Cuban economist: ‘In Cuba they should focus more on progress and not on control’

By Osvaldo Pupo / On Cuba News

“Asking a small private company in Cuba to produce, to be solvent with that production and to export, is practically asking it to do the impossible,” warns economist and businessman Oscar Fernández, in an interview with OnCuba.

The former professor of the Faculty of Economics at the University of Havana and Ph.D. of Economic Sciences points to the existing regulatory framework for the private sector on the island as one of the causes of this reality.

“There are very few incentives for transformative projects to appear, flourish, maintain and grow, that generate production, that transform raw materials and turn them into added value,” he said.

Since their birth, micro, small and medium-sized enterprises (MSMEs) face an adverse scenario, which adds to the uncertainty that usually accompanies the creation of a business anywhere in the world.

“In Cuba, a private company that has just been born is seeing how it survives the first few months. It still does not have its processes clear, nor its supply and marketing channels built. It begins to do its first successful or failed tests, it has no real access to legal financing to buy machinery, nor a budget to finance the administrative structure it needs to keep up with the myriad of regulations that affect it. Obviously, it does not enjoy protection from the State budget to rescue it from bankruptcy, and in addition, all the tax exemptions that previously allowed it a year to mature were eliminated,” said Fernández.

He knows this firsthand, because after a career of almost twenty years as a university professor, he decided to start a family business in the midst of the pandemic: Deshidratados Habana is an MSME based in the Havana municipality of Playa that makes 60 dehydrated products (mostly fruits), even from raw materials that are usually thrown away.

The emergence of the business was not only motivated by the need to react to the crisis, but by Oscar’s desire to show that a private business focused on production could survive despite such an adverse outlook.

However, both at the time he took the plunge and now, he says there is uncertainty about what will happen in the long term and that there are no sources of financing to undertake a project that will pay for itself over a longer period of time.

Juggling currencies

Financial financing is the Achilles heel for the emergence and survival of private businesses in Cuba, particularly productive ones.

“If I need to buy equipment to start my production, where does the financing come from? With a bank loan in Cuban pesos I cannot import the equipment,” Oscar Fernández stated.

“Some time ago, some institutions were giving loans in dollars to MSMEs, but they were short-term, that is, to be repaid in six or nine months. As a commercial loan it works, but it is very difficult to repay money that has been used to buy equipment in that time,” he pointed out.

The businessman reflected that, hypothetically speaking, it would not be possible to repay a loan of that type in the same currency in which it was granted because there is no exchange market on the island.

“In an open economy like Cuba, so dependent on imports and that needs so much from exports, it is irresponsible to keep legal exchange options closed. Ensuring a minimum exchange rate is as basic a function as making transfers work and ATMs dispense cash. That is one of the main distortions affecting us and it continues to go untapped even in political speeches,” he said.

One solution to obtain foreign currency could be to export. “However, if you export your goods, that money goes into a company account in MLC. With that account you cannot pay foreign suppliers, because then the bank does not allow them to have access to their liquidity when they need it,” explained Fernández.

“MLC accounts are not backed up and, therefore, all new income generated from an export automatically goes to an account of this type and leaves you totally unable to import goods,” he said.

Deshidratados Habana, his company, has been exporting some of its products to Europe since 2023. However, to obtain the necessary packaging, he has to pay the supplier abroad. This is a foreign company based in Cuba, with businesses on the island and with products on consignment in a state company.

“When the state company, which mediates in this operation, invoices for the packaging, it tells me to make three payments: one abroad, another in MLC, which is the importer’s margin for its commercial service, and the customs fees in Cuban pesos,” he said.

In the parliamentary sessions of July, the government announced that it would not allow payments abroad or for MSMEs to use the dollar or another foreign currency as a payment method. The announcement was ratified in the text of the new regulations for the private sector on the island that came into effect on September 19.

“If the authorities completely close the possibility for SMEs to sell in dollars, not even wholesale; if they also do not allow payments abroad and do not respect the income from exports that enter the accounts, what they are doing is closing the possibility for these businesses to survive,” warned Fernández, who commented that this situation will have a devastating impact on the supply.

He also argued that the private companies that import and sell final consumer goods and obtain profits from this are making a decisive contribution to sustaining the supply, in the face of a drastic reduction in the state market in recent years and the continued problems with agriculture.

“We need the import of food not to stop,” said the economist.

“Under the current circumstances, any act that threatens to reduce the supply, whether as part of the restrictions imposed by the American government or as a consequence of a decision by ours, should be considered sabotage to the national economy,” he added.

New rules, more restrictions

“There are warning signs and proposals are made, but then decisions take a different direction,” said Fernández worriedly in response to the reality facing the private sector on the island, with the new legal framework already in place.

“The economic policy of this country should put much more emphasis on how to generate progress than on how to generate control. There is a false belief that there is a lack of control, but, in reality, what there is is an excess of mechanisms that are totally ineffective for achieving progress. It is an economy designed for control,” he said.

The economist shared with OnCuba his opinion on some of the decisions contained in the new legislation.

“With the approval of MSMEs in the municipalities, in accordance with the local development strategy, a lot of businesses that are not restricted to the territory in which the legal address of the owner is located would be prevented from emerging,” said Fernández.

“There is a fatalism there. For example, let’s suppose that a business like ours that dehydrates fruit arises in the Centro Habana municipality. It is possible that the local development strategy of that municipality does not contemplate this among its priorities. It is possible that someone in the government decides that it is not in the interest of the territory. However, I would dare say that a good part of the ventures that arise in the form of MSMEs have the horizon far beyond the limits of the municipality. It is absurd that this can become a restriction even before being born.”

“The policies of the territory must promote certain activities over others, but not prevent the development or emergence of any new idea that someone wants to try at their own risk,” he said.

He also warned that with this decision to approve MSMEs and non-agricultural cooperatives in the municipalities there may be a lot of discretion and greater room for corruption.

On the other hand, he described as “total nonsense” what has been happening by putting limits on the social objectives of MSMEs.

“It is wrong that you can only have up to five or seven activities, when any company that starts does so thinking that it will do one thing and a year later it is doing another. That is the most normal thing in the world,” he said.

“In addition, state companies do not have limited social objectives, they can do whatever they want. So, why are private companies going to be restricted? Allow only a few activities and if it does not work out, they go bankrupt?”

Fernández believes that the government is not trying to close the private sector overnight with this new regulatory framework, but he does affirm that many of the businessmen who had bets on developing the country could give up.

He also commented that many of the measures announced last July in parliament are not yet formally formulated, but that, although he does not have a complete judgment, a rosy scenario cannot be expected in the future.

Fear of MSMEs

Other experts interviewed by OnCuba and vox populi identify the causes of this greater control over private companies in the boom of the sector in the last three years. According to data from the Ministry of Economy and Planning (MEP), until last May, when approvals were stopped, there were 11,046 private MSMEs in Cuba, of which almost 60% were newly created.

Gastronomy and accommodation, construction, manufacturing and the production of food and beverages, in that order, are the most common sectors among new entrepreneurs. The private sector created 213 thousand jobs in these three years.

However, these numbers have caused fear among the most conservative.

“They pose an equation that is too simple, linear and reducible: ‘private entrepreneurs only think about individual benefits and will increase their scale of expectations to a point where they are not satisfied and aspire to political power.’ Or that the accumulation of wealth allows you to aspire to political power. That is not the case,” said Fernández.

“I seriously doubt that the owners of MSMEs have the capacity to take political power in Cuba, when what can corrupt any political system does not necessarily have to do with whether or not there are private companies,” he stressed.

Meanwhile, he commented that the Cuban economy cannot be at the mercy of the ups and downs of the political consensus regarding the role of the private sector every day. “We need the private sector to consolidate and articulate itself with the state sector, really,” he said.

On the other hand, Fernández considered that the expression that there are too many MSMEs in Cuba is wrong. He explained that more companies of this type are needed in the midst of the fiscal deficit of 18% of the GDP in which the island’s economy is mired.

“The State has a huge budget deficit because it spends more than it earns,” he said. “The only way to achieve a real, sustainable increase in income is by multiplying the tax base. If today there are 11 thousand MSMEs in Cuba, we should have more,” he said.

However, he criticized the fact that economic activity is not stimulated and, instead, restrictions are being placed.

“By eliminating the tax exemption that MSMEs had for one year, although the collection is increased because these companies are paying taxes from the first moment, they will be so complicated in their behavior that there will be a higher mortality rate, many will not be able to survive the first months. Others will not even be born because they do not have the incentive they had before,” he commented.

“From a logical point of view, everything you tighten today implies a reduction tomorrow,” he stressed.

Asked why they persisted in their business idea, despite the adverse scenario, Oscar Fernandez questioned why they would have to give up.

“Why are we going to let ourselves be defeated by dogmas, by adversities, by people who do not understand? We are here trying to move forward, we are here trying to show that it is possible, that there are ways to solve Cuba’s problems and that they should be solved with the inclusion of everyone willing to contribute. There is no one left out,” he concluded.