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).

A New Travel Warning for Americans Traveling to Cuba 

 Last Wednesday (September 13), the U.S. State Department issued a warning about Americans traveling to Cuba that was discussed in an earlier post.

On September 18, the Department updated its Cuba Travel Warning after Hurricane Irma had hit and damaged the island.[1] It stated the following:

  • “The Department of State advises U.S. citizens to carefully consider the risks of travel to Cuba while Hurricane Irma recovery efforts are underway.  Major roads are now open in Havana and power and water service has been restored in most of the city, but some parts of the country may be without power and running water. North central Cuba suffered severe damage and should be avoided until further notice. On September 6, the Department authorized the voluntary departure of U.S. government employees and their family members due to Hurricane Irma.”
  • “Travelers should apprise family and friends in the United States of their whereabouts, and keep in close contact with their travel agency, hotel staff, and local officials.”
  • “U.S. citizens in Cuba in need of emergency assistance should contact the Embassy by telephone at +53- 5280-5791 or the Department of State at 1-202-501-4444. At this time, U.S. citizens should not attempt to go to the U.S. Embassy in Havana as it suffered severe flood damage.”

Meanwhile the Cuban government announced that it would help its citizens recover from Hurricane Irma’s devastating swipe at its north coast and rebuild their homes. The plan would have the government finance 50 percent of the cost of construction materials for such rebuilding. Defense councils will certify the extent of damages and the resources necessary to make repairs.[2]

For homes that collapsed or lost their entire roofs, the state will take over interest payments. Defense councils also will consider subsidies for victims whose incomes are too low to purchase all the required construction materials, and those who still owe money on previous construction loans may be granted subsidies.

Hurricane Irma will have a major negative effect on Cuba’s economy. Economist Carmelo Mesa-Lago, a professor emeritus at the University of Pittsburgh, is convinced that GDP will decline over the last six months of this year. Another Cuban economist, Pavel Vidal, who is a professor at Javeriana University in Colombia, thought the hurricane damage “may pump up inflation” and cause ‘financial complications.”

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[1] U.S. State Dep’t, Cuba Travel Warning (Sept. 18, 2017); Rosenberg, US warns would-be Cuban travelers: consider the risks following Hurricane Irma, Miami Herald (Sept. 18, 2017)

[2] Information for the population, Granma (Sept. 18, 2017); Whitefield & Torres, Cuba announces program to repair Irma-damages homes as experts assess damage to economy, Miami Herald (Sept. 18, 2017).

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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