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Guessing in Cuba on Economic Policy Results

By February 15, 2020 No Comments

By Oscar Fernandez Estrada  (Progreso Weekly)

Photo: Pan Xiaozhen.

HAVANA TIMES – After a bad 2019, the new year is already more than a month into its start. And to evaluate last year’s economic performance will require guessing given that the authorities have not released an iota of information to the public. For the first time in a long time not even an official estimate of GDP growth has been offered, which although I do not consider it a leading indicator of the evolution of the economy, at least it gives us an idea of where things are going.

A number of events significantly affected last year’s performance. New and very severe restrictions imposed by the current U.S. administration limited the availability of fuel, affected the flow of visitors to the Island, and strengthened the distrust of foreign investors.

However, it cannot be said that it was a year of inaction on the part of the Cuban government, or that its efforts have been reduced to ‘cyclical’ survival. Implemented were measures that impacted the economy. For example, there was an increase in the average salary of State employees of close to 68 percent. Also, a set of small transformations towards greater decentralization in state enterprises was introduced. But, without a doubt, what garnered most attention was the opening of stores which sold consumer goods in dollars, through the use of credit cards.

Dollarization officially expands

When the dollarization of the economy was announced on Oct. 15, 2019, Cuba’s convertible peso (known as CUC) saw a depreciation in the informal markets of between 10 and 20 percent, which was fueled by speculation and expectations, with hopes of even greater depreciation if the State did not intervene in the supply of the currency. Instead, in spite of not intervening, the government in fact restricted the sale of foreign currency by its banking institutions, did not eliminate the 10 percent charged for the exchange of dollars, and despite what was predicted, the informal market seems to have stabilized at a rate of close to 1.10 CUC = 1.00 U.S. dollar.

Authorities recently have announced an expansion of the dollar economy. The opening of dollar stores throughout the country, the inclusion of new items being sold, and finally allowing ‘custom imports’ are the three new measures that expand this policy. And after three months from its launch — and taking into account the information embargo by the authorities — it is impossible to assess how well the new initiatives are performing. “The new measures have proven their worth,” as well as, “they evolved dynamically,” and, “they’ve proven just,” are some of the statements offered to explain them. And surely they are positives, but devoid of any evidence. Once again, without data, we must become brave fortunetellers.

Even without official figures, it is easy to demonstrate gaps in this triumphalist approach. Chronic shortages found on Feb. 6, for example, in Havana’s auto parts stores is proof enough of the unexplained problems

Direct acquisition of the first currencies should have immediately guaranteed the replenishment in these stores. They should have been, since their inception, packed markets restricted only by demand, since in theory they do not require the complex and diminished central currency allocation mechanism for their reproduction. All products incorporated into this system must strictly comply with the principle that ‘it never runs out’ under penalty of damaging the sustainability and credibility of the mechanism.

The types of products offered is another striking issue. To date an opportunity has been wasted to promote the acquisition of means of production, so necessary to unlock sectors such as agriculture, instead of betting on consumer goods that reinforce the non-productive sector and a vocation of importing.

Redirecting custom imports

Special mention should be given to the often-repeated promise of custom imports, whose procedures had been formulated three months earlier in Resolution 383 of the MINCEX (Ministry of Commerce and Foreign Investment). There appears to be a serious turn of the wheel here.

Last October the Foreign Trade Minister stated that the price of these imports would have “a small profit margin because the goal is to provide the service, not to become rich because of it.” If this rule is upheld the incorporation of cars for sale presents a conflict. If, as announced now, 85 percent of the price of cars is collected — without putting in doubt where the money goes — the margin of trade must necessarily be higher. One might ask whether price policy of the other products that can be imported will respond to the ministerial logic of facilitating the operation by a small profit margin, or will it entail a ‘Guinness World Record’ markup as on automobiles. The acuity of the explanations offered at the time of the policy launch in October are now characterized by the total opposite. 

On another matter, at the time, it was announced that 11 companies would be charged with the purchasing power. Among those were entities belonging to the Ministry of Foreign Trade itself, the Ministry of Industries, CITMA, ETECSA, MINTUR, a subordinate directly to the Council of Ministers, as well as 3 others belonging to the Group of Business Administration SA (SASA).

Less than 90 days later, and without having imported anything, eight of the 11 companies were, for some unknown reason, unauthorized to operate. Now all custom import operations that sell in dollar stores are in the hands of only three companies: CIMEX, SASA, and Caribbean Shops, all under the control of the GAE (Armed Forces Business Administration Group) system.

This emerging market can be extended depending on the course taken by economic policy during 2020. It will depend on the speed and how radical the monetary reunification process becomes, as well as how much is granted to the private sector. But the biggest problem lies not in the monopolistic control of the state over this economic activity, but in the dangers of dissolving even potential competition between state entities themselves. If you really want to build an economy that favors the consumer, we must battle against all monopolies.

Dollarization vs. Reunification

The idea that a part of the national industry can get exports at the border is one of the main potentialities of this mechanism by allowing participating companies to break the bonds of the Liquidity Certificate. However, even if undertaken with great resolve, this process could take quite some time — perhaps years — before it begins to bear fruit. Then that the authorities bet on this option would contradict the idea of a short-term currency exchange unification process, which should guarantee a stable and unified convertibility for the Cuban peso. If the decision is to unify, in the course of this year, and the goal is to devalue the exchange rate as much as necessary to find its balance and to purify major distortions, then a parallel mechanism of dollar stores becomes redundant.

Or the plan may be another: to advance a process of partial dollarization, which divides the economy into emerging and traditional sectors. This is a model used successfully during the 1990s, where the emerging sector transfers most of its operations to dollars while gradual devaluations are produced for the traditional sector, and attempts are made to control the uncertainties associated with social costs. Who knows?

As long as public information that is vital is not divulged, economists and other social scientists called to offer solutions will have no other choice but to continue guessing.

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