Is Short-Term Economic Recovery Possible in Cuba?

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.