Cuba – new changes, same challenges

Former President of Cuba (2008-18) Raúl Castro on 19 April stepped down as first secretary of the ruling Communist Party of Cuba (PCC). President Miguel Díaz-Canel faces a herculean task as a series of economic and political changes take place and challenges will deepen throughout the remainder of the year.

• The implementation of economic reforms will pose hurdles rather than solutions. Inflation and the scarcity of goods will deepen because of the currency unification. This is also likely to negatively affect plans to boost internal production.
• Although the government is seeking to boost the private sector, opportunities for private and foreign business will remain extremely limited. Joint partnerships with the State are likely to remain the main way of doing business in Cuba, but this scheme will continue to be impacted by existing sanctions.
• While Díaz-Canel’s appointment as the first secretary of the PCC marks a generational change in leadership, it is unlikely to translate into a radical change for the country. Senior PCC members will ensure the conservation of the status quo.
• Despite recent changes both in the Cuban leadership and in the US, a radical change in the bilateral relationship is unlikely over the next year and most sanctions will remain in place.

Hasta la victoria, ¿siempre?

Although COVID-19 had a relatively limited impact on the island in 2020 in terms of case numbers and deaths, the impact on the economy has been more marked. According to the Ministry of Economy, GDP decreased by 11% in 2020 – the highest drop in over two decades. This was driven by the impact of the pandemic on tourism – one of the main sources of income for the country – as well as by economic restraints due to six-decades worth of economic sanctions and restrictions imposed by the US.

These factors will exacerbate poor economic performance throughout the remainder of the year, as will the implementation of several economic reforms. Castro’s decision to step down from the leadership of the PCC is unlikely to translate into a change of direction for policymaking in the 12-month outlook. Likewise, the attitude from the US towards its peers in Havana will not see any tangible changes, at least during the first half of the administration of President Joe Biden.

Overhaul

Since mid-2020, Díaz-Canel has worked to speed up the implementation of a series of economic reforms aimed at fixing the country’s economy. These reforms were approved in 2011 and have the support of a broad sector of the PCC. However, their implementation has proven cumbersome. The delays are rooted in the reluctancy of a group of old guard PCC members to loosen their grip on the country’s economy and to embrace a changing status quo.

The first change took place on 1 January, when the government began the currency unification process. Under this scheme, the Convertible Cuban Peso (CUC) will no longer be a legal tender on 1 July and the country’s sole currency will be the Cuban Peso (CUP). The official exchange rate was set at CUP 24 = USD 1. Along with the currency unification, the government increased the minimum wage to CUP 2,100 (USD 87) and increased pensions by 400%. These measures were implemented to prevent a rise in inflation as a result of the currency unification.

Nevertheless, the result of these policies has so far been negative. During the first quarter of 2021, inflation increased by 160%, according to official estimations, and it is likely to increase further by the end of the year. Such an increase in inflation is likely to be driven by the unavailability of market basket products, as it is more expensive to produce them locally since local production is tied to imported supplies and materials. Likewise, the street value (non-fixed rate) of the USD will continue to grow. In the first quarter of the unification, it has already more than doubled to an estimated CUP 50 = USD 1.

The government continued the implementation of reforms in February. In an attempt to increase the participation of the private sector in the economy, a labour reform took effect on 10 February. The bill increased the number of activities legally available to the self-employed (cuentapropistas) from 180 to over 2,000. At the same time, it reduced to 124 the number of activities that will continue to be exclusively carried out by the State. These include medical and financial services, book printing and the media, as well as the defence sector.

Despite the intention of the reform however, to increase the participation of the private sector, the reality is that it will remain extremely limited over the next year. The main change is likely to be reflected in small and medium-sized enterprises (SMEs), as an increasing number of shops, restaurants, and tourism-related companies will now be legal. Nevertheless, the restrictions to credit, and soaring prices of imported goods will make it hard for these new businesses to last more than a couple of years. Opportunities for foreign and transnational companies will remain limited – larger companies will remain under the control of the State and the Army. This means that competition will remain out of reach for private and foreign businesses unless they participate in a joint venture with these institutions. However, the continuation of US-imposed sanction will halt the potential constitution of these ventures.

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O Captain! My Captain!

Castro’s departure from the leadership of the PCC opened the door to Díaz-Canel, who became the first non-Castro to hold the title of first secretary since the end of the Cuban Revolution in 1959. His resignation was widely expected – as it was part of a political reform pushed by Castro himself in 2011 to increase the political participation of fellow members of the PCC by eliminating positions “for life” and instead limiting them to ten years.

The appointment of Díaz-Canel is unlikely to result in substantial changes. Despite his pragmatism and his reformist agenda, his room to manoeuvre will be extremely limited. Senior members of the PCC are highly likely to maintain a strong influence on his actions – they remain loyal to the principles of the Cuban revolution. The military will also play a pivotal role in keeping Díaz-Canel in check.

Regardless of the scrutiny that will continue over Díaz-Canel, the reality of the country’s complex economic situation will force him to continue implementing economic reforms in an to attempt to fix the economy. His administration is likely to seek to boost internal production, especially agriculture, during the remainder of the year. This is unlikely to be successful however, as the continuous devaluation of the CUP will make it harder to get access to the imported supplies required to carry out jobs. As a result, a potential increase in bouts of anti-government protests by dissent groups is likely. The government’s response will be a moment of truth for the new leader of the PCC. On the one hand, a repressive response towards dissidents would likely result in increasing sanctions from the US, while on the other hand, a stance perceived as being permissive would likely raise some eyebrows among those inside the PCC who are seeking the continuation of the Castro mandate.

Distant neighbours

To exacerbate matters, the sanctions imposed by the US were extended in January. The administration of former president Donald Trump (2017-21) on 11 January designated Cuba as a State Sponsor of Terrorism. According to the State Department, the decision was driven by the country’s persistent assistance of the Venezuelan regime under President Nicolás Maduro, and its support to Colombian guerrilla groups, especially dissidents from the now-demobilised Revolutionary Armed Forces of Colombia (FARC) and the National Liberation Army (ELN). The decision restricts the arrival of US humanitarian aid to Cuba and limits the purchase of firearms and military equipment for the government.

The measure was widely perceived as a manoeuvre by the outgoing Trump administration to delay any potential rapprochement from the Biden government towards its Cuban counterpart. However, any tangible changes in the relationship between the two are unlikely to occur over the next two years as the US government will instead focus on prioritising on the country’s recovery from the pandemic.

Cuba is likely to see an increase in challenges throughout 2021, mostly in terms of the economy. Although reforms brought about by the government are necessary, the timing of their implementation could not have been worse – due to internal and external factors. Improvements are unlikely to take place over the next year. However, the impacts of the economic situation for the political scene remain to be seen.