Cuba: Facing a Tough New Year

By Eric Hershberg, William M. LeoGrande, and Max Paul Friedman*

Intensified U.S. sanctions and the crisis in Venezuela are forcing renewed belt-tightening in Cuba and hindering the government’s ability to undertake even its modest economic reform agenda, but the country is not entering a new “special period” and significant instability does not appear likely in 2020 despite some increased social tensions. The big losers from U.S. sanctions are the small private-sector businesses — B&Bs, restaurants, and entrepreneurs — providing services to U.S. visitors, an estimated 638,000 a year before the Trump Administration clamped down over the course of 2019. But the government has also been forced to make major cutbacks.

  • To cope with fuel shortages caused by U.S. sanctions against oil companies shipping Venezuelan oil to Cuba, the government reduced production in many factories to maintain energy supplies to consumers and avoid overly straining the power grid. Public transportation also faced drastic cuts, largely because of a lack of diesel fuel needed to distribute gasoline. Only some of the affected bus routes have since been restored.
  • Shortages of an array of necessities — from bread, coffee, meat, and many basic medicines to all energy products — have been severe and show no sign of abating as the economy sputters. Domestic demand for products that Cuba can produce, including electric bicycles and appliances, is strong, but financing is too tight. The government is phasing out the convertible peso (CUC) that it artificially pegged to the dollar and is establishing new hard-currency stores to capture dollars now flowing abroad as Cubans buy both consumer goods and inputs for domestic private enterprises in Panama and elsewhere at the rate of $25 million per month — hard currency the government desperately needs. Those dollars the government captures will supposedly be made available for domestic producers to import essential inputs. Cubans expect the CUC to become worthless paper sooner as some vendors now accept only foreign currency, and the street value of a dollar is now more than 1.15 CUC (compared to the official rate of 0.87 CUC).

One leading economist deemed 2019 to have been the worst year since 1993 — with growth essentially flat — and said the forecast for 2020 looks no better. State-owned enterprises are failing to perform efficiently despite years of rhetoric about rationalization and improvements. Foreign purchases, long hindered by a lack of hard currency, have been made even harder by the U.S. sanctions, as suppliers increasingly fear Washington’s scrutiny. The government has not responded to growing pressures by accelerating the sorts of meaningful reforms that have long been needed to increase production and efficiency.

  • Its strategy focuses on import substitution, according to a senior economic official, to reduce the need for hard currency by producing more consumer goods and inputs domestically. The tourism sector has boomed over the past decade, but more than half the hard currency revenue it generates goes to imported inputs. Cuba spends some $2 billion importing food while more than half its arable land lies fallow.
  • Financing investment needed to make import substitution a viable strategy is difficult. Cuban government officials speak of doubling domestic investment, now only 11-12 percent of GDP, but without increasing indebtedness — a huge task for such an inefficient economy. In addition to encouraging tourism enterprises to substitute local for imported inputs, the government hopes to improve conditions during 2020 by implementing a decades-old proposal to establish a closed dollar-based system in which companies retain a portion of revenues to finance investment and imports.
  • Foreign direct investment is the other potential but a largely elusive source for capital. Government fact sheets continue to emphasize the importance of the Mariel Special Export Zone, which has some 50 promised users, $2.5 billion in promised activity, and 7,000 promised jobs. Actual activity in the Zone, however, falls far short of that. The Trump administration’s activation of Title III of the Cuban Liberty and Democratic Solidarity Act (“Helms-Burton”), which allows the previous owners of property expropriated after the 1959 revolution to sue anyone benefiting from it, has made new investors hesitant.

While the economic outlook looks difficult indeed, there are few signs that the government is anxious about social frustrations and tensions becoming a serious challenge, much less an existential threat. The government continues to resist obvious (and relatively easy) reforms, such as allowing cuentapropistas licenses for multiple lines of business. Allowing the CUC to disappear gradually may be a precursor to addressing the years-old distortions caused by the country’s multiple currencies and exchange rates, but there’s still no sign that the government is ready to implement a unified peso. Havana apparently calculates that the country is hardly the pressure-cooker that U.S. policy aims to create by, as U.S. Secretary of State Pompeo reportedly told EU diplomats recently, “starving” the population so as to bring about a regime collapse.

  • Young independent journalists say that public organizing via social media is at times successfully pressing the government, which they deem largely ignorant of popular concerns, to revoke unpopular measures. Yet growing access to the internet may also serve to distract youth from more threatening forms of organizing. Giving people a sense of input on issues like the arts, animal rights, and sexual identity that do not threaten core government policies and processes is probably taking an edge off discontent.
  • The new year is likely to be difficult, particularly as the Venezuela crisis drags on, but, as observers say, “Cuba does ‘bad’ pretty well.” Hope is never a plan, but virtually everyone in Havana expresses hope that U.S. elections in November might bring back a pro-engagement U.S. policy that helps grow Cuba’s private sector and relieving pressure on sources of financing for Cuba to move ahead with its modest reform strategy.

January 7, 2020

*AU Professors Hershberg, LeoGrande, and Friedman traveled to Cuba in December.