Elías Amor Bravo, Economist, January 30, 2021 — January is coming to an end and we still know little about the effects of the government’s currency unification program. Recent official press coverage of a nation-wide tour by senior government officials has provided some loose, unrelated bits of information but not a comprehensive, accurate and competent analysis of the measures adopted by the regime.
What is obvious is that currency unification has all the characteristics of a political compromise that prioritizes the sloganeering of communist party congresses over social and business needs. Initial impressions based on recent statements by senior government officials is that currency reform is an economic policy without public support. It has been widely rejected and heavily criticized by all sectors of society, which has forced authorities to go back and quickly retool it.
This kind of reaction is what happens when a government tries to implement economic policies that do not respond to social needs or that are perceived as such by the public. One of the basic tasks of public policy makers is knowing, understanding and interpreting what people want and then designing appropriate economic policies to address their social demands.
Currency unification does not do that. It seems more like a burden imposed by a government oblivious to social demands, one that is only interested in fulfilling some guidelines dictated by the ruling party, of which, it can also be said, has never taken into account the real needs of society.
What can be said at this point about currency unification is that it has created a divide, with officials on one side and the Cuban public on the other. Among the many reasons for this are wildly unpopular price increases and tariffs, the rise of hard currency stores that force customers to use dollars to make purchases, an artificially high official exchange rate, and the reduction in subsidies to families whose incomes have not kept pace with inflation, which the government has been unable to control and that is bound to get worse.
What can be said at this point about currency unification is that it has created a divide, with officials on one side and the Cuban public on the other. Among the many reasons for this are wildly unpopular price increases for goods and services, the rise of hard currency stores that force customers to use dollars to make purchases, an artificially high official exchange rate, and the reduction in subsidies to families whose incomes have not kept pace with inflation, which the government has been unable to control and that is bound to get worse.
The exchange rate initially set for the Cuban peso has been falling and further devaluation will be necessary. The unofficial rate on informal market has been setting the pace of the Cuban economy, leaving the Central Bank to follow its lead. But the longer this goes on without the government taking action, the harder and more painful the adjustments will be, leading to the dreaded shock therapy, which communist leaders have said they do not want to apply.
After the steep devaluation of the peso, businesses now also face higher costs for intermediate goods and are not finding domestically produced alternatives for more expensive imports.
Higher wages without increases in productivity will also lead to higher labor costs. If this is not offset by price increases, the result could be underfunding and bankruptcy, as happened from 2014 to 2019, when 12% of Cuban companies disappeared.
The most serious aspect of this inflationary spiral, fed by one of the highest money surpluses in the world and a runaway deficit equivalent to 20% of GDP, is that it could reach double digits. Much of the problem stems from rising prices and taxes on goods and public services, though the regime has never missed an opportunity to blame self-employed workers and rental property owners of price gouging, and to launch smear campaigns against them.
The relationship between state and non-state pricing is leading to a significant transfer of wealth from the miniscule private sector to the state sector which, if not corrected soon, could end up ruining many small-scale entrepreneurs, who had been generating substantial tax revenue for the regime.
No sooner had the cancellation of subsidies and grants been announced than the first protests began. In the end the plan was shelved. Instead, the regime has had to allocate additional budget reserves to deal with increases in subsidies for utilities and food. Rationed goods and services are in increasingly short supply, a situation which more severely impacts so-called vulnerable groups. In time, the ration book will disappear but it will happen in the worst possible way because nobody is thinking about how to reduce consumer prices by increasing supply. What’s to come is even worse.
People suddenly realize that, though wages and pensions have risen, the increases are not enough to offset the rise in consumer prices and that living on a state salary means being poor. On the other hand, the communists see the rise in job applications at provincial employment offices, which they believe to be a result of the rise in wages, as a good thing. But perhaps it is the other way around. This is also the kind of thing that could have negative effects in the short term.
The one-month-old currency unification process is the result of an economic policy that is not well designed, not well timed and does meet any of its stated objectives. Among its results:
• Public dissatisfaction with wages, consumer prices and reduced subsidies for vulnerable segments of the population
• Companies’ inability to use profit sharing strategies to improve worker productivity.
• A generation of artificially high public sector employment in which surplus jobs and redundancies abound, systemically reducing productivity.
• The increasing inability of the agricultural sector to produce enough food.
These problems could increase in the coming months if steps are not taken quickly to address them. Governments have a responsibilty to make changes in economic policy without directly interfering in the economy by creating conditions conducive to economic activity, clearing up uncertainties and addressing the expectations of businesspeople.
The communist regime’s priority in relation to currency unification should be to stabilize the economy, which will likely not be easy given the magnitude of the deficit, the lack of foreign exhange earnings and the need to negotiate debt relief with Russia, the Paris Club and Angola. It does not have much wiggle room and at some point will have to decide if the chosen path, based on previous communist party slogans made during times that were very different from the present, must still be followed.
President Díaz-Canel has only one card to play. And when a politician is facing a dilemma like this, he either has to finish the game or reshuffle the deck. His legacy wil be measured by the decisions he makes. With all the talk by the nation’s leaders about about the revolution and “dialogue,” they now has a historic opportunity to actually do it. The Cuban economy will not last another quarter, regardless of what Biden does. They all know this.
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