Selling in USD Doesn’t Make Cuban Companies More Efficient

By El Toque

HAVANA TIMES – With national products being sold in foreign currency with USD prices becoming more and more common, state-led companies “are getting fresh hard currency as if they were exporting, but they are in fact taking advantage of the shortages that exist in the economy right now and the fact that a dollarized market exists that allows this,” economist Oscar Fernandez Estrada pointed out, during an interview for an episode of El Enjambre, a podcast by elTOQUE. 

“The effect the Reforms Process should have had on these companies’ productivity and efficiency dissipate,” as these acquire revenue in foreign currency without establishing themselves on the international market and without having to pay 24 pesos for the dollar. 

“This is the main contradiction of these reforms: the main objective of the Economic Reforms Process, which is to make State companies’ situation more transparent and force them to make a leap in efficiency which even forces them to make adjustments, isn’t being met at all because sales in dollars act as an escape valve. These companies haven’t been able to react because the reforms process currently underway hasn’t matured enough to give state-led companies greater autonomy in their management. As a result, we are reaping results that weren’t expected from the Reforms Process,” Fernandez explains. 

This economist believes that conditions needed to have been created beforehand, so that sales would respond to pressures created by a new devaluation. Meanwhile, every company selling exports, would have increased its sales and, as a result, their benefits, because the exchange rate would have worked in their favor. 

“Before, you needed one peso to buy a dollar and every dollar deposited went onto accounting records as a peso as well; now, a dollar is 24 pesos. The thing is, if you apply this pressure to companies and conditions aren’t created for them to react with real autonomy, it’s very hard for them to take a leap in efficiency that allows them to overcome the pressure of devaluation.” 

According to the academic, the coexistence of the dollar market in stores and the intercompany environment dissipates hopes of jumps in efficiency that it was hoped the Reforms Process would impose on these companies with a high percentage of imported goods. While they need 24 pesos now to be able to import something worth a dollar, letting these companies sell directly in USD equivalents – as is the case today – creates artificial export conditions, as if they were exporting, when they haven’t made any progress in productivity or efficiency; they haven’t conquered export markets.

How does Cuba find its way out of the inflation labyrinth?

In order to reduce inflation and develop the economy, the Cuban State needs to create intervention and regulation strategies for exchange markets with economic instruments, Oscar Fernandez also said in this episode of El Enjambre. The most important thing is to determine which indicators are going to measure the evolution of our economy towards its targets, he explains. 

The high inflation rates that are hitting the country hard are linked to fluctuations on the informal exchange market, as prices handled by the State are not dynamically growing. There is a crack in benchmarks of money’s purposes and, as a result, currency chaos ensues because of value loss. “For example, fuel hasn’t gone up in price, it remains the same; however, private drivers have stepped up their prices because living costs have gone up, because everything being sold in the dollar stores is following chaotic standards.”

In the Cuban economist’s own words, the State needs to find a way to manage the informal exchange market of foreign currency, just like it did in the ‘90s, when it faced an exchange rate of 150 pesos to the dollar on the street. During that crisis, the State designed economic policies to intervene in the informal exchange market and regulate it with market-based instruments. In a relatively short time, it managed to lower the exchange rate until this stood at 20:1. “If the dollar on the informal market remains a reference, illicit market prices will never go down and wages will never be enough.”

Giving a boost to the private sector and unlocking other methods of prodcution before the Economic Reforms Process was a key factor to reduce the inflation rate the Cuban population is suffering today. If it had done this, economic actors of all stripes would have been in a better position to respond to the pressures of this process, the expert believes, who praises the recent opening of the private sector to more activities. 

The economist believes that the creation of more private businesses with legal status and non-agricultural cooperatives with greater freedom than before, is a process that will have an extremely positive impact on sales in a relatively short period of time. “It’s expected that this greater flexibility in the private sector today translates into greater, more varied sales in a 1-3 year period, as well as greater ties even with the state-led sector.” 

One of the most controversial statements made by minister of Economy, Alejandro Gil, has been that the Economic Reforms Process was not the cause of inflation. According to Fernandez, inflation in Cuba today was going to happen regardless of the measures the Government was or wasn’t going to implement, because of the breakdown in the global economy produced by the pandemic, which have been felt for much longer than initial forecasts. 

“Trade flows have been interrupted and maritime transport has become a lot more expensive, which is key for receiving goods in a country like Cuba. This phenomenon in the global economy was going to give rise to inflation in Cuba under any circumstance, just like it has in other countries. On top of that, we have restrictions linked to US foreign policy, which makes this even more difficult.” 

Nevertheless, regardless of the international situation that was going to bring a certain level of inflation and shortages with it due to the disappearance of tourism revenue, the expert points out that the Economic Reforms Process has produced a “reset” in the economy; currency variables are intervening at a very delicate time, which is making this situation worse. 

Camilo Condis: “In May 2021, the minister of Economy Alejandro Gil said that small and medium-sized enterprises are overvalued and won’t be a magic fix for the Cuban socialist State economy. What does he believe the role of small and medium-sized enterprises needs to be in the Cuban economy?

Oscar Fernandez: “Small and medium-sized companies effectively aren’t a magic fix. They won’t be the answer to important problems in the Cuban economy, nor will they give way to breakthrough production levels, precisely because they are small and medium-sized, but they will be able to bridge gaps in the economic ecosystem.

“It is believed that an economy is fixed with large companies in big sectors, that we will have tourism, nickel and that we will have an economy if we develop three or four sectors. That is wrong, because the country cannot be run as if it were a company. There have to be ecosystems; it’s like a forest where there have to be a million different sized organisms, that do many different things, for tall trees to stand strong and grow. It’s exactly the same, these small and medium-sized enterprises will oxygenate the system. 

“Beyond creating job opportunities and bridging many gaps in product supply that don’t exist today, it will produce ties with the state-led sector. State companies will be able to solve many things they haven’t been able to find a solution to with other state-led companies, because of the flexible nature of production in small and medium-sized enterprises. The second thing they can take greater advantage of is that small cracks will open up in the US blockade via the private sector, and joint ventures with state-led companies will be able to break some of the chains that US sanctions pose for Cuba.” 

When wages have less purchasing power

Fernandez said that the Economic Reforms Process failed from top to bottom, which is an opinion many of his colleagues share, including Pedro Monreal, who wrote on Twitter: “The Reforms Process said that those receiving a state wage would be in a better situation. Measured against this objective, the Reforms Process is a failed economic policy.” 

Oscar Fernandez adds that the Reforms Process is the heir to currency unification, which should have been implemented a few years before and was absolutely essential. Nearly every economist clamored for this to happen and, although it was quite close to happening in 2014 with a plan and timeline conceived for its execution, it was delayed for reasons that remain unknown, and was then implemented at the completely wrong time. 

The policy failed to meet its objectives. A year later, there are still different currencies circulating; in addition to the Cuban peso, you have MLC stores (a kind of virtual dollar), dollars in cash and other foreign currencies, such as the euro, circulating in the economy. The most basic objective, which was to eliminate the dual exchange rate, wasn’t met. There is an exchange rate for the digital dollar on the street that stands at about 80 pesos for MLC, and a bit less for dollars in cash. 

On the other hand, the official exchange rate remains at 24 x 1, but because an exchange market doesn’t exist where the bank can sell at this rate, the same situation has arisen, just like it did two years ago. Alongside the official exchange rate of 24:1, there is another exchange rate that is handled by the illicit market. The final outcome? A significant devaluation of the Cuban peso. 

The Government has increased wages with the promise of prices not going up so much and, as a result, their wages would ensure greater purchasing power. However, this situation has not been controlled. A clear supply crisis has unfolded; prices have gone up which has led to devaluation in costs, of production supplies too, which is then translated into higher final product prices. “It’s very hard to contain this; inflation is expected because of weak product supply conditions to react to new pressures imposed by the Reforms Process.” 

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