COVID-19 Reports on Latin America and the Caribbean: No. 30
Despite Cuba’s relatively low number of coronavirus cases and deaths, the challenges caused by the coronavirus pandemic and Trump era tightening of U.S. economic sanctions has pushed the Cuban economy to its worst crisis since the fall of the Soviet Union. On December 17, 2020, Cuban President Miguel Díaz-Canel announced during a year-end session of Cuba’s parliament that the Cuban economy had shrunk by 11% in 2020. This figure is even worse than that predicted by the United Nations Economic Commission for Latin America (CEPAL), which had predicted an 8.5% contraction for the Cuban economy, compared to an average 7.7% overall regional decline for Latin America and the Caribbean. Cuba’s Economic Minister Alejandro Gil reported to Parliament that the nation had received just 55% of the hard currency it had planned in 2020, brought on by the overnight closure of the nation’s tourism industry, Cuba’s major source for hard currency. Minister Gil also reported that the nation had received only 60% of expected imports. This translates to a 30% reduction in imports compared to 2019, meaning that Cubans faced scarcity and long queues for even the most basic products. This dire scarcity is directly due to the fact that Cuba imports more than 50% of its food, fuel, medicine and other vital resources, and these resources have significantly suffered, since the 2020 drop is on top of an import decline of 15% in 2019.
In a bid to turn the tide of the worsening economic crisis, the government of Cuba announced that it would unify its dual currency system, eliminating the Cuban Convertible Peso, known as the CUC, on January 1, 2021, and leaving the Cuban Peso, known as the CUP, as the country’s sole currency. The dual currency system has been in place since 1994, instituted by the Cuba government during the country’s severe economic crisis caused by the collapse of the Soviet Union and the intensification of policies surrounding the long-standing U.S. economic embargo of the country. The CUC was introduced as a replacement for the U.S. dollars that were trading on the island’s black market at the time. The currency unification is part of a wider reform package that would also see a fivefold increase in state wages and pensions to compensate for the inflation caused by the devaluation of the currency. Private sector workers will largely have to face the devaluation of the currency and subsequent inflation on their own. Cuba economist Ricardo Torres of the University of Havana stated, “It is very concerning because you have a significant portion of the population that could become very poor with this change.”
Two thirds of Cubans are state workers who are paid in CUP, which was worth about 4 U.S. cents, while workers in the country’s private sector, like tourism and foreign imports, were paid in CUC before the monetary reform, and earned seven times what state employees made. The value of the CUC was attached to the value of the U.S. dollar one to one. Cubans could buy the CUC at a rate of 24 CUP, and sell it for 25 CUP. While the Cuban government claimed that both currencies are of equal value, neither had tradable value abroad. Further exacerbating disparities and resentment towards Cubans who worked in tourism and had access to the stronger currency, the Cuban government used the two currencies to set extremely low prices for basic goods while many imported goods, often considered luxuries, were priced with huge markups when purchased in the domestic currencies.
As of January 1, 2021, dubbed Dίa Cero (“Day Zero”) the CUP will have an official exchange rate of 24 CUP to 1 CUC, and the population will have 180 days, until June 2021, to exchange their CUCs at banks and exchange houses. The devaluation of the currency at that rate means that private sector workers who have been paid in CUCs for years will lose significant buying power, in a year that so many of those workers have struggled due to the hit to the tourism sector as a result of the coronavirus pandemic. Moreover, despite the increase in wages to state employees, the entire population will experience massive inflation, and see an increase in the price of basic goods in addition to a decrease of subsidies for water, transport and electricity. The Cuban government will also impose controls on prices at new higher levels for services as well, like haircuts and shoe repair. Companies will receive assistance from the government and temporary loans for a year to curb massive layoffs and to mitigate the effect of the elimination of the double currency.
As previously noted, state employees will see increases in their wages as a means to soften the blow of the currency unification. The minimum monthly wage for state employees will increase from 400 CUP ($17) to 2,100 CUP ($88). The Ministry of Labor and Social Security published a new salary framework, which, in addition to raising the minimum wage, would also increase the maximum monthly wage to 9,510 CUP ($396). Under the framework, mid-level high school teachers and certain circus workers, like lion tamers and magicians earn the same monthly salary of 4010 CUP ($167). Mid-level school librarians will receive a monthly wage of 3610 CUP ($150), unless they work at a pre-university vocational school or military academy, earning them an additional 100 CUP ($4) per month. Recent medical graduates without specialization will receive 4610 CUP ($192). The governor of the province of La Habana will receive a monthly wage of 9010 CUP ($375) and the governors of all other provinces will receive 8510 CUP ($354).
In addition to the monetary reform, the Cuban government has taken other steps to revive its economy. Early on in the pandemic, it sold the services of its medical workers to other Caribbean nations as a source of revenue. Travel restrictions were eased in October 2020, opening airports in some provinces to international flights, in an effort to reopen the island to tourism. In December 2020, the nation eased restrictions on foreign investment, allowing foreigners to have majority ownership in Cuban businesses, except in companies dealing with natural resource extraction and public services. Perhaps most controversial, Cuba took steps to reinvigorate its economy in late 2019, by ending a fifteen-year ban on dollar transactions.
Even then, the Cuban economy was suffering because the government’s reserves of foreign currency were running dry, and the nation was suffering fuel shortages caused by a drop in imports of subsidized oil from Venezuela. In a bid to move money that was in the pockets of Cuban citizens into the government’s emptying coffers, Cuba announced that citizens could open bank accounts that receive dollars, yen and European currencies. They could then use their bankcards to buy imported goods, mostly household appliances and automotive parts, from state owned stores called Tienda Moneda Libremente Convertible. In July 2020, the government expanded the effort, opening additional foreign currency shops that sell food and toiletries, in addition to eliminating the 10% tax on transactions with the U.S. dollar. In September 2020, the Cuban government reported that more than 120 official outlets pricing goods in dollars were in place, and planned to open more.
The move was met by a push back by many Cuban citizens, concerned by the deepening disparities created by the shops, as not all Cubans can afford to buy dollars, nor receive remittances of foreign currency from abroad. The country was already experiencing food shortages, even before the pandemic, because the government could not afford to import all the food it needed for its citizens, due to a lack of foreign currency. Cuba imports 2/3 of its food, as the local production of food is very difficult for farmers. They must sell the bulk of their products to the state, at prices set by the state. The government gives them seeds, fertilizer and tools, but it is often not enough to produce maximum yields from their land. One farmer recently complained that the state required him to produce 15,000 lbs. of pineapples, but the state failed to transport the produce, nor was he paid for his crop, leaving the pineapples to rot. The new economic reforms do not address the problems faced by farmers, but further reforms may occur throughout 2021.
Citizen’s concerns about the foreign currency shops appear to be justified, based on the first-person accounts reported on social media and other media outlets. International journalists have visited one of these foreign currency shops, and found products in foreign currency shops that were missing from peso stores, including detergent, chicken, beef and canned goods. However, even in the foreign currency shops, scarcity prevails, and the food that is available is often exorbitantly priced. A recent report included an account of a 17-pound ham selling for $230 and a seven-pound block of manchego cheese for $149. To make matters worse, queues to get into government-run peso supermarkets means two queues: one to get a number for a time slot, and another to get into the store, with waits of 8-10 hours, only to be confronted by shelves empty of meat and basic toiletries. The success of the shops largely relies on remittances from Cuban exiles abroad to the island, but it was unclear how successful the move would be, given the impact of the pandemic on the global economy. Remittances sent by Cubans who live in the U.S. began to quickly dry up as the pandemic led to huge unemployment in the United States as well.
Compounding the nation’s economic woes, are the ever-tightening sanctions imposed by the Trump administration, implemented in the hopes of forcing the Communist Party out of power, or possibly to win favor with Cuban American voters in Florida. The sanctions imposed have included: restrictions on people to people trips and the barring of “direct financial transactions” with a long list of restaurants, shops and hotels owned by the Cuban government, further efforts to restrict non-family trips to the island, limitations on remittances from the U.S. to $1000 per quarter, banning cruise ship travel, and cancelling a deal to allow Cuban players from playing in the MLB without defecting. In November 2020, the U.S. banned remittances from U.S. companies to Cuban military-controlled companies, that include Western Union’s main Cuba partner. The move forced Western Union’s 407 offices in Cuba to close, cutting off a vital lifeline to Cuban citizens. In the waning days of his presidency, Trump dealt another crippling blow to Cuba, placing it on the list of state sponsors of terrorism. These latest sanctions were imposed despite pleas by the United Nations High Commissioner for Human Rights, Michelle Bachelet, to the international community to “alleviate or suspend sanctions and embargoes” as a humanitarian gesture during the coronavirus pandemic. The Cuban government may be hoping that the incoming Biden administration will undo some of the sanctions imposed by the previous administration. Even if this occurs, and the measures instituted by the Cuba government begin to pay off, the situation in Cuba will get worse before it gets better, as economists predict that further devaluations will be needed in the future. Time will tell if Cuba’s efforts or an easing of U.S. sanctions may help in turning the tide of the crisis, bringing relief to the Cuban people.