Cuba is the largest country in the Caribbean with a population of 11.25 million. Today, Cuba is in difficult economic times as the economy has deteriorated significantly from 1990. The market rate for the Cuban peso has completed almost a full circle over the last 15 years after collapsing in value in the early to mid 1990's to clawing most of its exchange losses back to its current valuation reflecting the economic events in Cuba during this time. After the collapse of the Soviet Union in 1989-90, Cuba lost in excess of $6 billion USD a year in subsidies. Unlike the Soviet Union, Cuba has stayed with for the most part with a failed economic ideology of a state command control economy. Cuba under communism has the state setting production quotas and prices, not allowing Cuban businesses to react freely to market forces. State central planning is a discredited economic system of the 20th century. The state also takes an active role by essentially managing all foreign trade. Currently, the overall standard of living is depressed when compared to the 1990 level. By year 1999, trade with Russia was only valued at $1 billion USD, well down from 1989.
POLITICS: President Fidel Castro, age 76 is in power since 1959 representing the Cuban Communist Party. President Castro has designated his brother Raul, age 71 to be his successor. For the most part, the United States trade and travel embargo that was implemented in 1960 is still in place. On October 18, 2000, the U.S. congress eased trade sanctions against Cuba specifically with food & medicine as long as Cuba pays in cash. In addition, a travel ban was also eased as year 2001 with approximately 200,000 American's visiting Cuba and this figure is growing. Fundamental changes are slowly taking hold in Cuba including freedom of religion, the beginnings of a class structure with rich and poor. Domestic political opposition to President Castro is currently small and divided while being held hostage to government crackdowns for their views on freedom and democracy.
ECONOMY: Cuba currently produces basically nothing of value, everything is imported, tourism and remittances from the United States form the basis of the Cuban economy. Cuba is a state controlled socialist economy where the state has a firm hand in the affairs of the citizens and foreign trade. Some markets have slowly started to open up, very limited forms of private ownership exist. From 1989-1993, the Cuban economy entered a depression contracting by 35 percent whereby industrial production fell 75 percent as Soviet subsidies ceased to exist as the Soviet Union imploded. Economic reforms and an economic overhaul was implemented in 1994 in order to expand industries such as tourism in order to replace the lost annual Soviet subsidies. Improved Cuban sugar crops after years of poor harvests and a massive influx of tourists from around the world particularly from Europe and Canada resulted in the Cuban economy recording annual growth of 3.5 percent from 1994-2000. Another industry of importance to Cuba include cigars although it was greatly damaged from hurricane Lili in early October 2002. However, much of the Cuban economy remains in a state of disarray and shambles coupled with a current glut of sugar on the world market yielding lower prices. Future foreign exhange earnings for Cuba may exist in its nickel production, expansion of the coffee industry, rum, rice production to replace sugar crops and the potential to exploit oil exploration.
Tourism is one of the few bright lights for Cuba as it is presently the world's fastest growing tourist industry since its inception in the late 1980's. Tourism accounts for 50 percent of Cuba's foreign exchange. Increased tourist activity has resulted in a construction boom in area's, new restaurants and traffic are now common. Havana now has a brand new $100 million USD airport, over 60 major airlines fly to Cuba. The tourism industry which is now exploding and is currently the largest industry within Cuba growing by 20 to 25 percent annually. Tourism is now worth over $2 billion USD/year to Cuba as it employs over 100,000 directly. The eventual lifting of the U.S. embargo in place since 1960 with the return of Cuban-Americans and their money to Cuba bodes well for Cuba's long term future along with a new government after Castro's rule.
The global recession over the last two years have impacted Cuba, lower level of remittances pegged at around $1 billion USD/year the majority from Cuban-Americans. The sugar industry which has been Cuba's historical lifeline income earner for centuries has been forced to restructure due to inefficiencies with 75 mills being shut down displacing 100,000 workers. Tourism has recently over taken the sugar industry as Cuba's largest foreign exchange earner with many resorts now accepting euros for payment. One positive development taking place is an upswing in commodity prices, particularly nickel which will benefit Cuba's mining industry.
Economic Statistics
GDP as measured by purchasing power parity is $25.9 billion USD (2002), GDP/Capita estimated at $2,300 USD (2002). GDP growth for 2001 at 3 percent, year 2000 at 5.5 percent, 1999 at 6.2 percent albeit from a low level. Inflation is relatively low with 2002 recording 7.1 percent, a significant jump after 2001 at only 0.5 percent and year 1997-2001 at negative 0.5 percent (deflation).Balance of trade deficit came in at $3 billion USD for 2002 and 2001. During year 2002, the United States sold food worth $170 million USD to Cuba. The fiscal deficit is at 2.5 percent of GDP. External debt is at $12.3 billion USD plus outstanding monies owed to Russia estimated upwards of $20 billion USD (2001). Net energy importer - primarily oil. Official unemployment rate is at 5.8 percent. The government employs 90 percent of the workforce. Sugar ranks Cuba as the world's number four producer.
POSITIVE: large black market economy - entrepreneurs are going underground. CONCERN: energy power shortages, illegal migration to the U.S. using dangerous homemade rafts, alleged human rights violations in order to show favorable statistics including infant mortality rates, fair telecommunications with only 500,000 land phone lines and few mobile phones.
REGIONAL and GLOBAL ANALYSIS: United States, Caribbean, Venezuela
Cuba is moving closer to the European Union with trade agreements. Both Canadian and European multinationals seek to establish themselves in Cuba in areas of mining, rum, cigars, etc. Today, Spain is the largest buyer of Cuban cigars. Many tourists that arrive in Cuba today are from Europe, Canada and illegal American visitors. Cuba's credit rating with many nation's is tarnished including Venezuela where Cuba has defaulted on oil payments and to the EU on trade credits to several European countries. Cuba is not a member of CARICOM and has isolated itself from the rest of the Caribbean countries in terms of trade. In fact, major trading partners now include surprisingly the United States, Canada, Netherlands, Russia, Spain and France.
KNOWLEDGE: historically, Cuba had one of the most prosperous countries in all of Latin America and a close relationship with the United States prior to President Castro taking power in 1959. Today as outlined above, the economy is in shambles coupled with food shortages. US President George W. Bush is taking a tougher stance on Cuba by recently adding Cuba to the 'Axis of Evil' category. President Castro's political interference is greatly impacting Cuba's economy. Cuba should and will be in time a much wealthier nation with a dramatically higher standard of living once free markets and democracy are allowed to function.
Cuba located only 90 miles south of Florida, the nature of its geography right next door to the wealthiest and largest economy on the globe will benefit Cuba significantly. Tourism, nightlife and Cuba again will be the Las Vegas of the Caribbean. The power of free markets will win and BI.C believes President Castro realizes this phenomenon as he is balancing market liberalization and political control. Similar to other Caribbean countries, Cuba in due course will modernize and have to take a serious look at banking & financial services as a source of national revenue once democracy takes hold and laws are updated. In order to make change a positive outcome in Cuba, in BI.C's view, the United States should drop all trade and travel embargos and let the market works it magic, the market will force political changes quicker than trying to starve the people and keeping them powerless under current misguided policies.
CURRENCY: ISO symbol 'CUP', Cuban peso. At time of review on March 25, 2003, the official exchange rate is 1 CUP to 1 US-dollar ('USD') although the market rate is fluctuating around 21 CUP to 1 USD. Cuba operates three legal currencies that are in use. The US-dollar has been legal since August 1993 and is the de facto currency of Cuba as much of the Cuban economy operates in US-dollars. The domestic CUP is used by nationals to buy goods & services and is officially pegged at par with the USD. The black market trading range since 1998 for the Cuban peso is in a trading range of 20 to 28 CUP to 1 USD. The CUP would be trading at 40 CUP to the USD if it wasn't for the Cuban government imposing a freeze on the exchange rate. Finally, Cuba also operates the convertible peso which matches the peso at par, this allows the Cuban government to maintain an artificial low exchange rate in order to give price subsidies. Coinage denominated in US currency is no longer accepted within Cuba. Since June 1, 2002, the Euroland euro is accepted as official currency in Varadero. Hard currencies is currently in relative short supply to purchase Western consumer goods.
CURRENCY HISTORY: historically, the black market rate for the convertible Cuban peso 'CUP' for domestic use peaked at a low 120 to 1 USD in 1994. During 1989-90 near the end of the Soviet Union, the CUP was at a trading level of approximatley 7 CUP to the USD. Steady appreciation of CUP versus the USD from the 1994 low as the Cuban government has implemented policies to shrink the money supply, lower subsidies to unprofitable enterprises.
CURRENCY FORECAST: President Castro is threatening to roll back de facto
US-dollarization in order to restrict remittances to further enhance his grip of control. The current freely traded USD is the greatest current political threat to President Castro. If President Castro can control the hard currency, he can further keep his power, the U.S. trade embargo actually helps his regime stay afloat. It is indeed Castro's vision to dismantle the dual currency system in use. Potential rollback of USD convertibility would allow the Cuban government to confiscate the majority of the $1 billion USD's remitted back to Cuba by Cuban exiles each year.
Short term volatility for the peso as depreciation risk has increased with President Castro's recent political theatre, this will remain so until President Castro leaves power or changes his policies. Potential for enormous trade as it is very likely Cuba will be a much different place in 20 to 30 years from its current state of affairs as foreign investment will take presence in a significant way. Cuba's geography and proximity to the United States with U.S. free market forces coupled with the eventual removal of President Castro from power will ultimately see the demise of the Cuban peso itself as outright US-dollarization may inevitably take hold. UPDATED: March 25, 2003.
