Power outages loom
What we had been auguring for months has come to pass: Castro's economy is entering a phase of maximum intervention, very similar to a "Special Period", whose consequences nobody can anticipate. The difficulty of this juncture and the scope of the restrictive measures slated were addressed in a talk given by Marino Murillo Jorge, the country’s highest-ranking economic official, at the National Assembly's Commission on Economic Affairs, which, on its opening day, analyzed compliance with the Economic Plan during the first half of 2016.
This is a plan that is facing a crisis as a result of the paralysis of the "engines" that had driven the growth of Castro's economy. Specifically, the problems are "falling oil and nickel prices, and a failure to meet the sugar production levels and revenues called for in the plan." The convergence of these critical phenomenon, internal and external, impacts the financing of the economy and means that, once again, Cuba will have to face "a tense situation with regards to liquidity, which is not new, but entails taking a set of measures," Murillo said.
He went on to add that "services vital to the population shall be maintained, as will internal monetary equilibrium, and what that means for retail trade, as well as regulations designed to increase the Cuban peso's purchasing power and the investment program linked to Cuba's future development." These decisions will entail an increase in the public deficit, doing irreparable damage to the internal balance the economy needs to improve its international credibility.
Under such conditions, Murillo stated that it would be very difficult to achieve 2% growth in the GDP, which may indicate that Castro's economy is already in recession during the first half of this year, and, what is more serious, this temporary situation could get worse in the coming months.
Murillo blamed the economy's lack of liquidity on "falling oil and nickel prices, and failures to meet the sugar production and revenues called for under the plan." The importance that the Castro regime assigns to oil prices is noteworthy. In fact, it is the subject of the only coverage this news received in the newspaper Granma, from which we draw here. A reader with the handle ID PP96 wrote: "I don't understand why the drop in the price of oil affects the liquidity of our economy. Cuba is an oil-importing country. Thus, in my opinion, if prices fall, this should be beneficial for the economy. This is confusing for me. I'm not an economist. Please, could someone clarify this situation ...? "
The reader is absolutely right. Countries lacking oil (such as Spain, for example, which imports 100% of the crude oil used in its economy) are benefitting from lower prices on world markets, which allows them to obtain trade surpluses because exports clearly surpass imports, and due to the actual Terms of Trade (TOT). In contrast, for Castro's economy the fall in oil prices is detrimental because the regime has received from Venezuela, pursuant to an agreement between Castro and Chávez, covert subsidies pegged to those prices that allow for the resale of petroleum byproducts in other countries.
Thus, the Cuban regime wants to see, as if it were an oil-exporting country, high oil prices, in order to be able to generate more resources from that process of exchange and resale involving Venezuela. If prices fall, as has happened, revenues decrease. Thus, an external factor becomes an internal one affecting the economy.
In the case of nickel, the explanation seems more evident. Problems in the sugar sector and failures to meet planned targets are "classics" of the Castro economy, arising from the existing model, which quashes economic freedom and property rights.
The regime's solution to the liquidity problem is to "reduce liquid expenses as much as possible and exploit the numerous reserves existing in inventories, as the economy today has 1.2 billion in useful inventory over what is stipulated in the plan." What this means is that power outages are close; that investments in infrastructure, so necessary and urgent for the national economy, are cancelled or postponed sine die; and that subsidized food prices will further impact the State's general account, creating larger deficits, without this meaning that the goal of increasing the population's consumption capacity will be achieved.
Under such circumstances remittances from families abroad, and tourism revenues, will play a key role in bolstering liquidity in Castro's economy. Murillo, however, did not devote a single line in his speech to these questions. I wonder why that is.