Cuban economy: mirror of impatience

The process of the updating of the economic model is immersed in basic policies and is revealing more ambitious aims. Though it has achieved still not very visible results, it is generating reactions abroad.

Port infrastructure works are a priority in the investments.

Foto: Jorge Luis Baños

Will the Cuban economy be able to grow more than four per cent in 2015? The question is inevitable after a triad of years of slow down, to the point of reaching a level of stagnation in 2014: a gross domestic product (GDP) growth of 1.3 per cent. Despite the transformations undertaken since seven years ago, and better programmed starting 2011, the economy is still not showing signs of an expected reaction. But the gradual accumulation of measures, some profound, others frankly cautious, introduce new rules of the game in sensitive areas and tend to change the scene increasingly more radically.
When will the effects or results be perceived? Or are they perhaps already being seen?

 

The economic evolution in 2014 once again ruined the plans presented a year before to the National Assembly of People’s Power. The government had set itself the goal of a 2.2 per cent GDP growth, but it was a decimal point below the worst registered this century. In 2002 and 2009 the economy had closed with mediocre increases of 1.4 per cent and, since then, it has shown an irregular performance, not making the take-off previewed by the authorities and dreamed of by the Cubans.

 

When in 2011 the programme of economic transformations – the Economic and Social Policy Guidelines – were approved, the government had set itself the goal of growing around 4.4 per cent a year, but it has only averaged 2.4 per cent.

 

The manufacturing and sugar industries were mainly to blame for last year’s failure to meet the plan, according to brief comments made regarding this by Economy and Planning Minister Marino Murillo at a meeting of the Council of Ministers in December. Other activities like construction fared better, but did not even out the balance.

 

In mid-2014 the government went further when analysing the poor results of the economy. In addition to mentioning the already seen bad work of manufacturing and sugar agribusiness, it mentioned the lower than previewed foreign incomes, adverse climate conditions and “internal inadequacies our economy continues to face.”

 

Export incomes suffered due to a decrease in the sugar prices of almost 10 per cent and a contraction of nickel production due to the capital repairs in the Moa plants in eastern Cuba. The 9.4 per cent increase in the international prices for this metal did not compensate for the reduction of the production capacity.

 

Compared to nickel, productions and incomes grew in another two fundamental sectors for the Cuban balance in hard currency: tourism and the sugar agribusiness itself. But the progress was less than previewed.

 

Sugar expectations and agricultural doubts

 

The sugar harvest, of key importance though it lost its crown in Cuba in terms of production and exports, came up against “adversities like an anomalous winter season, with frequent rains,” the director of the Analysis Department of Azcuba Business Group, Dionis Pérez, reported. But he also admitted “organisational deficiencies, break downs and the personnel’s lack of preparation.” Sugar production increased 4.2 per cent, but was 12 per cent below the plan.

 

The sugar agribusiness failed to meet its plan for the third consecutive year, though it has entered a gradual process of recovery that could lead the 2014-2015 harvest to an increase of 20 per cent over the plan, judging by the favourable evolution until the close of the third quarter of 2014. Key indicators like the industrial yield are stable. If this step is confirmed, sugar production could become one of the sectors that would most influence a change of colour in the GDP at the close of 2015.

 

Climate changes also affected another sector in 2014, agriculture. The drought punished agricultural and livestock productions. Combined with the limitations for the development of irrigation with the water from reservoirs, it especially affected the planting and harvesting of rice. After several years in expansion, the production of this cereal, basic in Cubans’ diet, registered an 8.1 per cent decrease.

 

Other agricultural sectors had a better performance. The production of tubers grew 21.6 per cent, to more than 2.117 billion tons, especially because of the good banana harvest (652,000 tons, for a 25.5 per cent increase). However, one of the products most demanded, potatoes, continues being depressed, with another consecutive annual strong drop. This time the harvest dropped to less than half of the previous year, to 59,000 tons, according to the National Office of Statistics and Information (ONEI).

 

Meanwhile, the vegetable harvest registered a 14.3 per cent increase, up to 1.903 billion tons.

 

The livestock entities still haven’t been able to achieve a solid increase. While beef and pork meat productions increased 8.6 per cent and 11.3 per cent, respectively, cow’s milk decreased 1.3 per cent and egg production, another basic food product in the island’s diet, remained unchanged, at a level that still does not meet demand.

 

Though the indicators reflect considerable increases in some cases, production levels still remain below demand and the prices in the agricultural markets continue being very high for Cubans’ average income.

 

In the face of the inadequacies of agriculture, the diet still depends on the import of rice, beans, chicken, peas, maize, soy and other supplies. Last year the country spent 2.057 billion dollars on imported food, higher by 8.3 per cent than what was spent in 2013. The government blames the growth to the price hike tendency of the majority of those products on the world market.

 

Tourism’s driving force

 

According to estimates by former Economy Minister José Luis Rodríguez, the total value of imports increased by around 7 per cent, while exports contracted 1.6 per cent during the year. As a result, the foreign trade surplus decreased 47 per cent compared to 2013 and concluded in 1.591 billion dollars.

 

Services continue being the principal source of hard currency for the country. With incomes of around 8.2 billion dollars, professional services, medical in first place, bring in around half of the export incomes. Tourism contributes the fourth part, while remittances, estimated for years at between 1.5 and two billion dollars – an amount close to the gross income of the leisure industry -, compensate opportunely the balance of payments.

 

In the export front, tourism fared better. After a practically stagnated 2013, the reception of foreign visitors recovered the following year and has vigorously taken off in 2015. From a mediocre 0.5 per cent growth in 2013, that indicator climbed to 5.3 per cent last year. For the first time it achieved the dreamed-of figure of three million arrivals: 3,002,745, according to ONEI. Even so, it was way below the plan. The Tourism Ministry (MINTUR) had set itself the goal of a 10 per cent increase in visitors.

 

The sector’s hard currency incomes maintained a similar tendency: they increased 5.6 per cent. The tourist installations collected more than 1.888 billion dollars in the year, according to ONEI.

 

This 2015 had a much better start. The number of visitors grew 14 per cent in the first three months, a take-off that, if it keeps on like this the rest of the year, would place tourism as a sector of double influence in the recovery of the economy. In addition to the incomes it contributes, it would consolidate its mission of being the economy’s driving force; it is a sector that guarantees demand for other numerous activities of the economy: the machine and textile industries, energy, agriculture and the food industry, construction, transportation, the production of furniture and others.

 

An increase in tourism would have a positive impact on the rest of the economy, including basic activities like investments, which have in the leisure industry one of its principal financing sources.

 

Continued weak execution of investments

 

A usual weak flank in the Cuban economy, once again the alarm went off regarding the investment activity in the first half of 2014. The late handing over of works, the deficit of labour force, low productivity, the lack of culture in terms of contracting and the inability of executing efficiently foreign financing are interlaced in the string of problems criticised at that moment by then Economy Minister Adel Yzquierdo.

 

However, before the close of the year, investments started growing: they stood at around 5.564 billion pesos, around 7 per cent higher than the total of the previous year.

 

If the path of fulfilments were to continue, the investment indicators could also boost the hike in the GDP. For the current year, the government aims to execute 7.159 billion pesos’ worth of investments, higher by 1.595 billion than what was estimated to be executed in 2014. That magnitude represents an ambitious 28 per cent increase.

 

“Productive investments reach 57.1 per cent and those for infrastructure 17.7 per cent,” Murillo commented in December.

 

As a reflection of the mentioned problems, 151 enterprises closed the year with losses due to inadequate economic management and obstacles by the country’s commercial structures. A great deal belongs to the agriculture and livestock sector. By agencies, the Agriculture Ministry heads the black list, with 71 entities with deficits. It was followed by the Industry and Tourism Ministries, as well as by Azcuba. Among all of them, they accumulated 439 million pesos’ worth of losses in 2014.

 

The bad economic management of enterprises and commerce was reflected in the 2014 State Budget. The circulation and sales taxes failed to collect 826 million pesos because of the drop in supply. As an expression of the transformations undertaken in the economic model, the private and cooperative sectors’ tax contribution increased by 29 per cent. But, even though both are expanding, their contribution is still limited; it represents only 4 per cent of the State’s gross incomes.

 

In short, incomes were 7 per cent higher that the budgeted amount, while expenditures increased by 6 per cent. As a result, the fiscal deficit was 4.1 per cent in relation to the GDP.

 

Changes in the model and financial strategy

 

The year 2014 was of key importance in the carrying out of basic policies and essential programmes for any economy. It confirmed the announcement made by President Raúl Castro when he said before Parliament in December 2012: “the updating of the Cuban economic model, after the initial measures of suppressing prohibitions and other obstacles for the development of the productive forces, is marching at a confident pace and is beginning to go in-depth into questions of greater reach, complexity and depth.”

 

Four interconnected lines stand out: external finances, foreign investments, business relations, including wage policy, and the programme for the currency unification.

 

Due to their essential functions it is foreseeable that the process of updating or renovation of the Cuban economic model is being conferred greater solidity. If they advance and are successful, a more vigorous reaction of the economy can be expected, four years after the approval of the Economic and Social Policy Guidelines.

 

The organisation of external finances and the relations with foreign capital, which the Cuban government has defended as a strategic objective, scored an important victory last year. Russia wrote off 90 per cent of Cuba’s foreign debt, the largest the Caribbean nation had dragged on since the time of the Soviet Union: 35.2 billion dollars was the sum total of the old financial obligations.

 

The operation served as the culminating point of a sustained work of recovering commercial and political relations with Russia, as part of a programme of diversification of foreign trade ties, which also include two more countries of the BRICS group, China and Brazil. During a visit to Havana, Russian Foreign Minister Sergei Lavrov ratified that the remaining 10 per cent of the debt, around 3.52 billion dollars, would be reinvested in the Caribbean nation when it pays it. Lavrov also participated in the signing of documents and juridical instruments that expand bilateral collaboration, planned until 2020 since the 10th meeting of the Intergovernmental Commission held in November 2012.

 

The agreement to restructure the debt with the government of Vladimir Putin gave continuity to a series of similar manoeuvres with creditors from several countries (China in 2010, Japan in 2012 and Mexico in 2013), with the explicit objective of recovering international financial credibility.

 

The agreement with Russia, which was Cuba’s principal creditor, placed the country in a stronger negotiating position for the restructuring of its remaining debts with the western countries of the Paris Club, said analyst Richard Feinberg, of the Washington-based Brookings Institution. The visit to Havana in March 2015 of the chairman of the Paris Club, Bruno Bézard, confirms Feinberg’s comment.

 

Cuba also settled 447.3 million dollars in pending dividend payments to international economic associations, an operation that increasingly consolidates its position.

 

Economist Rodríguez coincided with the positive external effect that this policy can have. “An increase in the payment of the debt service,” he said, “that can be estimated at 84 per cent, with not pass unnoticed by the international financial centres, which is a point in favour of retaking of credits for a similar figure.” But he warns that “while the country has been honouring its foreign payment commitments in recent years, reducing the amount of the debt from 37 to 30 per cent of the GDP, international estimates state that the paying off of back payments is still pending, equivalent to 27 per cent of the creditors’ total.”

 

Strong bet on investments

 

The effort to improve the country’s financial credibility is linked to changes introduced in another basic policy. In March 2014, the Cuban Parliament approved a Law on Foreign Investment, in line with a new conception of the role it is playing in the Cuban economy.

 

As head of the government commission leading the process of updating the economic model, Murillo admitted that investments by companies from other countries play a determining role for the development of decisive sectors of the Cuban economy. This position is far away from the previous interpretation that reduced foreign capital to a mere complement of State investment.

 

The new law incorporates or expands fiscal guarantees, with a special regimen that exonerates investors from paying taxes on profits during eight years, with possibilities of extending the period or eliminating payment in case of reinvestment of these profits. They are also exempted from taxes for the use of the labour force, among other tax payment facilities.

 

The government’s aim is to attract foreign firms that invest, in tune with the strategy announced by Cuba of expanding the general line of investments in order to raise the rate of gross capital formation or rate of investment to a range of more than 20 per cent of the GDP. That indicator achieved 6.846 billion dollars in 2013, 8.9 per cent of the GDP, according to ONEI, a data way below the regional average of 22.9 per cent of the GDP, according to the Economic Commission for Latin America and the Caribbean (ECLAC).

 

According to Murillo, the expansion of all the investment alternatives, including the foreign ones, would be what would enable an annual 7 per cent growth of the GDP. Economists estimate it is necessary for the economy to grow no less than six per cent per year to be able to speak of development.

 

As proof of the aforementioned, the new investment policies point to basic infrastructures like railway, aqueduct, port and energy systems, all of which have a strategic value. The programme for the development of alternative energy sources, for example, announced at the beginning of the year, seeks to transform the energy matrix to increase the participation of renewable sources in power generation: from 4.3 per cent at present to 24 per cent in a period of 15 years.

 

The Business Opportunities Portfolio presented by Foreign Trade and Investment Minister Rodrigo Malmierca a short while after the Law on Foreign Investment was approved maintains tourism, energy, mines and transportation in the special offer for foreign capital, but has opened the range of priorities to previously less favoured sectors, like agriculture, construction and the majority of industries, including the sugar industry and another in full expansion, the pharmaceutical and biotechnological industry, which has been able to rank among the first export sources. The offer promotes 246 projects with foreign capital for a total of 8.7 billion dollars.

 

The most radical definition of the new step was anticipated by President Raúl Castro in person, last February. He told the delegates to the Congress of the Central Organisation of Cuban Trade Unions (CTC) that this law responded to the “pressing need to promote and attract foreign investment to revitalise the country’s economic and social development.”

 

In the first months of 2015 the government approved a package of legal regulations to reorganise and boost investments in the country. This movement, in addition to completing the changes initiated with the Law on Foreign Investment, confirms the importance granted to the search for capital and the decision to execute these costs with efficiency, one of the pending debts in the Cuban economic model.

 

The first Special Development Zone

 

The strategy of reactivating investments as the backbone of the economy was completed with the opening of the Mariel Special Development Zone (ZED), 45 kilometres to the west of Havana. In 2014, companies from 36 countries – Spain, Cuba, Italy, Vietnam, China, France, Brazil, Mexico, Holland and Canada, among others – initiated negotiations to establish themselves in this enclave, conceived as a platform to lead the new stage of promoting alliances with foreign capital.

 

In January 2014 Brazilian President Dilma Rousseff and President Raúl Castro personally attended the official inauguration of the modern Mariel Container Terminal, the base of operations key for the ZED. After the South American giant’s investment of 802 million dollars in the first stage, through the National Economic and Social Development Bank (BNDES), Rousseff announced a new financing of 290 million for the Mariel ZED.

 

“A new stage is now beginning,” said Raúl Castro to the guests at the inauguration of the Container Terminal, “in which we propose to promote important national and foreign investments in the Mariel Special Development Zone that will allow for increasing exports, the effective substitution of imports, the high technology and local development projects and that they contribute with new sources of employment.”

 

U.S. economic blockade on Cuba shakes

 

The approval of a new foreign investment policy and law opportunely came ahead of the simultaneous announcement by the Cuban and U.S. presidents, Raúl Castro and Barack Obama, on the start of talks to re-establish diplomatic relations between the two countries.

 

The unexpected news also came before Cuba’s persistent strategy to organise its relations with international creditors and strengthen commercial ties with countries that tend to become active world geopolitical poles.

 

One of the foreseeable effects of a gradual normalisation of relations to later put an end to the U.S. economic blockade on Cuba is the more expedite rapprochement of businesspeople and investors from third countries to the Caribbean nation. In recent years the extraterritorial character of the U.S. pressures has been concentrated on European banks, a line that discourages Havana’s possible foreign partners.

 

According to the report presented last October by Cuban Foreign Minister Bruno Rodríguez to the UN General Assembly, since 2010 the Obama administration has carried out 130 extraterritorial actions by virtue of the blockade, of which 81 were executed in financial spaces. From January 2009 to June 2014, the Department of the Treasury fined 36 U.S. and foreign banking entities with a total of 2.6 billion dollars for taking care of Cuba’s commercial or financial operations.

 

A month later, the French BNP Paribas Bank ceded and accepted to pay Washington a record fine of 8.9 billion dollars for violating the U.S. economic sanctions to three countries, among them Cuba. The German Commerzbank joined the sanctioned banks in March of the current year, with a U.S. fine of 1.71 billion dollars for maintaining financial operations in USD with four countries, including the Caribbean nation.

 

Despite the aggressiveness of the economic blockade, seeing the governments of Cuba and the United States talking in a civilised way around a table lessens de facto the decades-old tensions. The reaction of tourism in the first months of the current year can constitute a favourable symptom of rapprochement and recovery of other countries’ ties with Cuba. In addition, there was a strong hike in the price of shares of European companies like the Meliá Hotels International hotel group, the largest company of the sector in Spain, immediately after Raúl Castro and Barack Obama announced the start of talks.

 

Reform knocks on the door of state-run enterprises

 

The surprise change in the U.S. attitude takes place in a year in which the programme of transformations known as updating of the economic model is being deepened. In May 2014 a package of legal regulations came to light, taking the reform to one of the fields that could have the greatest economic effects, given that the state-run enterprises are the principal support of the Cuban economy.

 

A group of decrees and resolutions that came into force in mid-2014 grants enterprise managements greater autonomy and authority and, at the same time, responsibility. While Decree-Law 320 ratifies planning as the principle of the socialist economic model, other legal simultaneously published regulations set their sights on the market when drawing up plans.

 

The reorganisation of financial relations between enterprises, and between these and State entities and agencies, point to separating more clearly the governing character of the ministries and the executive functions of the enterprises. It proposes a change in the decades-old dominating verticality or centralism in the Cuban economic model. The enterprises will have more autonomy to move, expand, set prices and sell the productions and services they are able to create.

 

But the implementation of new structures, like the higher organisation of business leadership (OSDE), has not made very clear the elements of the system or has revealed the weaknesses criticised in the parliamentary session of last December.

 

The hour of wages?

 

Perhaps one of the novelties with the greatest impact was introduced by Resolution 17 of the Labour and Social Security Ministry: the enterprise managements will be able to apply their wage policies without the bureaucratic setbacks that used to tie up or hindered such a sensitive matter.

 

With the aim of “eliminating administrative restrictions to encourage the increase of work productivity,” the resolution establishes forms of payment by yield that will be approved by the directors of enterprises or of business groups, without being subject to tariffs established in offices of a Labour Ministry distanced from the internal reality of each enterprise.

 

The package of legal regulations, and especially Resolution 17, opens the doors to the solution to a one of the most acute problems the Cuban economy has been dragging: payment systems that are not an incentive for work. But it treds thorny paths. In December, Murillo announced that 320 enterprises paid 189 million pesos in wages without the indispensable productive backing, a tendency that, if generalised, threatens with leading to the end of that transformation.

 

Before the government published Resolution 17 and other legal regulations to reform the business system, Raúl Castro recognised in February, during the 20th Congress of the CTC, that “wages do not meet all the needs of workers and their families.” He reasoned that the low retribution “generates lack of motivation and apathy toward work, has a negative influence on discipline and encourages the exodus of qualified personnel to better paid activities independently of the required professional level.”

 

Despite admitting these conflicts, the authorities have explicitly opted for caution in terms of wage policies. They are avoiding an inflationary outbreak. Even so, in March more than 440,000 health workers’ wages were tripled, under the opinion that they have become the sector that contributes the greatest amount of hard currency to the country. The measure increased by millions of pesos the expenditures of the State Budget.

 

Another key step in the strategy of transformations of the labour and economic sphere was the approval by Parliament of the new Labour Code. In addition to proposing more radical projections of union movements before the administrations, the plan and the wage policies, the document joins the legal regulations that recognise the existence of private enterprise in Cuba by extending the guarantees of labour protection to the workers hired by other natural persons.

 

The step props up, therefore, one of the most visible transformations in the Cuban economic reform: the expansion of self-employment. After some 30,000 persons joined the private sector, last year closed with 477,000 incorporations to this employment option.

 

The development of the non-state management forms took on another turn in 2014 based on the creation, as an experiment, of the non-agricultural cooperatives. At the close of the year the government had authorised the constitution of 498 cooperatives and 329 were already working.

 

Toward the currency unification

 

The problem of Cubans’ wages and incomes is waiting for the solution of one of the most complex and tense conflicts of the Cuban economy since the 1990s: the elimination of dual currencies and exchange rates.

 

In October 2013, the government started up a programme for currency unification that immediately unleashed speculations and rumours of all types regarding the definite date as Zero Day due to a trio of resolutions that the Finances and Prices Ministry published in March 2014.

 

These resolutions establish methodologies for accounting and price policies when a single currency exists, the Cuban peso or CUP. The seminars carried out throughout the year to prepare the technical personnel have demonstrated the high complexity presented by the return to a radically different currency scene, also from the exchange point of view. The control of inventories, debt, spending, wages, bank accounts, contracts, accounting operations and the creation of wholesale and retail prices…. While the ministries, enterprises, budgeted units and territorial governments prepare to operate with different rules of the game in all these fields, the authorities are testing formulas that gradually approach consumers to an atmosphere of a single currency.

 

The shops that operate in convertible pesos (CUC) in 2014 gradually incorporated simultaneous price systems in both currencies, as well as the possibility of paying in any of the two currencies according to the rate of the CADECA Exchange Houses: 24 CUP x 1 CUC (the official exchange rate, meanwhile, remains at 1 USD x I CUC, equal in turn to 1 CUP).

 

Judging by the definitions made when the Council of Ministers announced the start of the timetable for the execution of the measures that will lead to the currency and exchange unification, the process will first take place in the sphere of the economic relations of juridical persons and later for retail commerce and natural persons.

 

The year and a half since then has confirmed that it will not be an easy process; but the population continues having high expectations. The Cuban president in person warned a few years ago that the solution to many problems depends on the elimination of dual currency. Among such problems he mentioned prices and wages.

 

Even though the process of transformations is not marching with the dreamed-of speed, it is evident that it has entered deeper waters. “We will undertake and we will face the most complex and technical tasks in the updating of the economic model in the coming years,” Economy Minister Marino Murillo said on the threshold of 2014. To the same extent in which the changes are undertaken in basic policies, of strategic value, a greater impact could be perceived on the scale of the entire economy.

 

The expected or dreamed-of results are still not perceived too much domestically, but outside the country reactions are already being seen. (2014)

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