2017: Cuba, the eternal obstacle race

A 1.6 percent GDP growth in 2017 is keeping the Cuban economy far from the level demanded for development, while obstacles access to hard currency continue and from the United States the blockade policy is sending signs of getting worse.

The record number of foreign tourists in Cuba grew by almost half a million visitors, reaching 4.7 million in 2017.

Among the export sectors, tourism is almost an oasis, when incomes from medical services to other countries and the traditional exports have a tendency to decrease. State and foreign investments can be speeded up with the renegotiation of the foreign debt. The updating of the economic and social model also introduced novelties in 2017 in state-run enterprises and private businesses, but after seven years a feeling of dissatisfaction among the population and the authorities due to the speed of the changes has started being perceived.

 

Adding to the dissatisfactions originating from the external sector of the Cuban economy, common for years, in 2017 there were more intense signs of other red lights and, compared to this, the reiterated plans which do not lack a dose of daring. The program of transformations of the economic model is debating between advances, promises, deceptions and marked delays, a few months from a forecasted change of generations in the Cuban State’s political leadership.

 

The economy’s step forwards, described as “discreet” by Economy Minister Ricardo Cabrisas, still do not bring the benefits expected from the updating of the economic and social model. But they are able maintain the trust in a reform that officially got the green light in 2011.

 

The 1.6 percent growth of the gross domestic product (GDP) in 2017 was assessed as positive by some Cuban economists. “It is undoubtedly surprising and surpasses by far the 1.1 percent of the first semester of this same year,” opined Juan TrianaCordoví. When taking into consideration the difficult conditions the country faced last year, this expert assessed that “achieving a positive performance is very good news.”

 

Financial restrictions, pressures due to the debt, setbacks with the prices in the international markets, an acute drought, Irma’s disaster and the no less disastrous Trump were part of the obstacle race that Cuba faced in 2017. Judging by the forecasts for 2018, the hurdles continue on the race track.

 

The “good news” of the GDP growth in 2017 came as a timely relief for the Cuban conscience, gnawed for more than a year by the report that that indicator had dropped 0.9 percent in 2016 – this data, given by the Economy Ministry in December 2016 was late in being corrected by the Cuban Statistical Yearbook, a year and one month later, when it published that the GDP had grown 0.5 percent in 2016.

 

In any case, the consensus shared by the government and the economists is that the current growth rates of the economy remain distant from the estimated five or six percent needed for development. The GDP reached an average growth of 2.3 percent from 2011 to 2017, below the 4.4 percent the authorities had aimed for, when at the start of this period the Guidelines of the new economic policy were approved. For the present year the plan is to grow two percent.

 

Irma’s record

 

One of the traumas that had the greatest impact in 2017 took place in September with Hurricane Irma. Considered one of the most destructive in the meteorological history of the Caribbean, in Cuba it caused the death of 10 persons and the biggest economic losses blamed on a cyclone in several decades: 13.185 billion pesos, as was reported by the government (one peso equal to one dollar according to the official exchange rate).

 

Causing the greatest economic damage in several decades,Hurricane Irma affected important tourism destinations, industry and agriculture, and destroyed thousands of homes.

Irma, which punished 11 of the country’s provinces, especially vent its fury on five of them: Camagüey, Ciego de Avila, Sancti Spíritus, Villa Clara and Matanzas. It covered a long stretch of the northern coast, where the principal Cuban tourist destinations are located, important industrial zones and agricultural and livestock productions. It damaged close to 160,000 homes, more than 30,000 with total or partial collapses, and paralyzed the entire national electric system.

 

This disaster, which at least put an end to several years of a costly drought, surpassed the damages of the previous worst meteorological moment in several decades, the sum of hurricanes Gustav, Ike and Paloma in September 2008, which between the three caused some 10 billion pesos’ worth of losses.

 

Less than two months after Irma, the tourist destinations of the Cuban northern group of keys reopened their installations, thanks to a national operation of reconstruction and restoration of hotels, highways, bridges and other access ways and services, in time for the start of the high season. But the costs and consequences of the hurricane in other areas of the economy, like the sugar agribusiness and agriculture, will be felt late this year.

 

Trump against normalization

 

For Cuba, the political and economic storms originating in the United States are as permanent as the hurricanes in the Caribbean. With an aggressive rhetoric, in 2017 President Donald Trump put a stop and rolled back the process of peace and normalization of relations between the United States and its Caribbean island neighbor which Barack Obama (2009-2017) had initiated.

The Donald Trump administration has taken concrete steps to cool or rollback the steps initiated by Barack Obama to normalize relations with Cuba.

The U.S. departments of state, commerce and the treasury in November put into effect a package of measures to restrict doing business with a group of 180 Cuban enterprises and travel to Cuba by U.S. citizens, which had witnessed a marked escalade that benefited both countries’ tourist industry.

 

As a consequence, putting an end to the more than half a century of U.S. economic, commercial and financial blockade on Cuba is again distant. The new measures were announced by the White House a few days after Havana reported that this blockade had cost the country 4.305 billion dollars in the last year – from April 2016 to June 2017 – due to the increase in the price of imports, the failure of foreign investments and other commercial obstacles.

 

However, after Washington announced the new restrictions, only small airlines from that country, like Spirit and Alaska Airlines, suspended their flights to Cuba. The principal ones, American Airlines, Delta and JetBlue, among others, on the contrary announced plans to expand the commercial flights they had reinitiated in 2016, protected by the rapprochement favored by Obama.

U.S. cruise ships announced they are planning an increase in trips to Cuban ports, despite U.S. government pressures against doing business with this Caribbean country.

Neither has the enthusiasm of the U.S. flagged cruise lines cooled down. The Carnival Cruise, Royal Caribbean and Norwegian Cruise companies reiterated at the close of the year in Havana their plans to expand to 286 their trips to Cuban ports until 2019, with 455,000 passengers, which points to turning this country into one of the principal cruise destinations in the Caribbean, as analyst José Luis Perelló observes. This development would be an important contribution to the boom tourism is witnessing in the largest of the Caribbean islands.

 

Tourism against all odds

 

The tourist industry closed 2017 with another leap, despite the slowing down in September and October because of the impact of Irma and, to a lesser extent, by the U.S. political storms, which reached grotesque levels with the story of the alleged sonic attacks against U.S. diplomats in Havana.

 

Almost 4.7 million foreign visitors arrived in Cuba, a 16.2 percent growth in relation to the previous year, way above the plans of receiving 4.2 million. The increase, which is a continuation of the annual two-digit advance initiated in 2015 – after the simultaneous announcement by presidents Barack Obama and Raúl Castro on December 17, 2014 – took place despite the contraction in 2017 of Cuba’s principal issuing market, Canada.

 

Although Canada continues in first place with more than a million visitors, the arrival of Canadians decreased 5.9 percent in 2017, a drop compensated by the strong increase of the European markets, among others.

 

The biggest growth was that of visitors from the United States, whose visits doubled to close to 620,000, to rank in second place in relation to visits to Cuba. The majority traveled to this country on board cruise ships based in Florida and with tours of the Caribbean, which include the ports of Havana, Cienfuegos and Santiago de Cuba. Thus they avoid Washington’s ban on traveling to the Caribbean nation as tourists.

 

Breaking down the GDP estimate by activities, tourism headed the growth dynamics in 2017, with a 4.4 percent increase, according to the annual report by the economy minister. It is followed by the communications and transportation sectors (3%), agriculture (3%) and construction (2.8%).

 

José Luis Rodríguez, one of the economists who most rigorously examine the evolution of the Cuban economy, observes that “the sectors officially listed as having the best performance only represent 26 percent of the GDP.” After criticizing the insufficiency of official information, Rodríguez estimates that other activities, like commerce and basic social services, must have also had a positive influence to achieve the 1.6 percent economic growth.

In 2017 the export of traditional Cuban products remained low due to production problems in cases like nickel and the price for sugar in the international market.

Financial tensions

 

With a strong and sustained flow of visitors, tourism is almost an oasis among the sectors that contribute hard currency to the Cuban economy. Compared to the incomes from the leisure industry, which in 2017 reached 8.1 percent with 3.318 billion dollars, other main export products have not done well, including the export of professional services.

 

In December, Cabrisas recognized before Parliament a noncompliance in the incomes for the sale of goods and services abroad, although he did not give numbers. Economist Intelligence Unit estimates a drop of 8.5 percent in the general total for the export of services – professional services plus tourism – in 2017 and of 28.6 percent from 2014 to 2017.

 

It is logical to deduce that if the incomes for tourism have grown, the general reduction in the export of services is due to a contraction in the incomes from qualified labor force. The medical services Cuba provides to Venezuela are especially under pressure due to the political and economic situation in that country. The intergovernmental contracts for Cuba’s medical assistance to Brazil are also facing a possible reduction.

 

The blow is sensitive since the professional services are the principal support of the Cuban commercial balance, with contributions that in 2015 reached more than eight billion dollars.

 

The export of goods, the traditional ones in first place, meta situation to be cursed: sugar production increased by around 20 percent during the last harvest, but the prices went down in the international market. The international price for nickel, on the contrary, moderately went up, but in recent years a Cuban production that has had setbacks was unable to take advantage of this. The same occurred with the Cuban exports of oil derivatives, affected when in 2017, for the second consecutive years, the import of crude from Venezuela contracted due to the political crisis and domestic economic tensions in that country.

 

Meanwhile, the productions of the pharmaceutical and biotechnological industry have remained among those with the highest incomes in the range of exports, with hundreds of millions of dollars each year, and the patent in other countries of Cuban medicaments of advanced technology and some that are exclusive.

 

Renegotiated debt: benefits and pressures

 

The restrictions in the availability of hard currency, acknowledged by the Cuban government, have become complicated in the immediate due a strategy by the State to recover international financial credibility and reduce those pressures in the mid-term: the reorganization of the foreign debt.

 

After the successful debt renegotiation with other countries, Cuba has had to face financial obligations that increase the pressures on the State coffers. In July 2017, Cabrisas reported that the country had paid, in mid-year, 2.306 billion dollars due to these payment agreements.

 

Analysts like José Luis Rodríguez estimate much higher amounts, derived from the successful organization of expired debts from years ago. He therefore assesses as “colossal” the effort implied for Cuba of making these operations without the backing of the IMF, the World Bank or other international financial agencies, and with the aggravating factor of billions of dollars lost due to the U.S. economic blockade.

 

Even when commitments for renegotiated payments are met, the Cuban government has recognized the persistence of delays in meeting the obligations in short-term debts with suppliers. “The noncompliance of the payment of expired official invoices has determined damages to imports, as well as difficulties in the use of the credits,” Cabrisas said before the MPs in December. This is why the country stopped importing some 1.5 billion dollars in the first semester, the minister reported in July.

 

The failures in the flow of imports have affected the supply to industrial productions and agriculture, in addition to being seen in the irregular offer in retail commercial establishments. The disappearance, by moments, of some products became a more common phenomenon than usual in the shops selling in hard currency during 2017.

 

Despite such headaches, a reaction has started to be made out that could well be interpreted as an incipient benefit from the reorganization of relations with foreign creditors: the reanimation of foreign investments in Cuba.

 

Foreign investments: progress or slowness?

 

The foreign direct investments (FDI) in Cuba gained some speed in 2017, judging by the official figures and despite the fact that they are still far from the economy’s needs.

 

During the last Havana International Trade Fair in November, Foreign Trade and Investment Minister Rodrigo Malmierca announced that during the year that had gone by since the previous edition of that trade event, Cuba had signed foreign investment deals with a “committed capital of more than two billion dollars.”

 

The speed seems to have picked up. The capital negotiated during almost three previous years amounted to 1.346 billion since the approval in early 2014 of Law 118 on Foreign Investment, until the close of 2016.

 

The new projects were agreed upon – for their execution in several years – in the renewable energy, oil prospecting, construction, tourism, mining, banking sectors and in the light, food and sugar industries.

 

According to press reports, there were 209 foreign investment deals in November. Half of them, 104, are management contracts with international hotel chains; 97, joint ventures; and only eight 100 percent foreign capital investment projects. The latter are established in the Mariel Special Development Zone (ZEDM), which with 33 projects is performing as the spearhead in the Cuban policy of development with foreign capital.

 

Judging by reports on the Plan for the National Economy in 2017, the entrance of foreign capital still remains distant from a goal that Cuba places at between 2 and 2.5 billion dollars of execution per year. The country’s investments program forecasted 6.5 percent of foreign participation this year, which represents a bit over 500 million dollars, according to Cuban press commentaries.

 

Surprisingly, despite the limitations of fresh capital, Cuba insists on increasingly more ambitious investment aims.

 

Ambitious State investments

 

The economy minister in December presented a program of State investments of 10.8 billion pesos (or dollars, according to the official exchange rate) in 2017, in first place for the tourist and energy sectors, as well as for the hydraulic infrastructure (transfers and reservoirs) and storage capacities and dissimilar industries, with advances since some years ago.

 

That plan implies a 23 percent leap and some 2 billion pesos on the investments executed in 2017. Will Cuba be able to meet this plan?

 

The recent tendency backs it. Although in 2017 the country only executed 90.8 percent of the National Investment Plan, it already implies a growth of some 2.2 billion pesos (34%) over the execution of the previous year (6.5 billion pesos).

 

The challenge is tense, among other reasons because the foreign participation is still low: barely 5.6 percent of the total value of the investments the country is planning in 2018, after a 2017 that in proportion was also reduced.

 

It seems the government efforts to speed up the investment program, for the time being with state resources, is due to the repeated concerns of local economists about the country’s low rate of investments. That indicator, still slightly higher than 10 percent of the GDP in 2017, remains distant from development conventions that demand more than 20 percent.

 

The key to revitalizing the activity of investments and of the economy in general depends to a great extent on a process of Updating of the economic model, which is advancing more slowly than previewed –common knowledge shared by the topmost authorities.

 

Dissatisfactions with the speed

 

“All the problems we have faced in the updating of the model are more complex and deeper than what we had thought initially,” the head of the Standing Committee for Development and Implementation, Marino Murillo, said to Parliament in December and admitted that at the beginning “we thought we could resolve this in a shorter period of time.”

 

As an example he gave the delay in the dual currency and exchange rate, one of the most hurtful obstacles the Cuban economy is confronting, in the first place by the state-run enterprises.

 

“No one can calculate, not even the wisest of the wise we have,” President Raúl Castro later added, “the high cost that the persistence of the dual currency and exchange rate has represented for the state-run sector.” He recognized that this evil “favors the unfair inverted pyramid, where the greater the responsibility the lesser retribution received and not all the apt citizens feel motivated to work legally.”

 

The MPs’ applauses after the president said that “this matter has taken too long and its solution cannot be delayed more,” expresses the generalized exhaustion of society in the face of this problem.

 

In that parliamentary session, Murillo committed himself to presenting, at the latest this March, a report on the march of the updating, as well as a strategic projection of how to face the implementation of the Guidelines up to 2021.

 

Important definitions are expected on four priorities mentioned by Murillo: the dual currency and exchange rate – he said that more than 200 persons are working on the solution of this problem, through consultations with foreign experts -, the system of state-run enterprises, the Long-Term Development Plan and foreign investment.

 

The question pending a reply is if the country will be able to speed up the process of transformations that saw 2017 go by with new measures in sensitive areas of the economy, but still without the big advances or results expected by society.

 

Novelties of the reform

 

The most important novelties of 2017 include the final approval and publication of the programmatic documents of the process of changes, pending since the 7th Congress of the Communist Party of Cuba was held in April 2016: the Guidelines of the 2016-2021 Economic and Social Policy, the Conceptualization of the Economic and Social Model and the Bases of the Long-Term National Development Plan (until 2030).

 

Another package came to light at the end of the year consisting of a decree-law and three decrees with the aim of extending the autonomy of the state-run enterprises, a sphere with previous gradual transformations in terms of wages and other areas. Published in December, the new legislations seek to perfect the corporations called higher organizations of business management (OSDE) and to expand the separation of state and business functions, which were centralized by the ministries in the previous economic model.

 

Throughout the year the authorities also approved measures to better organize the nascent non-state activity, in a rather vain effort to put a ceiling to the excessive hike in the prices of specific businesses, like the private taxis, which Havana calls almendrones.

The government stopped granting permits to a group of private work activities linked to the agricultural and livestock markets, given the people’s complaints about their high prices and other flaws.

With an eye on the evolution of self-employment, the government stopped the approval of new permits for 27 activities recognized by law (the total is 181), although temporarily. And it canceled definitively the granting of permits in five activities, three of them linked to the agricultural and livestock market, an area of insistent complaints by consumers and the press because of the persistence of high prices.

 

Despite the adjustments, the persons incorporated to private work increased in 2017 to almost 580,000, according to October reports.

 

In 2017 the approval of new non-agricultural cooperatives was also stopped. The government announced its intention of reorganizing that activity to eliminate distortions of the original concepts of this experiment, lack of discipline and even problems of corruption in some of them. At the same time, it established provincial limits for the operations of this non-state business form. At the start of 2018, a total of 429 cooperatives should be maintained, after the incorporation of five linked to fishing.

 

Other activities extended the maximum of land that can be handed over in usufruct to cooperatives and other agricultural and livestock producers and are seeking a more efficient use of those soils.

 

Faced by the proximity of the promised report for the first quarter of this year, tensions have increased among the population due to the dissatisfaction with the results of the process of transformations. Because of its impact on all the economy’s functioning – foreign and domestic trade; industries, agricultural and livestock productions, tourism, energy, banking and other services; enterprises and budgeted units, the wholesale and retail sector, etc. -, the dream of the currency and exchange rate unification perhaps synthesizes, as few others, the process’ biggest debt.

 

Cuba concluded 2017, therefore, submerged in questions, plans and expectations more than in the estimate of profits, after seven years of the official start of this Updating of the economic model. New actors, aspects and regulations have come into play, with no visible changes even in the economy’s capacities, in an obstacle race that threatens to be eternal.

 

(2018)

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