Primary Author and Team Leader Following Cuba – Mary Peplinski
Keywords: GDP, Austerity Measures, Cuban Peso, Convertible Cuba Peso, hard currency
In the summer of 2016, Cuban officials announced that GDP growth in the country was expected to slow to less than 1% on average by 2017. The Cuban national statistics office publishes a breakdown of GDP data only on an annual basis so it is difficult to identify the particular factors that are driving this rapid deceleration. However, it is highly likely that this downturn is due to cuts in aid from Venezuela, lower export income and austerity measures imposed by the government. These factors combined with the imminent retirement of leader Raul Castro, may lead Cuba into a new era of economic hardship.
Since the United States and Cuba began restoring relations in the summer of 2015, expectations had been high among Cubans that the country’s economic situation would quickly improve. Unfortunately, the island’s main benefactor, Venezuela, is currently experiencing a major economic crisis that has led to a drastic cut in oil subsidies to Cuba. It is estimated that as much as 40% of the oil supplied by Venezuela has been cut. For the first time since the ‘Special Period’ in the 1990s following the collapse of the Soviet Union, Cubans are dealing with power outages and transportation shortages.
Although Cuba still experiences great economic difficulties, the government has announced several major reforms including eliminating the country’s complicated dual currency system in hopes of bolstering the islands weakened economy. According to multiple government sources, Cuba is expected to eliminate its dual currency system over the next few years in a first step to simplifying a multiple exchange system that investors view as a major obstacle to business.
The island country currently circulates two currencies: the Cuban Peso (CUP) and the Convertible Cuban Peso (CUC). The majority of people in Cuba are paid in CUPs but most goods are valued in CUCs. When the Soviet Union collapsed, Cuba was left with limited access to a hard currency. Leader Fidel Castro was forced to legalize the dollar in 1994, reversing a law that had made possession of American currency punishable by prison. In 2004, the CUC was brought in to replace the dollar but many Cubans simply viewed this change as a new name for an old problem. Neither currency is convertible on the foreign exchange market. It is speculated that the unification of the Cuban Peso could take over three years. If the change is implemented, a single currency would potentially increase Cuban exports and increase foreign investment interest in the country.Cuba has several industries that have potential for growth especially because of newly restored relations with the United States. However, there are many indicators suggesting that growth in Cuba will slow partially due to the country’s limited trading partners falling on hard times. Although the immediate economic outlook in Cuba is uncertain, stronger economic growth is anticipated for 2018 and beyond. This predicted growth is based on the assumption that American sanctions continue to be lifted and the two countries relationship continues to improve. Although there are risks involved with investing in Cuba, it is possible that long-term investments could generate a positive return providing that Raul Castro and his successor continue to foster relations with the United States and the Cuban currency is unified, among other factors.