New airs and old debts mark 2015

With the best economic growth of recent years, the Cuban economy closed 2015 with key agreements to reorganise its international financial ties, reactions in tourism and signs of change if the normalisation of relations with the United States advances. But the process of updating the economic model has still not met important goals.

The resumption of cruise trips to Cuba sent a sign of encouragement, in the midst of a process of economic transformations that has not rendered all the previewed results.

In Cuba, 2015 was a year that passed through foreseeable paths after the global surprise caused, at the close of the previous year, by the announcement made by presidents Raúl Castro and Barack Obama. The imminence for the first time of the possible end to an era of bilateral entrenchment, which had reached very bitter and aggressive tones, came as a shock to many persons worldwide.

The talks to normalise relations had their peak moment with the opening of embassies in Havana and Washington, though the principal laws and restrictions of the economic blockade the United States has maintained against Cuba for more than half a century continue. The new airs, which don’t blow from the north, have started being felt in areas of trade and in diverse fields of the Cuban economy.

 

Visits to Havana and strategic hubs of the Cuban economy by U.S. companies, legislators and government representatives have not stopped throughout the year. The signing of the first agreements to start unblocking trade ties and some partial White House decisions indicate a calculated basis. U.S. business interests have gained more strength than political views whose failure Obama himself has repeatedly recognised.

 

Faced by the perspective of having to face the competition of the world’s first economy on the Cuban scenario, Cuba’s traditional partners and envoys from other European and Asian countries that had remained more distant have also revitalised their visits. Cuba has reached with them important economic agreements this year.

 

Though it is still early to see substantial effects, a year after the December 17 announcement the first reactions are being perceived in activities like tourism and the renegotiation of the foreign debt. The consequences of the change of attitude and strategy of the United States is intertwined with the results of the transformations initiated in the economic model almost 10 years ago and that became official when the Communist Party approved in 2011 the Economic and Social Policy Guidelines.

 

But the economy is still affected by previous weaknesses, evident in sectors like agriculture, business activity or in the growth forecasts for 2016.

 

Is the economy taking off?

 

With a four per cent growth of the gross domestic product (GDP), the Cuban economy achieved in 2015 its best result, after the meagre one per cent of a year before and of averaging an annual growth of 2.2 per cent for six years.

 

After reporting that the Cuban economy grew four per cent in 2015, Economy Minister Marino Murillo announced a new slowing down for the current year.

After reporting that the Cuban economy grew four per cent in 2015, Economy Minister Marino Murillo announced a new slowing down for the current year.

Foto: Marino Murillo, Vicepresidente del Consejo de Estado. Foto: Ladyrene Pérez/Cubadebate.

Economy Minister Marino Murillo associated this GDP growth to liquidity advances for the enterprises that were able to finance the import of supplies and the early contracting of credits. Both factors guaranteed stable productions throughout the year.

 

Another reason for the growth mentioned by Murillo to the National Assembly of People’s Power was the tendency of lower prices for imports. He specified that the depreciation also affected some raw materials Cuba exports, but at the same time the country was able to “import more with the same budget, which is not much,” he said. “Less money has allowed us to contract more raw materials.”

 

The highest production increases were registered by the sugar agribusiness (16.9%), construction (11.9%), the manufacturing industry (9.9%) and commerce and services (8.6%).

 

In line with the strategy approved in the country several years ago, one of the year’s results that most satisfied the government is that the participation of material production in the GDP increased in 2015 to 61.1 per cent, which a year before had been 59.3 per cent.

 

Murillo admitted that there are still many reserves of efficiency in the economy, though he described this growth as a good result, taking into account that Latin America is not growing.

 

A sign that the Cuban authorities are perceiving stormy clouds on the economic horizon is that for 2016 they proposed a lukewarm GDP growth: two per cent. To maneuver, they ordered a review and making more efficient use of the inventories and a general reduction of fuel consumption: a 20 per cent cut in the country’s administrative activities, while 10 per cent will be reduced in services.

 

Hope inevitably lies overseas. If the permanent sanctions of the economic blockade are finally ended and relations with the northern economic giant are normalised, they point to also improving the possibilities of business with other partners in the world and opportunities in the Cuban economy. The first signs already appeared in 2015.

 

Visits and talks with the U.S.

 

With the declared aim of understanding how the Cuban economy functions and initiating a dialogue to build a new system of trade relations between both countries, several U.S. government representatives came to Havana accompanied by leading companies.

 

U.S. Secretary of Commerce Penny Pritzker, during a visit she made in October, said that what they mainly want is to hear and learn. She was the second representative of the Barack Obama cabinet to travel to Cuba after December 17, 2014. She was preceded by Secretary of State John Kerry, to inaugurate in August the U.S. embassy in Havana.

 

These first approaches seek to open opportunities, generate mutual trust and knowledge with respect to what can be done “within the framework of the embargo,” Pritzker said, who in just two days visited enterprises, a construction cooperative, Old Havana, the Mariel Special Development Zone (ZED), and met with the press and with Foreign Trade and Investment Minister Rodrigo Malmierca.

 

U.S. Secretary of Agriculture Thomas Vilsack is the third member of Obama’s cabinet to visit Cuba in 2015.

U.S. Secretary of Agriculture Thomas Vilsack is the third member of Obama’s cabinet to visit Cuba in 2015.

Foto: U.S. Secretary of Agriculture Thomas Vilsack looks at vegetables as he visits a market in Havana, Cuba, Friday, Nov. 13, 2015. Vilsack is on a four-day official visit to Cuba to try to boost agricultural trade. (AP Photo/Ramon Espinosa)

Another well-known visit was that of Secretary of Agriculture Thomas Vilsack. He travelled to the island in November, accompanied by a senator and three House representatives and important companies from the sector, with the express aim of making agriculture a bridge for trade, cooperation and the exchange of ideas between both countries.

 

According to a Department of Agriculture report – “U.S.-Cuba –Agricultural Trade: Past, Present and Possible Future” -, U.S. food sales dropped to 286 million dollars in 2014, after reaching a peak 685 million in 2008. The report, published a few months before Vilsack’s visit to Havana, forecasts that the export of agricultural products to Cuba con increase threefold compared to the present ones – they averaged 365 million dollars in the three-year period of 2012-2014– if the economic blockade’s barriers are eliminated. It sees opportunities in products like rice, wheat, powdered milk, cheese, dry beans and soy oil, which Cuba now imports from other countries.

 

First U.S. agreements and measures

 

In their meetings with their Cuban counterparts, both Vilsack as well as Pritzker analysed the reach and limitations of the measures applied in 2015 by the Obama administration to relax the blockade restrictions in terms of travel, telecommunications and remittances.

 

With a record 3.5 million visitors in 2015, the Cuban tourist industry is one of the first to react in the face of the prospect of a normalisation of relations with the U.S.

With a record 3.5 million visitors in 2015, the Cuban tourist industry is one of the first to react in the face of the prospect of a normalisation of relations with the U.S.

A month after the opening of the U.S. embassy in Havana, the departments of the Treasury and of Commerce announced regulations to make more flexible a group of measures put into force at the start of the year. The first package increased fourfold – up to 2,000 dollars per trimester – the amount authorised for the sending of remittances, and the September one eliminated all currency limits. The regulations implemented in 2015 partially modify some barriers regarding travel, telecommunications and Internet, financial and commercial transactions, physical representation of U.S. businesses in Cuba, legal services, educational activities, emergency medical services and humanitarian projects.

 

The third package, directed at gradually relaxing the restrictions of the economic blockade, would be reserved for January 2016.

 

U.S. citizens can now get a licence to travel to the island for health, academic, cultural, family and other reasons, completing a list of up to 12 authorised categories. But they are still banned from traveling to this Caribbean archipelago for tourism.

 

The Cuban Foreign Ministry has welcomed the benefits but has described the measures as limited. Though it recognises that the principal legislations of the blockade can only be revoked by Congress it has persistently reiterated that President Obama has wide-ranging faculties to reduce or annul the restrictions. Among these it includes forbidding Cuba to use the dollar in its international transactions and others that hinder trade even with third countries, if it involves, for example, products that contain raw materials or components of Cuban or U.S. origin.

 

Meanwhile, Obama again asked Congress in January of this year that it lift the economic blockade under the criterion that 50 years of isolating Cuba have failed, placing the U.S. in regression in Latin America.

 

Both governments are negotiating means to speed up the rapprochement, its representatives systematically meet to seek consensus on thorny subjects like migrations and drug trafficking, world leading U.S. companies are present at the Havana International Trade Fair and they meet with Cuban officials and enterprises, and agreements and arrangements are starting to appear.

 

Last December both governments agreed to re-establish direct postal service during a new round of talks in Miami.

 

Others are hurrying up

 

The prospect of a solution to the U.S.-Cuba conflict, the renegotiation of Cuba’s important debts and the economic transformations undertaken by this nation have speeded up the visits of Cuba’s traditional economic allies and of governments and companies that had remained distant.

 

Two historic centres of economic and political power in the world, United Kingdom and Japan, in April explored the expansion of trade and financial ties with the largest of the Caribbean islands. Fumio Kishida became the first Japanese foreign minister to come to Havana. He arrived accompanied by representatives of important Japanese companies, almost simultaneously with a delegation of British and Irish companies of the Cuba Initiative group.

 

Francois Hollande, the first French president to visit Cuba, expanded the number of European governments interested in increasing relations with this country after the Cuban-U.S. December 17, 2014 announcement.

Francois Hollande, the first French president to visit Cuba, expanded the number of European governments interested in increasing relations with this country after the Cuban-U.S. December 17, 2014 announcement.

France and Holland were another two countries whose governments visited Havana to deepen trade relations.

 

In May, Francois Hollande became the first French president to travel to Cuba. Referring to the talks initiated by Havana and Washington, he affirmed that “France, together with the European Union, is going to accompany Cuba in this process” and promised to continue as “a faithful ally” of this Caribbean nation.

 

In addition to meeting with President Raúl Castro and other Cuban government officials, Hollande spoke at a business forum with the hosts, accompanied by representatives of Pernod-Ricard, the Accor hotel group, Air France and several banks, among others. They want to promote bilateral trade, inferior to Cuba’s exchange with other European countries like Spain, Holland or Italy, which are neither viewing the scenarios with their arms crossed.

 

Ready to not lose leading positions in sectors like tourism, the Spaniards sent several business delegations. On one occasion, 80 companies arrived headed by Industry, Energy and Tourism Minister José Manuel Soria, who expressed the aim of expanding Spanish investments in the Cuban archipelago.

 

Following a similar line, the Dutch carried out an intense activity, with a peak moment in January 2016 when Foreign Trade and Cooperation Minister LiliannePloumen accompanied a delegation of 77 companies. In addition to exploring businesses, Ploumen attended the presentation of a new joint venture between the Anglo-Dutch transnational Unilever and the Cuban Suchel, which undertook an investment in the Mariel Special Development Zone.

 

Cuba’s foreign debt and the Paris Club

The 2015 agreement to restructure the debt with the Paris Club was another key step in the Cuban strategy to reorganise its financial relations with the world.

The 2015 agreement to restructure the debt with the Paris Club was another key step in the Cuban strategy to reorganise its financial relations with the world.

 

The agreement to renegotiate an 11.1 billion dollar debt with the Paris Club was one of the most significant results in the year. The agreement closes a strategy undertaken by the government of Raúl Castro to reorganise its external finances, a practice that gained fluidity with the Cuban-U.S. process to normalise relations.

 

The negotiations to settle the debt, whose payments Cuba suspended in 1987, registered a key moment with the visit to Havana last March by the president of the Paris Club, Bruno Bézard. The agreement, announced in December, commits Havana to paying, in a term of 18 years, the 2.6 billion dollars of the principal and exempts it from repaying the accumulated interests.

 

The arrangement gives continuity to the renegotiation of other debts with countries like Russia, Japan and Mexico and has made an impact on the Cuban credibility to seek new sources of financing.

 

First reactions, tourism and investments

 

The accelerated growth of tourism throughout 2015 was one of the visible consequences of the Cuba-U.S. talks and the first measures adopted by the Obama administration. The year closed with a leap of half a million tourist arrivals: they increased 17.4 per cent for a record 3.5 million.

 

During a recent visit to Spain, Cuban Tourism Minister Manuel Marrero said that “the number of visitors could double when the blockade ends.”

 

The Cuban government aims to practically double the number of rooms in four years. The country today has some 60,000 rooms for tourism after in 2015 new hotels were opened in the northern cays. The private sector has added more than 18,000. The expansion plans are depending on foreign investments. Even though the entry of U.S. investors and hotel chains has still not been defined, foreign companies’ interest in Cuba shot up after the December 17, 2014 announcement.

 

Marrero said that out of 16 foreign consortiums managing hotel installations, 11 are Spanish and at present 15 companies from that country are studying new business opportunities, among them some construction companies.

The inauguration of power plants in two of Cuba’s industrial hubs, in Moa and the oil deposits to the east of Havana, reaffirmed energy as an investment priority.

The inauguration of power plants in two of Cuba’s industrial hubs, in Moa and the oil deposits to the east of Havana, reaffirmed energy as an investment priority.

 

The leisure industry is heading the investments plans the government presented at the close of the year. They would absorb 1.3 billion dollars out of the 7.8 billion previewed for the entire economy. It has also prioritised investments in the agriculture and livestock sector, which was greatly affected in 2015.

 

The planned investments would represent a strong growth compared to 2015, a year in which they had already experienced a strong advance: they reached 6.911 billion dollars; that is, 46.1 per cent over the 4.729 billion in 2014.

 

The government has given priority to key sectors of the economy because of their capital contribution or as basic infrastructure. Proof of this are the works to enhance the energy capacity with power generation plants in industrial regions in the west and east of Cuba. One of them, built by Energas in Boca de Jaruco, points to a better exploitation of the so-called accompanying gas of the oil deposits close to Havana. On the other tip of the island’s geography, in mining and nickel industry areas, the Electric Diesel Plant of Moa was inaugurated early this year. Both classify among the largest investments concluded by Cuba in recent years.

 

The government of Russia, a traditional ally of Cuba’s energy policy, in October granted the island a credit for 1.2 billion dollars to finance the construction of four new generators in another two thermoelectric plants, one in Mariel, annexed to the Special Development Zone, and another three in the Este de La Habana Thermoelectric Plant. With a joint capacity of 800 megawatts, it would raise the country’s capacity to 6,000 MW.

 

Simultaneously, Cuba is developing works for power generation based on renewable energy sources. Wind-powered parks and photovoltaic installations are being added to a programme of plants annexed to the sugar industry for the use of bioenergy. Foreign investment is one of options conceived to compensate or annul the traditional antagonism between the environment and the economy.

 

Drought affects agriculture

 

The 2015 drought, one of the strongest registered in two decades, considerably affected important crops in the country. Productions like rice, basic in the Cuban diet, registered losses. The Grains Agribusiness Group of the Agriculture Ministry (MINAG) reported that this cereal’s harvest amounts to 165,000 tons, from the 252,000 planned for the year.

The drought strongly affected the harvest of rice and other crops.

The drought strongly affected the harvest of rice and other crops.

 

The water reserves of the 242 reservoirs managed by the National Institute of Hydraulic Resources (INRH) decreased to critical levels: up to 36 per cent by mid-2015. According to this agency, 137 of the country’s 168 municipalities were declared in diverse degrees of drought.

 

Agriculture and livestock and forestry registered one of the poorest results of the year. With a 3.1 per cent growth, it was below the general increase of the GDP.

 

As a climax to the drought, in the final months of the year a series of unusual rains for that season damaged the production of vegetables and tubers. The head of MINAG’s vegetable department, Osmar Méndez, reported that the precipitations of December reduced the tomato harvest to 20,000 tons, as compared to the 35,000 of the initially planned and the 50,000 tons collected a year before. Potato, carrots and other crops also suffered.

 

The sugar agribusiness, on the other hand, experienced a vigorous advance in 2015. The harvest, whose peak moment is in the first months of the year, increased sugar production by 16.9 per cent. The effects of the drought were set aside for the current sugarcane harvest, which began in December under dark forecasts.

 

Non-state work gains ground

 

The number of private workers tends to remain at half a million persons, a record reached in mid-2015.

The number of private workers tends to remain at half a million persons, a record reached in mid-2015.

The labour reorganisation the government set itself lies on the expansion of private work. In 2015 this employment modality reached a record of half a million registered persons; it includes the private microenterprises for restaurants, home rentals, transport and construction, among others.

 

In early June, 504,613 persons had opted for self-employment in some of the more than 180 legally authorised activities. The figure, which is equivalent to 10 per cent of the economically active Cuban population, tends to remain at those levels after a faster take off in the first years.

 

Also as part of non-state work, the Cuban updating of the economic model has extended the alternative of the cooperatives to non-agricultural activities (previously they only existed in the sphere of agriculture and livestock).

 

But the principal weight of the economy continues falling on the shoulders of a mainly state-run business sector, also subject to important changes but whose results are still in the making.

 

New wage system in enterprises

 

In the face of the continued economic losses throughout three years, a group of state-run enterprises went bankrupt, in their majority belonging to the agricultural and livestock sector. In mid-2015 the government announced the disappearance of 24 entities out of the 124 that concluded 2014 with negative results in their management – 73 per cent of the total were involved in agriculture.

The currency and exchange rate unification continues among the aims with little advance in the programme of transformations of the Cuban economy.

The currency and exchange rate unification continues among the aims with little advance in the programme of transformations of the Cuban economy.

 

The parliamentary Committee on Economic Affairs reported to the rest of the MPs that 87 of those entities lost almost 323 million pesos, despite having planned their profits.

 

With this measure the government is achieving one of the Economic and Social Policy Guidelines approved in 2011, which have in the business sector one of the most complex and tense transformation objectives. In addition to establishing a decentralisation through the restructuring of government agencies and models of business groups, it has incorporated a system of payment according to results or yields to reactivate the incomes from work.

 

Regulated through Resolution 17 of the Labour and Social Security Ministry (MTSS), which came into force together with a legislative package in 2014, the new payment system eliminates the ceiling in wages. Though it has come up with obstacles due to flaws in planning, supplies or financing, it is one of the few measures benefitting the population’s incomes.

 

The average wage in Cuba rose to 640 Cuban pesos per month in 2015 compared to 584 pesos a year before, Economy Minister Marino Murillo reported to the National Assembly of People’s Power. Though the new wage policy makes it possible to pay several thousands of pesos a month to the workers of some enterprises, personal incomes still remain among the goals that have not been met by the process of economic transformations.

 

Other debts of the process of updating of the economic model are close to the deficit in pockets. One of the most well-known and awaited is perhaps the elimination of the dual currency and exchange rates, recognised by economists and the government as one of the most severe obstacles the Cuban economy is facing today. After some preparation steps when announced in October 2013, the programme for the unification of currencies and the exchange rates has not reported advances.

 

The enterprises, local governments, budgeted entities, research centres, economists and the population in general said goodbye to 2015 with their sights set on the Congress announced by the Party for next April, awaiting answers about the course the economy will follow. (2016)

 

 

 

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