuban population lives below the poverty line, and the average monthly salary for State workers in 2018 rose to 740 Cuban pesos (approximately 30 dollars). The audience also discussed what pattern of inequality the population was politically willing to accept and whether this  which could fracture Communist ideology on the Island.[4]

Overriding all of these issues and problems is the recognized need for Cuba to eliminate their dual currency system. According to Pavel Vidal, a Cuban economist,“It is impossible for Cuba to achieve a significant and sustainable improvement in the productivity of its economy so long as it operates with two national currencies, with multiple exchange rates between them and an official exchange rate that is excessively overvalued.”[5]

However, Vidal said “state enterprises that show permanent losses should be closed or merged instead of being allowed to operate in a ‘financial bubble’ where they are sustained by implicit subsidies received every time they pay for imported inputs using an overvalued exchange rate. This bubble must be burst, and the state sector must be restructured. Enormous amounts of financial and human resources have been wasted in supporting state enterprises with no economic value.” Vidal added that if the Cuban government chooses true currency reform, “it should be accompanied by not only a greater opening to foreign investment but also by liberalization of the private sector. An expansion of the private sector, he said, “would allow Cuba to absorb the unemployment that would be produced from enterprises that go bankrupt.”

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[1] Caulfield, Cuba’s next president faces choice between economy and communism, the Hill (April 4, 2018).   Many of these issues have been discussed in posts listed in the “Cuban Economy” section of List of Posts to dwkcommentaries—Topical: CUBA.

[2] Martinez, Promoting development and connecting Cuba to the world (Photos), Granma (April 3, 2018).

[3] Peraza, New accords strengthen strategic relations between Cuba and Vietnam, Granma (April 4, 2018).

[4] Ramirez, Rich “comrades,” Diario de Cuba (April 4, 2018).

[5] Whitefield, Cuba desperately needs to reform currency system, but timing couldn’t be worse, Miami Herald (April 4, 2018).

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.