CUBA: ECONOMIC RESTRUCTURING, RECENT TRENDS, AND MAIN CHALLENGES.

CUBA: ECONOMIC RESTRUCTURING, RECENT TRENDS, AND MAIN

CHALLENGES

The collapse of the European socialist block caused a deep crisis in the Cuban economy,

which suddenly lost:• Its main suppliers of equipment, raw materials, food and particularly fuels

• The markets for over 80% of its exports

• The sources of spare parts and assistance for most of the technology installed in the previous 30 years

• Its sources of financing and economic preferences

At the same time, the United States’ Government reinforced its economic embargo with several additional measures, aimed at defeating the Cuban Revolution

Effects of the external shock 1990-1993

-61%

-75%

-79%

-77%

-35%

158%

121%

-100% -50% 0% 50% 100% 150% 200%

Gross Investment

Imports

Exports

Foreign Trade

Gross Domestic Product

Budget deficit

Money supply

Economic Reforms to Face and Reverse the Crisis• Macroeconomic adjustment to correct some imbalances.Macroeconomic adjustment to correct some imbalances.• Structural reformsStructural reforms (decentralization and reorientation of foreign

trade, opening to foreign investment, banking re-structuring, enterprise rationalization and decentralization)

• Resources were concentrated in a few sectoral programs Resources were concentrated in a few sectoral programs (aimed at developing hard currency earners or substituting imports)

• Continued development of medical services and infra-Continued development of medical services and infra-structure (structure (not only for Cuban nationals, but also aimed at exports)

• The US $ was allowed to circulate in the countryThe US $ was allowed to circulate in the country (a network of state dollar shops was set up and $remittances were allowed)

• Reintroduction of small private propertyReintroduction of small private property (agricultural markets, industrial and handicraft private markets, self-employment)

• Conversion of most state lands and agricultural companies Conversion of most state lands and agricultural companies into semi-private cooperativesinto semi-private cooperatives.

THE STATE PROPERTY KEPT PREVAILING IN MOST KEY SECTORS

THE PHILOSOPHY OF TRANSFORMATION

MAIN DECLARED GOALS

• To preserve the country’s independence

• To keep and improve socialism• To create the economic and social

basis to re-launch a development program once the crisis was over

RESULTS

Gross Domestic Product

GDP Growth Rates1990-2000

4,3

-20,0

-15,0

-10,0

-5,0

0,0

5,0

10,0

15,0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Annual rate

Average 94-2000

Gross Domestic Product

GDP Growth Rates2001-2006

5,4

12,5

3

1,8

3,8

11,8

6,3

2,8

9,9

0

2

4

6

8

10

12

14

2001 2002 2003 2004 2005 2006

Annual rate

AR 01-06

AR 01-03

AR 04-06

Cuban strategy for reinsertion in world markets brought changes in sectors acting as growth engines

- Sugar, traditional engine now secondary

- Tourism and Remittances emerged with the reform displaced sugar

- Healthcare services, biotech patent licensing, nickel, oil & gas recently emerged as key sectors

For some of these sectors foreign investment played an important role

BUDGET DEFICIT / GDP ( % )

3,2

05

101520

2530

3540

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

Breakdown of Budget Expenditures

250

1250

2250

3250

4250

525019

90

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004 05 E

06 P

Education Healthcare PúblicaDefense Social SecurityDwelling and Communal Services

( M illion Pesos)

UNEMPLOYMENT

5

7,97,1

6,2 6,3

5,4

4,13,3

2,31,9 1,9

0

1

2

3

4

5

6

7

8

91

98

9

19

95

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

( %)

EXTERNAL SECTOR

Foreign Trade: Goods and Services

-2000

0

2000

4000

6000

8000

10000

12000

2000 2001 2002 2003 2004 2005 2006

Exports Imports Balance

Trade of Goods

2448,4

9357,4

-6909,0-8000

-6000

-4000

-2000

0

2000

4000

6000

8000

10000

12000

2000 2001 2002 2003 2004 2005 2006

Million USD

Exports of Goods

Imports of Goods

Balance

Exports of Goods StructureExports of Goods Structure

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1990 1994 2004

Others

Agriculture

Fishing

Tobacco

Mining

Sugar

Exports of Services

2643,6 2571,5 2450,32978,3

3932,8

6864,97283,7

0

1000

2000

3000

4000

5000

6000

7000

8000

2000 2001 2002 2003 2004 2005 2006

USD Million

90

10

36

64

30

70

0%

20%

40%

60%

80%

100%

1989 2003 2005

Structure of Cuban Exports

Goods Services

Current Account(million USD)

-800

-600

-400

-200

0

200

400

1999 2000 2001 2002 2003 2004 2005

PERFORMANCE OF FDIPERFORMANCE OF FDI

MMUSDMMUSD

407407 403403 342342 313313Active Joint Active Joint VenturesVentures 123123 170170 258258 210 210 330330306306 3733736262 392392 258

0

500

1000

1500

2000

2500

3000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Sales Exports Dividends for the country

Reinforcement of the social content of the economic policy

Improvement of the free educational system in all levels

Refurbishment, expansion and retooling of the free healthcare system

Increases of wages, pensions and social assistance

MAIN CURRENT CHALLENGES

• The low productivity prevailing in some manufacturing sectors and most of the agriculture

• An increase of petty and mid corruption

• Critical condition of dwellings, transportation, and part of the infrastructure

• The need to eliminate the dual currency system introduced to face the crisis

Economic Policy Measures to face these challenges

To increase the productivity in manufacturing and agriculture:

• The government has deepened the restructuring of state companies, emphasizing on accounting, control and discipline

• Cooperatives and other flexible schemes are being extended in agriculture

• State companies, cooperatives and private producers have been granted state financing

• Foreign investment has been allowed and promoted in particular areas.

To face corruption:

• A partial re-centralization has taken place in most sectors

• Foreign exchange controls re-established

• Approval is now required for high-value import transactions

• Revenues of state companies were concentrated in a single account at the central bank.

To face the critical condition of infra-

structure, dwelling and transportation:

• Program to build 70,000 houses and

refurbish 150,000 per year.

• Gradual recovery of transportation

• Energy revolution

• Investments in highways, water pipelines,

ports

To move towards currency unification:

• US dollar withdrawn from the domestic economy

• Gradual revaluation of the two Cuban currencies

The prevalence of State Property in most relevant economic sectors has been confirmed as the main strategic economic policy principle of the Cuban Government.