Back to top
Summary 2020

A Disastrous Year for the Cuban Economy

At DIARIO DE CUBA we run down the most important issues affecting the Cuban economy in 2020.

A group of Cubans walk down a street in Havana.
A group of Cubans walk down a street in Havana. Diario de Cuba

2020 could be described as "disastrous" for the Cuban economy. Although the island had been stagnant for several years, the tepid forecast of 1% growth issued by Economy Minister Alejandro Gil at the end of last December clashed with the major contraction (-11%) the country suffered.

The economic downturn has been so devastating that not even the forecasts released by the Economic Commission for Latin America and the Caribbean (ECLAC) were close to reality, as the entity predicted a drop of just 8.5% for the island.

The coronavirus pandemic

One of the main reasons for the economic collapse on the island was, undoubtedly, the coronavirus pandemic. However, as Cuban economist Omar Everleny has stated, the Cuban economy had been enduring "a profound crisis since mid-2019, whose palpable effect was a shortage of gasoline, on the one hand, and a lack of some foods, such as chicken, sausages, toilet and detergent, on the other."

However, the economist pointed out that the effects of the pandemic aggravated this situation, which included a drop in international tourism and a cessation of a good portion of private sector activities.

Ricardo Torres, a professor at the University of Havana's Department of Economics, indicated that "the island's productive activity had been slowing down significantly since 2016" while "economic growth was halved between 2016 and 2019, compared to the period from 2010 to 2015."

Torres also stressed the damage from the closure of borders for the Cuban economy, since "each month of closure represents a loss of about 140 million dollars." And foreign investment was stagnant.

In an interview Mauricio de Miranda added that the consequences of the pandemic "have been devastating, as the country's closure to international tourism meant the loss of one of the main sources of currency, which had very serious consequences for the economy. Furthermore, every sector has been affected, and Cuba is in no condition to carry out online work activities."

The Dollarization of the Economy

One of the first measures that the Cuban government took in the face of the worsening of the crisis was the opening of stores, which currently exceed 300, at which various products are sold in foreign currencies - which several economists noted could mean the beginning of a process leading to the dollarization of the economy.

In this regard the Cuban economist Tamarys Lien Bahamonde stated that the economic logic of the measure is similar to that of a "freeze on bank accounts", since "the country will not sell foreign currency to individuals, and will prevent these currencies from leaving the island."

"In the same way that the crisis of the 90s led to the partial dollarization of the economy, whose impact on inequity was not long in coming, this measure will have a similar effect, exacerbating the already existing social inequalities in Cuba", Bahamonde added.

Fellow economist and president of the Cuban Liberal Union, Elías Amor, stated that, in his view, the measure was calculated to "drain foreign currency that enters the country and centralize it in the State, preventing it from being channeled to the informal economy or the activities of private businesspeople."

He added that "the Government maintains its prohibition against capitalizing remittances to augment assets, a practice that in other Latin American countries is very favorable for development" but rather, "prioritizes their allocation to regular expenses (food, cleaning and toiletries, appliances, tourism packages, etc.)"

According to Emilio Morales, "it is a desperate measure with the purpose of capturing dollars from the Cuban diaspora, since the system itself is not capable of generating them." Thus, he believes that "the operation's aim is to obtain the dollars that Cubans residing abroad send to help cover the food, hygiene, transportation and communication costs of their relatives on the island."

Both specialists agree that this was not a financial strategy, since it would first be "necessary to talk about the implementation of laws that facilitate free enterprise, the liberalization of prices and liberation of the country's productive forces, and laws that protect and promote free enterprise, allowing for a market based on supply and demand," Morales said.

The July package of measures

In July, when the crisis was already irreversible, the Cuban authorities announced a group of measures with the aim of timorously liberalizing some aspects of the economy, including the elimination of the tax on the dollar and the creation of a list of permitted freelance activities to replace that of prohibited ones.

In this regard, Mauricio de Miranda state that "good intentions were expressed, such as monetary and exchange unification, the expansion and flexibilization of self-employment permits, small and medium-sized companies, both state and private and cooperatives, the proposal of greater autonomy in the management of state-owned companies, although it is not yet known where that autonomy will lead, because nothing has been said about the suppression of the Superior Business Management Organizations."

The economist added that he approved of  authorizing private companies and cooperatives to do business with other countries, although he disapproved of them doing so only through foreign trade companies.

According to Omar Everleny, the measures were also positive, but he indicated that "the delay in their execution undermines the results they should provide in the medium term." In addition, the specialist noted that "it is not the first time that measures have been announced and then, at the time for their implementation, reluctance affected their development."

Monetary and exchange unification

One of Cubans' biggest historical demands was addressed at the end of the year, with the beginning of the process of monetary and exchange unification; only that, this time, rather than a salvation for household economies, it would mean the coup de grace for the savings of the island's residents and trigger an imminent inflation process.

Mauricio de Miranda considers this process "essential", but at the same time pointed out that "it will probably be adopted at the worst time" which he views as "consistent with the style of economic changes that are implemented in Cuba: they are only adopted when crisis situations reach the limit."

"Now, I would like to point out that while there is a partial dollarization of the economy, we are not dealing with true monetary unification, because the national currency does not fully fulfill the functions of money if it cannot operate in a segment of the market," he added.

In this regard, Carmelo Mesa-Lago, an Emeritus Professor at the University of Pittsburgh, stated that, in the short term, the "Ordering Task" will bring "inflation and unemployment," as it is very likely that the Government "will eliminate the subsidies for state companies with losses," so they will have to close many of them.

The economist added that, to deal with unemployment it is necessary "to expand the private sector, especially self-employment, in order to absorb state unemployment."

The outlook at the end of the year on the island cannot be less auspicious. Most Cubans fear the beginning of the new year, as it is still uncertain whether salaries will be enough to pay the new rates for basic services and products.

Meanwhile, there are no precise dates for the start of the vaccination campaign against Covid-19, which began in December in various parts of the world. This delay could hinder the recovery of tourism and employment. But the greatest risk that Cubans face, according to several specialists, is the inevitable inflation that will be unleashed by the implementation of the Tarea Ordenamiento.

Sin comentarios

Necesita crear una cuenta de usuario o iniciar sesión para comentar.