With COVID-19 Under Control, Cuba Launches New Economic Battle

Helen Yaffe

The exemplary domestic and international response of socialist Cuba to the global SARS-CoV2 pandemic has been recognised worldwide. By late July, authorities had the virus under control; 87 people had died, none of them children or healthcare workers, and Cuba was entering phase three of post-Covid-19 recovery.

While Cuba’s public health response protected the population, the economic cost was high, particularly through the loss of international tourism – the country’s second largest source of foreign revenue – as borders were closed. This compounded adverse conditions already imposed by external factors, principally the economic crisis in Venezuela and the intensification of US sanctions under the Trump administration from 2017.

From GDP growth of 4.4% in 2015, following US President Obama’s rapprochement with Cuba, growth slowed to 1.3% between 2016 and 2019 and was forecast at just 1% for 2020. Now in the context of the pandemic, on 15 July, the UN’s Economic Commission for Latin America and the Caribbean forecast a fall in Cuba’s GDP of 8% for 2020; the forecast for Latin America and the Caribbean was -9.1%.

Challenges facing the Cuban economy

On 16 July, in a speech to the Council of Ministers, Cuban President Miguel Diaz-Canel pointed out that ‘in recent months we have faced numerous [US] attempts to prevent the arrival of fuel at our ports, shortages of food, supplies and raw materials to sustain important production processes, and [US] sanctions that have reduced our foreign exchange earnings in the midst of the pandemic.’ Despite this, he said, ‘we raised, as far as possible, wages in the budgeted sector; [electricity] blackouts were avoided; we maintained the vitality of productive activity, the fundamental investments for developing the country; we approved measures to protect and serve the entire Cuban population, without distinction, from the impacts of Covid-19.’

However, the country’s approach has to change, he said, as it recovers from the impacts of the Covid-19 pandemic, faces the resulting global economic crisis and advances with the country’s National Plan for Economic and Social Development until 2030. He announced a strategy of economic transformation which, within the framework of the centrally planned economy, will introduce greater emphasis on market mechanisms and the private sector to stimulate domestic production, particularly in agriculture, decentralise decision making and unify Cuba’s dual economy. Increasing market mechanisms heightens contradictions within the socialist planned economy, but is a necessary concession under the adverse circumstances listed below:^[1]

+ Intensification of the US blockade. In 2019 alone, 86 new sanctions were introduced by the Trump administration, including application of Title III of the Helms Burton Act of 1996, which seeks to curb foreign investment in Cuba, and measures to obstruct oil shipments from Venezuela. The cost of the US blockade in 2019 alone was calculated at $4bn; a figure that will rise substantially in the coming period. That was double Cuba’s 2019 debt servicing obligations.

+ The ongoing economic crisis in Venezuela, one of Cuba’s main trading partners, which suffered a 25.5% fall in GDP in 2019 as US sanctions were intensified.

+ A growing shortage of foreign exchange due to several factors: the 9.3% decrease in international tourism in 2019 (resulting from US measures); the loss of export markets in medical services (from Brazil and Ecuador), which by January 2020 had seen a 19.6% fall in earnings on the previous year; and the freeze on tourism in late March 2020 due to the pandemic. With the emerging global economic crisis, remittances are expected to fall dramatically.

+ From September 2019, Cuba had to function with 50% of the fuel it requires and oil from Russia, Algeria and Angola was purchased under less favourable conditions.

+ A Caribbean-wide drought saw agricultural production in Cuba fall below planned output; shortages were exacerbated by the pandemic.

+ US sanctions created shortages of medicines, and prevented Cuba from purchasing, or receiving donations of medical equipment to treat Covid-19 patients.

Shortages have seen long queues for food staples during the pandemic. President Diaz-Canel recognised this in his speech: ‘…there is a shortage in stores, yes, and why is that? Why does Cuba not have more hard currency? Among other things, because of the blockade, because of the financial persecution…because every time we export to someone, they try to cut that export; because every time we are arranging credit, they try to take away the credit; because they try to stop fuel getting to Cuba and then we have to buy in third markets at a higher price.’

The loss of tourism revenue and a falling demand for exports has meant a sustained loss of income while additional expenses were incurred in the health sector; financing the isolation centres for treatment of Covid-19 patients, covering workers’ wages and social security for the population. In April and May, the state-controlled prices of some staple products were reduced. Inevitably, the budget deficit has risen. Internal factors which contribute to Cuba’s economic weaknesses, inefficiency and low productivity, have frequently been identified and measures to address them were announced by President Diaz-Canel in summer 2019.

Planning to combat uncertainty

The new ‘economic-social strategy’ was approved by Cuba’s Council of Ministers on 16 July and announced to the population the same day via the daily televised Round Table (Mesa Redonda) programme, which began by airing the President’s speech.²

In the subsequent discussion, Cuba’s Minister of the Economy and Planning, Alejandro Gil, explained that the strategy covers 16 key economic areas. ‘We always say that the more the uncertainty, the greater the planning must be’, he said. ‘So we have a detailed strategy that is in line with our economic model and guidelines [for updating the Cuban economy], while focusing on lifting obstacles and operating our economy in a more functional way’. The new strategy is based on nine principles:

1) Maintaining centralised planning, while decentralising the administrative allocation of resources.

2) Augmenting national production and ending dependence on imports.

3) Regulating the market through (mainly) indirect methods.

4) Increasing integration between different economic actors in the state and non-state sectors.

5) Harnessing domestic demand to generate jobs and productive growth.

6) Increasing the autonomy of management in state sector enterprises to improve efficiency.

7) Implementing approved but pending aspects of policy that update forms of management and ownership.

8) Encouraging internal competitiveness, to guarantee efficient use of material and financial resources, and by expanding incentives.

9) Adhering to environmental policies and sustainable development.

The objective is to increase national production, decrease imports and increase and diversify exports. Policies will aim to diversify commerce in agricultural production, strengthen the autonomy of state enterprises, create mini-, small- and medium-sized state enterprises in industry, permit non-state businesses to import and export via 37 specialised state enterprises, allow cooperatives to sell directly to foreign and mixed-ownership companies, encourage foreign direct investment, especially in food production, foster cooperatives and improve and expand self-employment. Many of these measures were announced last summer, now the aim is to speed up their simultaneous implementation.

Other measures enable the state to capture urgently needed hard currency from a population which holds a lot of cash (liquidity in the hands of the population was 59% of GDP in 2018). In late 2019, the government opened 80 outlets selling domestic appliances, electric motorcycles and car parts in freely convertible (globally traded) currencies, including the US dollar which was removed from domestic commerce in 2004. Used cars went on sale for US dollars in February. From 20 July, an additional 72 state stores run by Tiendas Caribes and Cimex began selling ‘medium and high-range’ food, toiletries and hardware goods in freely convertible currencies. Purchases can be made with a national bank card from an account opened with tradable currencies, or international MasterCard and VISA cards not linked to US banks. The hard currency collected at these stores will help purchase the supplies required in the over 4,700 stores which continue to sell to the population in Cuban national pesos (CUP) or convertible pesos (CUC). Cuban state and non-state entities can hold current accounts in hard currency. Tourists can pay for some services in hard currency. Also, from 20 July, the 10% tax applied to US dollars that enter the Cuban banking system was removed.

Reducing the importation of food and fuel is vital; but progress has been painfully slow. 70% of the food Cubans consume is imported, despite the potential for domestic substitution. The US blockade obstructs external financing of investments in the technologies Cuba needs to shift from imported hydrocarbons to domestic renewable energies. Meanwhile, encouraged by the Trump administration, right-wing Cuban exiles are intensifying media attacks on Cuba, demanding tougher sanctions and a community boycott of remittances and visits to the island.

President Diaz-Canel said: ‘…globally we are witnessing the confluence of a deep crisis as a consequence of the impact of Covid-19 [and] the definitive collapse of neoliberal paradigms defended by imperialism…’ Cuba’s public health response to Covid-19 put those neoliberal paradigms to shame. Now it needs an end to the US blockade so it can develop the potential of its welfare-centred economy.’