Cuba red car

Cuba’s Economy in 2017

As of March 2017, there were reports emanating from the Cuban government that premium gasoline would be rationed in the coming months.

According to official Cuban data, the island nation’s economy fell 0.9% in 2016 despite significant increases in the travel and tourism sector. (Readers should note that the Cuban government tracks and publishes very little macroeconomic and financial data.)

A political and economic crisis in key trading partner Venezuela is to blame, according to President Raul Castro at a speech at Cuba’s National Assembly last year. He is predicting a slightly brighter outlook for 2017.

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The impact of Cuba’s sharp economic contraction occurred in the second half of 2016 after the cash-strapped government slashed imports, investment and fuel in response to lower exports and a drop in the highly subsidized oil deliveries from Venezuela. It had reported 1% growth for the first half of 2016.

“Financial tensions and challenges that might intensify again in certain circumstances will persist, but we hope that gross domestic product (GDP) will grow moderately, by around 2% (in 2017),” according to Castro.

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For the first three decades after the Castro regime came to power, the Cuban economy was dependent on billions of dollars in annual subsidies from the Soviet Union.

After the breakup of the Soviet Union in 1991, these subsidies stopped, and Cuba entered a period of significant economic hardship (the “special period”). More recently, the Cuban government has relied heavily on subsidies from Venezuela to support its economy. Among other things, Venezuela has provided Cuba with around 100,000 barrels of oil per day, some of which the Cuban government refines and then sells on the world market to generate hard currency.

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However, as Venezuela’s political and economic situation has deteriorated, these subsidies have reportedly declined. As far back as July 2016, the Cuban government announced the need to prepare for energy shortages and other economic challenges. 2017 is witnessing the direct impact of Venezuela’s economic deterioration.

Although the majority of the economy continues to be controlled by the state, the Cuban government has undertaken several reforms in recent years that have created opportunities for Cubans to engage in additional private sector activity.

ox in cuba
Cohiba covers are unloaded in Pinar del Rio, Cuba. Image by Cuba Journal

Many reforms have taken place since 2008 when Raúl Castro was elected as head of the state by the Cuban National Assembly. Among other things, these reforms have been driven by the Cuban government’s stated goal of reducing the number of workers on the state payroll by 1.8 million. The Cuban government has also set the goal of increasing the private sector’s contribution to GDP from approximately 5% in 2011 to between 40 and 45% by 2017. It is unlikely this goal will be attained in 2017.

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Former U.S. President Obama’s use of executive authority to loosen some U.S. sanctions has focused attention on the practical aspect of investing in Cuba. It is uncertain whether the momentum behind Obama’s moves, which enjoy overwhelming popular support in the U.S., are likely to continue under President Trump’s administration.

Anthony Bourdain artfully sums up what’s happening in Cuba by saying,
“The toothpaste is out of the tube and there’s no putting it back.”

The Cuban private sector has grown rapidly since 2008 but remains small compared with other economies – and it faces various constraints. The Cuban private sector includes (1) self-employed entrepreneurs or sole proprietors (cuentapropistas), (2) agricultural cooperatives and other private farmers, and (3) nonagricultural cooperatives. The latest Cuban government data indicate that the percentage of the Cuban workforce in the private sector has grown from 17% in 2008 to 29% in 2015. It is also still highly constrained by the Cuban government and faces challenges, including a lack of access to needed supplies and equipment.

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U.S. regulatory changes have created some new opportunities in Cuba, but economic engagement is still limited. The U.S. government has made six sets of regulatory changes since December 2014 to ease restrictions on travel, remittances, financial services, and trade with Cuba. For example, the Department of Commerce created a new export license exemption to facilitate U.S. exports that support the Cuban people, including the private sector.

Age of Cuba's tractors

Despite the loosening of some U.S. embargo restrictions, the regulatory changes have not created significant new opportunities for agricultural exports, which are the vast majority of U.S. exports to Cuba and have been authorized since the passage of TSRA in 2000. Driven by declining agricultural exports, U.S. trade with Cuba has decreased since the regulatory changes. U.S. exports of goods and services to Cuba declined from $299 million in 2014 to $180 million in 2015.

This is a continuation of a longer-term downward trend from a high of $712 million in U.S. exports to Cuba in 2008. Over time, Cuba has increasingly shifted its agricultural purchases to the European Union and other countries such as Brazil, Argentina, and Canada.

These countries are able to offer more favorable credit terms than U.S. producers given embargo-related restrictions on U.S. credit financing of agricultural exports. In addition, U.S. officials noted that the Cuban government is potentially making a political decision to purchase fewer U.S. exports to push for additional U.S. legal and regulatory changes.

Cuba’s total imports:

Authoritative data on travelers from the U.S. to Cuba are not available; however, Cuban government data indicate that U.S. visitors to Cuba increased by 77% from 2014 to 2015. The increase in U.S. visitors to Cuba is expected to benefit the Cuban private sector as it is concentrated in the tourism sector and will affect private restaurants bed and breakfasts, and taxi services.

For example, Airbnb has reported that more than 13,000 Americans booked rooms in private Cuban homes in April 2015 through March 2016. These private homes, known as casas particulares, operate as cuentapropistas (sole proprietors).

With the U.S. embargo restricting Cuba’s access to Western international financial institutions (World Bank, International Monetary Fund etc), Airbnb’s positive impact on Cubans and tourists will likely continue.

In January 2017, U.S. travelers to Cuba totaled 43,200, a 125% increase compared to the same month in 2016, according to Cuba government statistics.

From January to June 2016, non-family visits (excluding Cuban-Americans) increased from 76,183 to 136,913, according to Cuba government statistics. And newly-restored commercial air passenger service between the U.S. and Cuba didn’t start making a real impact until the forth quarter 2016.

old man with cigar in old havana
Image by Cuba Journal

Josefina Vidal, Cuba’s chief negotiator in talks with the U.S., estimated recently that the combined total of visits by Cuban-Americans and other U.S. travelers last year was 614,433, a 34% increase over 2015.

Overall, Cuba attracted more than 4 million visitors in 2016, making it the second most popular destination in the Caribbean after the Dominican Republic.

Last year, Cuba negotiated a debt restructuring with the Paris Club of bilateral creditors. France is Cuba’s largest single creditor. (Cuba’s bilateral creditors are different from the US claims issue that remains unresolved between the two countries.)

As part of the debt restructuring, Aeroports de Paris, the French government-owned firm that runs Charles de Gaulle, will receive a concession to operate Jose Marti that will include a renovation by the French firm, Bouygues.

FURTHER READING: Robert Feinberg’s Book on Cuba’s Frontier Economy

Cuba’s Economy in 2017 was last modified: March 30th, 2017 by Simons Chase