Reporter Nie Lin
Cuba has taken another big step forward in economic reform.
According to the Financial Times, Cuba's minister of labor and social security, Martha Elena Feitó, said over the weekend that it would increase the number of sectors in which Cuba's private economy is allowed to operate from the current 127 to 2,000, leaving only 124 sectors in the country to remain partly or fully under state control.
Cuba's private economy has been confined to a very small number of sectors, such as agriculture and tourism, until a few months ago, when it was allowed to enter the country's retail sector and to conduct foreign trade in cooperation with state-owned enterprises and foreign capital. According to Fito, 600,000 people in Cuba are employed in the private sector, accounting for about 13% of the country's working population.
The Financial Times quoted Cuban economist Ricardo Torres as saying that opening up the private sector gives the government more leeway to reform state-owned enterprises, reduce bureaucratic authority, and help create jobs and curb inflation in Cuba.
In fact, the COVID-19 pandemic has forced the Cuban government to speed up the pace of reform to some extent. Tourism is Cuba's mainstay industry, but last year, the number of Cuban tourists plummeted by 80 percent due to the pandemic.
In April 2018, Raul Castro stepped down as head of the country and Miguel Díaz-Canel Bermúdez was elected as the new President of state and president of the Council of Ministers, and a year later was elected as the first president of the country. Since the country's first confirmed case of COVID-19 in March 2020, the Cuban government has taken measures such as temporarily restricting the entry of foreigners and canceling large gatherings.
Under the double whammy of COVID-19 and the Trump administration's economic sanctions, Cuba suffered its worst economic crisis since the early 1990s. In 2020, the Cuban economy shrank by 11% year-on-year, and in the previous years, the Cuban economy had been in a state of near stagnation.
The easing of restrictions on the private economy is only part of the economic reforms of the Díaz-Canel government, which is also accelerating the reform of Cuba's monetary and exchange rate system.
Since the 1990s, Cuba has been operating a "dual-track system" of currency and exchange rates. The collapse of the Soviet Union in the early 1990s led to the loss of value of the Cuban peso, which was pegged to the Soviet ruble, and in 1993 Cuba approved the circulation of the United States dollar within its borders, a large number of United States dollars flowed into Cuba, and the United States dollar and the peso circulated in the Cuban market at the same time.
However, as U.S. economic sanctions and embargo measures against Cuba escalated, in November 2004 the Cuban government announced a ban on the circulation of the United States dollar within its territory and instead used convertible pesos. The official exchange rate for convertible pesos and United States dollars is 1:1, while 1 convertible peso can be exchanged for about 24 Cuban pesos.
Zhang Xinyu, a postdoctoral researcher at the School of International Translation and Interpretation of Sun Yat-sen University, previously wrote that the "dual-track system" allowed Cuba to obtain foreign exchange through international trade and an open tourism market, which played an important role in Cuba's economic stability for a period of time. On the other hand, the system has widened Cuba's income disparities and led to social class divisions. Practitioners in foreign-related fields such as tourism, foreign trade, and services have the opportunity to obtain a large number of convertible pesos, and the income gap between them and most of the domestic economic practitioners is increasing.
In addition, the monetary "two-track system" has deprived the Cuban peso of its monetary functions, such as means of valuation, instruments of procurement of goods, means of savings, instruments of debt relief and means of payment, and has led to confusion in national accounts and distorted the normal functioning of the macro economy.
In order to solve the problems caused by the "dual-track system", the Cuban government decided to reform the currency system. In 2016, the Cuban government announced that it must immediately eliminate the monetary "dual-track system". In 2017, Cuba began allowing the use of Cuban pesos in foreign exchange collection agencies and issued banknotes in denominations of 200, 500 and 1000 pesos to facilitate transactions. In February 2020, the Cuban government issued a proclamation stipulating that the state catering industry would no longer be allowed to accept convertible pesos, only the collection of pesos.
The impact of the epidemic has put the Cuban economy in trouble, which has promoted the acceleration of the "dual-track system" reform to a certain extent. In October 2020, the Cuban government announced the restoration of a unitary exchange rate system, abolishing the convertible peso and retaining the Cuban peso. In order to give the population sufficient time to exchange pesos, the Cuban Government has stipulated that the exchange rate will be kept stable for at least six months after the start of the currency-consolidation process.
In addition, in order to compensate for the inflation that may be triggered by currency depreciation, the Cuban government plans to significantly increase the national wage and pension.
"After the abolition of the currency 'dual-track system', the income of local residents is expected to increase, enterprise imports may become cheaper, and the obstacles faced by enterprises in import and export settlement will also be greatly reduced." But currency reform will also bring potential crises and challenges to Cuba, such as severe inflation, distribution imbalances, and shortages of foreign capital. Zhang Xinyu said.
In her view, the effective overcoming of those challenges depended, on the one hand, on whether the Cuban Government could control prices and inflation, and on the other hand, whether the Cuban Government could effectively promote other economic reforms in parallel with monetary reforms, thereby ensuring the sustainable acquisition of foreign capital and the smooth progress of production.
Some analysts have pointed out that Cuba's successive economic reform measures are also "expressing their determination" to the United States to a certain extent. During the Obama administration, the United States and Cuba normalized relations in July 2015. However, former US President Trump changed his Obama policy and turned to a tough attitude toward Cuba.
In November 2017, the Trump administration banned U.S. citizens from doing business with 180 Cuban entities. In September 2018, Trump signed a decree extending the trade embargo imposed on Cuba in 1962 for a year. In March 2019, the Trump administration announced renewed economic sanctions against Cuba, and in January 2020, at the last moment of his departure, Trump listed Cuba as a state sponsoring terrorism and imposed new sanctions on Cuba.
After Biden took office, Cuba hopes that the U.S. government will be able to retract some of the sanctions previously imposed by the Trump administration. John Kavulich, chairman of the U.S.-Cuba Trade and Economic Committee, told the Financial Times that the Biden administration may prefer to engage Cuba if it succeeds in promoting monetary system and private sector reforms.
"The point is that the Biden administration must believe that Cuba is serious about economic reform. The only way to show this is to endure the pains of transformation. Kavulich said.