Cuban Economists Doubt New Foreign Businesses Will Help Lower Inflation

The warehouses of Granferretero, a Spanish-Cuban joint venture, are located near the port of Havana. (14ymedio)

14ymedio bigger14ymedio, Madrid, March 20, 2023 — Doubts are growing after the announcement by Cuba’s state-run media that the first five wholesale businesses to be financed with foreign capital will begin operations in the country in April or May. Little else is known about a plan that officials hope will lower inflation but which economists view more skeptically.

Nor is much known about the five companies themselves, though apparently two of them — Grupo Sur from Argentina, and Emifoods from the United Arab Emirates — are in the food service sector. Another company, Camacho, founded 30 years ago in Catalonia, is involved in cleaning and personal hygiene. Farmavenda Ibérica, a Spanish company founded in Asturias in 2017, is a wholesaler in an unspecified field.

Lastly, there is Granferretero, a public-private partnership created to provide Cuba with hardware supplies. The Spanish partner, based in Madrid, is Gurea Industrial & Automotive Equipment S.L., about which more can be found on its website, which launched a few months ago.

State media reported that the deal is now in the final phase: “legal documentation, operational flow, warehouses and stores that will sell food, clothing, household items, cleaning and hygiene products and other items in high demand.” Alejandro Gil, minister of Economy and Planning, and Betsy Rodriguez, minister of Domestic Trade, touted the impact all of the companies will have in “reviving national industry” despite the fact that they are aimed at the wholesale market.

This assumption is strongly rejected by Elías Amor, a Cuban economist based in Spain. “This policy of attracting foreign capital to sectors of the economy before first stimulating and growing the domestic market is a strategic design flaw. Foreign capital is not for getting an economy up and running from ground zero but to support and stimulate it once the foundations have already been laid for its development,” he wrote in his blog, Cubaeconomía, on Monday.

According to Amor, the entry of these companies represents a victory for Rodrigo Malmierca, minister of Foreign Trade and Foreign Investment, over those of his colleagues Gil and Rodriguez. He exerted pressure to get approval for foreign capital to enter the wholesale market, a sector that has not traditionally been an area of economic opportunity. The first projects, however, are more to the liking of the minister of Economy, who — as Amor believes — wanted to limit the range of products wholesalers can sell.

The first unknown involves the exchange rate, says Amor, who is convinced that a rate of 24 pesos to the dollar would not attract the interest of private companies, which are used to operating at very high margins. Nobody will be interested in meeting the needs of Cuban consumers if the numbers do not add up.

“An increase in the wholesale supply does not have an automatic anti-inflationary effect,” adds the Cuban economist Pedro Monreal, who has also analyzed project. “It is unclear how a small handful of suppliers would not lead to a market monopoly. In addition to supply, two other factors are important in setting consumer prices: the exchange rate and overall demand, which is difficult to control when there is a high budget deficit, as is the case today.”

For Monreal, the currency exchange rate is a key issue but there is an additional factor. “It’s reasonable to assume they will expect to be paid with hard currency. Imports are a key component of these businesses’ sales and acquiring those imports entails having to spend foreign currency. That would have an impact on the country’s balance of payments. On the other hand, imports tend to be ’subtracted’ [when calculating] GDP,” he adds.

Monreal believes foreign capital is necessary but, if these projects are going to stimulate domestic production, it would require a “level of investment that would allow an underfunded agro-industrial manufacturing plant to produce goods for the domestic market.”

“Foreign capital is vital and deserves attention but not under these conditions,” says Amor, who believes the Cuban economoy must fundamentally change if it wants foreign capital to work.

Regardless of what the economists think, the reaction from other Cubans has been one of distrust, with many on social media responding to the news with a sense of despondency. Expectations were that 2023 would be a year of recovery, yet not only have things not improved during the first quarter of the year, they have actually gotten worse. “When will people start seeing the benefits? Do I have to wait till 2030 to buy my son some shoes?” asks one online commenter.

“If you can only pay for things in hard currency, nothing will change. I think it will be years before things are priced in pesos. Inflation will keep soaring, I don’t know how high,” notes another. Someone else responds, “Do you think a foreign business is going to come to our country and sell things for pesos? That will happen only when the Cuban peso has real value and is truly convertible. Then you’ll see that currrent prices are a joke.”

Though the news has generated widespread debate, there are those who still have unshakeable faith in the system. “Let’s trust the solutions they come up with. I know the country’s leadership wants to solve the problems. The prices of some products are already beginning to drop somewhat. If there are more things to buy, they will either lower prices or lose sales,” reads one comment. Others provide a reality check: “Give us just one example, sir, of a product that has dropped in price. You must have dropped out of the clouds.”


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