While mobilizations are already underway in Cuba for the traditional rally in Havana on May 1st, the economic situation remains anything but simple. Many prices have reached unprecedented heights in the socialist country, which has melted the purchasing power of incomes and pensions to dangerously precarious levels. The government is now planning to counteract this with new measures.
The perfect Storm
After the monetary reform of January 1, 2021, everything initially looked the same. Stores opened, and the devaluation of the peso by 2400 percent (from 1:1 to 1:24) in the state sector seemed to be just a matter for the books. Soon, however, significantly increased incomes met an increasingly tight supply in the context of pandemic and tightened U.S. sanctions. The economy slumped 11 percent in 2020. The lack of foreign currency caused the government’s import capacity to drop by a good half, and a massive demand overhang was the result. Coinciding with the currency reform, Cuba was placed back on the list of “state sponsors of terrorism” as a “parting gift” from the Trump administration, further complicating the situation. Nationwide protests occurred in July 2021. “We waited so long for the perfect moment for monetary reform that we ended up doing it at the worst possible time,” commented Cuban economist Juan Triana. Instead of the perfect measure, the perfect storm came.
The nominal average wage rose from 879 to 3838 pesos with the currency reform, and the minimum pension from 280 to 1528 pesos. However, as the economy ramped up at the end of the lockdowns, a new price level also became established. To siphon off much-needed foreign currency, parts of the trade were dollarized. In many stores where the peso convertible (CUC) was used in the past, payment can now only be made with foreign currency cards. An informal currency market has emerged where one euro trades for just 190 pesos. In August 2022, a new exchange rate was established for the population, which is 1:120. However, this can only be fully operated in one direction (when buying foreign currency).
A simple café, which used to be priced at one peso, now charges 5 pesos in many cases. Higher-priced street cafés, which have to align their prices with the informal exchange rate, sometimes charge ten times as much. A pound of tomatoes, which used to cost 10 pesos, now costs up to 80 pesos. A pound of onions that used to cost between 10 and 20 pesos now trades for around 150 pesos. The price of pork has more than quadrupled. Without the basic services provided by the state-run “Libreta” magazine and the prices for electricity, gas, transportation, Internet and other state services kept constant through subsidies, many families would not even be able to keep their heads merely above water. Remittances from abroad, from which about one-third of the population benefits, have gained in importance.
But even with foreign currency in their pockets, many things in Cuba continue to be scarcer than before. According to the Ministry of Health, two-thirds of medicines are unavailable or only sporadically available, and in Havana, lines of several hundred meters of cars have recently formed again in front of gas stations due to a lack of fuel. A basic stock of food and hygiene products is now also being distributed outside the “Libreta” system in peso stores by household allotment. In addition, beyond the black market, many daily necessities are scarcely available. There, a liter of soybean oil costs up to 900 pesos, about 5 euros. The scarcity of goods and services is now at a level that entails massive economic efficiency losses, since not inconsiderable amounts of working time are lost for transport and purchasing, as economist José Luis Rodríguez recently said in a program on the subject.
Current estimates on inflation
Inflation, unlike in other Latin American countries, was not an issue in Cuba for a long time. In the 1960s, all prices were centralized, and the advantageous trade relations with the Soviet Union and its long-term price guarantees allowed for monetary stability. This began to change with the dissolution of the socialist camp in the 1990s. The island economy slid into a severe recession. The currency reform of 2004 and the introduction of the CUC, however, ushered in another era of low inflation that lasted for 16 years. Between 2000 and 2019, average annual monetary inflation was 1.3 percent, but the purchasing power of wages also remained at a low level. Although the crisis of the 1990s hit the national economy harder overall, today’s inflation now dwarfs the levels of that time.
According to estimates by former central bank economist Pavel Vidal, inflation in 2022 was around 200 percent. The government cited 77 percent for 2021 and 39 percent last year, though those figures focus on government prices, which also rose, and do not capture developments in the informal market, Economy Minister Alejandro Gil acknowledged. According to the Consumer Price Index for 2022, the strongest increases were in food and beverages (+63 percent) and restaurants and hotels (+56 percent). Hardly any changes were recorded in the health sector (+2 percent) and telecommunications (+0.3 percent).
Taking the cross-section of basic services, farmers’ markets, foreign exchange stores and the informal market, consumer prices have increased more than fivefold since the currency reform, with the largest increases occurring in 2021. The median wage in the state sector is currently 4142 pesos, equivalent to about 34 euros. The bottom line is that the real purchasing power of wages is noticeably lower than in 2019.
Meanwhile, the recovery that was actually planned for last year has been further delayed by the war in Ukraine: mainly due to the decline in global tourism and the explosion in global prices for raw materials and food. Only in the last few months, with the decline in world market prices of the most important imported goods for Cuba, there are signs of an easing at least on that front. The island has to import around 70 percent of the food it needs, while domestic agriculture has suffered further setbacks since the pandemic as a result of declining fertilizer imports. If the fall of world market prices continues, this would be an important relief with regard to inflation in Cuba.
Solutions in sight?
In the run-up to the National Assembly election, the issue of horrendous prices dominated delegate exchanges in the constituencies. President Díaz-Canel described the example of elderly people “who have contributed their entire lives to the construction and development of the country” and who are “ridiculed” by merchants when they complain about exorbitant prices. “This cannot be allowed in our society, this is not what the Revolution was made for,” the Cuban head of state said. According to Prime Minister Marrero, there are “many situations in which, even with a cost calculation based on the informal exchange rate, prices are formed with profits up to three times higher.”
Several meetings of the Council of Ministers have been held in recent weeks to develop strategies to combat inflation. What is on the agenda?
The demand overhang must be reduced, and at the same time the resources for state imports are limited. This can be summarized as the overarching consensus. Reviving domestic production is seen as the key to balance limited import capacity. Part of the foreign currency revenues, which were originally earmarked for food imports, will be invested accordingly in the domestic food industry this year. The deepening of the reform of state-owned enterprises, the decentralization of authority to individual provinces and the increase in their autonomy are likely to follow this year.
A concrete positive example in the fight against inflation has come to materialize with the opening of foreign trade to the private sector: A year ago, a 0.3-liter beer can on the streets of Havana cost the equivalent of $1.5. Several private businesses have since begun importing beer on a large scale. The supply has increased. Today, the price of beer is almost consistently less than one Dollar.
A major problem is the continuing lack of integration of the more than 7,000 new small and medium-sized enterprises (SMEs) into the economy. About one-third of them are in food production, but they cannot import for lack of foreign currency income to get production going. With regard to price regulation, the introduction of general price ceilings has been rejected by the government as an instrument, since this only combats symptoms, not the causes of inflation, Economy Minister Alejandro Gil said. Instead, a cost analysis of the products and services with highest in demand in each municipality will now be carried out together with the various stakeholders. “These must be regulated through consultations,” demanded Prime Minister Manuel Marrero. The state should accommodate businesses, for example, by lowering lease fees and reducing the sales tax on provincial level, Marrero proposed. The bundling of purchases by various state institutions is also intended to depress prices and create more stable purchasing structures for producers. Strict action will continue to be taken against speculation and hoarding.
An important step toward stabilizing supply is the opening of new wholesale and retail markets with foreign participation, which will begin soon. In parallel, work is underway to reduce the budget deficit (currently around 13 percent of GDP) and service debt and trade defaults, two crucial macroeconomic variables without which upward price pressures cannot be broken. For value chains to function sustainably, however, a solution to the currency distortions is needed. Last summer, the government announced new, prioritized foreign exchange channels for companies, and a “breathing exchange rate” was also discussed. The implementation of these plans is still pending, but in the medium term the interplay of the various measures could take effect. Until then, inflation will probably keep Cuba in its grip for some time to come.
This article was first published on Cuba Heute, a German-language news portal.