Cuba

Activity struggling to recover in the face of shortages and inflation

The economic rebound of 2021-2022 failed to restore pre-pandemic activity levels and gave way to a recession in 2023. This took place against a backdrop of high inflation, linked to food and energy shortages, as well as the scarcity of foreign currency. The economic situation was also aggravated by the persistence of US sanctions and the effects of the pandemic. Although tourism recorded a 50% increase over 2022, with 2.4 million visitors, this remains below the pre-pandemic figure of 3.5 million.

A recovery is forecast for 2024. However, fiscal retrenchment, the persistence of US sanctions and energy shortages, and the slow recovery of tourism will prevent a rapid exit from recession. Weak domestic consumption will persist. Even if supported by expatriate remittances, it will continue to be impacted by food and energy inflation. The latter is the result of the currency reform of 2021 (even aborted), followed by the pandemic and the war in Ukraine. The government also increased the price of petrol fivefold in March 2024, hitting household purchasing power hard. In addition, public investment in the maintenance and development of critical infrastructures will remain constrained by budgetary constraints. Private investment will remain restricted, notably due to the US Helms-Burton Act, which sanctions foreign companies investing in the island. Private sector expansion will also be hampered by the lack of international financing. U.S. sanctions will hamper imports of raw materials, intermediate goods and spare parts needed to maintain infrastructure and sustain agricultural (14% of exports) and industrial production. Venezuela's economic difficulties have reduced deliveries of its fuel oil and diesel, which are essential for 95% of the electricity generated on the island. Last, oil prices, which are expected to remain high, will also weigh heavily on the sugar and transport industries.

Persistent current account deficit

The current account deficit narrowed slightly in 2023, mainly due to the gradual recovery in tourism (8% of GDP in 2021, compared with 12% in 2019). In 2024, this trend will continue, as exports of services continue to be driven by tourism. The balance of trade, which is structurally in deficit, will be supported by mining exports (47.5% of total exports in 2023, mainly nickel), beverages and tobacco (23%) and chemicals (8%). However, exports of agricultural products, particularly sugar cane (4% vs. 10% in 2019), will suffer from wetter, warmer weather, which will impact alcohol, syrup, and rum production. Foreign investment, which would fuel industrial modernisation, will remain limited due to continuing US sanctions, the regulatory framework, and the monetary regime. Cuba's continued inclusion on the US list of "state sponsors of terrorism" will continue to discourage investors. As a result, the current account deficit will be financed mainly by domestic bond issues.

A historic fiscal austerity plan

In 2023, the public deficit widened owing to lower non-tax revenues and high spending on health, education, social protection, and food subsidies. It is expected to narrow in 2024. The government will target spending on infrastructure to attract FDI. In addition, a historic plan of fiscal restraint was announced in December 2023. It plans to replace libretas, which offer subsidies on basic products, with direct financial aid to vulnerable population groups. Other measures include tariff increases for certain public services, such as water, electricity, and passenger transport. However, despite its recent rise, the price of a litre of petrol is only worth USD 0.5 at the official rate. The bulk of the deficit will continue to be financed by the issue of sovereign bonds placed with the public financial sector.

The monetary reform of 2021, including the devaluation of the peso, led to a downward revaluation of GDP and a surge in the public debt ratio. In January 2021, the government implemented a monetary reform aimed at aligning the Cuban peso (CUP 1: USD 1), used for foreign trade, national accounting, and public enterprises, with the convertible peso (CUC 24: USD 1) used by tourists and the population. This reform, introduced in the midst of the pandemic, contributed to galloping inflation, reinforced by the effects of the war in Ukraine. However, faced with the depreciation of the parallel market rate, the authorities introduced in August 2022 a second legal exchange rate of CUP 120 to USD 1 for personal transactions. Nevertheless, the informal market rate continued to depreciate, reaching CUP 400 per USD 1 in early May 2024, before recovering slightly to CUP 340 per USD 1 in early July. The peso's weakness is due to a persistent shortage of foreign currency, exacerbated by the slow recovery in tourism. This could lead the government to consider a further devaluation of the official rate.

Despite an agreement on the restructuring of its bilateral debt made up of arrears and late interest with Paris Club creditor countries in 2015, Cuba defaulted again in 2020. The agreement, which wiped out 77% of this debt (Russia and China had already written off their claims), provided for the balance of USD 2.5 billion to be converted into investment projects or rescheduled until 2033. This debt is only part of the Cuban debt estimated by the government at USD 19.7 billion in 2020, or around 126% of GDP. The lion's share is owed to private creditors, including the CRF I Ltd fund (USD 1.3 billion).

Sanctions maintain the island's isolation

Miguel Díaz-Canel (Communist Party of Cuba, PCC) has been President of the Republic since October 2019. He was re-elected in April 2023 for a second and final term, ending in 2028. Executive power is shared between Mr. Díaz-Canel and Prime Minister Manuel Marrero Cruz, appointed by the National Assembly. In the legislative elections of June 2023, its 470 seats were renewed. Only PCC candidates and their allies were in the running, winning all the seats. The country is still under an American embargo, introduced in 1962 to bring about regime change. Cuba is facing a severe economic crisis, marked by widespread shortages and a deterioration in living standards, leading to ongoing demonstrations since July 2021 and growing emigration, particularly of young people to the US. Since 2022, more than 500,000 Cubans (5% of the population) have moved to the US. Moreover, the authorities are taking advantage of emigration to encourage the most vocal citizens to leave the country.

On the external front, relations with its big American neighbour remain tense, despite some recent minor relaxations of sanctions under the Presidency of Joe Biden, such as lifting the cap on remittances and access to American accounts for private Cuban companies. In addition, US sanctions against Venezuela, Cuba's main regional ally, which is also facing difficult economic conditions, are having an impact on the island. The extraterritorial scope of US sanctions explains the measured support of other countries in the region (Brazil, Colombia and Mexico), as well as others (the EU and Canada). Cuba is also seeking to diversify its support, notably by strengthening its relations with China and Russia. Closer ties with China are reflected in debt rescheduling and investments. For example, China has invested in biotechnology and pharmaceutical joint ventures, and financed the modernisation of Santiago's cargo port. Cuba is also supporting Russia in its war against Ukraine. Russia's presence is illustrated by the irruption of its military vessels off the coast of Cuba.

Last updated:June 2024