Anti-inflationary Policies in Cuba and Inequality

“The wild spike in prices led to distortions and dissatisfaction, especially among those who saw their purchasing power drop.”

By Luis Brizuela (IPS)

HAVANA TIMES – The Cuban government has many challenges right now, including the implementation of anti-inflationary policies that will help reduce social inequalities, which have become more visible after economic reforms began in January.

“My husband’s wages and my own are spent almost entirely on food, transport and paying our bills at home. It’s been a while now since we’ve bought clothes, we only think about how we’re going to be able to save up enough to dress and give shoes to our two children, Moraima Valle, a history teacher living in Havana, explained.

Valle stressed to IPS that she earns the equivalent to 170 USD per month at the official exchange rate, but that a pair of shoes costs more than 200 USD, “and we can’t even afford to have a soda out on the street.”

Also living in Havana is pensioner Miguelina Calvo, who worked as a telephone operator, and she told IPS that the 72 USD of her pension vanish into thin air because “prices at the agro-market are through the roof and I need to buy some medicines on the illicit market, as they are almost never available in the drugstore.”

The Reforms Process kicked off on the first day of this year, a comprehensive reforms plan that included eliminating Cuba’s Convertible currency which was in theory the equivalent of the dollar, devaluation of the regular Cuban peso, a spike in wholesale and retail prices, getting rid of a series of subsidies, raising costs of services, as well as an increase in wages and pensions.

Experts recognize that these are important to make state-led companies’ accounts more transparent and to readjust economic variables with international standards, but they also say that they have come almost 10 years after the reforms program was first approved in 2011 to modernize the socialist socio-economic model.

Currency reform was undertaken amidst shortages of food, medicines, and basic essentials because of the COVID-19 pandemic, and the inability of national industries to step up production, as a result of the economic crisis that has existed for three decades.

After a five-year period with low growth rates, this Caribbean Island country lost 13% of its Gross Domestic Product (GDP) ever since the beginning of 2020 and up until September 30th, official statistics reveal.

In the past two years, revenue had dropped by almost 3 billion USD because of the collapse of the main economic leaders, while the priority of health measures to contain the pandemic reduced the sum available for imports, in a country that buys almost 80% of the food it consumes alone.

In addition to all of this, US sanctions increased and the embargo became stricter, which has been hindering financial operations since 1962, and makes it impossible for Cuba to access credit from international financial bodies.

“The wild spike in prices led to distortions and dissatisfaction, especially among those who saw their purchasing power drop. Likewise, it’s also a reason for a lack of motivation at work, as wages are engulfed by prices,” economist Omar Everleny Perez Villanueva explained to IPS.

According to the expert, high inflation “has affected every social group, but especially the most vulnerable such as the elderly, those who receive social security benefits, large families with lots of children or single mothers.”

The numbers speak for themselves

On October 27th and 28th, during the sessions of the National Assembly of People’s Power, the unicameral Cuban Parliament admitted that the rate of inflation continues to increase.

Cubans are experiencing prices that are 7-10 times above official prices, one of the reports presented to the legislative border revealed.

Currency reform increased the minimum wage by 500% to the equivalent of 87 USD, and the maximum to almost 400. In the case of pensions, the lowest stands at 63 USD.

The measure established a fixed official rate of 24 pesos to 1 USD, but on the street, this figure varies between 68 for 1 USD in cash to 78 pesos for a bank deposit for purchases with a debit card in stores with prices in USD, and this money can’t be withdrawn.

Reports handled by Parliament estimate that the deficit in products offered stands at 2.5 billion USD. They claim that it’s a factor that has shot up prices on the illicit market and made the price of the basic basket of goods and services go up, as it now costs double the 60 USD initially planned for monthly expenses.

Furthermore, the reforms process hasn’t stopped the partial dollarization of the economy, after stores opened in 2019 to sell electrical appliances, food and basic essentials, with debit cards priced in USD and linked to accounts in foreign currencies.

Several government officials argue that this controversial mechanism allows the country to collect foreign currency and that some of this money is used to stock up some products at stores where most of the population go, as they only receive their wages and income in Cuban pesos.

Such a segmentation of the economy translates into inequalities in terms of wages and consumption, because “not every family has access, nor can everyone buy the same quantity of products they need,” sociologist Reina Fleitas told IPS.

On the one hand, “you have those who live off their wages, whether they are from the State or not, and on the other, you have people who have access to alternative sources of income via remittances, private businesses or because they form part of the growing illicit market,” Perez Villanueva explained.

Given chronic shortages of some products or the inability to buy in the US dollar stores, analysts highlight that a percentage of the population satisfies their consumer needs on the illicit market, which is partially sustained by the theft of resources from state stores.

In regard to inflation and its effects “we’re aware of the severity”, and the government has made it a top priority to find a solution and to take care of vulnerable people,” stated president Miguel Diaz-Canel at the National Assembly on October 28th.

The Government has slightly lowered some prices such as electricity, which has been the subject of much criticism, while they continue to repeat that they won’t apply “shock therapy” and nobody will be left helpless in a country with universal and free access to education and public health.

Meanwhile, the rations booklet has been kept in effect since 1962, ensuring the 11.2 million inhabitants on the island receive a small monthly ration of rice, sugar, grains, coffee, cooking oil and animal protein, regardless of income, although this doesn’t cover all dietary needs, but it is relief for low-income households and vulnerable groups, at least for part of the month.

Fairer social and economic investment

Analysts highlight the fact that the protests that broke out across the island on July 11th were in keeping with the expensive cost of living and a more severe economic crisis, as well as different internal and external factors.

In the weeks following the protests, the government has given greater priority to social programs such as building and repairing homes, infrastructure projects and specific assistance to people in vulnerable situations. [As well as the arrest of hundreds of people who dared to protest.]

“The Government has shown signs of trying to improve the life of Cuban families, and positive measures such as those that contribute to broadening the range of economic actors and to create new sources of employment, but the positive effects aren’t being seeing in consumption,” Fleitas pointed out.

In her opinion, “fairer social and economic investment is needed in its distribution to keep domestic migration in check” and she reminded us that in Havana, for example, many neighborhoods classified as “vulnerable” are founded by people who come from even more disadvantaged communities, especially in the East.

According to the sociologist, “the same synergy between government and science to fight the pandemic” should be employed with social sciences, as “its results haven’t been given the same importance as other disciplines… and its publications are not only for diagnosing problems, but also to formulate policy proposals.”

Perez Villanueva believes “the regulation of prices needs an injection of imports or sales of national goods.”

In recent months, the government has approved measures to revitalize business activity, and it has authorized the first micro, small or medium-sized enterprises (MIPYMES), in late September, and there are now over 300 signed up.

“However, there continue to be obstacles in the decision-making power of business managers, while MIPYMES need to deal with authorized state bodies to import, or purchase supplies on the illicit market, which affects prices,” the economist summarized.

Read more from Cuba here on Havana Times.