Cuba - iuj.ac.jp€¦ · Cuba 1 Country Report November 2005 ' The Economist Intelligence Unit...

Country Report

Cuba

November 2005

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom

Cuba at a glance: 2006-07

OVERVIEW The one-party political system is unlikely to change while the president, Fidel Castro, remains in office. The Economist Intelligence Unit�s forecast assumes that he will remain in power in 2006-07. He will continue to groom his successors with a view to enabling the political system to survive him, but his absence would herald major changes in the power structure. We expect relations with the US to remain hostile, helping to bolster domestic support for Mr Castro, but limiting the possibility for relaxation of US sanctions. Relations with the EU will be strained, but closer ties with China and Venezuela will improve economic prospects. Despite a sharp rise in public investment, we expect the fiscal deficit to remain above 4.5% of GDP. Macroeconomic stability will remain a priority, with an increasing role for the Banco Central de Cuba (BCC, the Central Bank). More external financing will raise average annual GDP growth above 4%, with expansion of public services and of the mining, oil, construction and tourism sectors, and some export diversification. With a sharp increase in capital goods imports, the current-account deficit will widen in 2006-07.

Key changes from last month

Political outlook • There have been no significant new developments in the past month.

Economic policy outlook • An increase in income from the sale of professional services and higher tax

revenue is financing major public investment programmes. We expect the announcements of further new projects in the coming year.

Economic forecast • In the light of new trade data showing a rapid acceleration of import

spending, particularly on capital goods and industrial inputs, we have made an upward adjustment to our estimates and forecasts for investment. We also expect the trade and current-account deficits to be wider than previously anticipated, reflecting the sharp increase in imports.

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Cuba 1

Country Report November 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005

Contents

Cuba

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators

6 Outlook for 2006-07 6 Political outlook 7 Economic policy outlook 8 Economic forecast

11 The political scene

20 Economic policy

23 The domestic economy 23 Output and demand 24 Tourism 25 Agriculture 26 Infrastructure 27 Oil and gas 28 Mining 28 Manufacturing

28 Foreign trade and payments

List of tables 8 International assumptions summary 11 Forecast summary

List of figures

11 Gross domestic product 11 Consumer price inflation

Cuba 3


Cuba November 2005

Summary

The one-party political system is unlikely to change if, as the Economist Intelligence Unit assumes, the president, Fidel Castro, remains in power in 2006-07. We expect relations with the US to remain hostile, limiting the possibility for relaxation of US sanctions. Relations with the EU will be strained, but closer ties with China and Venezuela will boost the economy. Despite a sharp rise in public investment, we expect the fiscal deficit to remain close to 4% of GDP. Macroeconomic stability will remain a priority, with an increasing role for the Banco Central de Cuba (BCC, the Central Bank). More external financing will raise annual GDP growth above 4.5%, with expansion of public services and of the mining, oil, construction and tourism sectors, and some export diversification. With a sharp increase in capital goods imports, the current-account deficit will widen in 2006-07.

Tensions have eased as power cuts have become less frequent, a drought has ended and the government�s hurricane responses have been successful. New homes have been promised, and an anti-crime campaign has been stepped up. The political and military leadership have raised their profiles, while dissidents have been repressed and divided. Hostile relations with the US remain, with both sides using propaganda as a weapon. US sanctions have been tightened while the UN has condemned them. Relations with the EU have been uneasy but ties with Venezuela and Canada have grown.

Public spending has risen in line with new sources of revenue and financing. A housing programme has given little role to the market, but could lead to a review of the rules, while the continuing crisis in the sugar sector has given rise to a policy debate on agriculture.

Public investment has helped to lift growth in 2005. Tourism arrivals are up by 10%. Agriculture has been hit by drought and hurricanes, but improvement is expected. New investments will improve the housing stock and strengthen power generation and distribution. New foreign partners have been attracted to the oil sector, and will help to lift nickel output. Steel and construction-linked industries have grown but overall manufacturing performance has been weak.

Swelling imports and declining exports have widened the goods trade and current-account deficits, but higher services earnings and an increase in direct investment and credits have provided the foreign exchange to cover them.

Editors: Emily Morris (editor); Robert Wood (consulting editor) Editorial closing date: November 11th 2005 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Outlook for 2006-07

The political scene

Economic policy

The domestic economy

Foreign trade and payments

4 Cuba


Political structure

Republic of Cuba

Centralised political system, with close identification between the PCC and the state

President, currently Fidel Castro Ruz

The Council of Ministers is the highest executive body; its Executive Committee is composed of the president, the first vice-president and the vice-presidents of the Council of Ministers

National Assembly of People�s Power; 609 members elected by direct ballot; the Assembly meets twice a year, and extraordinary sessions can be called

A People�s Supreme Court oversees a system of regional tribunals; the Supreme Court is accountable to the National Assembly

Provincial and national assemblies: last elections January 2003; next elections due in January 2008. Municipal elections: last held April 2005; next due October 2007

The organs of the state and the PCC are closely entwined, and power devolves principally from the Executive Committee of the Council of Ministers

The Partido Comunista de Cuba (PCC) is the only legal political party

President of the councils of state & ministers Fidel Castro Ruz First vice-president Raúl Castro Ruz Vice-president Carlos Lage Dávila President of the National Assembly Ricardo Alarcón de Quesada

Agriculture Vacant since September 2005 Armed forces Raúl Castro Ruz Audit & control Lina Pedraza Rodríguez Basic industry Yadira García Vera Communications & informatics Ignacio González Planas Culture Abel Prieto Jiménez Economy & planning José Luis Rodríguez García Finance & prices Georgina Barreiro Fajardo Fisheries Alfredo López Valdés Foreign investment & economic co-operation Marta Lomas Morales Foreign relations Felipe Pérez Roque Foreign trade Raúl de la Nuez Ramírez Government Ricardo Cabrisas Ruíz Labour & social security Alfredo Morales Cartaya Light industry Estela Domínguez Ariosa Public health Jose Ramon Balaguer Science, technology & the environment Vacant since October 2004 Sugar Ulises Rosales del Toro Tourism Manuel Marrero Cruz Transport Carlos Manuel Pazo Torrado

Francisco Soberón Valdés

Official name

Form of government

Head of state

The executive

National legislature

Legal system

National elections

National government

Main political organisation

Key ministers

Central Bank president

Cuba 5


Economic structure

Annual indicators

2001 a 2002 a 2003 a 2004 b 2005 b

GDP at market prices (CuPs bn)c 29.6 30.7 32.3 34.0 37.3

GDP (US$ bn)bd 27.9 28.8 30.3 32.4 35.3

Real GDP growth (%) 3.0 1.5 2.9 4.0 5.5

Consumer price inflation (av; %) -4.1 b 8.8 b 0.6 b 1.0 4.2

Population (m) 11.2 11.2 11.2 11.3 11.3

Exports of goods fob (US$ m) 1,661.5 1,402.0 1,654.4 1,890.0 2,063.0

Imports of goods fob (US$ m) 4,838.3 4,129.0 4,624.5 5,645.0 7,056.3

Current-account balance (US$ m) -653.3 -296.0 -155.1 b -515.0 -1,133.3

Total external debt (US$ bn) 11.9 b 11.9 b 12.3 b 12.6 13.1

Debt-service ratio, paid (%) 15.8 b 16.9 b 15.4 b 14.8 13.5

Official internal exchange rate CuPs:CUC (av) 1.0 1.0 1.0 1.0 1.0

Unofficial internal exchange rate CuPs:CUC (av) 23.3 26.0 26.0 26.0 24.3

Official external exchange rate CUC:US$ (av) 1.0 1.0 1.0 1.0 0.9

Unofficial external exchange rate CuPs:US$ (av) 23.3 26.0 26.0 26.0 23.0

a Actual. b Economist Intelligence Unit estimates. c The nominal local currency GDP series is not compatible with the US$ GDP estimates at the official rate (Ps1:US$1) and the unofficial (market) rate. d This is an estimate only, based on available information. This series is not consistent with nominal GDP and exchange rate because neither the official nor unofficial exchange rates can be used to derive dollar GDP.

Origins of gross domestic product 2003 % of total Components of gross domestic product 2003 % of total

Agriculture & fisheries 6.5 Private consumption 64.9

Mining 1.8 Government consumption 26.4

Construction 5.6 Gross fixed investment 9.1

Electricity, gas & water supply 1.9 Changes in stocks 0.3

Manufacturing 16.0 Exports, goods & services 14.4

Services 68.3 Imports, goods & services 15.1

Principal exports 2004a US$ m Principal imports cif 2003a US$ m

Nickel 824 Machinery & equipment 1,035

Sugar & sugar by-products 324 Fuel 1,010

Tobacco products 217 Food 928

Medicines 130 Chemicals 482

Main destinations of exports 2003b % of total Main origins of imports 2003b % of total

Netherlands 20.0 Spain 12.3

Canada 16.1 Venezuela 8.8

China 6.6 US 6.2

Russia 9.8 China 5.6

Spain 7.9 Canada 4.0

a Economist Intelligence Unit estimates. b Based on IMF, Direction of Trade Statistics Yearbook.

6 Cuba


Outlook for 2006-07

Political outlook

Tensions between the Cuban and US governments continue to overshadow domestic politics. By restraining economic growth the sanctions have contributed to everyday frustrations, and by providing the illegal opposition with support and publicity the US has helped to keep the dissident movement active and boosted its international profile. But US economic sanctions and continued support for dissidents have also helped the president, Fidel Castro, to rally nationalist sentiment to strengthen his own position. US sanctions enable the Cuban government to deflect criticism by highlighting the damage they inflict on the Cuban economy, and the US government!s open support for dissident groups has served to reduce the dissidents� credibility both at home (among the strongly nationalist population) and abroad. On balance, the bilateral tensions appear to be more of a prop than a threat to the one-party political system.

Nationalism is an important factor in the government�s ability to maintain sufficient popular support to ensure its survival. It divides the dissident groups between those who work closely with the US authorities (and openly ally themselves with hardline US-based émigré organisations) and the less hard-line groups who hope for a peaceful transition to liberal democracy and market economy without foreign involvement. It also provides some of the explanation for the continued popularity of Mr Castro, who is regarded as a national hero by many. Other factors underlying the survival of the one-party communist system are the high level of public participation in official mass organisations, offering a broad section of the public a stake in the existing political system, and state provision of extensive health, education and welfare services. These features of the Cuban system explain why, despite continued economic hardship and restrictions on economic and political freedoms, open public protest is restricted to a small minority. The Economist Intelligence Unit expects this to remain unchanged in 2006-07, with the result that there is no immediate domestic threat to the government.

Our forecast is still based on the assumption that Mr Castro, who has been president for more than 45 years, will not leave office before the end of 2007. As long as he remains the head of state, he will continue to handpick the next generation of leaders, who will continue gradually to assume greater responsibilities within the existing political structure. However, Mr Castro will be 80 in 2006, and this fact alone ensures that the uncertainty over the succession is a risk factor. The most likely scenario in the event of Mr Castro�s death would be a continuation of the existing political system. However, no single figure would be able to substitute for him, so a less centralised system would be likely to emerge, giving rise to the possibility of a power struggle between conservatives and reformers within the leadership. The main immediate risk in the event of Mr Castro�s death, however, would be from action taken by the US. Current indications are that the US government, working

Domestic politics

Cuba 7


with US-based émigré organisations, might seek to destabilise Cuba in the hope of precipitating a regime change.

The US government continues to stress official hostility towards the Cuban government and this stance is unlikely to change in the next two years. There is little room to inflict further economic damage on Cuba, as it has already taken sanctions laws close to their limits, but the bilateral tensions will continue to act as a deterrent to potential investors from other countries. Increasing ties with China and Venezuela have started to provide a significant economic stimulus, and these relationships seem set to become more important. This makes Cuba�s official relations with the EU less significant, encouraging Cuba to reject political conditions imposed by the EU on any increase in the scale of co-operation. However, bilateral co-operation with some EU member countries will continue. Cuba will continue actively to cultivate closer relations with countries in the Latin American and Caribbean region, although these will suffer periodic setbacks resulting from issues of human rights and pressure from the US.

Economic policy outlook

Fiscal policy is being re-orientated from a preoccupation with stability to an expansionary stance, led by public investment. However, the effect of this expansion on prices and the exchange rate will be tempered by firmer control of monetary growth and the use of foreign exchange through both direct and indirect means. The control of hard-currency resources by the Banco Central de Cuba (BCC, the Central Bank) is reversing the trend towards autonomy of state-owned enterprises, with mixed effects on economic efficiency. Closer auditing and greater accountability and regulation may reduce waste and corruption at the enterprise level, but bureaucratic controls will impose extra administrative costs and inhibit initiative.

Measures taken to �de-dollarise� the domestic economy over the past two years demonstrate that a strategy for moving towards a single currency and single exchange rate is being developed, but until this objective is achieved the economy will continue to be plagued by dislocation and perverse incentives. We expect further progress towards creating the conditions for exchange-rate unification, but our forecast assumes that there will continue to be two domestic currencies and three exchange rates until after 2007.

After slightly overshooting the 2004 public spending target, our forecast anticipates that the fiscal deficit will be stable within its target range of 3-4% of GDP in 2006-07. In recent years, fiscal management has been strict, with slippage only in exceptional circumstances, and we expect this to remain the case for fear of feeding inflation and eroding the value of the Cuban peso. We expect that higher social spending and new public investment programmes will be financed by an increase in tax revenue arising from firm growth and high nickel prices, as well as by earnings from the export of Cuban health and education services to Venezuela. However, the arrival of new lines of foreign official concessionary financing to finance public investment projects, together with the authorities� improved capacity to contain the inflationary impact of a

Fiscal policy

Policy trends

International relations

8 Cuba


wider deficit through monetary policy, makes it more likely that the authorities might decide to increase the deficit target to allow for more investment.

Fiscal policy has traditionally been the main tool for macroeconomic management, but changes in the monetary system over the past year have increased the Central Bank�s ability to control monetary variables. The allocation of financial resources will continue to shift from the central planning authorities towards the banking system, under the supervision of the Central Bank. Rules issued in December 2004 enable the Central Bank to monitor and control hard-currency credit creation, helping to tackle the problem of inter-enterprise debt and to reduce payments risk for both domestic and foreign creditors. However, the central planning authorities will also continue to use direct controls for the allocation of finance, while a large informal economy and the co-existence of different markets with divergent prices will continue to hamper monetary management.

Our forecast assumes that the existence of two domestic currencies and three exchange rates will continue to represent barriers to integration between the domestic economy and the external sector. However, we expect that, during the next two years, further changes in the currency system will be introduced. These may be disruptive in the short term, but significant progress towards unification could potentially galvanise an upturn in the formal sector of the domestic economy.

Economic forecast

International assumptions summary (% unless otherwise indicated)

2004 2005 2006 2007

Real GDP growth World 5.0 4.3 4.0 3.9

OECD 3.3 2.5 2.3 2.4

EU25 2.4 1.6 1.9 2.2

Exchange rates US$:� 1.244 1.242 1.245 1.338

Financial indicators US$ 3-month commercial paper rate 1.48 3.49 5.13 4.88

Commodity prices Oil (West Texas Intermediate; US$/b) 41.8 57.4 57.3 47.9

Sugar (US cents/lb) 7.2 9.6 10.8 9.8

Nickel (US$/lb) 6.3 7.0 6.7 6.2

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

Our forecast is based on the assumption that there will be no sharp shocks to threaten the current relatively favourable conditions for Cuba�s external accounts. Following an acceleration to 5% in 2004, world GDP growth (at purchasing power parity exchange rates) has slipped to 4.3% in 2005 and we expect it to ease further, to around 4%, in 2006-07. This is still a brisk pace, and will be sufficient to ensure the continued expansion of international trade and tourism, with a gradual overall downturn in commodity prices. However, large and persistent imbalances within the economies of the OECD and China

Monetary policy

International assumptions

Cuba 9


present important risks to this forecast, and these imbalances could give rise to a sudden correction that would hit economic performance and heighten risk aversion.

The main determinants of Cuba�s terms of trade are the prices of nickel and sugar exports, and the cost of oil imports. We expect the overall terms of trade to remain steady in 2006-07, as the benefits of a reduction in oil import prices will be offset by a decline in nickel export prices. The impact of slightly higher sugar prices will be slight, given the relatively small contribution that sugar now makes to export revenue. The net impact of oil price changes on the Cuban economy has been reduced by the terms of an agreement with Venezuela, which supplies most of Cuba�s oil imports: the agreement allows the prices of Cuba�s exports to Venezuela (mainly professional services) to move in line with oil prices.

A weaker US dollar in 2006-07 will boost the dollar value of non-dollar-denominated earnings (including most of the income from tourism), but inflate the dollar value of Cuba�s non dollar-denominated external debt, which accounts for around 70% of the total. An improvement in Cuba�s access to foreign credit will reduce Cuban borrowing costs, despite the expected rise in US interest rates.

The main constraint on GDP growth in the past decade has been Cuba�s restricted access to external financing; as this constraint has been relaxed, prospects have improved. Major new trade agreements, investment commitments and credit lines from China and Venezuela are providing a significant boost, and will continue to do so in 2006-07. This"together with continued growth of the tourism, nickel and oil sectors"will allow GDP growth to rise to a trend rate of over 4%, despite tighter enforcement of US sanctions and low sugar earnings.

Within the domestic economy, in 2006-07 there will be output increases in oil, power, nickel and non-sugar manufacturing, as well as continued expansion of public services, tourism, and exported professional services. We expect agricultural performance to improve from the low base in 2005, which was caused by drought. On the demand side, real disposable incomes and consumer spending (which have lagged behind economic growth over the past five years) will accelerate, while government spending will keep growing. Investment has already begun to pick up from its depressed level, and we expect it to provide a strong stimulus to the economy in 2006-07.

There are positive as well as negative risks to the outlook. On the positive side, a major oil find is a possibility, but it is not included in our forecast. On the negative side, Cuba�s heavy dependence on tourism and nickel exports leave it vulnerable to a slowdown in world economic growth, and its new dependence on Venezuela means that growth would be hit if the Venezuelan president, Hugo Chávez Frías, were to lose power unexpectedly.

Consumer price inflation is determined by the net effect of price movements in the formal and informal markets, denominated in both Cuban pesos (Ps) and convertible pesos (CUC). The government can influence inflation by using price

Inflation

Economic growth

10 Cuba


controls and regulating the limited free markets, but the prices of goods in the retail outlets"both those operating in convertible pesos and the free agricultural and produce markets denominated in Cuban pesos"are affected by market pressures. In the case of the CUC markets, the prices in Cuban peso terms fluctuate with changes in the unofficial Ps:CUC exchange rate; and in the case of the free markets, prices are sensitive to movements in the demand and supply of goods. In 2004-05, an increase in prices in the hard-currency sector was followed by pressure on food prices in the peso-denominated free agricultural markets resulting from the drought. In 2006-07 we expect inflation to moderate. Improved supply will subdue market prices in the peso sector, but this effect will be offset by an increase in demand arising from higher house-hold earnings. We expect the Cuban peso cost of purchases in the convertible peso outlets to decline as the Cuban peso appreciates against the convertible peso, but some administered prices are likely to be adjusted upwards.

The lack of convertibility between the two domestic currencies"the Cuban peso and the convertible peso"for all but personal transactions remains. This distorts the labour market and creates an obstacle to the integration of the domestic and external economies, and so acts as a barrier to the growth of Cuba�s domestic economy. Changes in the currency system introduced over the past year suggest that a strategy for the unification of the two Cuban currencies is being developed, and we expect that the two domestic currencies will be brought into closer alignment by the end of 2007. However, our forecast assumes that this process will be gradual and full unification will not occur within the outlook period.

We expect the current-account deficit, which we estimate to have widened to 3.2% of GDP in 2005, to grow further in 2006-07 owing to the boost to import capacity from new sources of external financing. The growth of spending on goods imports will outstrip export growth over the period, as a result of a high level of spending on capital goods financed mainly by new foreign partners, particularly in the energy, mining and infrastructure sectors. As a result the trade deficit will widen. The growing trade deficit will be offset by an expansion of the services surplus, owing to continued growth in income from tourism (although the underlying rate of growth will slow) and strong earnings from other services"mainly health and education services sold to Venezuela. Our forecast anticipates that lower interest rates on external financing will help to trim the income deficit, despite a rise in profit remittances, while the growth of net current transfers will be inhibited by tight restrictions imposed by the US authorities on remittances to Cuba.

Although the Cuban authorities have cut the number of small foreign businesses active within Cuba, they continue to woo larger companies for foreign investment in major projects in strategic sectors, particularly mining and energy. Much of the new investment will come from non-OECD state companies or private companies backed by official financing or guarantees. There are no official data on the level of international reserves, but we expect rising inflows of external financing (particularly from China and Venezuela) to allow a further modest rise in reserves. The total debt stock will grow but

Exchange rates

External sector

Cuba 11


authorities will use the improvement in the external financing position to pay off some of Cuba�s debt arrears and improve the terms of debt servicing in the forecast period.

Forecast summary (% unless otherwise indicated)

2004 a 2005 a 2006 b 2007 b

Real GDP growth 4.0 5.5 4.7 4.5

Industrial production growth 5.3 4.4 4.5 6.3

Gross agricultural production growth 2.2 -12.0 8.0 8.0

Unemployment rate (year-end) 1.9 c 1.9 1.8 1.8

Consumer price inflation (av) 1.0 4.2 2.4 1.7

Consumer price inflation (year-end) 4.0 4.2 1.7 1.7

General government balance (% of GDP) -3.9 -3.9 -3.8 -3.6

Exports of goods fob (US$ bn) 1.9 2.1 2.3 2.5

Imports of goods fob (US$ bn) 5.6 7.1 8.0 8.5

Current-account balance (US$ bn) -0.5 -1.1 -1.6 -1.7

Current-account balance (% of GDP) -1.6 -3.2 -4.2 -4.2

External debt (year-end; US$ bn) 12.6 13.1 13.4 13.5

Official internal exchange rate CuPs:CUC (av) 1.00 1.00 1.00 1.00

Unofficial internal exchange rate CuPs:CUC (av)d 26.00 24.35 21.82 19.89

Official external exchange rate CUC:US$ (av) 1.00 0.94 0.92 0.90

Unofficial external exchange rate CuPs:US$ (av)e 26.00 23.00 20.01 17.88

a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Actual. d Available only domestically, for personal transactions. e "Unofficial" exchange rate used domestically, for personal transactions. Since 1994 Cuban pesos (Ps) have been exchangeable for convertible pesos (CUC) or US dollars legally, in state-run exchange houses, known as Casas de Cambio (Cadecas). Until April 2005 the CUC:US$ exchange rate was fixed at 1:1; on April 9th 2005, the fixed rate was replaced by an adjustable peg, with the rate set initially at CUC0.93:US$1.

The political scene

Tensions have eased over the past quarter. Despite months of intensive repairs to the electricity network and repeated official assurances that the technical and managerial failures were being addressed (following the replacement of the minister responsible in November 2004"see November 2004, The political

Power cuts, hurricanes and floods influence the mood

12 Cuba


scene), patience with the frequent power cuts in the capital, Havana, was wear-ing thin by mid-August. In the summer heat, there were reports and rumours of angry outbursts, and suggestions by some unofficial commentators that these reflected a more generalised frustration with the government. But by mid-Sep-tember, as routine politics resumed, the academic year began and power interr-uptions started to become less frequent, the tensions receded while the govern-ment�s promises of improvements in the months ahead increased optimism. The weather also helped. After the severe damage from a direct hit from Hurricane Dennis in July (August 2005, The political scene), none of the hurri-canes of the past quarter"Emily in mid-July, Katrina at the end of August, Rita in mid-September and Wilma and Alpha in the second half of October"made landfall. Instead, they brought heavy rain as they skirted around the edges of the island, ending a severe two-year drought in the central and eastern provinces.

While the rains from the unusually active hurricane season brought a welcome end to drought in the east, the worst of the damage to infrastructure from winds and rain"including yet more damage to the power grid"was felt in the west. However, reports of the devastation of Hurricane Katrina in the US helped to temper complaints about the authorities� failure to end the power cuts in Cuba. Although the tone of the Cuban state-controlled television broadcasts of events in New Orleans in the aftermath of the storm was sympathetic to the suffering of people caught up in the disaster, the political message"that emergency planning and disaster relief in the US compared unfavourably with hurricane preparedness and response in Cuba"was clear. As subsequent hurricanes passed by, the early warnings, mass evacuations and mobilisation of state resources and community organisations all appeared remarkably efficient and effective in contrast with the images of New Orleans. Inefficient and restrictive as the Cuban system of central planning might be, national emergencies provide the authorities with the opportunity to show their strengths in terms of mobilisation and co-ordination, and to remind people that the state provides their security.

The regular session of the National Assembly in early September provided an upbeat assessment of economic prospects for the coming months and promises of improvements in living conditions. The major housing programme announced by the president, Fidel Castro, in July was confirmed by the vice-president, Carlos Lage. The planned programme envisages the construction of 150,000 new homes by the end of 2006 and a further 100,000 in 2007, representing the fastest pace of building since 1959 (see Economic policy and The domestic economy, Infrastructure). With construction about to get under way, official reports have been published highlighting the extent of the problem, and acknowledging that the deterioration of housing conditions and lack of new building over the past 15 years has led to ever-increasing overcrowding, creating risks to both physical and mental health. The problem has long been recognised by Cuban social scientists as a cause of stress and despair, contributing to both a high suicide rate and emigration.

The other major theme of the September National Assembly was crime, and this issue has also dominated many of the discussions in other official political

National Assembly promises new homes

Anti-crime campaign enters a new phase

Cuba 13


organisations. Official statements have referred to evidence of a declining rate of petty crime, but no specific data have been given and even if there has been a reduction there is no sign that the problem has ceased to be a concern. Crime was a central theme at September provincial assemblies of the Partido Comunista de Cuba (PCC, the Cuban Communist Party). Discussions of education and enterprise management also highlighted links with the issue of crime prevention. The direct influence of enterprise management on economic crime has been highlighted by the efforts of the Ministry of Audit and Control, which has been delving deeper into the accounts and systems, with a reported 10% of enterprises being subjected to �special investigations�. The activities of auditors also appeared to be linked to a dramatic move on October 16th, when the staff of Havana�s petrol stations were abruptly removed from their posts (on full pay) without warning and replaced by social work students from the eastern province of Holguín. The aim of the exercise appears to be to check on the extent of pilfering that had previously been taking place by comparing the accounts before and after the change of staff. According to press reports, the extent of the problem had previously been exposed when the same method was piloted in the western province of Pinar del Río.

In the context of the government�s clampdown on crime and the management failures that allow it to flourish, there has been speculation that two recent dismissals might have been linked to wrongdoing. The first was that of Wilfredo López Rodríguez (54), removed from his post in the Grupo de Apoyo (Support Group, often referred to as Mr Castro�s "inner circle"). Mr López had been in the post since 1995, and had been thought to be one of the rising stars. The official announcement on August 25th revealed little about the reasons for the decision, simply stating that Mr López was being relieved of his post to allow him to undertake �other duties�. The mystery deepened when it transpired that the decision had been made as long ago as May 4th. The second high-ranking casualty was Humberto Rodríguez González, president of the Instituto Nacional de Deportes, Educación Física y Recreación (INDER, the national sports council) since 1997, who was dismissed on October 3rd. Once again no reason was given, but a stream of sporting defections in recent years and concerns about low-level corruption in international sporting contacts might have played a part. Mr Rodríguez has been replaced by his former deputy, Julio Christian Jiménez Molina, a former basketball star with reputation for effectiveness, and the post has been upgraded to that of minister.

In Cuba�s one-party political system underlying political currents are hard to interpret, but the signs are that the president and the armed forces have been working to demonstrate their dominant positions in political life. Mr Castro has increased the frequency of his public appearances in the past quarter. On television, he has appeared frequently on the regular Mesa Redonda (Round Table) programme, discussing issues selected by the authorities as worthy of debate. As usual, there has been a strong emphasis on US foreign policy and US-Cuba relations. Mr Castro�s participation in public events has included his unexpected appearance on September 5th at the PetroCaribe summit in Jamaica. These appearances may have been intended to silence the summer

The president and military appear in control

14 Cuba


rumour mill, which included unsubstantiated stories of tensions between Mr Castro and Mr Lage.

A higher profile for the military is in keeping with the growing influence of the Fuerzas Armadas Revolucionarias (FAR, the armed forces), under the leadership of Mr Castro�s brother, Raúl, over the past few years. After a sharp reduction in its budget in the wake of the collapse of the Soviet Union in the early 1990s, the army has extended its reach through greater involvement in the economy (particularly in food production, transport and tourism) and Raúl Castro has become closely involved in economic policy initiatives. The army played an important role in hurricane mobilisations, and in the latest round of Communist Party meetings for regional branches of the FAR, party cells responded to a recent PCC Central Committee call for strengthening the PCC within the FAR.

The only major change in senior political leadership over the past quarter has arisen from the death of the minister of agriculture, Alfredo Jordán Morales, on September 21st. Mr Jordán, who was 55, had been suffering from cancer, but although his death had been expected no replacement has yet been announced. The reasons for the delay in making the new appointment are unclear, and could reflect possible policy shifts (see Economic policy). Among the younger generation, Lisette Martínez Luzardo was elected president of the Federación de Estudiantes de la Enseñanza Media (FEEM, the secondary school students� union) on September 15th. The FEEM is regarded as an important body for grooming the next generation of leaders, as well as supporting the state�s emphasis on strengthening the education sector. Former leaders of the youth organisations often play an influential part in national government: the former president of the Federación de Estudiantes Universitarias (FEU, the university students� union), Hassan Pérez, remains a key player within the powerful Unión de Jóvenes Comunistas (UJC, young Communists� organisation), while the former UJC first secretary, Otto Rivero, reportedly remains active in waging the "Battle of Ideas" and the links with Venezuela, despite some speculation and rumours about his absence from public view in recent months.

Since the relatively large public meeting in May (August 2005, The political scene), the level of dissident activity appears to have waned. The most consistent activities have been protests staged by a small group consisting mainly of relatives of political prisoners known as the Damas en Blanco (Women in White), who have held low-key weekly demonstrations outside their church base in the Miramar suburb of Havana, demanding the release of the prisoners. Their demonstrations have not been disturbed by officials, although they have attracted international attention, emerging as joint winners of the EU�s Sakharov prize for human rights campaigners. Oswaldo Payá, leader of one of the moderate dissident groups, the Movimiento Cristiano por la Liberación (MCL), was awarded the same prize in 2002. A new coalition of more hardline groups was launched in late July, in what seems to be a response to the call for unity at the May meeting. The coalition, named the Iniciativa Pro-Cambio (the Pro-Change Initiative), claims to represent 43 Cuban and five émigré organisations, and has issued a statement calling for a change of

Dissidents suffer repression and divisions

Cuba 15


government, the establishment of a democratic system, a market economy and respect for human rights. It has also announced its intention to collect signatures in support of its demands. It is not entirely clear who the main drivers are, but the tone of the statement is close to that of the Asamblea para la Promoción de una Sociedad Civil (Assembly for the Promotion of a Civil Society, known as the Asamblea), the group responsible for the May meeting. Although it claims to be seeking to unify the dissident movement, the Initiative�s call for a petition seems to be designed to sideline the most prom-inent moderate dissident group, the Varela project, championed by Mr Payá, which has already collected more than 11,000 signatures to demand political changes. In this respect, the Initiative is likely to drive a deeper wedge between the different groups by increasing their rivalry, rather than encouraging unity.

In September, international focus turned towards a group of less prominent imprisoned dissidents on hunger strike in protest at their treatment and the treatment of others in prison. The strikers, Adolfo Fernández, Félix Navarro, Víctor Rolando Arroyo and two Varela project activists, José Daniel Ferrer and Omar Pernet Hernández, all appeared to have ended their protests by mid-October.

The government�s policy towards the outlawed opposition remains unchanged. Dissidents continue to be closely monitored, frequently harassed and prosecuted for a range of crimes ranging from public order offences to acting as agents for a foreign power. Having been restrained in their response to the May meeting, the authorities have resumed arrests and other punishments. On August 19th local government authorities confiscated the land on which the May meeting was held, adjacent to the southern Havana home of Félix Bonne, one of the main organisers. The site was taken over by the Rancho Boyeros municipality, supposedly to allow greater public use for social development. Apart from repression, another weapon used by the Cuban authorities is to encourage divisions within the movement. Given the extent to which Cuban intelligence agents have infiltrated these groups in the past, it is possible that the petition proposed by the new Initiative has been encouraged by agents provocateurs to undermine the work and relative success of the Varela project.

Relations between Cuba and the US remain fundamentally unaltered, although there are some small signs that the tenor of hostility might be set to moderate. The new head of the US interests section in Havana, Michael Parmly, a career diplomat, seems unlikely to be as provocative as his predecessor, James Cason, who came to the end of his term in September. This appointment has coincided with the replacement of Roger Noriega, one of the champions of the ideological anti-Castro agenda, as assistant secretary of state for hemispheric affairs, and with an October trip around Latin America by the US deputy secretary of state, Robert Zoellick, to woo the region and discuss trade and economic ties. Another small indication that the US administration might be tilting towards a less ideological approach is the fact that in September the US government quietly backed away from its claim that Cuba presents a biological weapons threat. A report to Congress based on a classified US intelligence-community-wide assessment, known as a National Intelligence Estimate, confirms that although Cuba has the �technical capability� to undertake

US policy on Cuba sees change in style but not substance

16 Cuba


research into biological weapons, it is �unclear whether Cuba has an active biological weapons effort now, or even had one in the past�.

From the Cuban side, Mr Castro has also made a gesture of conciliation by accepting a US disaster relief team to discuss a regional response to natural disasters, after receiving an offer of US assistance (in the form of damage assessment and medical supplies) in the wake of Hurricane Wilma. The US offer followed a tradition on both sides of offering help that has generally been refused: the US offer of US$50,000 following Hurricane Dennis in July was scathingly rejected by Mr Castro, and the Cuban offer of over 1,500 doctors and 24 tons of medical supplies in the wake of Hurricane Katrina at the end of August was first ignored, then rejected, by the US. However, there is a precedent in which a breakthrough in bilateral relations was precipitated by disaster, when US exports of agricultural goods were allowed following a major hurricane in 2001.

But the slight change in style and possibility of co-operation in disaster relief are overshadowed by the persistent underlying hostility between the two countries, evident in the reaffirmation of US efforts to damage the Cuban economy and precipitate regime change, and vigorous propaganda efforts on both sides. Following the appointment of Caleb McCarry as the US �Transition co-ordinator� for Cuba, specifically to �accelerate the demise of Castro!s tyranny� in August (August 2005, The political scene), US government officials have reaffirmed their commitment to planning and assisting a change in Cuba�s political and economic system. As part of this effort, the US interests section has been running a series of seminars on transition, with video links to commentators in the US and the participation of dissidents. Topics have included the legal and judicial systems, the role of the public sector in a market economy, the health system in transition, and the issue of confiscated property. In response, the Cuban government in early October initiated its own nationwide programme of public discussions in each neighbourhood to examine the US plans for transition, officially referred to as �annexation�. The first, in a neighbourhood in Havana, was attended by the minister of foreign relations, Felipe Pérez Roque.

The propaganda war between the US and Cuba has been waged with vigour. In line with official US policy, as stated in the May 2004 Report to the Commission for Assistance to a Free Cuba, the US government has stepped up support for dissidents within Cuba and assistance for the dissemination of news of their activities and oppression. There has also been a noticeable inc-rease in the number and scale of radio and television broadcasts transmitted to Cuba from US military aircraft (with an increased budget of around US$40m).

For its part, the Cuban government has become a founding shareholder in Telesur, a new Latin American television station under an initiative headed by Hugo Chávez Frías, the president of Venezuela, to counter what they perceive as US domination of information in the region. The new station, also backed by the Argentinian and Uruguayan governments (and with Brazil expected to join), started broadcasting in July and transmission reached Cuba in August. In its recent rhetorical attacks on the US, the Cuban government has focused on

Propaganda is seen as an important weapon

Cuba 17


alleged US double standards on terrorism, centring on its long-standing cam-paign for the release of the five Cuban agents imprisoned in Florida (referred to by the Cuban authorities as �prisoners of imperialism� punished for their counter-terrorism work) and outrage at the lenient treatment of Luis Posada Carriles, an alleged anti-Castro terrorist (August 2005, The political scene). A ruling by three judges at the Atlanta Court of Appeals in August overturned the convictions of the five agents, on the grounds that the Miami trial had not given the defendants a fair hearing. A subsequent challenge to the Atlanta Court of Appeals decision was accepted by the state attorney, leaving the issue still unresolved. The case now goes to the full 12 Atlanta judges, but whichever way their ruling goes, it is likely to face further challenges.

The Luis Posada Carriles case also remains unresolved. An immigration judge in El Paso (where Mr Posada is being held in detention after entering the US illegally) decided at the end of September that he could not be extradited to Venezuela, on the grounds that he might be tortured there. Although neither the Cuban nor Venezuelan governments can have been surprised at this outcome, the ruling provoked an angry response, as it might open the way for Mr Posada Carriles to be granted asylum. The case continues to provide Mr Castro with a useful moral campaign both for his domestic audience and in international forums. Cuba and Venezuela raised the case at the Ibero-American Summit in Salamanca, Spain, and were successful in winning approval for a declaration on terrorism that included a call for Mr Posada Carriles�s extradition.

A sign of the current poor state of bilateral relations is evidence of accusations over Cuban migration to the US. According to the US State Department, the Cuban authorities have not been fulfilling their obligations under the bilateral migration agreements by failing to adequately patrol Cuban territorial waters to pick up would-be migrants, and by refusing exit permits to more than 500 of the 20,000 who have been granted permission (in accordance with the bilateral accords) to travel by the US authorities over the past year. Cuban officials have denied the claims. In reply, they blame the problem of illegal migration and the associated trafficking business on US law, which allows Cubans who reach land to stay in the US. On the US side, the migration is attributed to the Cubans� frustration and despair. According to official US Coastguard figures, during the twelve months to September 2005, more than 2,700 Cubans were intercepted at sea, more than twice the number in the same period in 2003-04 and the highest number since the crisis year of 1994, when almost 40,000 were intercepted. The US Border Patrol service also reports that the number of Cuban migrants reaching the US shore has risen, with around 1,800 Cubans reaching South Florida in the twelve months to the end of September, compared with less than 1,000 in the previous 12-month period.

The US authorities remain determined to tighten economic sanctions against Cuba. US exports of food to Cuba have been affected by stricter conditions on Cuban payments for imports of agricultural goods from the US (May 2005, The political scene), and there have been reports of an increase in prosecutions under other provisions of existing sanctions law. One foreign company that fell foul of the increasing rigorous pursuit of sanctions violations in 2004 was UBS, a Swiss Bank. UBS is under new investigations by a US congressional sub-

US economic sanctions tighten as Cuba wins a UN vote

18 Cuba


committee on oversight and investigations. The politically-charged investigation is into claims that the US$3.9bn of transactions carried out between Cuban entities and UBS between 1996 and 2003 involved money-laundering rather than legitimate earnings, mainly from the tourism industry, as claimed by Cuba. The US action against UBS in 2004 was one of the factors that precipitated the November 2004 withdrawal of US dollars from circulation within Cuba and surcharge on dollar remittances to Cuba.

In this hostile climate, the US-based anti-sanctions campaign has been muted in recent months. It has won approval of the House of Representatives for a number of amendments to ease sanctions over the past two years, but each has been removed before reaching the final vote. However, representatives of the US agricultural sector, which is permitted to export to Cuba, have continued to actively seek more business despite criticism from anti-Castro hardliners within the US.

While the current US administration remains firmly committed to maintaining and strengthening sanctions, Cuba has continued to campaign internationally to win the support of other countries against them. For the 14th consecutive year, it presented a resolution condemning US sanctions to the UN summit. Although the resolution keeps winning an overwhelming majority"in 2004 it was passed with 179 votes for and four against"the Cuban government campaigned vigorously ahead of the vote, as it regards the size of the majority an important diplomatic weapon. On September 27th, in preparation for this year�s vote, the Cuban government published on the Internet a 66-page document setting out the economic and social costs of the sanctions. The estimated economic cost is US$82bn since the sanctions began, and US$2.7bn in 2004 alone. The majority for the resolution, on November 8th, was the highest so far, with 182 votes in favour and four against.

Cuba�s relations with the EU have strengthened, but remain contentious. The EU�s �Common position� on Cuba, which involves �constructive engagement� but imposes political conditions on deeper co-operation, displeases the Cuban government while also attracting criticism from supporters of the dissident movement. Wide differences between member countries on Cuba policy make consensus difficult. In an attempt to demonstrate its commitment to promoting political freedoms, the EU issued a statement in September expressing concerns about the conditions for political prisoners, some of which were on hunger strike at the time, and calling for their release. The head of the EU mission in Havana also met Mr Payá and some of his fellow dissidents. Confirming the delicacy of EU-Cuban relations, on October 3rd, the Cuban Ministry of Foreign Affairs confirmed that although relations with the EU were improving �tenuously�, they were not a Cuban priority. The statement was a confirmation of Cuba�s refusal to respond to political pressure and its view that there is more to be achieved by cultivating bilateral links with individual EU member countries than by seeking to work with the EU as a bloc.

Since 2003 EU policy vacillation has centred on the question of whether dissidents should be invited to embassy functions. Following a decision to invite them in the wake of a clampdown on dissidence in early 2003, Cuban

EU policy on Cuba remains contentious

Cuba 19


officials refused to attend. This reduced the scope for any kind of �constructive engagement�, resulting in a review and a decision to reverse the move in early 2005, but to review it after six months. The outcome of this review was that individual embassies should be allowed to choose how they maintain contacts with dissidents, but as the Cuban side continue to insist that they will boycott embassies that invite dissidents to official functions, the embassies remain constrained. This was illustrated in early October when the Cuban government refused to send officials to the German embassy�s national day reception because dissidents had been invited to a separate reception on the same day.

The EU is declining in relative significance for Cuba in economic terms owing to the expansion of ties with other regions. In Latin America, the most significant developments concern Cuba�s increasing links with Venezuela. Following a visit by Mr Chávez in August, Venezuelan businesses attending a bilateral trade promotion forum signed contracts reported to be worth around US$40m for exports of goods to Cuba (including footwear, clothing and other light industrial products) in September.

Within the Americas, Cuba has worked to build relations with Canada. A September Cuban trade delegation headed by Pedro Álvarez, president of the food import enterprise Alimport, was followed in early October by a four-day official visit by the Cuban minister of foreign affairs, Felipe Pérez Roque. The Canadian foreign minister, Pierre Pettigrew, addressed concerns about Cuban hunger strikers and human rights, but this does not appear to have soured relations. Canada remains important for Cuba not only for its economic relationship (having reportedly overtaken Spain in 2004 to become the most important source of foreign investment, and still the main source of tourists, with around 600,000 last year) but also because of its traditional differences with the US on Cuba policy.

More broadly, the Cuban government appears to have been pleased with the outcome of the 5th Ibero-American summit (which includes Spain, Portugal and all the Spanish- and Portuguese speaking countries of Latin America and the Caribbean) in Salamanca, Spain, in mid-October. A resolution on US sanctions, proposed by Mr Pérez Roque, was passed. Similar resolutions have been passed at previous Ibero-American summits, but this time there were two differences that gave particular satisfaction to Cuba: the resolution labelled the sanctions a �blockade� in line with Cuban terminology (they had previously generally been referred to as an �embargo�, the term officially used in the US); and, despite the anti-Castro demonstrations outside, the conference did not include any resolution criticising Cuba on political grounds. The conference was followed by the Summit of the Americas (an annual gathering of representatives of all the democracies in the Western Hemisphere) in Mar del Plata. Although Cuba is excluded from this meeting, it took comfort from the large anti-US demonstrations and an alternative gathering staged in parallel with the main meeting (to which it sent a large delegation) that applauded Mr Chávez for his anti-US stance. Cuba�s relations with countries in the region tend to ebb and flow with anti-US currents, and these underlie the re-establishment of diplomatic relations with Panama in August after the election of Martín Torrijos, a more nationalist figure than his predecessor. The arrival in

Cuba cultivates ties with Venezuela and Canada

20 Cuba


Cuba in September of a delegation of around 70 Bolivian mayors, for a high-profile "summit" with Cuban mayors, appears to be an attempt to cultivate relations with elements of the Bolivian opposition that might become more important following elections there, which are currently scheduled to take place in mid-December 2005.

Cuba will host the next summit of the Non-Aligned Movement in September 2006, and this has been discussed with other official visitors during the past quarter, including the Indian foreign minister, Inderjit Singh, in September (who has been promoting economic co-operation in a range of sectors, from mining to informatics and biotechnology), Vietnamese officials and the president of Zimbabwe, Robert Mugabe.

Economic policy

The economic acceleration and surge of foreign-exchange inflows this year (see The domestic economy and Foreign trade and payments) have prompted a shift in Cuba�s economic policy stance, with a sharp increase in public spending, including major new investment programmes. Until now, the limited available resources for public investment have been concentrated on efforts to restore hard-currency earnings after the collapse in the early 1990s (led by tourism investment) and to maintain basic public services, including health and education. At the National Assembly meeting in early September, the vice-president, Carlos Lage, confirmed the promise made by the president, Fidel Castro in July (August 2005, The political scene) that 150,000 new homes would be built by the end of 2006 and 400,000 repaired. A major hospital refurbishment programme is also under way (see The domestic economy, Infrastructure).

A revised budget has not been published, but hard-currency spending on the 2005-06 housing programme alone (that is, imports of capital goods and raw materials) is given as US$1.62bn, in addition to unspecified Cuban peso costs. This compares with total government spending on investment in 2004 of Ps2.4bn. Parallel fiscal accounts are prepared for hard currency and Cuban pesos, although the totals are only published in aggregated form, using the 2004 official exchange rate of Ps1:US$1. With much of the government�s new sources of revenue this year coming in the form of hard currency (mostly from the sale of medical services to Venezuela), it is possible that the hard-currency accounts may show a surplus, but this is likely to be offset by a wider deficit in the Cuban peso accounts, as most of the materials and all of the construction labour will be paid for in pesos.

The details of the housing programme provide an example of the combination of centralised planning, local participation and market mechanisms in the Cuban system of economic management. The state will build some of the houses, but most of them will be built by the selected recipients, who will pay for the materials. Decisions about the allocation of the homes and housing materials will not depend on who can pay or do the labour: resources will be allocated on the basis of need and "revolutionary attitude". For some, prices

The structure of fiscal accounts alters

Mostly non-market production and distribution of homes

Cuba 21


will be heavily subsidised; others will be required to pay the full cost. Among the first recipients of new homes will be 6,000 health professionals returning from international missions (many in Venezuela), who will be required to pay the full cost from the hard-currency earnings they received while abroad. But although central government will play some part in allocation, most of the beneficiaries will be selected by local commissions, whose members are to be directly elected, in polls organised by local government councils. This method of allocating resources is similar to that already used for deciding who receives new telephone lines; it is supposed to ensure distribution according to need or contribution to the community rather than ability to pay, but also helps to reward participation in official structures.

The rules for housing have been under review, and the new construction programme may herald changes in the system. The housing market in Cuba is unusual, in that there is no free market for the exchange of homes (or indeed any other property titles). Ownership is conferred on former tenants, or leaseholders, after a given number of years, and 86% of Cuban homes are now owner-occupied. As there are no property taxes, these households pay nothing for their homes. However, if they wish to move to another dwelling they are required to apply through a state agency which arranges exchanges, and the selling price is set by the state at the cost of construction minus a depreciation charge, so the value, which does not reflect scarcity, declines over time. This explains why there is an extensive informal market in the exchange of homes, in which informal (that is, illegal) payments are made, often through intermediaries, to secure transactions. Prices in the informal market reflect scarcity, so the market has enabled those with higher incomes to acquire properties in the most sought-after locations. There is also an informal market for building materials: the subsidy for materials distributed to those who are awarded entitlements, and the lack of availability of such products for open sale, has left much scope and large incentives for black-market operations, which often involve goods stolen (mainly by insiders) from building projects or warehouses. One of the issues to be considered is the setting of interest rates for house purchases and for borrowing for building materials. At present, the rate ranges between zero for house purchases and 9% for other loans. If the cost of housing is too large a share of a household�s income, the effective interest rate can be reduced to lower the burden. For those who do not yet own their homes, the average cost of housing is only 10% of income.

With the 2004/05 sugar harvest (January-May) down by a half to only 1.3m tonnes (compared with a 1990 level of 8m tonnes"see The domestic economy, Agriculture), the crisis in the industry has deepened. This appears to have given rise to a debate within the government about the fate of the industry, with some concern about the government!s decision, announced in September, to accelerate restructuring. A major rationalisation programme was begun in 2002, which reduced the land under sugar and the number of mills by about a half, but this year�s crop is less than half the anticipated post-restructuring level. With the next harvest expected to increase only relatively modestly, to around 1.5m tonnes, the Ministry of Sugar plans to mothball around half of the remaining 85 mills for the coming season in order to minimise losses. Once

Poor sugar harvest sparks policy debate

22 Cuba


again, the salaries of sugar workers will continue to be paid and the state will provide facilities for retraining. It will also seek to provide alternative employment, with new food-processing plants to be installed on the sites of sugar mills and other jobs in agriculture or services to be created. However, concerns have been expressed about the social and economic costs.

Local communist party representatives in the sugar areas have objected that the rapid pace of restructuring and scale of rationalisation (with nearly half a million people directly employed in sugar sector and four times that number dependent on the industry) has led to undue suffering and signs of social stress, including depression and crime, in the sugar-dependent communities. The previous promises of alternative employment have been slow to materialise, with the drought setting back plans to establish new uses for the land, which were supposed to include large areas turned over to forestry as well as new crops and livestock. Their objections have been supported by some economists. Against the government!s argument that the sugar sector is uneconomic, they argue that the full costs of the downsizing, when the damage to associated industries and burden of maintaining the sugar workers! salaries, retraining and providing alternative employment are taken into account, outweigh the benefits. They have argued that more investment in sugar production and processing, if necessary by involving foreign businesses, could improve efficiency and reduce costs sufficiently to make the industry profitable. Higher oil prices, they suggest, could make sugar viable as raw material for ethanol or as an alternative fuel for electricity generation (with the potential capacity to produce around 800 mw of the national total of 3,200 mw at a production cost of around 4 US cents, less than half the cost of producing electricity from oil). An agreement to sell around 15 sugar mills to Venezuela for sugar and alcohol production, with technical assistance from Cuba, is cited as evidence that Cuban technology and expertise still have a positive economic value.

After delaying sugar restructuring for more than a decade after the loss of preferential prices made the sector a major drain on the economy, official policy appears to be resolutely geared to seeking the level of production at which sugar can be produced at an economic price. The strength of arguments used on both sides of the debate within Cuba is hard to determine, as information on costs is not available. However, the determination of the central authorities to push ahead with downsizing might suggest that, as a result of a lack of investment over many decades (with only eight of the mills built after 1959), Cuban sugar is still far from competitive on the global market. In 2005, with production insufficient even to meet domestic consumption needs of 700,000 tonnes plus contract commitments for deliveries to the two main customers, Russia and China, sugar had to be imported from Colombia. If the Colombian sugar was cheaper than the cost of production in Cuba, it would be hard to argue that more resources should be have been used to try to raise production levels. Despite being insulated by its central planning system, it seems that Cuba is undergoing the same process as the rest of the Caribbean, where the loss of preferential prices for sugar has precipitated a sharp contraction of production.

Cuba 23


The uncertainty about the future of sugar in Cuba raises questions about the future of the sugar ministry, which until now has overseen the restructuring and taken responsibility for the oversight of ex-sugar lands. The minister of sugar, Ulises Rosales del Toro, who was appointed in 1997, has overseen the transformation of policy towards the sector. As a former army general, he was associated with the innovative enterprise reforms undertaken by the Fuerzas Armadas Revolucionarias (FAR, the armed forces) in the 1990s, under the leadership of the president�s brother, Raúl Castro. As sugar cultivation has declined, the sugar ministry has continued to have responsibility for both non-sugar agriculture and other new economic activities on former sugar land, creating overlapping responsibilities between the sugar ministry and other ministries, particularly agriculture. The death in September of Alfredo Jordán Morales, the minister of agriculture (see The political scene) has therefore created an opportunity for reviewing ministerial responsibilities.

No successor has yet been named for Mr Jordán, who became minister in 1993, and oversaw some major reforms in the sector: the creation of Unidades Básicas de Producción Cooperativa (UBPCs, large co-operatives) from October 2003 to replace state farms; the September 2004 opening of new agricultural markets that allowed state, co-operative and private farmers to sell part of their output at free-market prices; and the introduction of hard-currency bonuses for growers of export crops. These changes raised expectations that there might be further, deeper reforms to the management of the agriculture sector, but, despite extensive discussions of the continuing shortcomings in the sector, more fundamental reforms have not emerged. The state still sets quotas, determines most prices and controls the distribution of inputs. There is an extensive network of agricultural research institutes and training and advisory services, but the poorly-functioning incentives structure and lack of finance for inputs or investments has left the sector with low average yields for most crops, particularly in the state-owned farms.

The domestic economy

Output and demand

After reaching a reported 7.3% in the first half of 2005, real GDP growth is accelerating in the second half of the year. The government has reiterated its estimate of 9% GDP growth for this year, using the official methodology, which differs from standard international measures by including public services at market value rather than cost (August 2005, The domestic economy, Output and demand). The surge has been made possible by new financing from China, trade agreements with Venezuela and continued strong growth of tourism. In expenditure terms, the sharpest upturn in the second half has been in public investment, particularly in activities linked to the new housing programme (see Economic policy). Anecdotal evidence also suggests that government current consumption has also increased, even without the additional spending arising from hurricane preparations and the huge task of reconstruction that followed in their wake, particularly from Hurricane Dennis, which struck the centre of

The death of the minister of agriculture may herald change

Public investment lifts growth

24 Cuba


the island in July, and Hurricane Wilma, which caused flooding to the capital, Havana, in late October. Household consumption also received a boost in the first half of the year owing to increases in pay and pensions, but there have been no further rises since then. However, there has been a sharp increase in the number of professionals posted abroad, each receiving hard-currency allowances which, at the current unofficial exchange rate, represent multiples of their Cuban peso earnings. When they return after their postings with their savings they will provide a significant boost to consumer spending. The decision to build houses for these returning workers, for which they will pay full cost, will both stimulate the construction sector and absorb some of the surge in liquidity.

The construction sector, which led growth in the first half, was given a further boost from the repairs and rebuilding necessitated by hurricanes even before the housing programme was announced. A wide range of services"including tourism, medical services, software, communication, bio-technology licensing and airport services"also appear to be performing strongly. Other, more traditional, industries have performed less well. The sugar industry has continued to shrink, while the electricity sector has struggled with chronic system failures, and the difficulties in both these industries have affected a range of other manufacturing industries. In contrast, production of nickel and steel, neither of which are dependent on the electricity grid, is reported to be expanding. Agricultural output has been badly affected by both drought and hurricane in the year to date, although the heavy rainfall of July-September is expected to boost yields in the final harvests of the year, helping to reduce prices in the free agricultural markets in the coming months. According to the Oficina Nacional de Estadísticas (the national statistics office), average prices in these outlets in September were 8% higher than the same month in 2004.

Tourism

In late October the minister of tourism, Manuel Marrero, confirmed that the official forecast for tourist arrivals in 2005 is 2.3m, a 12% increase from full-year 2004, lifting gross income from tourism by 15%, to US$2.7bn. In the first half, tourist arrivals were up by only 8%, but according to Mr Marrero they accelerated in July-September, to lift the rate of growth for the first nine months to 10%, with 1.75m visitors. The industry expects the rate of growth for the second half to be higher than the first. One of the reasons for the acceleration of year-on-year growth rates in July-December is the depressed base of comparison in the second half of 2004, when the impact of tighter restrictions on travel from the US was first felt (August 2005, The domestic economy, Tourism). According to data published by the Cuban authorities, the tightening of the limit on travel to Cuba by Cuban Americans to once every three years (compared with a previous limit of once per year) which took effect from July 2004 cut the number of these visitors by around 60%. At the same time, tighter implementation of existing restrictions on other (non-Cuban-American) US visitors cut the numbers from this group by more than 40%. The use of fines for those who try to evade US travel restrictions has jumped sharply: the US Treasury Department!s Office of Foreign Assets Control (OFAC), the institution

2005 tourist arrivals still expected to reach 2.3m

Cuba 25


in charge of implementation of US sanctions against Cuba, fined 307 people for unauthorized travel to Cuba in the first quarter of 2005, compared with 316 people for the whole of 2004. According to official data, in 2004 the number of Cuban-American visits was 57,000, still slightly more than the number of other visitors from the US.

Another reason for expecting stronger growth in tourist arrivals in the second half of 2005 is the effect of the diversion of tourists from the Mexican coast, which was devastated by Hurricane Wilma in late October. Even while the damage to some Cuban hotels was still being repaired, managers reported that the number of rooms left vacant by non-arrivals arising from the cancellation of flights during the storm had been quickly offset by additional bookings from tour companies seeking to place customers unable to take their Mexican holidays.

Agriculture

The two-year drought in central and eastern provinces (August 2005, The domestic economy, Agriculture) was brought to an end during the summer by unusually heavy rains associated with the active hurricane season. The drought badly affected agricultural output, including food, sugar and coffee crops. Rice production in 2005, at 580,000 tonnes, is 5% below the already-depressed 2004 level and production of maize is reported to have been similarly affected. The sharp increase in import spending on agricultural goods for the year as a whole, from US$1.2bn in 2004 to more than US$1.5bn in 2005, reflects these difficulties. The effect has also been felt in increases in the prices of food in the free agricultural markets, which were 8% higher in September 2005 than in the same month of 2004.

The drought appears to have been the main cause of a 48% fall in sugar prod-uction, reducing the harvest to 1.3m tonnes, the lowest for almost 100 years. This is far below the 4m-tonnes anticipated as the eventual level of production when the sector was rationalised in 2002. In the coming year, despite the rains, the harvest is expected to increase by only 8% to 1.5m tonnes: the cane, which takes two years to grow, has already been affected by the drought.

Official reports confirm that the 2005-06 harvest of coffee (August to March, with most activity in October-January) which is grown mostly in the central and eastern provinces, is expected to be below the previous year�s estimated total of 180,000 60-kg bags. The crop, already damaged by drought, also suffered from Hurricane Dennis in July.

Rains associated with the active hurricane season have ended the drought. Even in Las Tunas and Holguín provinces, the worst affected, the reservoirs, which had been down to as low as 10% of capacity, have been replenished and planting areas have been extended for the coming season. Of the 2.7m people who had been without piped water supplies at the end of May, 1.9m had had their supplies restored by the end of August.

Hurricanes cause damage but ease drought

26 Cuba


In contrast, officials have expressed optimism about this year�s tobacco crop. Although some of the areas under tobacco in the drought-affected central provinces were not productive, most of the crop is grown in the western province of Pinar del Río. With higher overall yields and less-severe damage than feared from Hurricane Wilma, which circled around the western tip of the island in late October, it appears that a good year is expected. The industry, which employs around 200,000 people, including many private farmers, exports over 100m hand-rolled cigars annually.

Infrastructure

According to official statements, in the first six months of 2005 construction activity grew by more than 8% because of government investment in improvements to hospitals and schools, and in the second half it will be further stimulated by the government�s housing programme (see Economic policy). The housing stock has deteriorated steadily since 1990. In the early 1990s government investment was slashed in response to economic crisis, and even when the economy started to pick up housing remained a lower priority than rebuilding Cuba�s export capacity and maintaining the most basic welfare services, despite the well-documented problems arising from overcrowding and dangerous buildings. The 150,000 new homes promised by the end of 2006 would increase the total housing stock by around 4% and represent a significant reduction in the estimated national housing deficit of 500,000 units; and the repair programme would be sufficient to improve half of the dwellings currently in unsatisfactory condition.

The Ministry of Basic Industries has been urgently engaged in repairs to the electricity-generating system and transmission network, but in August and Sep-tember these works served only to add to the frequency of power interrup-tions. Breakdowns and hurricanes compounded the problems. Improvement at last appears to be in sight, with the number of power cuts declining in October and the state electricity company, Unión Eléctrica, spending large amounts on generating equipment from abroad. In August 265 diesel-powered power plants worth over US$350m were bought from South Korea and Germany. The generators, with a combined capacity of around 10% of Cuba�s total, are expected to be delivered by March 2006, to guarantee continuity of supply.

Other electricity investments include the modernisation and improvement of the electricity distribution network and street lighting in Havana, to cover half a million households, co-financed by a development loan from the OPEC Fund for International Development, and two small hydroelectric power stations in the eastern province of Granma using Chinese finance. Cuba�s hydroelectric capacity, from 180 installations, is around 57 mwh, mostly feeding small rural communities. The search for less dependence on fossil fuels has also encouraged research and development and the opening in August of the first education centre for solar power, in Granma province. There has been no news of a proposed joint venture project with Venezuelan partners to build a new coal-fired power station.

Tobacco production appears to have escaped major damage

Public investments will improve the housing stock

New power plants are imported

Cuba 27


Oil and gas

Cuban oil production is currently limited to the coastal region in the north-west of the country, where crude is very heavy with a high sulphur content, but high world oil prices have increased foreign interest in Cuban territorial waters in the Mexican Gulf. The territory was opened to foreign exploration in 1999 in 59 blocks. Until this year, only 10 of these had been taken (by Repsol of Spain and Sherritt International of Canada). After the first test drilling in the territory by Repsol in 2004 showed good quality oil, but not in commercial quantities (August 2004, The domestic economy, Oil and gas), Repsol intends to drill again in 2006. With US companies barred from the Cuban oil sector by sanctions (although the US Geological Service estimated that there could be 5bn barrels of oil in the zone), Cuba has actively sought partners from the developing world, and has succeeded in attracting interest from the large, rapidly-growing Asian economies, eager to secure future energy import requirements. In September the Indian state oil company, Oil and Natural Gas Corporation (ONGC), which has experience in deep-water oil exploration, signed exploration agreements for two blocks adjacent to the Repsol block where the first tests were carried out, acquired 30% stakes in other blocks held by Repsol, and is reported to be in discussions for further exploration in Cuban territory. A Norwegian private company, Norsk Hydro, has also taken an equal stake in the same Repsol blocks and signed a memorandum of understanding with ONGC to work together on exploration in Cuba and other regions.

Talks with the Brazilian state oil company, Petróleo Brasileiro (Petrobras), appear to have ended without any commitments to exploration in the Gulf territory, but a Chinese company, Sinopec, has announced an agreement with the Cuban state oil company, Cupet, to produce oil from the coastal oil field with known reserves in the north-west of Cuba. According to press reports, production is expected to begin next year. The signing of a general agreement on co-operation in the mining and energy sectors with the South African government also opens the way for discussions with South Africa�s state-owned oil firm, PetroSA. Energy co-operation with Cuba!s closest Latin American ally, Venezuela, is focused on the supply of oil (with Venezuela now selling nearly 100,000 barrels/day to Cuba on favourable terms"see Foreign trade and payments) and plans for the modernisation and adaptation of Cuba!s Cienfuegos oil refinery to enable it to process Venezuelan and Cuban heavy crude. The project is part of a strategic plan by the Venezuelan state oil company, Petróleos de Venezuela (PDVSA), to increase refining capacity in the region, which includes a joint project with Petrobras for a large new refinery in Brazil. The Cienfuegos refinery, built with obsolete Russian technology for processing light crude, has been mothballed since the early 1990s, and since then Cuba has been searching for a partner. PDVSA has estimated the cost of the proposed project at US$60m-100m. The potential capacity of the refinery is reported to be 220,000 b/d, but the initial stage is planned to allow processing of 65,000 b/d, with production possibly starting by July 2007.

Mexican Gulf territory attracts new partners

Chinese and Venezuelan state companies confirm oil projects

28 Cuba


Mining

Official reports suggest that nickel output will reach around 77,000 tonnes in 2005, more than 6% more than 2004. Planned investments are forecast to increase capacity to around 120,000 within five years. These include 50% expansion of production by a joint venture with Sherritt International (Canada), and a project involving a US$600m investment in the nickel reserves in a field known as Las Camariocas, close to the existing fields in the eastern province of Holguín, involving Minmetals, a Chinese company. The importance of the Chinese domestic market for Cuban nickel arises partly from to the fact that US sanctions bar the sale to the US of any products containing Cuban nickel. As Cuba is now the world�s fifth-largest nickel and cobalt producer, this restriction has an impact on the value of the product on international markets.

Manufacturing

The overall performance of the manufacturing sector has been hampered by power cuts and the contraction of sugar-related industries, but a few industries have reported growth. The Cuban state steel company, CubaMetales, which has a monopoly of production, has reported investments of US$20m this year and announced plans to lift annual output to 500,000 tonnes by 2007 and diversify into higher value-added products. Steel production and exports are both reported to be up sharply in the first six months of 2005"a 50% rise has been cited, but no official output figures given"and output is reported to have expanded further since June. The other branches of manufacturing reporting expansion are mainly linked to the construction sector, with US$84m of an estimated US$1.6bn hard-currency cost of the housing programme to be spent on lifting capacity for building materials, fittings and furniture, and doubling the construction industry�s transport fleet. While most of the new vehicles will be imported, Cuba�s capacity for automotive assembly is reported to be growing.

Foreign trade and payments

Only scant trade data has been released by the government and official statements about the terms of important agreements affecting the external accounts have been vague. In early November the deputy minister of foreign trade, Antonio Luis Carricarte, in an interview with a Cuban business weekly magazine, Opciones, provided some preliminary totals for trade in the first nine months of 2005, but few details. He stated that total trade was up by 22%, with import spending having grown by 34%. According to Economist Intelligence Unit data, this would imply a year-on-year decline in export earnings for January-September of 14%. For the year as a whole, the rate of decline in export earnings will be less sharp than the first nine months, which includes the full impact of the fall in sugar earnings.

The decline in sugar earnings offset the effect of historically-high nickel prices early in the year. With the harvest down by almost 50%, we estimate that sugar earnings were in the region of only US$200m, around 5% of their level before

Only a few manufacturing industries are growing

Nickel expansion is expected to accelerate

Goods exports fall

Cuba 29


the economic crisis in 1990, when they accounted for around 80% of merchandise export earnings. This decline relegates sugar to fourth place in the rankings of Cuba�s exports, behind nickel, medicines and tobacco products. The sugar price, which has risen in 2005, is expected to continue to rise in 2006, to reach 10.8 US cents/lb, the highest since 1997, but the industry�s contraction ensures that the commodity will never return to its former importance for the Cuban external accounts.

Total export earnings were supported in the first half by high nickel prices, but the upward trend in prices (which saw the average price rise from US$2.7/lb in 2001 to US$6.3/lb in 2004 and surge once more in the first half of 2005) has come to an end: the spot price fell by almost 30% between May and November, and we expect the average price for 2006 to be US$6.7/lb, down from an estimated average of US$7/lb in 2005. No data has been provided for earnings from tobacco products, but press reports seem to suggest a modest increase. There have been references to strong growth of earnings from medicines, with reports that they have doubled to around US$300m in 2005.

With tourist arrivals expected to be up by around 12% in 2005, we expect that tourism earnings will rise by 15%, to US$2.7bn. The estimation of earnings from other services is complicated by a lack of transparency concerning the bilateral trade deal with Venezuela, under which the services of Cuban professionals, including more than 20,000 medical personnel, are sold under a barter arrangement in return for deliveries of Venezuelan oil. On the basis of public statements made, we estimate that these earnings could cover more than half of the cost of Cuba�s oil imports. We have included the oil and services trade covered by the barter deal in our forecasting model. Under the barter arrangements, Cuba�s services earnings will fluctuate in line with changes in the world oil price, insulating the economy from oil-price volatility. The exclusion of the barter transactions from the accounts would make no difference to the balance of trade in goods and services, but would understate the volume of trade. However, the accounts need to be treated with caution, as the barter deal will mean that Cuba�s services exports will be valued at above the world market price for such services while the oil price is high.

There has been a strong surge in import growth as total import capacity has been lifted by both the sharp upturn in earnings from services and new sources of financing. The new sources of foreign exchange have allowed an investment boom, lifting spending on imported capital goods and industrial raw materials, as well as higher spending on fuel and food imports (made necessary in part because of the effect of drought on domestic food production). The result has been a widening of both the merchandise trade and current-account deficits in 2005, continuing a trend started in 2004. We estimate that the trade deficit in 2005 will be around US$5bn and the current-account deficit US$1.1bn, or 3.2% of GDP, up from 1.6% in 2004.

The Cuban authorities are guarded about releasing data on the new foreign direct investments and external credits that are financing the current-account deficit, but a stream of reports in both the Cuban and foreign press have con-firmed new agreements. Some of the projects under consideration, including

Services exports are boosted by doctors

Goods trade and current-account deficits widen

30 Cuba


two nickel projects (one being studied by Chinese investors and another by Sherritt International of Canada), the Cienfuegos oil refinery (see The domestic economy, Oil and gas) and other major power projects, are large enough to have a strong impact on Cuba�s external accounts in the medium term.

The growth of bilateral economic co-operation with Venezuela has been altering the composition of Cuba�s merchandise trade. In 2004, according to Cuban official sources, Venezuela had become the most important trade partner, accounting for 22% of Cuba�s total trade (17% of exports and 24% of imports). Cuban-Venezuelan trade is set to expand further, following agreements signed in early October following one of a series of meetings of a top-level bilateral co-operation commission. The centrepiece of the bilateral trade is the oil-for-doctors programme, which is reported to be providing health coverage for 17m Venezuelans in return for oil, but the economic links are being steadily broadened, within a framework set out previously (May 2005, Foreign trade and payments). A programme to offer eye operations free to hundreds of thousands of poor people throughout the Americas, with Cuban medical facilities and Venezuelan financing, is also under way, and a long list of new projects has been drawn up. According to officials, Venezuelan will export to Cuba goods worth around US$1.4bn in 2005 (of which US$1.1bn is oil and US$300m food and other products) and this is set to expand to US$2bn in 2006.

China has become Cuba�s second-most important trading partner, with 10% of the total. Much of this is accounted for by China�s sugar imports, but bilateral ties in other areas have also been developing rapidly over the past few years. In late September two Cuban-Chinese joint-venture production plants were opened in China: a facility for the production of hepatitis B vaccine in the north-eastern Jilin province, and another to produce monoclonal antibodies in the capital, Beijing. Chinese official export finance helped to secure an October contract for the supply of 630 buses to Cuba by Zhengzhou-based Yutong Bus valued at around US$50m. Some of these buses will be assembled in Cuba.

Despite the growth of trade with Venezuela and China, Cuban official data confirm that OECD markets remain the most important for the Cuban economy, as it is heavily dependent on these markets for tourists. Among the tourist markets, Canada still holds the leading position, followed by European countries. Even in merchandise trade, the combined share of Canada and the US was 13% of the total in 2004 (Canada with 8% and the US with 5%). Within Europe, Spain (with 8%), the Netherlands (7%) and Italy (3%) are the leading trade partners.

Cuba�s natural trading partner, the US, has become an important supplier of food since restrictions on agricultural exports were partially lifted in 2001, but having reached over US$400m in 2004, the growth of this trade appears to have come to an end. According to a US consultancy, the US-Cuba Trade and Economic Council, official US data show that agricultural exports to Cuba in the first nine months of 2005 were US$261m, down from US$392m in the year-earlier period. However, monthly data suggest that the sharpest decline was in the months immediately following the tightening of payment rules in February (May 2005, The political scene), and that by the third quarter the trade was back

Chinese-Cuban economic co-operation

OECD markets still dominate, but others are growing

Venezuela and China are Cuba�s biggest trade partners

Cuba 31


up to its 2004 level. Visits to Canada by Cuban officials in the past quarter, which included a trade mission headed by Pedro Alvarez, the head of the Cuban state food importer, Alimport, reflect Cuba�s efforts to continue to diversify its suppliers.

0

10

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30

40

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Jan Feb Mar Apr May Jun Jul Aug Sep

2004 2005

US exports to Cuba(US$ m)

Source: US International Trade Commission.

Other important suppliers of food to Cuba include Brazil, which currently has a 4% share of Cuba�s trade, and Vietnam, with 3%. One of the small group of still-communist countries, Vietnam has become an important supplier of rice, in direct competition with US rice exporters. Exporters there, unlike their US counterparts, benefit from the friendly political relations between their government and Cuba, reflected in regular meetings of a bilateral committee for economic and scientific co-operation. The committee�s 23rd meeting in late September was followed by the signing of a US$50m contract for Vietnamese growers to supply 200,000 tonnes of rice. Cuba and Russia have also been seeking to pave the way for an expansion of trade through discussions for the rescheduling of US$161.1m of Cuba�s debt to Russia, according to reports in the Russian press in September. The valuation of Cuba�s total debt to Russia that dates from the Soviet era has been contentious.

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