Wednesday, June 16, 2021

Original Article Cuban Debt Relief

The Paris Club of wealthy nations agreed last week to grant Cuba more time to make payments under a 2015 debt agreement. The decision followed a visit to France by Cuba’s top debt negotiator, Deputy Prime Minister Ricardo Cabrisas. Cuba in 2015 defaulted on payments to the group and only partially met them in 2019. How important is Paris Club debt relief for Cuba? How likely is Cuba’s economy to recover soon from the Covid-19 pandemic, and what are the major factors holding the economy back? How much will the policies of U.S. President Joe Biden affect Cuba’s economy and its ability to return to international credit markets?

Pavel Vidal, associate professor in the Department of Eco[1]nomics at Pontifical Xavierian University in Cali, Colombia and former analyst in the monetary policy division at the Central Bank of Cuba: “Amending the 2015 arrangement is beneficial for both Cuba and the Paris Club. The Cuban government needs to complete its domestic monetary reform and maintain its commitment to debt payments. And the two things go hand in hand. The devaluation of the exchange rate helps to solve the balance of payments crisis. In turn, international capital is essential to maximize the benefits of the devaluation in exports and minimize inflationary impacts. The Cuban economy had to face the pandemic amid an extremely fragile macroeco[1]nomic situation. Cuba’s dependence on tourism deeply affects its private sector. Five years of a balance of payments crisis put into perspective the difficult situation the Cuban economy has been going through after the drop in trade with Venezuela and the tightening of U.S. sanctions.  Defaulting on commitments to international creditors traps the economy in a vicious circle. The shutout from international financial markets makes it more difficult to attract capital to reactivate the economy, thus further reducing future income needed to put international payments in order. Some positive events are likely to help the economy to get through the current crisis: achieving herd immunity thanks to domestic vaccines, a faster-than-expected tourism recovery and the materialization of the announced opening of small and medium-sized private enterprises. The ideal scenario would also include the U.S. administration taking constructive steps. If these events were to occur at the same time, they would amplify and complement each other, thus increasing the possibility of pulling the economy out of the current crisis.”

Arturo Lopez-Levy, assistant professor of politics and international relations at Holy Names University in Oakland, Calif.: “After the historic 2015 debt negoti[1]ation agreement with the Paris Club, Cuba made a sustained effort to pay its financial obligations. Presidents Raúl Castro and Miguel Díaz-Canel acknowledged the importance of honoring debt obligations to restore Cuba’s financial credibility and ease the road for anticipated significant macroeconomic reforms. Cuba’s 2019 constitution signaled a transition toward a mixed economy. In the middle of the Covid-19 pandemic, the Díaz-Canel administration launched a massive devaluation of the Cuban peso and implemented a long-postponed currency reunifi[1]cation. These new reforms ease the Cuban state’s roles as regulator, fiscal authority and entrepreneur, which is indispensable to integrating a mixed-market economy. Other recent measures expand the private sector and the creation of small and medium-sized companies. Cuba’s default after 2019 didn’t surprise anyone. The Trump administration tightened the economic siege with 240 new economic and financial sanctions. Trump rolled back Obama’s opening and activated Tittle III of the Helms-Burton law. In 2020-21, the Covid -19 pandemic wiped out most of Cuba’s tourism revenues. By postponing his rapprochement promises, Biden is aggravating the sequels of Covid-19 and obstacles to economic reform. Such neglect pushes Cuba into close relations with Russia and China. Saving the 2015 agreement is a first step toward a viable Cuban economy and realistic debt servicing, a goal that international creditors share. The resurgence forecast expects a rise in tourism revenue next year because Cuba and its most important markets (Europe and Canada) would be fully vaccinated. The government announced a new dialogue with the diaspora, anticipating a focus on economic opportunities to Cubans living abroad. The Cuban economy still has serious problems, such as excessive reliance on food imports, an aging population, limited in[1]vestments and an expected rise in inflation. But the devaluation placed economic reform at an inflection point toward better measure[1]ment and management of its fundamentals. The devaluation should attract remittances, foreign investments and tourists.”

Roberta Lajous, former Mexican ambassador to Cuba: “Like all Caribbean countries, Cuba faces a debt crisis due to dependence on tourist income. But the case of Cuba is cumbersome due to restrictions applying to U.S. citizens traveling to the island. Neighboring countries have generated income by applying a smart visa policy for U.S. citizens able to ‘work from home’ in a relaxed seaside setting. But Cuba depends on European and Canadian travelers subject to strict pandemic lockdown regulations. Economic reform has stalled in Cuba under the dire circumstances prevailing, just after a single currency was finally accomplished. No single issue could be more significant to improving the lives of the Cuban people and stimulating market-oriented reform than the lifting of all U.S. travel restrictions to the island. The Obama administration engaged in exchange policy with Cuba that benefited all involved, but that came to a halt under Trump. Timing is of the essence. If the Biden administration does not move fast, somebody else will offer other sources of income for strategic reasons. Cuba can further economic and political reform given the right incentives, thanks to an educated population. Relations with Cuba could be normalized by eliminating the embargo, which has come in handy to justify Cuba’s lack of advancement in human rights and democracy. If the United States is preparing to engage in a dialogue with Venezuela, why not with Cuba? Both countries have acted in tandem for almost two decades now.”

Carmelo Mesa-Lago, professor emeritus of economics and Latin American studies at the University of Pittsburgh: “The Paris Club’s postponement of Cuba’s debt payment was based, according to Minister Cabrisas, on the ‘unprecedented penuries’ caused by Covid-19 and its impact on tour[1]ism, former U.S. President Donald Trump’s strengthening of the U.S. embargo and 54 hurricanes since 2000. But two other causes were not mentioned: the worst economic cri[1]sis in Venezuela’s history, which has reduced buying of Cuban medical services and oil supply, and the island’s inefficient economic system, which despite some structural reforms has been unable to stop the GDP decline. Cabrisas and the Paris Club have so far not revealed the terms of the agreement, but it’s certainly a relief for Cuba, which has been suffering its worst economic crisis since the 1990s. The government is inoculating the population with its own vaccine, but still we lack reliable data on its results. Even if successful, Cuba is confronting severe obstacles for a recovery:

1.) the monetary and exchange-rate unification has provoked at least a 500 percent increase in inflation, generating open protests by Cubans;

2.) the most important monetary-unification measure, the closing of state enterprises in the red and the subsequent rise in open unemployment, has been postponed for one year, hence fiscal subsidies (18 billion pesos) will continue;

3.) tourism that generated about $3 billion annually—the second-largest source of hard currency—has been virtually closed for more than one year and will take time to recover; and

4.) President Biden has not removed any of the damaging measures that Trump imposed.”

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