Short-Term Policy Proposals
There are several policy measures and decisions that could be implemented in the very near term. They would help alleviate some of the bottlenecks currently preventing a short-term improvement in the country’s external economic position. Among the most important are the following:
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Redefine investment priorities to support productive development. This would create conditions to increase, in the short and medium term, the substitution of imports—particularly food products—and, over the medium and long term, to expand exports. Doing so would require redirecting public investment currently devoted in disproportionately large measure to the tourism sector toward agriculture, manufacturing, and, above all, energy infrastructure.
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Relax existing regulations and procedures that, in practice, discourage exports and import substitution by both state-owned enterprises and non-state forms of management (by its acronym in Spanish “FGNE”). This would require granting greater autonomy to state-owned enterprises as part of a comprehensive reform of the enterprise system, while further reducing bureaucratic procedures, permitting requirements, and the associated logistical and regulatory costs affecting export and import-substitution projects undertaken by both the non-state sector and state enterprises.
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Consider implementing a range of policy instruments widely used in developing countries not only to promote exports but also to facilitate the many processes associated with international trade.
The Single Window for Foreign Trade (VUCE) and the Single Window for Foreign Investment (VUIEX) are long-established instruments used throughout the world. In Cuba, however, they remain far from meeting accepted standards of integration, interoperability, and the automatic issuance of licenses, certifications, and authorizations. They continue to suffer from significant shortcomings in three areas: (a) the technical architecture of the system; (b) its information technology architecture; and (c) the governance framework under which these mechanisms operate.
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Radically and promptly revise the current exchange-rate policy. This should entail transforming the structure and operation of the foreign exchange market, the exchange rate itself, and the exchange-rate regime. Without such reforms, it is highly unlikely that exports or efficient import substitution will receive the incentives they require.
These reforms should be viewed as integral components of macroeconomic stabilization and structural reform. In turn, they would contribute to the necessary process of de-dollarization, without which it will be extremely difficult to restore the minimum level of confidence in national economic policy that is essential for both stabilization and renewed economic growth.
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Approve and implement the long-delayed legal framework that would transparently permit non-state enterprises (FGNEs) to establish businesses with foreign capital. At the same time, the regulatory framework and current policies governing foreign investment should be reassessed. Restrictive provisions remain in force that fail to recognize the high level of risk assumed by foreign investors who choose to do business in Cuba.
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Encourage remittance flows to Cubans residing on the island, based on flexible rules and full respect for the fundamentally private nature of those transfers, particularly remittances that could be linked, directly or indirectly, to the development of productive enterprises. Achieving this objective requires approval of the legal framework governing foreign-capital partnerships involving non-state enterprises.
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Develop a comprehensive strategy to renegotiate Cuba’s accumulated external financial obligations. The country has once again entered into default. This strategy should encompass all components included within the concept of “external debt,” namely:
a. obligations to official creditors, including the Paris Club, with which Cuba reached a highly favorable restructuring agreement in 2015 that included the cancellation of 90 percent of the outstanding debt;
b. obligations to private creditors, commonly referred to as the London Club;
c. short-term debt owed to suppliers; and
d. particularly important in Cuba’s case, obligations owed to foreign investors.
Because settling the latter is essential to attracting larger inflows of foreign direct investment, Cuba should adopt a negotiated financial mechanism based on a menu of options for honoring its accumulated obligations to foreign investors. Naturally, the credibility required to conduct a serious and complex negotiation with creditors depends on the Cuban authorities demonstrating tangible progress in both macroeconomic stabilization and structural reform.
Without such progress—that is, without a credible and broadly accepted roadmap for radical changes to the country’s economic structure—the current vicious cycle will simply repeat itself. At best, Cuba may obtain another round of debt restructuring accompanied by partial debt forgiveness. Within a few years, however, the country is likely to face yet another external liquidity crisis and another round of defaults on its negotiated obligations.
Conclusions
The Cuban economy is experiencing a profound structural crisis characterized by economic stagnation, prolonged recession, persistently high fiscal deficits, and sustained inflation. More than five years of stagflation have significantly eroded the population’s standard of living.
At the heart of this crisis lies an accumulation crisis. Cuba invests far too little—gross investment has averaged only 10.9 percent of GDP—a level insufficient even to maintain the country’s productive infrastructure. As a result, the economy has undergone a prolonged process of decapitalization and a corresponding loss of productive capacity.
This internal weakness has, in turn, produced an unsustainable pattern of external economic relations, characterized by a high dependence on imports, limited export capacity, the loss of foreign markets, and recurring crises of external liquidity.
Official economic policies and policy guidelines have proven insufficient and have been implemented only partially. The high degree of noncompliance has prevented the country from correcting structural distortions and advancing the reforms needed to restore growth.
External debt has risen to critical levels, and Cuba has once again fallen into default. Without deep structural reforms, the country will continue to cycle through repeated episodes of debt renegotiation followed by renewed default.
Reversing this situation requires radical structural transformations affecting the productive system, the enterprise sector, the regulatory framework, and the country’s system of economic incentives.
Redirecting investment toward productive sectors, relaxing regulations governing exports, modernizing the single-window systems for trade and investment, reforming exchange-rate policy, permitting foreign capital to participate in non-state enterprises, facilitating productive remittances, and renegotiating the external debt through a comprehensive strategy are urgent measures that can no longer be postponed.