The Cuban economy in 2016

HAVANA — The most pessimistic forecasts were confirmed. Economic growth went into negative space in 2016. This should not be underestimated; the decline of the real GDP by 0.9 percent is an unfavorable result. And it’s the first drop since 1993, when the Cuban economy hit bottom during the crisis that overcame us in 1990.

Nevertheless, it is necessary to put this in context. Domestically, neither its magnitude nor the current circumstances situate this drop anywhere near the debacle of the 1990s. This minus-0.9 percent pales by comparison with the minus-16 percent in 1993, which was the last drop in four consecutive years of decline (1990-1993). Today, the economy is more diversified and families have other sources of income.

Nor is this an exceptional performance in the regional context, even though Latin America is not a very demanding reference for the purposes of comparison. According to a preliminary report from ECLAC/CEPAL (the Economic Commission for Latin America and the Caribbean), seven other countries in the region saw red figures at the end of 2016.

Among them are some of the largest economies in the continent, such as Brazil (minus 3.6 percent) and Argentina (minus 2). Venezuela (minus 9.6) and Suriname (minus 10.4) suffered the biggest upsets. The region as a whole declines by 1.1 percent. Along with the specific factors in each country, the regional drop was a common element that had a negative effect on the hardening of external conditions.

During the year, different behaviors were noticed during the first and second semesters. During the first period, the behavior of some sectors was below expectations.

Due to adverse weather events and other longstanding problems, the production of sugar was estimated about 1.6 million metric tons, a drop of more than 15 percent. This happens at a time when raw-sugar quotations were the most favorable in almost two years, at least 40 percent higher than the levels in August 2014.

The other sector that has been experiencing problems for some time is the manufacture of nickel.

That sector is being affected by a combination of very depressed prices on the international market and stumbles in domestic production, which declined 5 percent this year. Amid strong tension in external financing and the reduction in the shipments of Venezuelan crude, the GDP rose only 1 percent in the period.

The outlook turned even gloomier in the second semester. It was marked by the impact of the austerity measures announced by the government in July and the weakness of the economic activity in general, with the exception of international tourism.

Power rationing, while discreetly managed to avoid an impact on strategic activities, and the annoying blackouts brought with them recessive effects. The planned slowdown in imports and investments sharpened that unfavorable spiral. The result was a contraction of the economy by year’s end.

No data are available to make a detailed analysis of the situation at the level of the various sectors. Although agricultural and cattle production grow, they remain below expectations and below domestic demand. Appreciable increases were noted in the production of fresh milk and pork, as well as discreet improvements in viands and vegetables.

The insufficient production is reflected in the behavior of sales in the agricultural/cattle markets. They increased only marginally (1.9 percent), basically the result of a rise in prices, while the physical amounts on the market declined in comparison with the previous year.

Amid this scenario, international tourism must have been the only major generator of hard currency that propelled the economy in 2016. Until October, the dynamics remained solid, with an increase of 12 percent in arrivals. The best performances came from the United States (Americans and Cuban-Americans) and most of the markets in Europe and Latin America.

However, Canada (the largest source of tourists) declined by 6.7 percent. This was due to a combination of factors, among which was the depreciation of the Canadian dollar against the U.S. dollar, to which the Cuban convertible peso (CUC) is anchored. Tourism income increased faster than the arrivals, though principally as a result of an increase in fares.

Quotations have skyrocketed in the past two years, essentially reflecting the existing tension between supply and demand. These decisions should be analyzed in greater depth. The latest increase, at the start of the high season in November, was decided by obviating several elements of the external context that gravitate negatively on the demand.

The depreciation of hard currency from Canada and Europe, which on the whole is contributed by more than 60 percent of the visitors, makes the Cuban destination in those markets less attractive. The Canadian dollar and the euro have lost 11 and 13 percent, respectively, of their value in the past two years. Taking into account the economic situation in both markets and the increase forecast in the interest rates in the United States, this situation should hold for the near future.

To this we’d have to add aspects of a geopolitical nature. The next U.S. administration has generated uncertainty, and its initial positions regarding Cuba have propitiated a greater caution among businessmen and occasional visitors. All the airlines authorized in the U.S. have inaugurated their services, but in December American and Silver Airlines announced that they would reduce their frequencies in some routes.

Without counterweights, this juncture presupposes a setback for an economy that desperately needs economic growth. An element that bears watching is the scant margin for maneuver by the decision-makers to enact some anti-cyclical measures that might allow to cushion the impact on productive activity. All the measures announced in July before the National Assembly are eminently reactive, with a markedly pro-cyclical character.

In addition to the already mentioned selective power rationing, the authorities decided to manage very conservatively the acquisition of new credits, so as to preserve an indebtedness threshold that won’t exceed the nation’s capacity for repayment. This has an elevated immediate economic cost, inasmuch as it makes the capacity to import dependent on the current availability of hard currency.

The temporary withholding of payment to suppliers also has a cost because it affects the credibility of the nation and the confidence in it. Among other effects, this translates into higher rates of interest.

On the domestic front, there have been problems in the agile implementation of previously agreed-to reforms. The pace of approval for new projects with foreign capital is very slow. This has prevented access to fresh resources short-term and, what’s even more important, barred an expansion of our productive capacity to ensure greater dynamism in the economy for the coming years.

One might ask if we couldn’t have acted with the same resolution to unlock the approval of projects with foreign capital, a problem denounced by President Raúl Castro himself in his speech before the National Assembly.

Likewise, we might contemplate a more flexible scheme in foreign trade, to facilitate commercial operations on the basis of a market rate of exchange. In this scheme, all forms of ownership should participate. Additionally, we should expand the role of domestic credits in the direction of the various economic agents.

Although the mobilizing effect in the productive apparatus is limited, taking into account the dependence on imports, the fact that the public sector itself finances part of the deficit with domestic savings acknowledges the possibility that these are resources that can make a positive contribution.

On the other hand, the brisk activity in the private sector begins to slow down because of the delay in the updating of the existing regulations and the lack of access to supplies and financing. The sector took off from very low levels, but we’re running out of the “reachable mangoes.” The next level requires deep reforms that have still not been implemented.

The result and the impact on the Cuban families

Unavoidably, an economic recession has negative effects on the population’s levels of life, but we should point out that the effects are measured by different factors. In the first place, because the economies are composed of diverse activities, the final result condenses unlike behaviors in many of them.

Lamentably, the disaggregated data to make this type of analysis are not available. Some activities of great importance for the family, such as agriculture (because of the availability of food), tourism (for its numerous trickle-down effects) and the remittances (because they imply a direct source of income for Cuban families) don’t necessarily follow the same trend as the GDP, so the impact is cushioned.

The same applies to the decision to avoid blackouts or to preserve similar levels in social services.

However, it was projected that the average salary would decrease in the state-run entrepreneurial system, which does affect the income of many homes. To this, we’d have to add that, in the second half of the year, the government imposed personal taxes on a considerable segment of wage earners. A tax reduces the revenue available for consumption or savings. On the other hand, we know little about public transportation or housing construction, areas of high public sensitivity.

The other factor to consider is the distribution of income. Although no recent data exist, we acknowledge that income inequality is today greater than 25 years ago. This means that the recession does not affect the various homes in a symmetric manner. To this, add the role of the informal economy, whose dimensions have grown and which furnishes considerable income and products to many families.

Taken as a whole, the previous elements imply that most of the Cuban homes are today in better condition to overcome the current difficulties. Nevertheless, the symbolic effect should not be underestimated. A recession at this time, after decades of economic strait-jacketing, is a noticeable psychological blow.

This is an element that should receive the greatest attention in the taking of decisions, inasmuch as it can worsen unfavorable tendencies, such as the emigration of highly qualified and young personnel.

The outlook for 2017

The short-term outlook for Cuba is dark. The 2-percent growth target established by the government for 2017 is reachable but it continues to be optimistic. The international scene has become less favorable. The abandonment by the European Union of its “common position” toward Cuba is an appreciable achievement. But other winds are blowing in Latin America and the United States.

Cuba has to work seriously and boldly in his agenda of domestic transformation. The island has to take advantage of the diplomatic capital it enjoys in various allies and nearby regions.

If Cuba shows that it is willing to advance resolutely in the search for a model of progress, it is very likely that it will find “springs” in foreign institutions, governments and businesses that are willing to assume a calculated risk, each one for different motives. Besides, this would have the incalculable additional value of burying the U.S. embargo once and for all.