The Phenomenon after Day Zero in Cuba

Por Amaruy Valdivia  (El Toque)

HAVANA TIMES – A lot of controversy has been stirred up recently about Day Zero, announced Thursday night as January 1, 2021. However, very little – almost nothing – has been said about what will happen in its wake, in the weeks that follow.

Any kid off the block can give you a quick explanation of the Government’s plan. Devalue the “State business” CUP to encourage exports, while prices, state pensions and wages are being radically adjusted. “We hope that wages will increasly slightly more than price increases,” said Marino Murillo Jorge, the Communist Party’s economic “update” chief, explained in mid-October.

In the beginning, the exchange rate with the US dollar will be fixed. Just last night that rate was announced at 24 pesos to 1 USD. “However, depending on economic changes, another exchange rate could be implemented,” said Murillo. He said the government has a strategy to stop wholesale prices from going up and, as a result, consumer prices.

In simple terms, this phenomenon is known as “currency rate transition”. It’s a concept under which the resulting price fluctuations in currency exchange rates against foreign currency, fall under.

“When there is a devaluation of currency, production costs, involving imported goods especially, go up and this is translated into the final price. This will happen in Cuba,” explained economist Pavel Vidal – former expert at the Cuban Central Bank, a researcher in currency policy and economic growth. He is also a professor at Pontifical Xavierian University in Cali, Colombia. Vidal spoke on a Facebook Live stream.

During the special broadcast organized by elTOQUE, which professor Carmelo Mesa-Lago – Distinguished Service Professor Emeritus of Economics and Latin American Studies at the University of Pittsburgh – also took part in, Vidal highlighted the importance of “controlled currency transition”. “Wealth won’t be generated in the short-term, but it will be redistributed towards the public sector. In order to do this, the transition needs to be controlled so that prices don’t go up more than the exchange rate, or wages.”

An example of this on a small-scale could be seen in the illegal import market run by “mules.” They will ultimately increase prices after Day Zero as a way to protect themselves against the CUP’s devaluation. Another expected outcome is that national industry using imported raw materials must readjust their costs and increase prices.

“It’s very likely that serious inflation happens and that people’s purchasing power declines, which is why we have to discuss what will happen with wages,” Mesa-Lago anticipated.

Greater social vulnerability, less subsidies

In the weeks that follow Day Zero, widespread “tension” will be inevitable, Vidal contemplates. “There will be an adjustment period and then, in the mid-term, we will gradually see benefits in the real economy.”

The transition towards this boom period is something that the government is concerned about. It has repeatedly stood by its commitment in recent months “to not leave anybody helpless”. In Carmelo Mesa-Logo’s opinion, this isn’t a meaningless statement, because as soon as the CUP is devalued, the State will not only have to deal with inflation, but also unemployment.

All of this in a country that has chipped away at its safety net for disadvantaged groups, since 1989, the researcher points out.

“Domestic problems and the effects of Trump’s brutal sanctions have increased the number of vulnerable groups in society. As a result, we would have expected subsidies to be extended, but this hasn’t been the case. Figures from Cuba’s Office of Statistics and Information reveal that direct subsidies, for example, fell from 5.3 per 1000 inhabitants in 1989, to 1.6 per 1000 last year; and that the sum of these benefits fell from 2.2% of the gross domestic product (GDP) in the late ‘80s, to just 0.3% today. These numbers tell us that as the number of vulnerable groups has grown, the State’s social welfare system has been cut back. It’s a bad precedent, in my opinion.”

The COVID-19 pandemic has made the problem worse. Things haven’t been this bad since the beginning of the 1990s Special Period crisis. In May, IPS news agency published an article about how the number of low-income families seen by the Institute of Social Welfare sextupled in the first few months of 2020, going from 112,000 to 606,945. So as to give you an idea of the magnitude of these figures, just remember that there are only some 3.8 million family units in the entire country, according to the Ministry of Interior Commerce’s census.

“Subsidies to vulnerable groups have been at the heart of a long debate,” Mesa-Lago reminds us, after pointing out how an opportunity was lost when Raul Castro announced his plan of reforms in the late 2000s.

“There was a general consensus that food items on the rations booklet be gradually cut out, based on the idea that free food for higher-income families didn’t make any sense.” Savings from this measure could then be reinvested in less advantaged citizens, and would encourage national consumption.

However, the opposition was pretty much unanimous and closed the doors to undoing the rations booklet. During the Guidelines debate, almost half of interventions focused on rejecting this proposal, forcing the President’s ministerial team to put the brakes on their plan.

In a “post-CUC” Cuba – with less subsidized products and services, and the announced fluctuation in exchange rates – the danger is that this “transition” will be so high that it ends up diluting the benefits of increasing wages and pensions.

“A monopoly market structure, without enough investment and a significant move towards dollarization, faces the risk of a high-impact transition. If the CUP is devalued by 10, prices will probably go up 10 times or more. This is a very high-impact transition, which would be lethal for the Government’s intentions to redistribute wealth,” Vidal warned.

Both experts agree that a key bone of contention lies in the contradictory focus with which they want to manage the transformation of state-led companies and price controls. While financial mechanisms are being used in the former, there is still an administrative philosophy in the latter, which will make it hard for there to be positive outcomes. “Price limits have an effect in the short-term, but they aren’t sustainable,” Vidal says.

According to the government’s predictions, after Day Zero, the Cuban economy will finally know what situation it’s in. However, it will also be more vulnerable to the dollar and other foreign currencies after this day, at least until the reform begins to yield its fruits. This isn’t your ordinary conflict.

Read more from Cuba here on Havana Times.