State Companies’ Inefficiency and News on the Cuban Economy
Despite the constant “modernization” and “tweaking” process of socialist state companies, this figure reveals the inefficiency of its business model
HAVANA TIMES – Alejandro Gil Fernandez, Cuba’s deputy prime minister and minister of Economy and Planning, announced on December 12, 2022, before the National Assembly of People’s Power, that 480 of Cuba’s state-led companies (approximately 24%) closed the year with losses.
Despite the constant “modernization” and “tweaking” process of socialist state companies, this figure reveals the inefficiency of its business model, which it still considers “key” and “immutable” for the country’s economic future.
Gil Fernandez also announced new measures to restructure the State’s business sector. He spoke about studying new forms of management, as well as government boards (a new classifying system for state companies) and increasing the number of companies being converted into state run small and medium enterprises (SMEs).
These possible changes are in line with Gil’s logic that neither the Cuban economy nor its businesspeople are “capitalists”. The minister insisted on the fact that losses and profits aren’t always indicators of efficiency in the Cuban model. He said that some continue to register losses because the Government decided to cap prices so as not to hurt the population, influencing their inability to cover costs. However, he also recognized that despite this analysis, the corporate design of a company can’t be based on constant losses which the State then needs to cover. He also admitted that the solution to this phenomenon couldn’t be shutting down a company.
Alejandro Gil said there are state companies that ended 2022 with a positive balance; but these results don’t necessarily correspond with a real increase in productivity. Over 500 state companies and over half a million employees benefitted from salary restructuring and its profit-sharing system. The situation had led state companies to share profits, the equivalent of wealth, which isn’t created by greater production, but instead by raising prices.
Gil stressed that “revenue or profits” can’t be the only incentive for socialist Cuban businesspeople, who have to think about the benefits of community as a country.
He also said that 2023 would be a better year for Cubans and said that GDP (gross domestic product) growth is estimated at 3%. Meanwhile, he announced that growth in 2022 was approximately 2% GDP, which was an improvement on the 1.7% growth reported in 2021. Despite this improvement, he stressed that the country is still 8% under the 2019 level.
2023: MORE INFLATION IN CUBA
Gil admitted that targets for exports and tourism in foreign revenue weren’t met in 2022, as well as targets for food production, like rice, beans, root vegetables, meat, and eggs, for example. He admitted that the main reasons for this low productivity included not having delivered agricultural supplies and fertilizers being “super expensive” on the international market.
Nevertheless, he said that agricultural products were being sold directly by different forms of production and he spoke of the work of the Agricultural Promotion Bank.
Measures approved by the Government to stop the “disproportionate and irrational spike in prices” haven’t worked either. Gil admitted that they haven’t been able to stop growing inflation between January and October 2022, which he put at approximately 29%.
This figure means that prices on the list of products and services used by Cuba’s Office of Statistics and Information (ONEI) to measure inflation have gone up approximately 30% over the first ten months in 2022.
The minister added that annual inflation, measured between October 2021 and October 2022, went up by approximately 40%, which translates into a drop – by this same amount – of the Cuban people’s purchasing power.
Many economists think that both of these official statistics are very optimistic or fall short.
In addition to the economic growth the Government anticipates in 2023, they are also planning for 83 state-led companies to report losses at the end of next year, and for the price of the Food Basket and other basic essentials to go up, as a result of what the deputy prime minister called “imported inflation”.
In his speech, Gil recalled that under the predicted conditions, the average wage – which will stand at 4,162 pesos in 2023 – won’t be enough to cover the population’s basic needs (it isn’t enough at the moment either). The hardest hit workers will be those linked to education and healthcare, who despite having received a pay raise in 2020 after the Reforms Process, still aren’t earning enough, because of uncontrollable inflation. He also stressed that a new pay raise won’t be the answer for this deficit.
After the Minister of Economy and Planning gave his accountability speech, Ulises Gilarte, the General Secretary of the Workers Central Union of Cuba (CTC), admitted that over a million public sector workers are earning less than 5000 pesos, and that over 1,700,000 pensioners are unable to cover their basic needs under the country’s conditions today.
PROMISES: MORE TOURISM AND FUEL?
Despite negative numbers in the Cuban economy, Gil insisted that 2023 will be a better year. He used different arguments to rekindle the hopes of those listening to him.
Key points in his argument that could potentially bring about an improvement in the national situation included keeping the COVID-19 pandemic in check, and he the results noted of President Miguel Diaz-Canel’s international tour, having been able to unblock different loans, according to government-controlled media in Cuba. He also spoke about the results from the Havana International Fair, which supposedly “proves foreign business owner’s interest” in the country despite the “blockade”. He said it shows the possibility that new investment opportunities might arise in 2023. Nevertheless, there were only six investment intentions in 2022, and only five projects have reached the negotiation phase.
He also pointed out that economic actors will further diversify next year, tourism will grow and there will be a better fuel supply. This increase in fuel availability will allow for stable electricity generation, he said. In order to have a better 2023, Gil hopes that the country will receive more tourists. The “ideal” number for next year is far from the 4.2 million visitors Cuba welcomed in 2019, just before the beginning of the COVID-19 pandemic.
The minister also said that they want to boost exports to over 1 billion USD, stepping up retail commerce by 15% and having a macroeconomic stability program. Meanwhile, the proposed plan also intends to increase innovation and apply concepts of a circular economy that already has innovative projects in Cuba.
Despite Gil’s promising speech, many of the arguments he used to keep up Cubans’ hope are just aspirations. They are part of a “plan”, a forecast which didn’t come true in 2022, like in so many other years.
Miguel Diaz-Canel’s international tour was able to unblock funding opportunities with strategic allies. However, these opportunities had been put on standby in the past because the Cuban Government had failed to respect its debt repayments. However, it’s unlikely they will be able to make these repayments in 2023 and even though they have strategic alliances, outstanding payments have meant that exchanges with creditors that don’t depend upon political allegiances, but on making these repayments, have been suspended.
Alejandro Gil also talked about diversifying economic actors. However, he pointed out that “the disproportionate, unjust and irrational increase in prices” is speculative in nature and this has no place in a socialist economy like Cuba’s own, where price control measures must carry on being developed. He insisted that the Cuban economy isn’t a market, but an “economy with space for the market”, where profits of economic actors need to be controlled.
Thus, the private sector will be the most affected, as its actors are unable to enjoy subsidy mechanisms at the expense of the State budget which state companies enjoy. Despite this lack of incentive and centralized control mechanisms, Gil hopes that approximately 4,000 new actors will join the Cuban economy in 2023.
He also said that the private sector accounts for 12-14% of the Cuban economy and guarantees 21-28% of passenger transport and 1% of cargo transport. He recognized that 14-15 million USD was brought in in revenue from exports and that this contributed to approximately 58 billion pesos circulating in the retail network. However, he didn’t use numbers to illustrate the growing importance of the private sector, but to highlight the leading role that state companies still hold in Cuba’s economic model.
Gil can’t guarantee the 1 billion USD increase the economy needs from exports. If tourism and exports don’t behave the way he’s planned – like in 2022 – it will be very difficult for the Government to ensure the generation of 20,140 gigawatts per year that is needed to supply the residential sector and keep up with greater economic activity.
We also must add that it seems the Cuban Government’s strategy continues to be using Turkish powerships as a solution to the electricity deficit, which are currently covering 15% of total electricity generation.
But this is “imported” electricity which the country is paying for in foreign currency that it obtains by different means, then selling this electricity in pesos at a subsidized rate.
As a result, the lack of foreign currency available encourages less electricity generation – like it has in the past. The National Grid can’t make up this loss, given its situation today. It doesn’t have new power plants, which with a lack of foreign currency, suggests that the planned major repairs of the country’s largest power plant: “Antonio Guiterass”, won’t happen either.
The Cuban Government also hopes to have an investment plan which Gil called “continuity”, to shake things up a little. In this plan, 49% of investments focus on food, cement, steel and tourism; approximately 95% are investments that have been in the works in previous years.
Nevertheless – and despite Gil recognizing that tourism in 2023 won’t reach pre-pandemic levels -, they hope to complete ten hotels next year, adding another 3147 rooms.
Cuban officials are saying “yes, we can” in 2023. But they haven’t explained how they’ll do this, beyond their hopes and dreams. Once again, they asked the Cuban people to “creatively resist” and “to fight” those who insist on setting abusive prices to fill their pockets.
It is the job of the Economic Minister to cheerlead for the Cuban economy. The glaring omission from his 2023 projections is the HOW. For example, what changes in the Tourism sector are going to be put into place to attract the increase in tourism? What changes are being put into place in the production of exports to make these exports more attractive to foreign buyers? Inflation is largely worldwide. Most of the countries who typically send tourists to Cuba are looking at economic recession for 2023. That means lower tourism. Gil’s plan sounds good but how is planning to make it happen?