Cuba - the Looming Crisis

Cuba: the Looming Crisis
July 21, 2016
By Fernando Ravsberg

HAVANA TIMES – Since Raul Castro announced at a session of the National
Assembly that there will be economic problems, speculation hasn't
stopped about a new crisis like the one experienced in the 90s. However,
the situation today is very different from that Cuba.

The country will participate in a forced savings plan, but the economy
is stronger: there are more business partners, new economic sectors and
more foreign exchange earnings. Nonetheless there will be hardships for
both the general population and entrepreneurs.

The Cuban economy contracts as a result of low oil prices, a paradox in
a country that imports crude. The problem is that Venezuela reduced
shipments [under highly favorable terms] by 20% in the first half of
this year.

The effects of the energy crisis are already being felt in the country.
Economic growth [in the first semester of 2016] slowed to 1%, half what
was planned. This was due to a drop in imports – some US $2.5 billion
less according to Marino Murillo, the architect of reforms.

In addition, Murillo announced that the government will suspend 17% of
the investments planned for this year and not make use of the loans
granted to Cuba by banks, governments and private lenders. This data is
more than enough to indicate a strong contraction.

A plan is already in motion to save 30% of fuel, with cuts at state
enterprises. The least productive end their work day at noon, and the
air conditioning of businesses, banks and institutions must be turned
off for several hours a day.

President Raul Castro said that the population would not be affected.
However, the fact is that neighborhoods are already seeing sporadic
power cuts, although very distant from the 90s, when there were
blackouts of more than 8 hours daily.

A tough year for Cuba

The year 2016 is turning out to be a rough one. Cuban government
finances suffer from the acquisition of oil at market prices, while they
must pay their debt with the Paris Club and other international
creditors. If they don't meet their obligations, interest will once
again skyrocket.

Cuban negotiators managed to eliminate most of the old interest but with
a commitment to pay the agreed-upon amount on time. Compliance will
allow Cuba to access soft loans, which could involve more than a 30%
savings on imports.

Those who might fail to collect their debts this year and certainly in
the first half of 2017 are some of Cuba's current providers, mostly
small intermediary companies from Europe, Canada and Latin America.

Raul Castro announced in the mid-year parliament session: "there have
been some delays in current payments to suppliers. In this regard, I
wish (…) to ratify the commitment of the government to pay the
outstanding debts."

Reducing imports, the debts with suppliers and fuel savings will affect
the lives of ordinary people. Power outages have already begun, there
will be fewer products in food stores, fewer construction materials and
transport will be more expensive.

Although the government has set caps on prices charged by private
transportation, these will seek ways to raise fares. Most of the fuel
used comes from the black market, where the cost of a liter of diesel
has doubled.

The differences with yesterday's Cuba

President Raul Castro said the country would not return to the crisis of
the 90s, "We do not deny that hardships may occur, even greater than at
present, but we are prepared and better able to reverse them than before."

Certainly the present situation is different. Cuba today has a
diversified trade, while at the outset of the 90s exchanges had been
almost exclusively with the Soviets, from which the island also received
100% of its fuel at subsidized prices.

Currently 50 thousand barrels of Cuban oil is produced per day, and this
is used at power plants. Venezuela continues to send about 80,000
barrels of oil, some oil is also imported from other countries, prices
are low and there are more sources of renewable energy.

During the past 25 years, a thriving tourism industry – non existent in
the 90s – has developed. It will bring in about 4 million visitors from
around the world in 2016, a figure that will skyrocket if and when the
US removes the ban on tourism to Cuba for US citizens.

Family remittances have tripled, reaching an amount close to US $2.5
billion a year. The cigar industry has gained market space and prestige
in the world already reaching peak production. And the manufacture of
cigarettes for export expands.

But the "crown jewel" of the Cuban economy is the sale of professional
services, with around US $8 billion in revenue. This comes mainly from
the contracts with Venezuela, and Brazil's "More Doctors" program.

In addition, the island has thousands of health workers, teachers,
engineers, architects and coaches in Africa, which provide hundreds of
millions of dollars more. In some cases they work in Cuban laboratories
located in different countries of the region.

Undoubtedly, the most profitable economic investment made by the Cuban
Revolution was in education, training more than a million university
graduates. The paradox is that it was not intended as a source of income.

Source: Cuba: the Looming Crisis - Havana Times.org -
http://www.havanatimes.org/?p=120128