The next year will determine Raúl Castro’s economic legacy

In this file photo, a food vendor spreads out convertible pesos, known as CUCs, the two bills on the right, and regular Cuban pesos at her stand in a vegetable market in Havana, Cuba.
In this file photo, a food vendor spreads out convertible pesos, known as CUCs, the two bills on the right, and regular Cuban pesos at her stand in a vegetable market in Havana, Cuba. AP

The tourists are still jamming Havana’s Cathedral Square and jostling to get into the popular private restaurants. But not too much is going right with the rest of the economy, and in the last year of his presidency, Raúl Castro faces a variety of economic challenges — that he may or may not take on.

Many state enterprises are barely limping along, there are jitters as the economy of Cuba’s Venezuelan benefactor spirals downward, the rules of the road are murky for private businesses, salaries are low, a messy dual currency system still needs to be unified, and Cuba is in dire need of much more foreign investment.

Analysts say there’s no doubt that Castro has more political capital than any successor would to make tough economic decisions, but many of Cuba’s economic problems are interrelated and the timing may not be good for any drastic moves — especially with Cuba’s relationship with the United States still up in the air.

Castro has said he plans to retire as president of Cuba’s Council of State and Council of Ministers in February 2018 but is expected to remain at the helm of the powerful Communist Party of Cuba. His heir apparent is 56-year-old Miguel Díaz-Canel, the first vice president of both councils.

Cuban officials are estimating economic growth of around 2 percent this year, but that figure is based on the assumption that oil prices will go up and tourism will keep growing. Not only do U.S. travel rules instituted under the Obama administration allow more Americans to travel to the island, but the rapprochement has helped stimulate more interest from other international visitors.

Cuban economist Omar Everleny Pérez Villanueva said 2 percent growth is “very ambitious.” A model by economist Pavel Vidal, a professor at Javeriana University in Colombia, puts the Cuban economy in negative territory with a decline of between .3 percent and 1.4 percent in 2017.

Tourism is one of the few bright spots.

Last year, Cuba welcomed a record 4 million international visitors, and Tourism Minister Manuel Marrero said recently that January and February visitor levels were 15 percent above the first two months of 2016. But Cuba needs to increase hotel capacity and is actively looking for foreign partners to invest in hotel projects and manage properties.

It is also possible that the Cuban sugar harvest will reach 2 million tons this year, but that’s dependent on the weather and no problems cropping up, Pérez said. With the exception of pharmaceuticals and biotech products, he said other Cuban industries haven’t taken off.

In 2010, Cuba began implementing reforms to decentralize the economy, expand Cuba’s private sector and increase productivity.

But so far, those “reforms under President Raúl Castro were not enough to give the promised dynamism to Cuba’s economic growth, a task that at this stage we know will be left to the next generations of Cuban leaders,” said Vidal.

…reforms under President Raúl Castro were not enough to give the promised dynamism to Cuba’s economic growth, a task that at this stage we know will be left to the next generations of Cuban leaders.

Pavel Vidal, economist

“I believe Raúl has many challenges,” Pérez said. “He can’t leave the country in recession,” but at the same time there is a thicket of difficult issues that must be dealt with — sooner or later.

Among them:

▪ Reviving economic growth

Last year, the Cuban economy declined by almost 1 percent as the economic crisis in Venezuela, Cuba’s chief foreign benefactor, deepened.

Especially critical in recent years has been the decline in the value of professional services exports — the doctors and other medical professionals that Cuba sends abroad, said economist Carmelo Mesa-Lago. Venezuela is the largest consumer of such services.

Because the government keeps a hefty portion of their foreign earnings, Cubans on medical missions have been money makers for the regime.

But Mesa-Lago, a professor emeritus at the University of Pittsburgh, calculates that the value of such professional services exports dropped 18 percent in 2014-2015 even as the Cuban economy grew by 4.4 percent, and the total balance of goods and services fell by 41.6 percent during that period. Cuba has traditionally used a surplus in its export of professional services to make up for merchandise deficits.

In 2016, when the Cuban economy shrank by .9 percent, it’s likely that surplus in services disappeared, he said.

▪ Unifying Cuba’s dual currency system

Having just one currency, rather than the Cuban peso (CP) generally used by the Cuban population and the Cuban convertible peso (CUC) used by tourists, foreign companies and some state enterprises, has been a goal for several years.

“But there is a problem. In 2016, the budget deficit was 7.3 percent of GDP, and because of the already difficult economic situation, they have had to print money,” Mesa-Lago said. The budget deficit may be even higher this year — perhaps 12 percent — generating even more inflation, he said.

“I’m not discounting [progress] in currency unification this year, but the timing is not good,” Mesa-Lago said.

Currently, the CP is valued at 25 Cuban pesos to $1, and the CUC is supposedly on par with the U.S. dollar, although a 10 percent surcharge and commission mean $1 U.S. will fetch only .87 CUC. Under currency unification, the CUC is supposed to disappear.

“[Castro] can’t do the whole thing in one year. The 25-1 spread is just too great,” Mesa-Lago said. Cuba has been experimenting with different exchange rates for state enterprises, and he expects that the currency unification process could begin with them.

Already, at state-run stores, prices are marked in both Cuban pesos and CUCs.

▪ Managing the uncertain economic relationship with Venezuela

Prior to Venezuela’s current economic crisis, this staunch ally was supplying Cuba with 80,000 to 90,000 barrels of oil a day, and Cuba used another 50,000 barrels daily that came from domestic production, said Jorge Piñon, director of the Latin America and Caribbean Energy Program at the University of Texas at Austin.

Daily consumption, which historically was around 137,000 barrels daily, has fallen to an estimated 120,000 to 122,000 barrels daily, he said.

Since last July, oil deliveries from Venezuela have dropped as much as 60 percent, Piñon said. But Cuba may be getting Venezuelan oil from other sources. “We’ve also seen an increase in deliveries to Cuba” from locations in Bonaire, St. Eustatius, Aruba and Curacao, where Venezuelan state oil company PVDSA owns or leases refineries and blending terminals, he said.

Venezuela used to send medium weight Mesa 30 crude oil to Cuba for blending at the Cienfuegos refinery and resale to third parties, but production at the Cuban refinery has fallen by half with the reduction in shipments from Venezuela.

Still, enough oil is arriving to run the residential power grid, although since July there have been cutbacks in electricity and fuel for state enterprises. For some, that’s meant “no air conditioning, directives to turn off the lights and everyone goes home at 5 p.m.,” Piñon said.

▪ Increasing salaries

There are constant complaints about low public salaries. A private cab driver, for example, can earn more than a physician or other professionals. Mesa-Lago said that even though salaries went up in 2015, buying power was just 62 percent of what it was in 1989. But raising salaries is tricky.

“If they print a lot of CUP, they increase nominal salaries, but with inflation, they would have to raise salaries even more to have real wage growth,” he said. And that could set off a further inflationary spiral.

“I think it will be very hard to raise salaries this year,” he said.

I think it will be very hard to raise salaries this year.

Carmelo Mesa-Lago, economist

Even though it’s still a long way from what Cubans aspire to, Granma, the Communist Party newspaper, reported that at the close of 2015, the average salary had risen 46 percent to 688 Cuban pesos.

▪ Attracting foreign investment

Last fall, Cuba unveiled its latest portfolio of opportunities for foreign investors. It included 395 joint venture projects, management contracts and other economic partnerships. The government has made it clear that foreign investment is a cornerstone of Cuban economic development going forward, but so far investment is lagging.

Since Cuba revamped its investment law in early 2014, it has attracted about $1.3 billion in investments. But Cuban officials say that to achieve 7 percent annual economic growth, it will need $2.5 billion in foreign investment each year.

Diplomats, business executives and members of the U.S. Congress who favor lifting the embargo all concur that Cuba needs to reform its legal system to offer foreign investors better legal guarantees, make it easier to sign contracts and allow them to directly hire their Cuban employees.

But analysts say Cuba seems to favor the path of slow economic reforms because it doesn’t want to do anything that could potentially be destabilizing and cause a weakening of political control.

“The political logic is predominant over the economic logic,” Mesa-Lago said. “Still, the Cuban government can sometimes act in unpredictable ways. I don’t think Raúl Castro will do anything significant in the time he has left, but he will support Díaz-Canel in carrying out reforms in the future.”

I don’t think Raúl Castro will do anything significant in the time he has left.

Carmelo Mesa-Lago, economist

Currently, two draft documents approved at last year’s 7th Congress of the Communist Party of Cuba are being debated. One deals with Cuba’s economic and social model going forward, and the other is a strategic economic development plan through 2030. The final form these documents take “will signal in many ways the pace of reforms in the coming period, or a backtracking,” said Domingo Amuchastegui, a former Cuban intelligence analyst who now lives in Miami.

Vidal, the professor from Colombia, said more reforms are necessary, particularly related to technological modernization and a law that would allow foreigners to invest in private businesses — something that happens now but without any legal protection for the investors — and would give the businesses of cuentapropistas, the self-employed, legal status.

“It’s difficult to predict what will go forward this year,” said Pérez, the Cuban economist. “There’s a lot of slowness. I already think the successor will be responsible for unfettering or giving impetus to the changes that Raúl undertook, or we’ll have to wait and see what happens during the parliamentary session in the middle of July to really know how far [Castro’s] administration was able to go.”

Follow Mimi Whitefield on Twitter: @HeraldMimi.