Cuba plans paradigm shift to beat economic crisis

DW has published an article noting that the Cuban government is set to enact price increases and subsidy cuts after another year of economic woes, however this "gradual correction" could make things worse before they get better. Caliber.Az reprints the article.

Cuban Prime Minister Manuel Marrero Cruz had only just presented his government's macroeconomic stabilization plan when President Miguel Diaz-Canel had to calm things down again. The measures are not the implementation of a "neoliberal package against the people," he assured lawmakers in the last parliamentary session of the year, but they do contain "complex decisions, as complex as the situation" in which Cuba finds itself.

The Caribbean island has been in the midst of a severe economic and supply crisis for the last three years, with rampant inflation, fuel and medicine shortages. Frequent power cuts have dominated daily life, sparking an unprecedented wave of emigration.

In response, the Cuban government has announced one of the biggest macroeconomic adjustment plans of recent decades for 2024. Increasing energy prices and ending general subsidies for basic provisions, the announcement by Marrero came as a surprise when he presented it to the National Assembly of People's Power, Cuba's congress, in late December.

Deficits at every level

"We are very dissatisfied that we have not made the necessary progress and mitigated the effects of external phenomena," Marrero told members of parliament, referring to the US blockade on the country.

"We could have done more. There are still shortcomings and subjective problems that affect the capacity of programs and economic forecasts."

Marrero's assessment was devastating. Cuba hasn't achieved its planned export revenues, and there is still a huge foreign exchange deficit. Goods and services aren't diversifying, and there hasn't been a sustainable production increase, particularly with regard to food. Meanwhile, foreign investment in economic development is insufficient.

Marrero's plan aims to reduce government spending by raising the prices previously capped by the state. At the same time, public spending on subsidies will be reduced by providing financial support to socially vulnerable groups instead of subsidizing products — a paradigm shift in policy.

"It's not fair that those who have a lot receive the same as those who have very little," he said. "Today we subsidize an old pensioner just as much as the owner of a large private company who has a lot of money."

Subsidizing people instead of products

Marrero was referring to the "libreta" ration booklet, through which basic foodstuffs such as rice, beans, cooking oil, chicken and other goods are distributed evenly to all Cubans at heavily subsidized prices. According to Economy Minister Alejandro Gil Fernandez, this amounts to an annual expenditure of $1.6 billion (€1.44 billion) for Cuba.

Marrero also announced tariff increases, declaring that the state could not continue the "wastefulness" of subsidies for water, electricity, liquid gas and fuel. Other measures will include future sales of petrol and diesel to tourists in exchange for foreign currency, more expensive local public transport and increased salaries in the education and health sectors, which have been particularly affected by staff shortages.

The government will also adjust the official exchange rate of the Cuban peso (CUP) to the US dollar, Marrero said, based on recommendations from the central bank. The official exchange rate is currently 24 CUP per US dollar for legal entities and 120 CUP for private individuals. On the informal market, the US dollar has now risen to 265 CUP.

Numbers underscore the crisis

The Cuban government recently published several macroeconomic figures underlining the economy's downward trend. The government estimates that gross domestic product will shrink by 1 per cent to 2 per cent for 2023, after forecasting growth of 3% at the beginning of 2023. Inflation on the formal market was around 30 per cent at the end of the year, though informal inflation is much higher.

Tourism also fell far short of expectations in 2023, with just under 2.45 million travelers to the country. Further measures in the macroeconomic stabilization plan are therefore aimed at reviving the sector. Other efforts to boost the economy will include promoting the production of exportable products such as nickel, tobacco and rum, as well as the import of raw materials and intermediate products to boost domestic production.

The aim is to create "a fairer and more efficient system" and "leave no one in the lurch," said Marrero, tacitly acknowledging the increase in social and economic inequalities. President Diaz-Canel later countered fears that the libreta could be abolished altogether.

Companies' access to foreign currency is to be improved by expanding e-commerce with payments from abroad, and foreign investment, particularly in food production and the expansion of renewable energies, will be increased. As of January 1, new taxes, along with tariff increases and reductions, will be applied to Cuban private companies.

"Nothing would make us happier than to announce that salaries will be increased and we will have enough foreign currency and fuel to end the burden of the shortage," said Diaz-Canel. "Unfortunately, we all know that this is not possible."

Now is the time to move forward with "a gradual correction," the president said, warning that no single measure will solve all the challenges. "Rather, the measures together may initially exacerbate certain problems."

Nevertheless, Diaz-Canel was confident the announced changes would "mark the beginning of a new trend in the behavior of the Cuban economy."