Saturday, January 23, 2016

Five Points - Sorting Through Raul Castro’s Economic Speech

Five Points: Sorting Through Raul Castro's Economic Speech
Posted on January 22, 2016

Dimas Castellanos, 16 January 2016 — A commentary on five economic
issues raised by the Cuban president on December 29, 2015 during the
closing session of the National Assembly of People's Power.

1. The president stated that, though the effects of the US blockade
remain unchanged and external economic constraints have worsened in the
second half of the year, Cuba's gross domestic product (GDP) grew by 4%
in 2015.

Not only have the effects of the "blockade" changed, financial
constraints have eased. Measures taken by the White House after the
announcement of restoration of diplomatic relations between the two
countries have led to a relaxation of the embargo. Meanwhile,
negotiations to reduce external debt have eased economic constraints,
especially after the Club of Paris wrote off three-quarters of Cuba's debts.

With regards to GDP, the Cuban government has acknowledged that, in
order to achieve significant development, the annual growth rate must
reach 7%. However, from 2011 to 2014 it grew by only 2.3% on average,
with a growth rate of 1.3% in 2014. In July 2015 Raul Castro reported
that the slowdown in GDP growth had been reversed and estimated that by
year's end it would be in the neighborhood of 4%, now the reported
target figure.

In order to understand this reduction in growth, one has to keep in mind
that between 1989 and 1993 GDP fell by 34%. However, whether the 4%
forecast is realistic or not, it would not mark a true recovery, as we
can see from the following four examples.

A – According to economics minister Marino Murillo, the sugar industry
grew by 16.9% in 2014. However, this fell short of the 73,000 ton
target, requiring the transfer of some 30,000 tons intended for domestic
consumption to fill the gap in the export supply.

B – The manufacturing sector grew 9.9%, but obsolete technology in the
industries that make up this sector led to considerable shortages of
products intended for sale in the network of hard currency retail
stores. As a result thousands of tons of chickens and thousands of cases
of beer had to be imported, with a resulting reduction in hard currency

C – The transport sector grew, but inefficiencies in cargo delivery
impacted other sectors and the time cargo vessel spent in port led to
additional costs.

D – Agriculture grew but, due to a shortfall, 50,000 additional tons of
rice and an additional amount of milk had to be purchased to fill the
gap. Given these deficiencies, the 4% figure says little and has even
less impact on the lives of Cubans.

2. Next year gross domestic product will continue to grow but at a lower
rate of 2%. As a result, financial constraints associated with falling
income due to lower prices on the world market for traditional exports
such as nickel are projected.

First of all, if arithmetic is independent of ideology, then half of
four is two. Therefore, if GDP goes from 4% to 2%, that does not mean a
better growth rate in 2016. That is a decrease.

Secondly, if debt was reduced through write-offs and negotiations — the
Club of Paris, for example, forgave Cuba $8.5 million of its $11.1
million in debt — and if improved relations with the United States
increased family remittances from $1.4 billion at the end of 2013 to $2
billion, and if tourism and medical services continue to generate
additional billions of dollars, the projected decrease cannot be
explained simply on the basis of alleged financial constraints without
mentioning other causes, among them the possible reduction or total loss
of hundreds of thousands of barrels of oil, which Cuba receives on a
daily basis from Venezuela.

3. Though the number of visitors from overseas has risen to three and a
half million, it cannot be overlooked that this has occurred in spite of
the fact that Cuba is still the only country in the world that US
citizens are prohibited from visiting as tourists.

The number of visitors from overseas did not increase in spite of the
fact that American citizens are prohibited from visiting Cuba. On the
contrary, this was achieved in large measure because President Obama
expanded the twelve categories established by the Treasury Department
under which tens of thousands of Americans and tourists from other
places of origin have been able to travel to the island since the
beginning of last year. Without this action, the increase would not have
been possible. Similarly, further growth will be considerably influenced
by the imminent arrival of new, regularly scheduled flights and the
advent of ferry service, all of which are expected as a result of the
restoration of relations between Cuba and the United States.

4. In spite of economic constraints, the fulfillment of commitments made
during various negotiations to restructure debts with foreign creditors
has reinforced the trend towards gradual recovery of our economic
credibility internationally. The latest evidence of this was the
agreement reached on December 12 with the Club of Paris. This agreement
facilitates access to financing in the medium and long term, which is
essential in securing the investments projected in our development plans.

Rather than the fulfillment of commitments, the outcome resulted from a)
the pragmatism of the creditors, who realize that the critical condition
of Cuba's finances make it impossible to recover their loans, b)
pressure by companies from creditor nations to invest in the island
under the new scenario, knowing that detente with the United States
creates opportunities on which Americans cannot yet capitalize, c)
expectations arising from the resumption of diplomatic relations with
the United States, and d) persistent propaganda by the Cuban government
to demonstrate "economic recovery."

The actions of the Cuban government are driven by a different logic. The
failure of its economic reforms and the crisis in Venezuela have
exacerbated the cash shortage. Therefore, access to short and medium
term financing, especially from Club of Paris member countries, breathes
new life into the economy without having to broaden relations with the
United States.

What has been forgiven, however, is the enormous amount of interest
accumulated over the years. The principal remains as outstanding debt.
The Club of Paris forgave Cuba $8.5 billion of its $11.1 billion in
debt, but the agreement imposes stiff penalties if the Cuban Government
defaults again.

Thus, the game starts over with a gesture of generosity but with clear
rules: Cuba must honor its commitments, which it has never been done.
This will be impossible in the medium to long term if the structural
changes that the economy and society require are not instituted.
Undertaking this is as necessary as it is impossible without the
corresponding political will. Fear of commitment seems to explain Marino
Murillo's statement to the National Assembly last December. He noted
that, if we do not achieve sustained growth in the economy, "we must
work towards a sustainable debt."

5. It is up to us to maximize excess capacity, concentrate resources on
activities that generate export earnings and encourage domestic
production, make the investment process more streamlined and grow
investments in the manufacturing sector and infrastructure, prioritizing
sustainable power generation and increasing the efficiency of energy

This is more of the same. We can find hundreds of proposals like this in
speeches given by Cuban officials for more than five decades without any
result whatsoever. Excess capacity does exist but it is elsewhere. It is
in reform, for which — given its situation — Cuba cries out.

Originally published in Diario de Cuba

Source: Five Points: Sorting Through Raul Castro's Economic Speech |
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