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.

Cuba Faces Economic Challenges  

Cuba is facing economic challenges. First, certain economists are projecting difficult economic times for 2017.[1] Second, ordinary Cubans already are facing difficulties finding basic foodstuffs.[2]

Carmelo Mesa-Lago, an economist and professor emeritus at the University of Pittsburgh, said, “The short-term prospects are not good.” If in 2015 Cuban GDP (Gross Domestic Product) grew 4.4%, “projections [for 2016] are of stagnation or slight decline, and a far greater fall next year.”

He said the economic reforms initiated by Raúl Castro are positive, but that they are “extremely slow. We are now in 2016, nine years since reforms began in 2007, and there have been tangible effects on the economy,” but there is a “need to find quick and accurate solutions . . . [to] accelerate the pace of the key changes.” For example, Mesa-Largo said, the development of the non-state sector “authorized only . . . generally unskilled jobs, [with] extremely low productivity.”

The other economist, Omar Everleny Pérez Villanueva, stated the Cuban economy will only grow an estimated 0.4% in 2016 and decline -2.0% in 2017. “Cuba must make major changes in its economy to rapidly overcome its structural problems in 2017.” He believes it is necessary for Cuba to develop small and medium enterprises, increase wages, allow foreign investment and accept portfolio investments (with the issuance of fixed income securities (bonds) and equity (shares)).”

On a personal level, ordinary Cubans have great difficulty in finding food to eat, due in part to increased competition for food supplies to feed the increasing number of foreign tourists who can pay more for food.

A U.S. journalist reports that the tourists’ “surging demand for food has caused] ripple effects. . . .Tourists are quite literally eating Cuba’s lunch. . . . [G]oods that Cubans have long relied on are going to well-heeled tourists and the hundreds of private restaurants that cater to them, leading to soaring prices and empty shelves. . . . Without supplies to match the increased appetite, some foods have become so expensive that even basic staples are becoming unaffordable for regular Cubans. . . . Rising prices for staples like onions and peppers, or for modest luxuries like pineapples and limes, have left many unable to afford them. Beer and soda can be hard to find, often snapped up in bulk by restaurants.”

To meet this immediate need for more food in Cuba, this blog has proposed that Cuba impose a requirement that all arriving airlines and cruise ships deliver to the Cuban government set quantities of certain foodstuffs.

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[1] The economic challenges of the island by 2017 according to two experts, Diario de Cuba (Dec. 13, 2016)

[2] Ahmed, Cuba’s Sure in Tourism Keeps Food Off Residents’ Plates, N.Y. Times (Dec. 8, 2016); Severson, For Cuban Home Cooks, Ingenuity and Luck Are Key Ingredients, N.Y. Times (May 17, 2016).

 

Economists Discuss Cuba’s Current Economic and Political Situation

On July 28, Cuba’s “Current Economic and Political Situation” was the opening session of the annual meeting of the Association for the Study of the Cuban Economy, a U.S. non-political, non-profit organization dedicated to promoting “research, publications, and scholarly discussion on the Cuban economy in its broadest sense, including on the social, economic, legal, and environmental aspects of a transition to a free market economy and a democratic society in Cuba.”[1]

The presenters at this session were (1) Joaquín P. Pujol, International Monetary Fund (retired); (2) Omar Everleny Pérez Villanueva, Cuban Economist, Temas Magazine;[2] and (3) Jorge R. Pińón, Researcher, Center for International Energy and Environmental Policy, University of Texas at Austin.

Economists’ Comments

Joaquín P. Pujol discussed “Cuba: Great Expectations, but How Real Are They?” Cuba is facing problems in servicing its foreign debt, unifying its unwieldy dual currency system, fixing its decrepit infrastructure and promoting sluggish foreign investment. “The Cuban government now finds itself again in need of foreign financing and they’re not going to get it. In fact, it has turned to Miami” as Cuban relatives and friends have become an important source of funding for small start-up businesses in Cuba.

Omar Everleny Pérez Villanueva discussed “Cuba: Economia y Desafios” [Cuba: Economy and Challenges]. Although the government has projected the Cuban economy will grow by 1 percent this year, “I’m not sure it will reach that this year.”

Even though final figures for 2015 haven’t been announced yet, he said Cuba would show a deficit in goods and services trade. And even though tourism is growing briskly, he said taking into account expenditures in the tourism sector, the yield can be disappointing.

Jorge R. Pińón’s subject was “Cuba’s Energy Crisis: Truth or Fiction?” Faced with mounting energy problems, Cuban officials announced strict energy savings measures at state enterprises earlier this month in hopes of avoiding blackouts during the sweltering summer months. Officials have said Cuba will have to cut fuel consumption by 28 percent during the second half of the year.

Cuba produces about 50,000 barrels of crude oil a day and has relied on Venezuela for the other 80,000 to 90,000 daily barrels it needs. But with Venezuela on the ropes economically, continued oil supplies are uncertain. Indeed, over the last six months, he said, total Venezuelan oil production has come dangerously close to dropping below 2 million barrels a day. “In our business that’s catastrophic.”

“As of last week there was enough oil . . . [in Cuba] to keep the lights on,” Piñón said. “June and July deliveries were sufficient.”

Some analysts, looking only at declines in oil arriving in Cuba directly from Venezuela, have predicted an even worse outlook for the island, but Cuba also receives oil from offshore Venezuelan facilities.

Cuba also has been stockpiling oil, and there is an estimated 60-day supply on the island. The question is what happens with Venezuelan deliveries in August and September. “The [economic] hurricane is coming in Venezuela and it’s a Category 5 hurricane. The question is: Will it hit Cuba?”

Already hours have been cut for some state workers, fleets at nonessential enterprises have been parked and some neighborhoods have reported blackouts, drawing comparisons to the 1990s “special period” when after the collapse of the Soviet Union and the end of its generous subsidies, there were severe shortages in Cuba in everything from fuel to food.

Indeed, Raúl Castro in his recent speech to the National Assembly said, “There is speculation and rumors of an imminent collapse of our economy and a return to the acute phase of the special period.” Raúl Castro said during a recent speech to Cuba’s National Assembly. But he said the island was “in better conditions than we were then to face them.”[3]

The surge in Cuban tourism and the growth of private enterprise also is putting more pressure on Cuba’s energy sector. About 68 percent of oil consumption in Cuba is fuel oil for its inefficient electrical power sector. The government has said it will protect the tourism sector and private businesses from cutbacks.

If Venezuelan oil supplies dry up, it’s unlikely Cuba would be able to find another benefactor like Venezuela in Algeria, Angola, Russia, China or any other country, forcing it to go to the world market to buy about $1 billion worth of petroleum annually.

In recent years, Cuba has actually been receiving more oil from Venezuela than it needs and has been selling the excess on the world market as refined petroleum products. But Piñón suggests it would be cheaper and more efficient for Cuba to shut down its refineries and buy gasoline and jet fuel than buying crude and refining it.

Other Gloomy Outlooks [4]

An even gloomier outlook was voiced by Pavel Vidal, a former Cuban central bank employee who is now a professor at Colombia’s Pontificia Universidad Javeriana Cali. He said, “Under current conditions, [Cuban] gross domestic product will dip into negative territory this year and decline 2.9 per cent in 2017. If relations with Venezuela fall apart completely, GDP could decline 10 per cent.”

Another economic negative is anticipated declines in Cuba’s export of medical services (its foreign medical missions), especially to Algeria, Angola and Brazil. In 2014 such medical services earned Cuba about $8 billion or 40% of its total exports.

Karina Marrón, deputy director of Granma, has warned of possible street protests. “A perfect storm is brewing . . . this phenomenon of a cut in fuel, a cut in energy. This country can’t withstand another ’93, another ’94.”Rapid response brigades in the 1990s were formed to quell social unrest; they are now reportedly on alert.

“Just when we thought we were going forward, everything is slipping away again,” says Havana retiree Miriam Calabasa. “I am worried people are going to decide enough is enough: then what?” A mechanic, Ignacio Perez, stated, “Nothing will get better any time soon; it can only get worse. The roads won’t be paved, schools painted, the rubbish picked up, public transportation improved, and on and on.”

But foreign businesses hope these great economic challenges may speed economic opening. “Venezuela’s problems increase the chance of Cuban reforms. This government only acts when it has to,” says one Spanish investor on the island.

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[1] Whitefield, Economists debate how hard Venezuela economic storm will hit Cuba, InCubaToday (July 28, 2016).

[2] As mentioned in a prior post, Omar Everleny Perez was one of the Cuba’s best-known academics, an expert in developing economies and a consultant for Castro’s government when it launched a series of market-oriented economic reforms in 2011. This last April (three weeks after Obama’s visit to Cuba), he was fired by the University of Havana for allegedly having unauthorized conversations with foreign institutions and informing “North American representatives” about the internal procedures of the university. Perez said he believed he was fired because of his critical writings about the slow pace of economic reforms.

[3] President Castro’s recent speech to the National Assembly was discussed in a prior post. His earlier speech to the Congress of the Communist Party of Cuba also touched on Cuba’s economic problems; this speech was covered in another post.

[4] Frank, Venezuela’s Economic Woes Send a Chill Over Closest Ally Cuba, Fin. Times (July 25, 2016).

 

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