The predictions finally were confirmed. During last July’s National Assembly session, the Cuban government announced that in 2016 there would be a contraction of the supply of fuel agreed with Venezuela.
The impact that the Cuban economy will face starting 2016 will be acute, dilated and, in any scenario, it seems the country would go into a recession. The magnitude and duration in time will depend on how the economic and political situation in Venezuela evolves and that country’s capacity to maintain, at least partially, the agreements with Cuba. But it will also depend on the economic policy response designed by the Cuban authorities to cushion the shock wave and come out of the possible recession.
In principle, the impact will not be of the same magnitude as the one experienced starting 1991. For the time being, the country is not heading toward a new Special Period, a crisis that began in the early 1990s, when the GDP registered a 35 per cent drop. The Cuban economy, it is true, is more diversified; but even so, the vulnerability zones are extensive, on a macroeconomic scale as well as for the families that most depend on the already depressed state wages and pensions.
The balance of payments shock wave
Given that the country will stop receiving a part of its oil with the favourable prices and financial conditions agreed with Venezuela, in the first place attempts will be made to reduce the consumption of fuel. Former Economy Minister Marino Murillo explained during last July’s National Assembly session that such a reduction in the state-run enterprises and institutions would be an average of 28 per cent. The total quota of planned energy would be guaranteed to strategic export sectors (for example tourism and nickel) as well as other key activities, but other sectors will receive fuel cuts of up to 50 per cent. The objective of the government is to not affect the residential sector and avoid at all costs the power cuts for the population. Murillo also explained that maintaining the supply in the consumption markets and the vital sectors for the population are a priority.
However, it is very probable that the country can maintain this reduction indefinitely, which is why at some time it will have to buy oil on the international market at higher prices and more demanding financial conditions.
The reduction in the sale of oil from Venezuela will probably make it necessary to continue compressing the operations of the Cienfuegos refinery. This is an activity that had been reporting important export incomes for the country.
Cuban exports will also be affected by the reduction of incomes from Cuban medical services in Venezuela given that there is an index-linking mechanism with the oil deliveries.
Moreover, Cuban exports have had adverse effects due to the lower prices for nickel, sugar and the climate effects on sugarcane agriculture. Summing up the previous factors one could expect a contraction in exports in 2016 of around 23 per cent, measured in current prices.
One would expect a larger decrease of current exports than of current imports, partly because the exchange terms are deteriorating with the reduction of the links with Venezuela.
All the above describes a complicated shock wave for the Cuban balance of payments.
In recent years the balance of goods and services in the Cuban balance of payment has been positive; in 2012 it represented 5.2 per cent of the GDP. This surplus has allowed the country to pay its foreign debt commitments and the obligations with foreign investors. But obviously a change in this balance will place at risk the payments to the creditors and foreign investors. There is some probability that a situation of “financial corralito” and non-payments will occur similar to what happened in 2008 and 2009. It all depends on the economic policy response the Cuban authorities use.
Tourism, to some extent, will be the salvation. With a two-digit growth in the arrival of visitors, it will partially compensate for the hard currency deficit, will help to sustain the demand in the services of private businesses and to mitigate the difficult situation families are going through. Like in the 1990s, it will be one of the driving forces that will help to come out of the crisis.
Investment, agriculture, industry and family consumption will inevitably drop, especially in 2017. In 2016 the Cuban enterprises and the centralised allotment of resources will be able to cushion the shock wave with the inventories of inputs and final goods, with the available reserves and with the deferment of payments to suppliers. However, in 2017 the adjustment will have to be much greater.
The adjustment of expenditures and the ceiling prices are not the only possible answer.
Until now the orientation of the economic policy seems to be cutting down on expenditures, adjusting the plan for the supply of fuel and the ceiling prices. No reference has been made until now about the need to speed up and deepen the structural changes.
The crisis in Venezuela doesn’t seem to have a short-term solution; therefore one would expect that at some point the Cuban authorities will become aware of the need to face the crisis not just with a procycled adjustment of expenditures, which as a last resort worsens the drop in the GDP, but rather one that promotes market liberalisation policies, a greater foreign opening and to redirect the country toward a new form of insertion in the international economy as an alternative to Venezuela.
There are several options to cushion the impact with structural changes. But there are some that would stand out as less complicated to implement and with a potential of greater impact in less terms:
– Giving the green light to the foreign investment projects that are in the process of approval, especially in the tourist sector and the Mariel Special Development Zone.
– Prioritising the tourist enterprises in the centralised allotment of hard currency given that nowadays it is the export sector with the greatest dynamism. Complete all the structural changes required to multiply this sector’s links to agriculture, the national light industry and the private and cooperative sector.
– Expanding the space for the small and medium private enterprise and the cooperatives. For this it must be necessary to create new licences for all types of private activities and cooperatives linked to tourism, computerised services and software production, the light industry and professional services like lawyers, accountants, publicists, among others.
– Eliminating the state’s monopoly over foreign trade. The restrictions must be eliminated for access to inputs and goods of physical capital for farmers, private enterprises and cooperatives.
Meanwhile, the ceiling prices that have been applied, without knowing the situation of the costs and without conciliating them with the private sector, will cause more shortage of supplies in the goods and services markets and will generate distrust in the reforms. The state-run press must stop promoting the hypothesis that the private sector is full of speculators who manipulate the prices. The prices have gone up because of the economic situation.
The price hike’s positive side functions like a mechanism that encourages production and the supply of services; in this way it guarantees that there isn’t a shortage of supplies and that the prices return to their previous levels when the economic situation changes. However, if the political and social cost of the inflation right now is calculated as too high, at least it would conciliate the policy with the private sector and would seek an intermediate solution that allows for the functioning of the private sector with the least inflation.
The structure of the Cuban economy has changed. This makes it necessary to change the instruments of the economic policy and to promote coordination between the different economic actors: private sector, workers and the State, One cannot hope to manage the private sector with the same instruments and controls that have been applied for the state-run enterprises. The option is not to leave fixed prices, ignoring the new economic reality, and seeking that they be complied with by force. A dialogue with the private sector is necessary.
Toward an active exchange policy
In the sphere of the exchange policy, an action that would be close at hand for the government would be the devaluation of the national currencies compared to the dollar. The devaluation of the convertible peso (CUC) with respect to the U.S. dollar would particularly help tourism’s competitiveness. The devaluation of the CUC would make the Cuba destination cheaper and would make it more attractive in terms of price, compared to other markets in the region. This would help to sustain the two-digit expansion rates of the last trimesters.
The official exchange rate of the convertible peso is 1:1 in relation to the U.S. dollar (in addition, a 10% tax is applied when individuals sell dollars in cash). If the convertible peso is devaluated by 30 per cent, for example, this would imply establishing an exchange rate of 1:30 CUC for one USD. The devaluation of the official exchange rate of the Cuban peso could also be applied at the same time, it being 1:30 CUP for 1 USD. The relation between the CUC and the CUP with respect to the rest of the international currencies would continue depending, as until now, on the dollar’s exchange rate on the international markets. There would be no reason to eliminate the 10% tax until the U.S. government does not prove that the restrictions for Cuba to use the dollar have been eliminated.
With the devaluation, all exporters in general would have an additional incentive when they are able to receive more CUC and Cuban pesos per each exported dollar. Thus there could be an increase in the wages of workers in the enterprises that contribute the most to the country’s incoming of hard currency.
Importers, on the other hand, would have less capacity for buying in dollars, which would help the balance of payments adjustment.
Of course, the devaluation in the short term has a negative effect on investors and suppliers with accounts and incomes in CUC, but it should be evaluated as an action that facilitates a more organised adjustment in the balance of payments and would help avoid a “financial corralito” in the Cuban banks.
A policy response that leads to a generalised change of relative prices and to an adjustment of the real active and passive assets is preferable than having to freeze bank deposits, affect the credibility of the banks and intensify the control of change and the discretionary and arbitrary allotment of available hard currency.
The devaluation would put pressure on a bigger inflation. But the inflationary effect on the final prices could be absorbed with the reduction of the high trade margins with which the retail state-run chains that market in CUC work.
Therefore, the devaluation of the CUC would not affect the population, beyond some punctual and moderate increases of inflation that could occur in the informal markets. Devaluating the CUC would affect very little the purchasing power of the currency in the country, the reduction of the value of the CUC would only be noticed when persons decide to purchase dollars.
There are foreign and Cuban citizens who live abroad and have invested in private restaurants, in the rental of private homes, among other variants. Their interest lies in changing their incomes into dollars or other hard currencies and initially they would lose from the devaluation. However, they must interpret in a comprehensive way the measure and consider that everyone gains if the country is stagnated in an economic crisis and if the devaluation improves the Cuban market’s competitiveness and increases the attraction to sustain the current tendency in tourist arrivals.
Together with the devaluation of the CUC, the Central Bank of Cuba would also be taking advantage of the situation to devaluate the official exchange rate of the Cuban peso, which would contribute at the same time to the goal of the unification of the currencies. Perhaps this is not the best year to apply the entire package of measures that would expand the start of the monetary reform, but it does seem an ideal time to apply the necessary devaluation of the official exchange rate of the Cuban peso.
Learning from the past, we must recall that in 2008 and 2009 the country went through a crisis in the balance of payments and the exchange rate of the CUC remained at a standstill. The causes of that balance of payments crisis were found in the increase of the international price for imported foodstuff, in excess expenditures and in the debts of previous years, and in the de-dollarization that led to an excessive issuing of convertible pesos.
It is very probable that if in 2008 and 2009 the Central Bank would have devalued the exchange rate of the CUC, the balance of payment crisis would not have ended, as was the case, in a financial corralito in the bank deposits of the national and foreign enterprises in the Cuban banks. The non-devaluation of the CUC also derived in the loss of credibility and quality of that currency, the so-called “liquidity certificates” had to be established, which since then limit its convertibility and increasingly hinder the fluency in foreign trade operations.
When the dollar was eliminated from the economy, in 2004 and 2005, the discourse and the official media proudly repeated that Cuba had recovered its monetary sovereignty, that we already had the autonomy to manage our monetary and exchange policy. Well then, now is the time to intelligently and audaciously use that sovereignty. In a globalised world, the countries that have their own currency have greater flexibility with the exchange rate to adapt to the changing conditions of the international environment and to face the foreign shock waves. We form part of that group.
The recent experience in Latin America, after the shock wave associated to the drop in oil prices and other commodities, confirms that the countries with flexible exchange rates and which have been able to devaluate their currencies, have been able to face the situation in a much less traumatic way than the dollarized economies, with fixed exchange rates and with exchange controls. We must learn from these experiences.
The structural reforms of the government of Raúl Castro have been slow and still do not offer the expected results, but with regard to the adjustments of expenditures and the control of the macroeconomic and financial balances, the decisions have been more drastic and the results more visible. Since 2009 to date, the economic policy decreased the growth rates of the monetary offer, controlled the fiscal expenditures and adjusted imports. This allowed for recovering the macroeconomic balances, overcoming the national financial crisis and gradually re-establishing the bank payments. The financial credibility started being recovered little by little, which has facilitated the renegotiations of the foreign debt the country has carried forward with the most important creditors, including the Paris Club.
To conserve what has been gained in financial credibility, the idea today is not to be over-confident thinking that the agreements with Venezuela will return to normalcy, but rather being prepared for the worst case scenario and, without greater delay, designing and implementing economic policy responses that combine the adjustment of expenditures, immediate structural changes, coordination with the private sector, and an active exchange policy. (2016)
Normas para comentar:
- Los comentarios deben estar relacionados con el tema propuesto en el artículo.
- Los comentarios deben basarse en el respeto a los criterios.
- No se admitirán ofensas, frases vulgares ni palabras obscenas.
- Nos reservamos el derecho de no publicar los comentarios que incumplan con las normas de este sitio.