Cuba: an economy exhausted by the pandemic, sanctions and an ineffective model

RIO DE JANEIRO, BRAZIL – The deteriorated Cuban economy has deepened its depression due to the effects of covid-19 in the tourist sector, one of the major sources of income of a country highly dependent on that foreign currency inflow and which continues to suffer from the increase of US sanctions and the delay in its reforms.

The accumulated wear and tear of years trying to keep the precarious family economy afloat, a reflection of the economy that plummeted 11% in 2020, was one of the catalysts of last Sunday’s anti-government protests in Cuba, the largest in 27 years.

All the economic indicators of the island, which foresees this year a fiscal deficit equivalent to 18% of its GDP, come from the Cuban State and are difficult to contrast since the island is not part of international organizations such as the World Bank or the International Monetary Fund.

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Last year, the island received 90% fewer visitors than in the previous period, a plummeting impact on the state coffers and the previously thriving private sector.

Shipments of subsidized Venezuelan oil that Havana has been receiving for two decades have also plummeted due to the crisis in the South American country.

The pandemic had brought to the surface economic problems rooted since the “special period” of the 1990s when the country was left without its main economic benefactor: the Soviet Union.

Since then, and especially in the last two years, moments of shortages and queues have prevailed, always under draconian US sanctions, while the Government continues to study how to revive the centralized economic model in force for 60 years with reforms still too slow, in the opinion of experts.

PANDEMIC ORDER

Cuba started 2021 with the “Tarea Ordenamiento”, one of the most complex economic reforms planned and postponed for almost a decade.

The “ordering” implemented despite the pandemic went through a monetary and exchange unification, increased prices, salaries, reduced subsidies, and a consequent devaluation of the Cuban peso (cup) and skyrocketing inflation.

In the opinion of Cuban economist Pedro Monreal, six months after its implementation, “far from monetary unification, there has been a growing partial dollarization, there is an enormous disparity between the official exchange rate and the informal rate, inflation is not contained, and subsidies have increased”.

The lack of state liquidity marks the panorama and has caused banks and exchange houses not to sell foreign currency to the population either. In contrast, the dollar and the euro have soared in the informal market, almost tripling the official rates.

To this was added the decision to suspend cash deposits of dollars on the island, according to the Government, due to the strong restrictions of the embargo for Cuba to enter those bills in international banks.

DROP-IN TOURISM

Some 64,712 foreign tourists visited Cuba in the first four months of the year, barely 6% of the 983,099 who did so in the same period of 2020, according to the National Statistics and Information Office (Onei).

Most were Russians, followed by Cubans living abroad, Germans, Spaniards, and Canadians.

Cuba, which has been reporting more than 6,000 covid-19 cases per day for consecutive days, suspended commercial and charter flights in April 2020 to curb the spread of the coronavirus and is now keeping them to a minimum to try to curb contagions.

Before the pandemic, tourism represented the second-largest official source of foreign exchange earnings – second only to the sale of professional services abroad – and contributed close to 10% of Gross Domestic Product (GDP). In the absence of official data, it is believed that the first real source of foreign exchange is remittances.

The country aspired to receive close to 4.5 million international visitors in 2020 and reverse the 9.3% drop of 2019.

Most Cuban hotels, all state-owned, operate under a mixed management regime with foreign companies, among which Spain has an important weight, as it controls 70% of the rooms on the island.

EMBARGO AND NON-PAYMENT TO CREDITORS

Cuba accuses the U.S. of having taken advantage of the covid-19 pandemic to increase pressure.

According to the government, this strategy caused the country to record losses of 9,157 million dollars last year, the highest figure reported since sanctions were imposed almost six decades ago.

To this and the pandemic, Cuba blames its current situation of non-payments fundamentally to its international creditors, especially the Paris and London clubs with which the island reached restructuring agreements in 2015 that have just been modified without the content being known.

The initial agreement forgave the island US$8.5 billion of total debt of US$11 billion with a commitment to pay in installments the remaining amount until 2023.

STATE-OWNED COMPANIES IN THE RED

Some 508 Cuban state enterprises have registered losses since the “Ordering Task,” which, according to the Minister of Economics, Alejandro Gil, showed the reality of many companies already in the red and were making losses for the State.

Gil assured that, on the other hand, 1,304 state-owned companies had made profits since then.

The multiple exchange rates of the two currencies existing in Cuba until unification, the Cuban peso CUP and the convertible CUC (parity to the dollar), distorted for years the accounting of state-owned companies by not showing their real state.

The Government insists that it wants to strengthen the socialist state enterprise and grant it “greater autonomy”. However, it maintains “the will to expand” the private sector, whose role it recognized as a major player (it generates 30% of employment) but has vetoed the economy’s strategic sectors.

FOOD IN DOLLARS

Another crucial factor of the malaise is the concentration of food and basic products in stores paid exclusively in foreign currency, despite most of the population collecting their salaries in Cuban pesos.

These stores opened at the end of 2019 and have been growing and concentrating the scarce supply as an official strategy to collect foreign currency, which has caused the population to denounce an “apartheid” between those who have access to hard currency and those who do not.

According to official data, Cuba imports more than 80% of the food it consumes, which represents an annual expenditure of 2 billion dollars.

More than half of local agricultural production is in the hands of the non-state sector, which has 66% of the land under cultivation, according to an analysis by economist Omar Everleny.

The agricultural reform to increase food production, considered a matter of “national security”, is part of the planned reforms. Still, it has taken a decade to come to fruition, and it was not until this year when 63 measures were approved, including the authorization to cattle farmers to freely sell beef, milk, and derivatives as long as they first comply with their quota the State.

However, the sector complains that the State does not allow them to import directly the tools and inputs they need, and sells to them in dollars, currency in which they do not sell their products.

THE LONG-AWAITED SMEs

In June, the Cuban government gave the green light to the creation of micro, small and medium-sized enterprises (MSMEs) in both the state and private sectors, but without access to strategic sectors such as health, telecommunications, energy, defense, or the press.

These areas are strategic for the Cuban State for economic or political-ideological reasons.

MSMEs will not be able to establish themselves to carry out some of the activities allowed for self-employed workers, such as computer equipment programmers, bookkeepers, translators, and interpreters.

On this issue, Cuban economist Pavel Vidal said that “it is already clear that Cuba is moving towards a mixed economy model, at least in terms of employment.” Still, he doubted that the weight of the private sector would exceed 50% of the GDP.