Cuba’s Macroeconomic Policy’s Aggressive Shift towards Expansion
Ernesto Hernández-Catá
February 2018
Macroeconomic policies I Cuba were generally restrained during most of the period from 1994 to 2012. For the past several years, however, these policies have turned aggressively toward expansion. Over the period 2013 to 2016 the budget deficit ballooned, government expenditure increased sharply, and the growth of the money supply and public sector wages surged. This shift towards expansion occurred against the background of a serious deflationary shock, as Venezuela cut its oil supplies to Cuba by almost one half. It came after a period of fiscal stringency in response to the payments crisis of 2008.
The evolution of Cuba’s fiscal position is summarized in the two right-most columns of Tables 1 and 2. The first period (referred to below as period I) covers the years from 2008 to 2012—a period of relative austerity. Period II, a period of expansion, spans the years 2013 to 2016. The overall fiscal deficit narrowed by more than $3 billion in period I, but in period II it widened by over $5 billon. The deficit peaked at 6.1 billion pesos in 2016, a level not seen since the immediate post-Soviet period in the early1990s, and Minister of the Economy Ricardo Cabrisas recently stated that it had widened further to 11.7 billion pesos in 2017.1
Total state expenditure surged by $6.5 billion in period II compared with a rise of $3.8 billion in period I. Unfortunately the composition of the surge in the recent period was not of the growth-friendly variety: it was more than accounted for by a strong pick up in current expenditure, while government investment (which accounts for the bulk of capital formation in Cuba) shifted from a modest increase in period I to a decline of 3.1 billion in period II. Furthermore, most of the surge in current spending resulted from a rise in subsidies to enterprises to levels not seen in many years, although social spending also rose briskly (mostly in the public health sector) following a period of contraction.
The increase in state revenue was approximately unchanged from one period to the other, although its composition was profoundly altered (Table 2). In the second period featured a drop in foreign revenue (associated with Venezuela’s cutback in oil exports to Cuba combined with the plunge in oil prices) 2 and a decline in enterprise transfers to the central government. But these declines were more than offset by a large increase in tax revenue, which apparently reflected a significant adjustments in the turnover and profit tax rates in 2015-16. It should be noted that the official data may underestimate borrowing from abroad owing to the practice of converting foreign currency data into Cuban pesos (CUPs) at par. However this does not affect the value of Venezuelan oil-related transfers which are offset by subsidies to domestic enterprises on the expenditure side.
The relaxation of monetary policy is illustrated in Table 3. The rate of increase in the broad aggregate M2A and its two components (currency and bank deposits) surged to historically high levels in period II. It should be pointed out, however, that the monetary data published by the national statistical agency (ONEI) cover only the aggregates denominated in non-convertible pesos (CUP).3 Accordingly, changes in the CUP-denominated monetary aggregates can reflect not only changes in the total money supply but also swaps of convertible pesos (CUC) for CUP money.
The expansionary shift in macroeconomic policies was also reflected in the unprecedented 15% average annual growth of public sector wages in period II, which compared with a rise of just under 3% in the earlier period. Wage increases in period II were broadly based across economic sectors, although they were particularly large in agriculture, the sugar industry, mining, and financial intermediation.
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The highly expansionary macroeconomic policies implemented in recent years probably contributed to sustain economic activity after the plunge in Venezuelan oil deliveries and the associated fall in Cuban exports of professional services. Together with the rapid increase in tourism, the shift in policies helps to explain why real GDP growth was positive (albeit quite low) in both 2016 and 2017 in spite of the magnitude of the oil shock.4 In that sense, the shift towards expansionary policies may have been justified, particularly since it came after a period of significant stringency. But the problem of insufficient long-term growth remains unresolved. To achieve its objectives of 5% annual growth, the government will have to adjust its tax and expenditure policies so as to restore confidence and make room for a much needed increase in investment.
[1] Ricardo Cabrisas Ruiz, “A Realistic Perspective on the Economy”, Granma, January 11, 2018.
2 This can also be seen in the 70% decline in the value of Cuban imports of petroleum and products from Venezuela from 2013 to 2016 (including those indirectly shipped from the Netherlands Antilles). Cuba’s exports of services also declined significantly over that period, in current as well as in constant prices. These exports consist primarily of professional services provided in exchange for oil, mostly to Venezuela.
3 See Pavel Vidal and Ernesto Hernández-Catá “The Performance of Cuba’s Gross Domestic Product, 2015-2016: 4. The Role of External Factors, Business Confidence and Economic Policies”. Cuba in Transition, Volume 25. The analysis presented in that article suggests that swaps of this kind have occurred in recent years.
4 In its long delayed release of the national accounts, ONEI recently reported GDP growth of 0.5 % in 2016. (Earlier the Economic Commission for Latin America and the Caribbean had announced a more credible 0.9% decline for 2016). More recently Minister Cabrisas (op. cit.) provided an estimate of 1.6% growth for GDP 2017.