Five Points: Sorting Through Raul Castro’s Economic Speech

Dimas Castellanos, 16 January 2016 — A commentary on five economic issues raised by the Cuban president on December 29, 2015 during the closing session of the National Assembly of People’s Power.

1. The president stated that, though the effects of the US blockade remain unchanged and external economic constraints have worsened in the second half of the year, Cuba’s gross domestic product (GDP) grew by 4% in 2015.

Not only have the effects of the “blockade” changed, financial constraints have eased. Measures taken by the White House after the announcement of restoration of diplomatic relations between the two countries have led to a relaxation of the embargo. Meanwhile, negotiations to reduce external debt have eased economic constraints, especially after the Club of Paris wrote off three-quarters of Cuba’s debts.

With regards to GDP, the Cuban government has acknowledged that, in order to achieve significant development, the annual growth rate must reach 7%. However, from 2011 to 2014 it grew by only 2.3% on average, with a growth rate of 1.3% in 2014. In July 2015 Raul Castro reported that the slowdown in GDP growth had been reversed and estimated that by year’s end it would be in the neighborhood of 4%, now the reported target figure.

In order to understand this reduction in growth, one has to keep in mind that between 1989 and 1993 GDP fell by 34%. However, whether the 4% forecast is realistic or not, it would not mark a true recovery, as we can see from the following four examples.

A – According to economics minister Marino Murillo, the sugar industry grew by 16.9% in 2014. However, this fell short of the 73,000 ton target, requiring the transfer of some 30,000 tons intended for domestic consumption to fill the gap in the export supply.

B – The manufacturing sector grew 9.9%, but obsolete technology in the industries that make up this sector led to considerable shortages of products intended for sale in the network of hard currency retail stores. As a result thousands of tons of chickens and thousands of cases of beer had to be imported, with a resulting reduction in hard currency earnings.

C – The transport sector grew, but inefficiencies in cargo delivery impacted other sectors and the time cargo vessel spent in port led to additional costs.

D – Agriculture grew but, due to a shortfall, 50,000 additional tons of rice and an additional amount of milk had to be purchased to fill the gap. Given these deficiencies, the 4% figure says little and has even less impact on the lives of Cubans.

2. Next year gross domestic product will continue to grow but at a lower rate of 2%. As a result, financial constraints associated with falling income due to lower prices on the world market for traditional exports such as nickel are projected.

First of all, if arithmetic is independent of ideology, then half of four is two. Therefore, if GDP goes from 4% to 2%, that does not mean a better growth rate in 2016. That is a decrease.

Secondly, if debt was reduced through write-offs and negotiations — the Club of Paris, for example, forgave Cuba $8.5 million of its $11.1 million in debt — and if improved relations with the United States increased family remittances from $1.4 billion at the end of 2013 to $2 billion, and if tourism and medical services continue to generate additional billions of dollars, the projected decrease cannot be explained simply on the basis of alleged financial constraints without mentioning other causes, among them the possible reduction or total loss of hundreds of thousands of barrels of oil, which Cuba receives on a daily basis from Venezuela.

3. Though the number of visitors from overseas has risen to three and a half million, it cannot be overlooked that this has occurred in spite of the fact that Cuba is still the only country in the world that US citizens are prohibited from visiting as tourists.

The number of visitors from overseas did not increase in spite of the fact that American citizens are prohibited from visiting Cuba. On the contrary, this was achieved in large measure because President Obama expanded the twelve categories established by the Treasury Department under which tens of thousands of Americans and tourists from other places of origin have been able to travel to the island since the beginning of last year. Without this action, the increase would not have been possible. Similarly, further growth will be considerably influenced by the imminent arrival of new, regularly scheduled flights and the advent of ferry service, all of which are expected as a result of the restoration of relations between Cuba and the United States.

4. In spite of economic constraints, the fulfillment of commitments made during various negotiations to restructure debts with foreign creditors has reinforced the trend towards gradual recovery of our economic credibility internationally. The latest evidence of this was the agreement reached on December 12 with the Club of Paris. This agreement facilitates access to financing in the medium and long term, which is essential in securing the investments projected in our development plans.

Rather than the fulfillment of commitments, the outcome resulted from a) the pragmatism of the creditors, who realize that the critical condition of Cuba’s finances make it impossible to recover their loans, b) pressure by companies from creditor nations to invest in the island under the new scenario, knowing that detente with the United States creates opportunities on which Americans cannot yet capitalize, c) expectations arising from the resumption of diplomatic relations with the United States, and d) persistent propaganda by the Cuban government to demonstrate “economic recovery.”

The actions of the Cuban government are driven by a different logic. The failure of its economic reforms and the crisis in Venezuela have exacerbated the cash shortage. Therefore, access to short and medium term financing, especially from Club of Paris member countries, breathes new life into the economy without having to broaden relations with the United States.

What has been forgiven, however, is the enormous amount of interest accumulated over the years. The principal remains as outstanding debt. The Club of Paris forgave Cuba $8.5 billion of its $11.1 billion in debt, but the agreement imposes stiff penalties if the Cuban Government defaults again.

Thus, the game starts over with a gesture of generosity but with clear rules: Cuba must honor its commitments, which it has never been done. This will be impossible in the medium to long term if the structural changes that the economy and society require are not instituted. Undertaking this is as necessary as it is impossible without the corresponding political will. Fear of commitment seems to explain Marino Murillo’s statement to the National Assembly last December. He noted that, if we do not achieve sustained growth in the economy, “we must work towards a sustainable debt.”

5. It is up to us to maximize excess capacity, concentrate resources on activities that generate export earnings and encourage domestic production, make the investment process more streamlined and grow investments in the manufacturing sector and infrastructure, prioritizing sustainable power generation and increasing the efficiency of energy providers.

This is more of the same. We can find hundreds of proposals like this in speeches given by Cuban officials for more than five decades without any result whatsoever. Excess capacity does exist but it is elsewhere. It is in reform, for which — given its situation — Cuba cries out.

Originally published in Diario de Cuba