A look at inflation in Cuba
It is difficult, though not impossible, to figure out the real inflation rate in Cuba without taking into account the several highly segmented markets that coexist, all with different prices and currencies… But, what is meant by inflation?
Inflation is nothing other than the general increase in average prices in a country for a given period of time. Like other economic indicators, they are usually calculated for one year. The inflation rate, therefore, provides the annual percentage change in consumer prices compared to the previous year.
There are many methods of calculating this, and one is to establish a basic basket of products and services necessary for the existence of an average home. The caveat in the Cuban case is that there is a minimum basic basket, which is delivered monthly to everyone at low prices, without annual inflation, but insufficient to guarantee the monthly needs of the people. It is estimated that this basic basket lasts for about 10 days on average.
One completes the rest of the month in markets where you pay in CUC (Cuban convertible currency) or go to the currency recovery stores (as they are called), or the free supply and demand markets, both agricultural and industrial, and even in informal markets with legal and illegal products, but that satisfy certain needs.
Economic theory states that it is positive for any economy to keep inflation low, given that a high level of inflation distorts market signals, and also generates inefficiencies with serious effects and, above all, makes life more expensive.
The structural economic crisis, such as the one that the Cuban economy is undergoing, together with external shocks like the U.S. economic blockade, the COVID-19 pandemic, the lack of foreign currency due to imbalances or decreased exports, the payment of debts resulting from the cancellation processes, have affected the supply of goods and services in the country, and this has translated into higher prices for products in some markets where the population has access, such as those in the agricultural and informal markets.
High budget deficits financed over long periods in the country, through monetary issuance, generated some inflation, and that inflation affected real income. Another factor that influences the increase in inflation is the credibility of the monetary authority (central bank) and the stability and rigor in the management of monetary policy, but in the Cuban case this is not very negative.
The inflation crisis currently being generated in Cuba is nothing new. The country went through the Special Period as a result of the disappearance of the socialist market, where GDP fell by more than 35 percent in the first years of the 1990s. During those years there was a significant decline in exports, added to the shortage of monetary resources due to the cancellation of credits received from these former socialist economies.
In spite of this adverse economic situation and the lack of supply, the Cuban government did not affect workers’ wages, which brought with it an inflationary spiral of high magnitude. The state had to subsidize most enterprises, which logically generated a huge fiscal deficit.
The cause of inflation in such circumstances was explained in the fiscal deficit, which was covered with money issued in the absence of other financial means during a large part of the crisis. This was reflected in a significant increase in prices in the formal and informal markets based on the absence of products or services.
Figure 1 (below) shows the price increases of the early 1990s, and how the population came to have 73 percent monetary liquidity relative to GDP. That liquidity decreased immediately when the country began to reap the rewards of its economic reform. Everything indicates that there is currently delayed consumption, since the population in 2018 already had 58.9 percent of monetary liquidity. But that figure shows enormous inequality in the country since there is a significant group of workers whose income for basic consumption is not enough, among other factors due to high prices paid in CUC —which are not a product of inflation, since they are stable prices, but high—, and due to the increasing price of the CUP (Cuban peso) today.
Figure 1: Rate of Inflation and Liquidity in Cuba. 1990-2018
Source: Profesor Carmelo Mesa-Lago for “The Cuban Economy in the Context of the Covid-19,” Webinar, Harvard University, May 1,2020.
The complexity of measuring Cuban inflation lies in the existence of two currencies circulating (CUP and CUC), and more recently the partial dollarization (there are products that are sold in dollars) together with various price structures, where they use different exchange rates. Furthermore, the distribution of subsidized or regulated products and services (the monthly ration card) persists, providing coverage to the entire population.
Also noteworthy is the exchange rate of the dollar to the Cuban peso, which during the Special Period reached levels of up to 160 pesos per one dollar, in the absence of a formal market and because few people received, or earned, dollars. And that currency was also necessary to buy in the new stores that were created for the purpose, since there were products that only sold in dollars. With the creation of CADECA (exchange centers), the exchange rate, despite the ups and downs, stabilized at 24 pesos per dollar, and the government decided to establish that as the fixed exchange rate.
With the arrival of remittances in ever-increasing quantities, contradictions once again occurred, since part of the population was able to pay for certain products at hyperinflationary prices, but those living on state wages have suffered greatly from the existing high prices.
Already in 2020 the sum of external and internal factors, highlighting the country’s shortage of foreign currency, the COVID-19 pandemic, and the intensification of the blockade, has led again to the shortage of basic necessities, which in turn has triggered upward the cost of certain things.
Cuba’s reality can be termed a “silent inflation” that is having subtle effects on people and the authorities, and can lead to mistakes if urgent measures are not taken, especially in agriculture.
In the early 2000s, the Cuban shopping habits underwent certain changes. Before then the monthly quota of needed products could be purchased for around 9.05 Cuban pesos (soap, bread, oil, coffee, rice, eggs, chicken meat, and beans), it might have even be a bit higher if other products were added.
By 2005, that same basket of standardized or regulated products was worth 17.45 pesos — an increase of 148 percent. Contrast that to the 8 percent increase in pensions, 6.72 percent increase in the minimum wage, and 11.9 percent increase in the average wage. Plus the new, higher-priced basket of products only contained an additional 2 pounds of rice and two eggs. Coffee prices also went up: what once used to cost 25 cents, was now 4 pesos, a 1600 percent increase.
In the current time of Coronavirus, the standard regulated basket of products, offered monthly per person, is worth around 80 pesos, and includes an additional pound of chicken, products for cleaning, personal care and hygiene products, a few more eggs, and other products. I do not mention products that are normally sold in CUC, but they are provided to people in CUP at this juncture, such as canned soft drinks at 10 CUP, which are not necessarily basic or stand out for their nutritional qualities. However, I insist, this regulated quota is still insufficient to cover one’s needs for a whole month.
And in spite of 2019 budgeted sector wage increase… it is not enough.
It is said that in socialism the power of labor is not a commodity. But can workers no longer aspire to be paid enough to satisfy their needs? Let us remember that as society and its components are more developed, the cost of labor increases, and not only covers what is essential to feed and clothe workers and their families, but should also include more leisure time, more guaranteed healthcare, and enough to allow you to enjoy a well-deserved vacation, go to the theater, cinema, buy books, household appliances, etc.
Betsy Díaz Velázquez, head of the Ministry of Internal Trade (MINCIN), reported, during an appearance on the TV show Mesa Redonda, that some products that are no longer subsidized will soon be sold through the ration book system and stores, but now under a system that controls the products.
In markets of supply and demand, and even with orders not to raise the price of goods, thereby setting the price of these goods, their price has increased.
For example, and taking some areas of the City of Havana as reference points, here are the price of some products. The unit of measurement is expressed in pounds:
March 2020 ( CUP)
|June 2020 (CUP)||% increase|
Source: From the author, based on observations in markets in the municipalities of Playa and Marianao.
The previous table is neither exhaustive nor very rigorous, but rather it was made by simple observation at different points of sale, but it does indicate the upward trend in prices.
It is important to mention that not all Cubans can wait in long lines to buy certain products necessary in daily life such as oil, meat, cleaning products, and others which are in short supply, and that is a gap covered by certain intermediaries who profit from the existing scarcity, and therefore the prices of that informal market have risen dramatically.
The only way to mitigate the current Cuban inflation is with higher production. This will have to conflate with solutions offered by the government’s national plan announced recently, but whose contents have yet to be disclosed. The plan insists on removing obstacles that halt production, but that insistence is not adhered to. And while we bet on gradual decisions, the economy continues to regress.
Hopefully economists will be offered the powers offered to epidemiologists and health personnel in Cuba, who managed well the health situation in the country in the face of COVID-19, and the results have been successful. It would be worthwhile for the economy, which is in a complex structural crisis, to also fall into the hands of its specialists, or at least that some of these specialists’ proposals be taken into account.