Is Short-Term Economic Recovery Possible in Cuba?

Photo: Yaritza Guirado.

By El Toque

HAVANA TIMES – “The first semester in 2022 has been extremely hard for the economy and there aren’t any signs right now that things will be any different in the second semester. This year has been a lot more strained than previous years,” economist Omar Everleny Perez Villanueva notes in a Facebook livestream organized by El Toque.

The expert listed different points within the current economic situation in Cuba that have led him to this conclusion:

– The tourism plan is pretty much impossible to meet, as it’s going to be very hard to get two million tourists here in the remaining months of the year.

– We have seen the least productive sugar harvest in the last 100 years, and it wasn’t even enough to cover our domestic demand. We are importing sugar again and export plans agreed with countries like China, haven’t been met.

– Even though it’s been a good year for nickel prices, production in Cuba has been limited to the point that there isn’t a great supply due to a lack of investment needed to develop the national nickel industry.

– Add to the above energy shortages in recent months, plus the annoying and constant blackouts. Gensets have been pulled out, which drive up diesel consumption. Many industries have grinded to a halt and others are paralyzed because of fuel shortages, to the point that production is impossible to reach expected levels.

– The fiscal deficit remained high in the first and second semesters, as “high” wages continue to be paid out in comparison to national revenue. On the other hand, high inflation rates mean that these wages, which would seem high, have lost their purchasing power. An income of 6,000 pesos might be considered high; however, a box of chicken can also cost you 6,000 pesos today.

– Consumers aren’t seeing the results of economic recovery in agriculture, because prices remain high and production remains low.

– Public transport has also been hit hard. It has only been running at 30% of its potential in Havana, lots of the time. This is linked to fuel shortages, but also a shortage of spare parts.

– Inequality is crystal clear. Many people are unable to live off their wages and pensions and have a quality of life that isn’t even basic, it’s pure survival. Prices have engulfed any social benefits.

– 2022 is a year that the country had to pay debts, and credits are no longer being granted because of the country’s high indebtedness.

– Cuba has little foreign currency and what exists is leaving the country with the people whose life mission is to leave the island. Every Cuban en route to the US, traveling via Nicaragua, takes approximately 10,000 USD with them. If over 100,000 Cubans have crossed the US border this year so far, that means 1 billion USD have left the country.

Perez notes: “I can’t see a sector that is capable of lifting the economy along to meet planned targets, but even if we reach 4% GDP growth, which was planned – and I think it’s impossible – we’re still talking about a country with a shrinking economy in recent years. This means to say that 4% doesn’t mean anything, because you must go to the foundations of this growth. If housing and hotels increase, but industrial production and food don’t, this growth doesn’t impact Cuban people’s lives.”

Tourism investments, GDP, national production, MLC… how do we untangle Ariadne’s thread?

“They’re already saying this decade is going to be tough, worldwide. This is going to affect Cuba, of course, and it’s going to affect its economic growth. The entire world has seen dark days in recent years,” the economist Tamarys Lien Bahamonde pointed out.

Bahamonde adds the dim international situation to the complex national situation put forth by Perez Villanueva. Industry hasn’t recovered on a global level and we’re expecting global inflation rates of 2.5%. These factors will lead to more expensive tourism, as transport, accommodation, food costs etc. will all increase. As a result, many people will have to reassess their household income, and travel plans will be cast aside or put off until the economic situation stabilizes. Add to this the Russia-Ukraine war, which is also affecting the recovery of the global economy.

“I would bet on very low economic growth in 2022, bearing in mind tourism levels during the peak season, as they haven’t recovered to 2019 levels. The Russia-Ukraine war has affected Cuba quite significantly, as we can’t forget that Russia was an important source of tourists for the country. Given the current situation, I wouldn’t recommend investing any more in tourism. I’d redirect funds to other economic activities that can be reverted into benefits for the Cuban economy,” Bahamonde says.

Perez Villanueva adds that it doesn’t make sense to invest 50% of the State budget on tourism and only 4% on agriculture and 0-something % on the sugar industry.

“Apparently, we weren’t going to have agriculture or sugar. Decapitalization of the sugar industry has reached such levels, that there isn’t any sugar to sell. You couldn’t lift up the economy even with a 200 million USD loan. We’ve reached a dead-end, who’s going to give us 500 million USD?”

The expert reaffirmed the urgency of a home-grown process that manages to cut all of the obstacles so the country can begin to export. If Cuba doesn’t export it won’t produce the foreign currency it needs. “Cuba is in a very tough spot,” he says.

On the other hand, economist Pedro Monreal highlights the experience of other countries with a similar economic, political and social structure to Cuba’s own today, and how they managed some kind of economic success. They shared three fundamental points when kicking off economic reforms: quickly leaving behind the centrally planned economic model and passing to active market regulation; significant reform in how prices are set, and lastly, a change in the country’s property ownership structure.

“An economic reform is a political decision, so it depends on internal factors that move one way or another. Any economic change in Cuba is going to take time, 10-12 years minimum, because there’s a very serious structural problem that can’t be changed overnight. The solution is increasing supply, but this won’t happen overnight,” doctor Monreal warns.

Economic Reforms: a spectacular failure

According to Tamarys Bahamonde, introducing and having the magnetic hard currency MLC card in circulation is one of the biggest problems, as it’s made it impossible for the Cuban peso to go up in value and become a means of payment and saving, which was the whole objective of the Economic Reforms process implemented in January 2021. This problem has distorted the system to a great degree, and we’ll have to deal with this for a long time.

“Scenes from the ‘90s are playing out again, including multiple exchange rates. Lots of structural flaws need to be fixed to get the country moving ahead in the next decade,” the academic points out.

Perez Villanueva says that every finance-related problem is due to insufficient supply and low production. Wages and the official exchange rate aren’t in keeping with reality.

“Reforms needed to begin with small and medium-sized enterprises, letting them import and granting them loans. Then, they should have embarked on more profound currency reform. They must work really hard on production and implement every measure possible to facilitate the recovery of national production,” he recommends.

In Pedro Monreal’s words, the Economic Reforms process failed spectacularly and the greatest mistake when kicking it off probably had to do with not fixing something they’d invented beforehand: the so-called MLC stores (with prices in US dollars), created in 2019 to stop capital flight via Cubans traveling to Panama in search of merchandise.

When Economic Reforms were implemented, they didn’t unify currencies, because there is a segment of the dollarized economy that remains intact, that continues to advance and engulfing the consumer market. MLC stores stopped being a space selling luxurious products, and started selling staple foods,” Monreal stresses.

“The dollarized market in Cuba disconnects the national economy because it creates a barrier between remuneration for work and consumption that should relate to this remuneration/work. This is a seriously incoherent element of the system,” the economist concludes.

Read more from Cuba here on Havana Times.

4 thoughts on “Is Short-Term Economic Recovery Possible in Cuba?

  • Excellent article. Always good to see Omar Everleny Perez Villanueva’s sensible observations.

    At one time I was hopefull after hearing Raul Castro’s call for reforms – but sad to see his pragmatic approach rebuffed. This inability to deal with the old guard who are fearful of change will hold Cuba back. So many people were hopefull Diaz-Canel would persevere with Raul’s reforms, but there is little evidence of that.

    Ultimately, generation charge will spur reform. But as long a there are those who fear reform are active, there seems to be little hope. Let’s hope that a younger generation can push forward with hope.

  • The thesis of this article is encapsulated in the three economic solutions listed that will bring about substantial, worthwhile economic change to Cuba’s economy if implemented outright.

    1. Quickly leaving behind the centrally planned economic model and moving to a more active market regulations. In other words allowing unfettered supply and demand – capitalism – determine the economic activity on the island and not top down central planning. In a nutshell capitalism must be allowed to begin flourishing to see any meaningful economic gains.

    2. Significant reform in how prices are set. The majority of Cubans must have financial access to those goods and services produced in the country. Prices set by the state for basic food stuffs, pork, chicken, milk, bread need to be subsidized so that Cubans can access these essentials. Allowing private ownership of agricultural production such as pig, chicken, egg, production will allow more production increasing supply lowering the price and allowing the average Cuban to be able to purchase essential foodstuffs. The key is allowing entrepreneurs to benefit from their own production perhaps selling all their production at market prices to a cooperative who then distributes the foodstuffs to Cubans at a price they can afford.

    Absolutely: “The dollarized market in Cuba disconnects the national economy because it creates a barrier between remuneration for work and consumption that should relate to this remuneration/work. This is a seriously incoherent element of the system,” the economist concludes.” How is a Cuban government worker, or just about any Cuban worker for that matter, paid in paltry pesos suppose to enter a MLC store and forced to buy products over priced in American dollars? Incoherent? That’s an understatement. How about outright economic exploitation of the Cuban worker by the totalitarian state?

    3. A change in the country’s property ownership structure. Ordinary Cubans must have the opportunity to own their own resources. Why can’t a Cuban own his own cattle, horse? Why must the government own title to the resource outright after the Cuban has purchased the resource? The Cuban after paying for a cow only “rents” it. The title to that animal always belongs to the totalitarian state. Absolutely absurd. How is this totalitarian method of economic slavery suppose to enhance the production of much needed sustenance? When a Cuban buys a cow or a horse the title to that resource must transfer directly to the Cuban owner who is then responsible to ensure, the animal in this case, is his/hers outright and will be maintained to be productive and economically sustainable.

    Economist Pedro Monreal and the other economists like him with their sensible economic solutions must pit their “foreign” ideas to a group of totalitarian ideologues who after 60 plus years are still stuck in their communist utopian ideas that in 2022 are archaic, irrelevant, destructive and non sensical. Does Cuba have to wait another 10 to 12 years for the possibility of some sensible economic change to take place?

    At the rate at which Cubans are fleeing the island towards Nicaragua as their first step to a better life, it behooves those decision makers left behind to make drastic, sensible, economic changes now, immediately, for the sake of the country. But of course that will not happen as long as totalitarian rulers are in power.

  • “The dollarized market in Cuba disconnects the national economy because it creates a barrier between remuneration for work and consumption that should relate to this remuneration/work. This is a seriously incoherent element of the system,” the economist concludes.”

    Is it an incoherent element of the system, or an incoherent system? A socialist system, which by definition separates the obligation to work from the right to consume, will always fail. There is no incentive to work or achieve. Its only goal is for everyone to be equal…..that is equally poor and miserable.

    When a government expropriates assets, fails to pay its debts, and ignores human rights, it should not be surprising that its national currency….which is based on the trust and integrity of its government…. is worthless. The failure of the Cuban government and its socialist ideals, has reduced the country to begger status. It has no prospects for recovery until it returns to capitalism.

  • I’m still wondering what does Diaz Canel and his advisors are thinking about? Why aren’t they investing in the production of their lands? and other kinds of investments for national production and industries.

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